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efl /fl Comptroller of the Currency Administrator of National Banks ^e [^iP©^ Office of the Comptroller of the Currency 1980 Comptroller John G. Heimann (Resigned May 15, 1981) Policy Group Senior Deputy Comptroller Senior Advisor to the Comptroller Senior Deputy Comptroller for Operations Senior Deputy Comptroller for Bank Supervision Senior Deputy Comptroller for Policy Chief Counsel Lewis G. Odom, Jr. (Retired November 1980) Charles E. Lord H. Joe Selby Paul M. Homan Cantwell F. Muckenfuss III John E. Shockey (Resigned August 9, 1981) Background The Comptroller The Office of the Comptroller of the Currency (OCC) was established in 1863 as a bureau of the Depart ment of the Treasury. The OCC is headed by the Comptroller who is appointed by the President, with the advice and consent of the Senate, for a 5-year term. The OCC regulates national banks by its power to: • Approve or deny applications for new charters, branches, capital or other changes in corporate or banking structure; • Examine the banks; • Take supervisory actions against banks which do not conform to laws and regulations or which otherwise engage in unsound banking prac tices, including removal of officers, negotiation of agreements to change existing bank prac tices and issuance of cease and desist orders; and • Issue rules and regulations concerning banking practices and governing bank lending and in vestment practices and corporate structure. The OCC divides the United States into 14 geographical regions, with each headed by a Regional Administrator. The Office is funded through assessments on the assets of national banks. John G. Heimann became the 24th Comptroller of the Currency on July 21, 1977. By statute, the Comptroller serves a concurrent term as a Director of the Federal Deposit Insurance Corpo ration; from August 1978 until February 1979, Mr. Heimann served as Acting Chairman. Mr. Heimann is Chairman of the Federal Financial Institutions Examina tion Council, and was a Director of the Federal Na tional Mortgage Association from July 1977 until May 1980. He is Chairman of the Commercial Reinvestment Task Force and a Director of the National Neighbor hood Reinvestment Corporation, a principal agent of the federal government charged with revitalizing com munities and neighborhoods. Before becoming Comptroller, Mr. Heimann was Commissioner of Housing and Community Renewal for New York State. From June 1975 to November 1976, he was New York State's Superintendent of Banks. A native of New York, Mr. Heimann received a B.A. degree in economics from Syracuse University in 1950. The university awarded him its Chancellor Medal in 1978. NOTE: The annual report of the Comptroller of the Currency for 1980 will be issued in two parts. The first part, 1980 Report of Operations, is scheduled for release in spring 1981 and the second part, 1980 Annual Report, is sched uled for release in summer 1981. The first part contains a summary of Office activities for 1980 and some summary materials on the national banking system. The second part contains merger decisions, enforcement actions, speeches and testimony and national banking system summary statistics for 1980. 1980 Annual Report Office of the Comptroller of the Currency Contents Title of Section Page Condition of the National Banking System Merger Decisions Enforcement Actions Selected Addresses and Congressional Testimony Statistical Tables 1 5 99 143 231 II Condition of the National Banking System The year 1980 was a period of both high and very volatile interest rates. The average monthly rate on fed eral funds, an important source of short-term financing for commercial banks, ranged from a low of 9.0 per cent to a high of 18.9 percent. That is in contrast to 1979 when that average rate varied less than 400 basis points. Similarly, the prime, a benchmark rate for lending to large corporate customers, rose rapidly from 15.25 percent at the start of the year to a then un precedented peak of 20 percent shortly after the Fed eral Reserve Board instituted an emergency credit re straint program on March 14. The prime rate then fell even more rapidly than it had risen, dropping to 11 percent in July, only to rise again to a new record of 21.5 percent by year-end. During 1979, the prime rate was unchanged for more than 5 months before climb ing 400 basis points to the year's high of 15.75 percent in November. Despite the extreme volatility of interest rates and the general economic downturn in the spring, national banks generally operated profitably, and net income for the system increased nearly 6 percent over 1979. That increase in net income, however, was well below the corresponding increase in total assets and sharply below the 17.4 percent increase in net income enjoyed in 1979. Successful commercial bank operations are more difficult in a period of rapidly rising interest rates be cause an increasing portion of banks' liabilities are rel atively short-term and interest sensitive funds. Al though in the past smaller banks, with their greater reliance on demand and savings deposits, have been relatively insulated from changes in the cost of funds, that situation is also changing. Greater consumer awareness of interest rates and particularly the rapid expansion of money market certificates led smaller banks to rely increasingly on purchased funds. To compensate for the increasing variability in their costs of funds, commercial banks continued the trend to ward greater reliance on variable-rate or shorter term loans and toward reduced reliance on long-term secu rities. Total assets of the national banking system, both for eign and domestic, totaled $1,095 billion at year-end 1980, an increase of $99 billion, or 9.9 percent, over the total for the previous year. That was the slowest rate of change in total assets since 1975 when assets increased only 6.9 percent. Reacting to rising interest rates followed by the credit constraint program initiated in the spring, loan growth failed to keep pace with total assets, increas ing 8.6 percent, or $48 billion, over the 12-month per iod. That loan growth was still disproportionately con centrated in foreign offices, with domestic office loans increasing only 6.3 percent. However, the long-term trend of more rapid growth in total foreign office assets was virtually stalled in 1980. Total assets at domestic offices, including the substantial net amount of $19 bil lion due from foreign branches and subsidiaries, in creased 9.9 percent. Foreign office (including Edge Act subsidiaries in the United States) assets, exclud ing amounts due to the head office, increased over 10 percent to $236 billion, nearly 21 percent of the na tional banking system's assets. Although total loan growth was modest, residential real estate lending held up well considering the histori cally high interest rates prevailing during the period. Total holdings of residential real estate mortgages at domestic offices of national banks increased 7.9 per cent to $85 billion. In part, that increase resulted from the innovative use of both short-term and variable-rate mortgages by national banks. For the first time in several years, national banks ac tually increased the proportion of securities in their as set portfolios. Their total holdings increased nearly $20 billion, a rise of 12.7 percent over the preceding De cember. However, the trend to shorter maturities con tinued. At year-end 1980, 28 percent of domestic of fice holdings of $80 billion in U.S. Treasury and agency securities had maturities of 1 year or less, compared to 25 percent at year-end 1979. The effects of rising interest rates and changes in the competitive situation of commercial banking were most readily seen on the liability side of the balance sheet. Although the 9.6 percent increase of $57 billion in domestic office deposits exceeded the growth rate in foreign office deposits for the first time in a number of years, a higher proportion of those domestic office deposits were paying a market rate of interest. Money market certificates of deposit, available in denomina tions of $10,000, increased 67 percent to $93 billion. Similarly, large negotiable certificates of deposits in creased $32 billion to $141 billion. However, the rate of growth in foreign office deposits dropped sharply from previous years'. Those deposits increased only 8.2 percent in 1980, to $206 billion, compared to a nearly 22 percent increase of $34 billion during 1979. Other sources of purchased funds (federal funds transac tions, liabilities for borrowed money and Treasury de mand notes) continued to increase more rapidly than total liabilities, increasing $12 billion or nearly 12 per cent in 1980. For the first time since 1976, equity capital in creased at a faster rate than total assets, interrupting the long-term decline in the equity-to-capital ratio for the national banking system. As national banks contin ued to retain more than 60 percent of their net income, total equity capital increased $5.6 billion to nearly $60 billion. Total equity capital was equal to 5.5 percent of total assets at year-end 1980, up marginally from the preceding year. Net income of national banks operating at year-end 1980 was $7.7 billion, a modest increase of 5.8 per cent over 1979. That increase was less than asset or equity capital growth so that both the return on assets and the return on equity declined slightly. It was also in marked contrast to the preceding 2 years which saw very rapid increases in net income. Indeed, 1978's in1 Table 1 1\3 Assets, liabilities and capital accounts of national banks, 1979 and 1980 (Dollar amounts in millions) December 31, 1979 4,448 banks Consolidated foreign and domestic Assets Cash and due from depository institutions U.S. Treasury securities Obligations of other U.S. government agencies and corporations Obligations of states and political subdivisions All other securities Domestic offices I December 31, 1980 4,425 banks Consolidated foreign and domestic Change 1979-1980 Fully consolidated Domestic offices $114,831 51,237 28,765 78,455 9,368 167,825 Amount Percent 8.4 $15,899 7,091 4,023 7,929 617 16.0 16.3 11.1 4.1 19,660 12.7 $188,554 $106,731 44,281 24,751 71,268 15,095 155,395 44,126 24,702 70,796 9,485 $204,453 51,372 28,774 79,197 15,712 149,109 175,055 36,119 442,986 5,296 437,690 7.7 600,417 6,023 594,394 39,030 471,018 5,850 465,168 2,807 552,858 5,461 547,397 47,559 562 46,997 8.6 10.3 8.6 8,074 6,780 9,575 7,910 1,501 18.6 13,756 1,312 45,346 996,281 12,923 1,193 41,711 15,538 1,314 55,539 792,256 1,095,123 14,493 1,190 59,123 869,570 1782 2 10,193 98,842 13.0 .2 22.5 9.9 185,858 369,729 1,794 41,945 44,453 8,066 651,845 237,652 414,193 185,858 369,729 1,794 41,945 44,453 8,066 -1,343 52,075 -108 -1,539 7,185 605 -.7 16.4 -5.7 -3.5 19.3 8.1 594,970 234,937 360,033 187,201 317,654 1,902 43,484 37,268 7,461 594,970 234,937 360,033 651,845 237,652 414,193 56,875 2,715 54,160 9.6 1.2 15.0 190,302 785,272 0 594,970 205,847 0 857,692 651,845 15,545 72,420 8.2 9.2 79,310 Federal funds purchased and securities sold under agreements to repurchase. . . . 7,687 Interest-bearing demand notes issued to U.S. Treasury 17,719 Other liabilities for borrowed money. . 1,277 Mortgage indebtedness and liability for capitalized leases 47,434 All other liabilities 938,699 Total liabilities 79,152 7,687 9,439 1,234 42,444 91,357 5,958 19,607 1,367 55,581 12,047 -1,729 1,888 90 8,147 15.2 -22.5 10.7 7.0 17.2 734,926 1,031,561 91,230 5,958 9,236 1,354 46,648 806,271 92,862 9.9 3,285 3,034 3,691 3,428 406 12.4 31 11,403 17,846 25,017 31 11,403 17,846 25,017 34 11,939 18,991 28,907 34 11,939 18,991 28,907 3 536 1,145 3,890 9.7 4.7 6.4 15.5 54,296 54,296 59,871 59,871 5,575 10.3 996,281 792,256 1,095,123 869,570 98,842 9.9 Total securities Federal funds sold and securities purchased under agreements to resell Total loans (excluding unearned income) Allowance for possible loan losses Net loans Lease financing receivables Bank premises, furniture and fixtures, and other assets representing bank premises Real estate owned other than bank premises All other assets Total assets Liabilities Demand deposits of individuals, partnerships and corporations Time and savings deposits of individuals, partnerships and corporations Deposits of U.S. government Deposits of states and political subdivisions All other deposits Certified and officers' checks Total deposits in domestic offices Demand deposits Time and savings deposits Total deposits in foreign offices Total deposits Subordinated notes and debentures . . . Equity Capital Preferred stock Common stock Surplus Undivided profits and reserve for contingencies and other capital reserves Total equity capital Total liabilities, subordinated notes and debentures and equity capital 36,447 187,201 317,654 1,902 43,484 37,268 7,461 39,254 crease of 20 percent was the greatest increase of the decade and was nearly matched by 1979's increase of more than 17 percent. The modest growth in net in come during 1980 resulted from the continued rapid growth in interest expense. That expense equaled 65 percent of total operating income in 1980, up from 60 percent the year before, and was an effect of both the high levels of interest rates prevailing for much of the year and the shift in liability structure at national banks. Interest and fees on loans totaled $77.5 billion in 1980 and accounted for 67 percent of total operating income. That was an increase of more than 25 percent over 1979, with total loans outstanding increasing only 8.6 percent. That disparity reflects the ability of na tional banks to adjust the return on their loan portfolios fairly quickly. For example, large national banks carry more than 60 percent of their nonresidential loan port folios on an adjustable rate basis, and nearly 58 per cent of their $365 billion in nonresidential loans had a maturity of 1 year or less. The fastest rising and second most important com ponent of operating income, interest on balances with depository institutions, jumped 53.4 percent to $10.6 billion. That resulted from both the relatively large in crease in those balances and the fact that most are either short-term or adjustable to changes in market in terest rates. Despite the total rise in operating income of 27.7 percent, the impact of rising rates on interest expenses led to an even higher rate of increase in op erating expenses. Interest on deposits, which accounted for more than 52 percent of total operating expenses, increased $16.4 billion, nearly 38 percent, over 1979. Interest on deposits in foreign offices continued as the most rap idly rising component, jumping $7.5 billion, a 44.6 per cent increase. However, the interesting change was the increasing responsiveness of interest on other de posits, largely savings accounts and small time de posits, to changes in interest rates. The rapid expan sion of $10,000 money market certificates issued at current interest rates made that expense item far more variable. The surge in the federal funds rate between January and April and again at year-end resulted in an in crease of 36.7 percent, to $11.6 billion, in the expense of federal funds transactions. In addition to rapid in creases in interest expense, all noninterest expense categories increased more rapidly than the growth in national bank assets. The effect was a 30.5 percent in crease in total operating expenses, which reached $104 billion. Income before taxes and securities transactions to taled $10.8 billion, an increase of 6.1 percent. After applicable taxes of $2.8 billion, income before securi ties transactions was 7.8 percent ahead of the 1979 figure. However, securities losses, which national banks have experienced since 1978, continued to in crease rapidly to $319 million after taxes, nearly dou ble the net losses incurred in 1979. Those increased losses, combined with a very small gain from extraor dinary items, left national banks with $7.7 billion in net income. Net loan losses, which increased slightly in 1979 for the first time since their recessionary peak in 1975, continued to rise in 1980. Both rising interest rates and the sharp downturn in the economy in the second quarter put some borrowers in difficulty. However, through increased provisions, national banks actually increased their allowance for loan losses by 10 per cent after net losses of $2.2 billion. Despite severe interest rate fluctuations, a sharp downturn in the economy and increasing competition from nondepository institutions, particularly money market funds, national banks generally were able to continue to expand and enjoy profitable operations. 3 Table 2 Income and expenses of national banks, 1979 and 1980 (Dollar amounts in millions) 7979 4,448 banks Amount 1980 4,425 banks Percent distribution Operating income: $61,801.9 Interest and fees on loans 6,931.2 Interest on balances with depository institutions Income on federal funds sold and securities purchased under agreements 3,551.2 to resell Interest on U.S. Treasury securities and on obligations of other U.S. govern ment agencies and corporations 5,367.2 Interest on obligations of states and political subdivisions in the United 3,748.2 States 754.9 Income from all other securities (including dividends on stock) 730.5 Income from lease financing 1,345.0 Income from fiduciary activities 1,316.1 Service charges on deposit accounts 2,453.0 Other service charges, commissions and fees 1,887.0 Other operating income 89,886.1 Total operating income Amount Change, 1979-1980 Percent distribution Amount 68.8 7.7 $77,492.6 10,634.5 67.5 9.3 $15,690.7 3,703.3 4.0 4,818.9 4.2 1,267.7 6.0 6,639.2 5.8 1,272.0 4.2 .8 .8 1.5 1.5 2.7 2.1 100.0 4,423.3 879.6 899.2 1,569.1 1,671.6 2,976.2 2,813.0 114,817.1 3.9 .8 .8 1.4 1.5 2.6 2.5 100.0 675.1 124.7 168.7 224.1 355.5 523.2 926.0 24,931.0 12,403.7 10,723.5 16,903.5 15,737.0 15.6 13.5 21.2 19.7 14,190.4 14,979.1 24,436.2 20,360.2 13.6 14.4 23.5 19.6 1,786.7 4,255.6 7,532.7 4,623.2 8,498.4 10.7 11,614.9 11.2 3,116.5 Operating expenses: Salaries and employee benefits Interest on time certificates of $100,000 or more (issued by domestic offices) Interest on deposits in foreign offices Interest on other deposits Expense of federal funds purchased and securities sold under agreements to repurchase Interest on demand notes issued to the U.S. Treasury and on other bor rowed money Interest on subordinated notes and debentures Occupancy expense of bank premises, net, and furniture and equipment ex pense Provision for possible loan losses Other operations expenses Total operating expenses 2,014.7 265.4 2.5 .3 2,762.1 296.3 2.7 .3 747.4 30.9 3,571.3 2,251.7 7,356.2 79,725.5 4.5 2.8 9.2 100.0 4,218.8 2,703.5 8,470.5 104,032.0 4.1 2.6 8.1 100.0 647.5 451.8 1,114.3 24,306.5 Income before income taxes and securities gains or losses Applicable income taxes Income before securities gains or losses Securities gains (losses), gross Applicable income taxes Securities gains (losses), net 10,160.6 2,753.7 7,406.8 -349.4 -163.2 -186.2 10,785.1 2,802.8 7,982.3 -538.7 -220.0 -318.6 624.5 49.1 575.5 -189.3 -56.8 -132.4 Income before extraordinary items Extraordinary items, net Net income 7,220.7 26.0 7,246.7 7,663.7 2.1 7,665.8 443.0 -23.9 419.1 Cash dividends declared on common stock Cash dividends declared on preferred stock Total cash dividends declared 2,648.2 1.5 2,649.7 756.6 2,296.5 1,539.9 2,948.9 2.5 2,951.4 300.7 1.0 301.7 801.0 3,004.9 2,203.9 Percent 52.1 12.8 12.4 13.4 90.6 44.4 708.4 664.0 Recoveries credited to allowance for possible loan losses Losses charged to allowance for possible loan losses Net loan losses Ratio to total operating income: Interest on deposits Other interest expense Salaries and employee benefits Other noninterest expense . . . Total operating expenses Ratio of net income to: Total assets (end of period) Total equity capital (end of period) Percent 48.2 12.0 13.8 14.7 88.7 0.73 13.35 0.70 12.80 Merger Decisions /. Mergers consummated, involving two or more operating banks Jan. 1, 1980: First American National Bank of St. Cloud, St. Cloud, Minn. First State Bank of Rice, Rice, Minn. Merger . . Jan. 2, 1980: First National Bank of Florida, Tampa, Fla. The First National Bank in Plant City, Plant City, Fla. The Broadway National Bank of Tampa, Tampa, Fla. Merger Jan. 2, 1980: Heritage Bank National Association, Cherry Hill, N.J. Coastal State Bank, Ocean City, N.J. Purchase Jan. 25, 1980: The First National Exchange Bank of Virginia, Roanoke, Va. Eagle Rock Bank, Inc., Eagle Rock, Va. Merger Jan. 31, 1980: The Citizens National Bank and Trust Company, Wellsville, N.Y. The State Bank of Belmont, Belmont, N.Y. Merger . . . . . Feb. 1, 1980: Ellis National Bank of Tampa, Tampa, Fla. Ellis National Bank of Davis Islands, unincorporated Hillsborough County, Fla. Ellis National Bank of West Hillsborough, unincorporated Hillsborough County, Fla. Ellis National Bank of North Tampa, unincorporated Hillsborough County, Fla. Merger . . . . . . Feb. 16, 1980; Baybank First Easthampton, National Association, Easthampton, Mass. Mohawk Bank and Trust Company, Greenfield, Mass. Purchase Feb. 29, 1980: BancOhio National Bank, Columbus, Ohio The Citizens Bank of Shelby, Shelby, Ohio Merger Mar. 10, 1980: National Bank of North America, New York, N.Y. Sixteen Branches of Bankers Trust Company, New York, N.Y. Purchase . . . Mar. 12, 1980: First National Bank of Mansfield, Plymouth, Ohio Buckeye State Bank, Galion, Ohio Merger Mar. 21, 1980: First National Bank of New Jersey, Totowa, N.J. South Amboy Trust Company, South Amboy, N.J. Purchase Mar. 21, 1980: Society National Bank of Cleveland, Cleveland, Ohio First National Bank of Clermont County, Bethel, Ohio Merger Page 9 10 10 11 12 13 14 15 16 17 18 18 Page Mar. 24, 1980: Pacific National Bank of Washington, Seattle, Wash. American Commercial Bank, Spokane, Wash. Purchase 21 Mar. 29, 1980: The Huntington National Bank, Columbus, Ohio The Farmers and Merchants Bank, Milford Center, Ohio Merger 22 Mar. 30, 1980: Security Pacific National Bank, Los Angeles, Calif. Inyo-Mono National Bank, Bishop, Calif. Merger . . 23 Apr. 1, 1980: The Commonwealth National Bank, Harrisburg, Pa. The First National Bank of Shippensburg, Shippensburg, Pa. 24 Merger . . . . Apr. 1, 1980: The Pierre National Bank, Pierre, S. Dak. The Badlands State Bank, Kadoka, S. Dak. Vivian State Bank, Vivian, S. Dak. Purchase 25 Apr. 21, 1980: La Salle National Bank, Chicago, III. Hartford Plaza Bank, Chicago, III. Merger 25 Apr. 30, 1980: Second National Bank of Greenville, Greenville, Ohio Fort Recovery Banking Company, Fort Recovery, Ohio Merger 26 May 1, 1980: Branch County Bank, Coldwater, Mich. Hickory National Bank of Michigan, Fawn River, Mich. Consolidation 27 May 27, 1980: Republic National Bank of New York, N.Y. Twelve Branches of Bankers Trust Company, New York, N.Y. Purchase 28 May 30, 1980: The First National Bank of Ashland, Ashland, Ohio Polk State Bank, Polk, Ohio 29 Merger June 23, 1980: First National Bank of New Jersey, Totowa, N.J. Commonwealth Bank of Metuchen, Metuchen, N.J. Purchase 30 June 27, 1980: First National State Bank—Edison, South Plainfield, N.J. Three Branches of Franklin State Bank, Somerset, N.J. Purchase 31 June 27, 1980: Key Bank of Southeastern New York, N.A., Chester, N.Y. The Valley National Bank, Wallkill, N.Y., Walden, N.Y. Merger 31 June 30, 1980: First National Bank in Bellaire, Bellaire, Ohio The Union Savings Bank of Bellaire, Bellaire, Ohio 32 Consolidation 5 July 1, 1980: Page Barnett Bank of Port Charlotte, N.A., Port Charlotte, Fla. Barnett Bank of Sarasota, N.A., Sarasota, Fla. Merger . . 33 July 1, 1980: The First National Bank and Trust Company of Hamilton, Hamilton, Ohio First National Bank of Middletown, Monroe, Ohio 34 Consolidation July 21, 1980: Rainier National Bank, Seattle, Wash. Bank of Everett, Everett, Wash. 35 Merger Aug. 1, 1980: Stuart National Bank, Stuart, Fla. Port Salerno National Bank, Port Salerno, Fla. Florida National Bank of Martin County, Stuart, Fla. 36 Merger .... Aug. 7, 1980: Peoples National Bank of Washington, Seattle, Wash. Columbia Bank, N.A., Kennewick, Wash. 37 Purchase Aug. 15, 1980: The First Jersey National Bank, Jersey City, N.J. Home State Bank, Teaneck, N.J. 38 Merger Sept. 8, 1980: First National Bank Northwest Ohio, Bryan, Ohio Tiffin Valley National Bank, Archbold, Ohio 38 Merger Sept. 13, 1980: Metro Bank of Huntington, Inc., Huntington, W. Va. Heritage National Bank, Huntington, W. Va. 39 Purchase Sept. 19, 1980: First Eastern Bank, National Association, Wilkes-Barre, Pa. South Side National Bank, Catawissa, Pa. North Scranton Bank and Trust Company, Scranton, Pa. Merger 40 Sept. 19, 1980. Society National Bank of Cleveland, Cleveland, Ohio First National Bank of Harrison, Harrison, Ohio Merger 41 Oct. 14, 1980: Michigan National Bank—Sterling, Sterling Heights, Mich. Sterling Heights Office of Michigan National Bank of De troit, Detroit, Mich. Purchase 42 Oct. 24, 1980: Sun Bank of Wilton Manors, National Association, Wilton Manors, Fla. Sun Bank of Lauderdale Beach, Lauderdale-by-the-Sea, Fla. Sun Bank of Broward County, Tamarac, Fla. Merger 43 Oct. 31, 1980. First & Merchants National Bank, Richmond, Va. J The Bank of Chatham, Chatham, Va. Merger 43 Oct. 31, 1980: First National Bank of Atlanta, Atlanta, Ga. Cobb County Bank, Powder Springs, Ga. Merger 44 Oct. 31, 1980: Florida First National Bank of Jacksonville, Jacksonville, Fla. Florida First National Bank at Fernandina Beach, Fernandina Beach, Fla. Merger .45 Oct. 31, 1980: Florida National Bank of Miami, Miami, Fla. Florida Bank at Fort Lauderdale, Fort Lauderdale, Fla. Merger 46 6 Oct. 31, 1980: Watseka First National Bank, Watseka, III. Iroquois County Trust Company, Watseka, III. Merger Nov. 1, 1980: Amoskeag National Bank & Trust Co., Manchester, N.H. Amherst Bank & Trust Company, Amherst, N.H. Merger Nov. 14, 1980: Sun First National Bank of Orlando, Orlando, Fla. Sun Bank of Osceola County, St. Cloud, Fla. Sun Bank of Seminole, National Association, Fern Park, Fla. Merger Nov. 21, 1980: First Security Bank of Utah, National Association, Ogden, Utah First Security Bank of Logan, National Association, Lo gan, Utah Merger . . Dec. 1, 1980: Ellis National Bank of Volusia County, DeBary, Fla. Ellis Bank of Seminole .County, Altamonte Springs, Fla. Merger . . . . Dec. 5, 1980: The Huntington National Bank, Columbus, Ohio The First National Bank of Burton, Burton, Ohio Merger Dec. 8, 1980: The Citizens and Southern National Bank of South Caro lina, Charleston, S.C. Colonial State Bank, Inc., Marion, S.C. Purchase . . Dec. 13, 1980: The Springfield Bank, Springfield, Ohio The Xenia National Bank, Xenia, Ohio Merger Dec. 15, 1980: First Bristol County National Bank, Taunton, Mass. The National Bank of Wareham, Wareham, Mass. Merger . . . Dec. 22, 1980: Flint Office of Michigan National Bank, Lansing, Mich. Michigan National Bank—Mid Michigan, Burton, Mich. Purchase Dec. 26, 1980: National Bank of Defiance, Defiance, Ohio National Bank of Paulding, Paulding, Ohio Merger Dec. 31, 1980: The Citizens and Southern National Bank, Savannah, Ga. The Citizens and Southern Emory Bank, Decatur, Ga. The Citizens and Southern Bank of Fulton County, East Point, Ga. The Citizens and Southern DeKalb Bank, Avondale Es tates, Ga. C & S Interim National Bank, Savannah, Ga. Merger Dec. 31, 1980: First National Bank of South Jersey, Egg Harbor Town ship, N.J. First National State Bank of Central Jersey, Trenton, N.J. Merger Dec. 31, 1980: Gulfstream First Bank and Trust, N.A., Boca Raton, Fla. Gulfstream Bank of Boynton Beach, National Associa tion, Boynton Beach, Fla. Gulfstream American Bank and Trust, N.A., Fort Lauder dale, Fla. Merger Page 46 . 47 48 48 49 49 50 51 51 52 53 57 57 55 //. Mergers consummated, involving a single operating bank Page Feb. 1, 1980: Southwest National Bank, San Antonio, Tex. Wurzbach Road National Bank, San Antonio, Tex. Merger . . 66 Feb. 4, 1980: First National Bank of McMinnville, McMinnville, Oreg. The First National Interim Bank of McMinnville, McMinn ville, Oreg. Merger 66 Feb. 6, 1980: Hardin National Bank, Kenton, Ohio F.B.G. National Bank of Kenton, Kenton, Ohio Merger 67 Feb. 25, 1980: The Mountain National Bank of Clifton Forge, Clifton Forge, Va. Colonial American National Bank—Clifton Forge, Clifton Forge, Va. Merger . . . Mar. 1, 1980: Atlantic National Bank, Atlantic City, N.J. Midlantic National Bank/Atlantic, Atlantic City, N.J. Merger 68 Mar. 17, 1980: Pittsfield National Bank, Pittsfield, Mass. Old Colony Bank of Berkshire County, National Associa tion Merger . . . 69 Mar. 20, 1980: Busey First National Bank, Urbana, III. Urbana National Bank, Urbana, III. Merger 70 Mar. 31, 1980: First National Bank in Sioux City, Sioux City, Iowa First National Interim Bank, Sioux City, Iowa Merger . . . . 70 Apr. 30, 1980: Bank of New Hampshire, National Association, Manches ter, N.H. New Hampshire Bank, National Association, Manchester, N.H. Merger . . 71 June 2, 1980: The Pomeroy National Bank, Pomeroy, Ohio Bank One of Pomeroy, N.A., Pomeroy, Ohio Merger . . 72 June 4, 1980: The Marine National Bank of Wildwood, Wildwood, N.J. Horizon Marine National Bank, Wildwood, N.J. Merger . . . 72 June 6, 1980: Gateway National Bank of Beaumont, Beaumont, Tex. New Gateway National Bank of Beaumont, Beaumont, Tex. Merger 73 June 30, 1980: Bank of Idaho, N.A., Boise, Idaho New Bank of Idaho, N.A., Boise, Idaho Consolidation 74 June 30, 1980: The Conrad National Bank of Kalispell, Kalispell, Mont. New Conrad National Bank of Kalispell, Kalispell, Mont. Consolidation 74 June 30, 1980: First National Bank, Fort Collins, Colo. New First National Bank, Fort Collins, Colo. Consolidation . . 75 June 30, 1980: First National Bank of Arizona, Phoenix, Ariz. New First National Bank of Arizona, Phoenix, Ariz. 75 Consolidation . June 30, 1980: First National Bank of Casper, Casper, Wyo. New First National Bank of Casper, Casper, Wyo. 76 Consolidation June 30, 1980: First National Bank of Oregon, Portland, Oreg. New First National Bank of Oregon, Portland, Oreg. Consolidation June 30, 1980: Santa Fe National Bank, Santa Fe, N.M. New Santa Fe National Bank, Santa Fe, N.M. Consolidation July 1, 1980: First National Bank of Toledo, Toledo, Ohio Toledo National Bank, Toledo, Ohio Merger July 7, 1980: Garden State National Bank, Paramus, N.J. New Garden State National Bank, Paramus, N.J. Consolidation July 8, 1980: Summit National Bank, Fort Worth, Tex. West Freeway National Bank, Fort Worth, Tex, Merger July 31, 1980: Peninsula National Bank, Cedarhurst, N.Y. 516 Central Avenue National Bank, Cedarhurst, N.Y. Merger Sept. 18, 1980: Bank of Indiana, National Association, Gary, Ind. Indiana Interim National Bank, Gary, Ind. Merger Sept. 18, 1980: County National Bank of Orange, Orange, Tex. County Bank, National Association, Orange, Tex. Consolidation Sept. 29, 1980: First National Bank of South Central Michigan, Quincy, Mich. SCM National Bank, Quincy, Mich. Consolidation Sept. 30, 1980: American National Bank, Omaha, Nebr. ANB Bank, N.A., Omaha, Nebr. Merger Sept. 30, 1980: First National Bank of Woodstock, Woodstock, III. FNW National Bank, Woodstock, III. Merger Oct. 1, 1980: Bank One of Fairborn, N.A., Fairborn, Ohio The First National Bank of Fairborn, Fairborn, Ohio Consolidation Oct. 1, 1980: The First National Bank of Madisonville, Madisonville, Tex. New First National Bank, Madisonville, Tex. Merger Oct. 1, 1980: Liberty National Bank and Trust Company of Louisville, Louisville, Ky. Liberty Bank of Louisville, National Association, Louis ville, Ky. Merger Oct. 20, 1980: O'Hare International Bank, National Association, Chi cago, III. O'Hare National Bank, Chicago, III. Merger Page 77 77 78 79 79 80 80 83 83 84 84 85 86 86 87 Oct. 21, 1980: The Commercial National Bank of Little Rock, Little Rock, Ark. Commercial National Bank of Little Rock, Little Rock, Ark. Merger 87 Nov. 3, 1980: The First National Bank of Columbus, Columbus, Ga. New Columbus National Bank, Columbus, Ga. Consolidation 88 7 Nov. 7, 1980. The Citizens National Bank and Trust Company, Wellsville. NY. Key Bank of Western New York, N.A., Wellsville. NY. Merger . Nov. 17, 1980: The City National Bank and Trust Company of Salem, Sa lem, N.J. Second City National Bank and Trust Company of Salem, Salem, N.J. Merger Nov. 21, 1980: First National Bank and Trust Company of Racine, Ra cine, Wis. 1st Bank and Trust Company of Racine, N.A., Racine, Wis. Merger . . Nov. 28, 1980: The National Bank of Northern New York, Watertown, NY. Key Bank of Northern New York, N.A., Watertown, NY. Merger . Dec. 5, 1980: Harbor National Bank of Boston, Boston, Mass. New Harbor National Bank, Boston, Mass. Merger . . Dec. 11, 1980: NorthPark National Bank of Dallas, Dallas, Tex. National Bank of NorthPark, Dallas, Tex. Merger Dec. 11, 1980: Security National Bank, Lynn, Mass. Security Bank, N.A., Lynn, Mass. Consolidation. Dec. 15, 1980: The City National Bank of Fort Smith, Fort Smith, Ark. Third National Bank of Fort Smith, Fort Smith, Ark. Merger . 8 Page 89 89 90 91 91 92 92 93 Dec 19, 1980: Page The First National Bank of Des Plaines, Des Plaines, III. Prairie Lee National Bank, Des Plaines, III. Merger . . 94 Dec 29, 1980: National Bank of Commerce of Birmingham, Birming-. ham, Ala. Commerce Bank, N.A., Birmingham, Ala. Merger . . 94 Dec 31, 1980: The First National Bank of Decatur, Decatur, III. Third National Bank of Decatur, Decatur, III. Merger 95 Dec 31, 1980: First National Bank of McDonough, McDonough, Ga. First National Interim Bank of McDonough, McDonough, Ga. Merger . . 95 Dec. 31, 1980: The Laredo National Bank, Laredo, Tex. New Laredo National Bank, Laredo, Tex. Merger . 95 Dec. 31, 1980: Security National Bank, Houston, Tex. Allied Bank-West Loop, N.A., Houston, Tex. Merger . . 97 Dec. 31, 1980: The Talladega National Bank, Talladega, Ala. First Alabama Bank of Talladega County, N.A., Ala. Merger . . 97 Dec. 31. 1980: West Side National Bank of San Angelo, San Angelo, Tex. New West Side National Bank of San Angelo, San Angelo, Tex. Merger 98 /. Mergers consummated, involving two or more operating banks. FIRST AMERICAN NATIONAL BANK OF ST. CLOUD, St. Cloud, Minn., and First State Bank of Rice, Rice, Minn. Banking offices Names of banks and type of transaction Total assets First State Bank of Rice, Rice, Minn., with and the First American National Bank of St. Cloud, St. Cloud, Minn. (11818), which had merged January 1, 1980, under charter (11818) and title of "The First American National Bank of St. Cloud." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge First State Bank of Rice, Rice, Minn. (State Bank), into the First American National Bank of St. Cloud, St. Cloud, Minn. (First). The application was ac cepted for filing on April 5, 1979, and is based on a written agreement executed by the proponents on Jan uary 31, 1979. State Bank operates from a single office approxi mately 15 miles from St. Cloud. It reported total de posits of $2.8 million on December 31, 1978. First also operates from a single office in St. Cloud and reported'total deposits of $87.5 million on Decem ber 31, 1978. It is a subsidiary of the Otto Bremer Foundation, a registered bank holding company that is the state's third largest banking organization with 2.8 percent of the commercial bank deposits. The applicants contend that First competes in a banking market which is approximated by the St. Cloud SMSA. First, the only subsidiary of the Otto Bre mer Foundation operating within this market, is the largest of 24 banking organizations with 19 percent of the market's commercial bank deposits.* Consumma tion of the merger would increase its share of market deposits by less than 1 percent. The Federal Reserve System has delineated a more limited definition of the relevant banking market, ap proximated by the eastern half of Stearns County, the western half of Sherburne County and all of Benton County. Within this market, First is the largest of 19 banking organizations with 21 percent of commercial bank deposits. Consummation of the proposal would increase its share of this market's deposits by less than 1 percent. * Market data are as of December 31, 1977, unless otherwise indicated. Market totals do not include deposits of Granite City National Bank, St. Cloud, which opened in 1978 or de posits of a branch of Santiago State Bank which are not re ported separately. $ 2,733,000 116,480,000 119,059,000 In operation To be operated 1 2 3 Because of its size, State Bank serves only its small community and nearby rural areas. State Bank's mar ket is entirely included in either the Federal Reserve or the SMSA definition of First's banking market. First re ports that it has extended 13 direct loans totaling $1.4 million in this area (2.6 percent of its total loans), and it also undoubtedly receives some deposits from the area. Consummation of the proposal would eliminate some existing competition but because of the large number of commercial banks competing in the market, including the state's two largest banking organizations, and the small market share of State Bank, the effect on competition would not be adverse. First could not now establish a branch (detached fa cility) in Rice due to the head office protection provi sions of Minnesota banking law. Since detached facili ties are not protected, consummation of the merger would open the community to branching by other com mercial banks. First's financial and managerial resources are satis factory, and its future prospects are favorable. State Bank's financial and managerial resources are limited. Its future prospects are uncertain due to substantial operating problems and its small size. First will provide additional banking services to the present customers of State Bank if the merger is con summated. These services include automated tellers and data processing, larger loans and additional lend ing expertise. The continuing bank will also be a single source of banking services that is convenient to both home and work for those customers who commute from Rice to St. Cloud. Consummation of the merger will result in increased convenience and satisfaction of additional needs for the consumer of banking services in Rice. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that First's record of helping to meet the credit needs of its entire community, including low and moderate income communities, is less than satisfactory. 9 This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the merger. November 21, 1979. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have any adverse effect upon competition. FIRST NATIONAL BANK OF FLORIDA, Tampa, Fla., and The First National Bank in Plant City, Plant City, Fla., and The Broadway National Bank of Tampa, Tampa, Fla. Banking offices Names of banks and type of transaction Total assets The First National Bank in Plant City (14793), Plant City, Fla., with and The Broadway National Bank of Tampa (14388), Tampa, Fla., with and First National Bank of Florida (3497), Tampa, Fla., which had merged January 2, 1980, under the charter and title of the latter (3497). The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge The First National Bank in Plant City, Plant City, Fla., and The Broadway National Bank of Tampa, Tampa, Florida (Merging Banks), into and under the charter of First National Bank of Florida, Tampa, Fla. (Tampa Bank). The application was filed on July 12, 1979, and is based on a written agreement executed by the applicant banks on June 12, 1979. The proponent banks are wholly owned, with the ex ception of directors' qualifying shares, and controlled by First Florida Banks, Inc., Tampa, Fla., a registered bank holding company. Consummation of this corpo rate reorganization would have no effect on competi tion. A review of the financial and managerial re sources and future prospects of the existing and proposed institutions, and the convenience and needs of the community to be served has disclosed no rea In To be operation operated $ 43,073,000 51,348,000 660,624,000 755,045,000 son why this application should not be approved (see 12 USC 1842(c)(21)). A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the banks' records of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the merger. October 22, 1979. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are all wholly owned subsidiaries of the same bank holding company. As such, their pro posed merger is essentially a corporate reorganization and would have no effect on competition. HERITAGE BANK NATIONAL ASSOCIATION, Cherry Hill, N.J., and Coastal State Bank, Ocean City, N.J. Banking offices Names of banks and type of transaction Total assets Coastal State Bank, Ocean City, N.J., with was purchased January 2, 1980, by Heritage Bank National Association, Cherry Hill, N.J. (1209), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION This is the Comptroller's decision on the application of Heritage Bank National Association, Cherry Hill, N.J. (Heritage), to purchase the assets and assume the lia bilities of Coastal State Bank, Ocean City, N.J. (Coastal). This application was filed on August 13, 1979, and is based upon an agreement executed by the proponents on August 6, 1979. As of June 30, 1979, Heritage had total deposits of $648.9 million, 10 In To be operation operated $ 63,170,000 q 743,861,000 799,213,000 46 51 and Coastal's total deposits were $55.5 million. Heri tage is a wholly owned subsidiary of Heritage Bancorporation, Cherry Hill, N.J. (Bancorporation), a regis tered bank holding company. Bancorporation is the fifth largest commercial banking organization in New Jersey and controls approximately 3.9 percent of total domestic deposits in the state. The relevant geographic market for Coastal is the eastern portion of Atlantic and Cape May counties along the southeastern coast of New Jersey where the bank's five offices are located. Within this market, there are 11 commercial banking organizations that operate a total of 63 offices and had total market de posits of $887 million on June 30, 1978. The three larg est banks in the market operate 38 offices and collec tively hold approximately 66.6 percent or $591 million of total market commercial bank deposits. Coastal ranks as the fifth largest bank in the market with 6.4 percent of total market deposits. Since Bancorporation has no banking offices in the market, it would merely succeed to Coastal's share in this market. The closest banking offices of the proponents are some 25 miles apart. These offices are separated by a number of communities, and there are offices of other commer cial banking organizations conveniently available to the public. Therefore, approval of this acquisition would not eliminate any meaningful degree of existing competition. New Jersey state banking statutes allow statewide de novo branch expansion by commercial banks. Thus, the proponent banking organizations could branch into the areas served by the other. Coastal has shown no desire to expand outside its market area, and it is unlikely that the bank would expand de novo into any area currently served by Bancorporation. The likelihood that Bancorporation would enter Coastal's market de novo appears remote since a previous branch it opened in this market proved to be un successful and was closed in 1972. Consequently, the overall competitive effects of this acquisition would not substantially lessen competition in any relevant market or violate the standards found in 12 USC 1828(c)(5). The financial and managerial resources of both Heri tage and Coastal are satisfactory. The future pros pects of the two banks, independently and in combi nation, appear favorable (12 USC 1828(c)(5)). After consummation of this transaction, the addi tional capabilities of Heritage, in conjunction with its corporate parent, will be made available to the present customers of Coastal in such areas as international banking, full trust services, equipment leasing and a substantially larger legal lending limit. These are posi tive considerations on the issue of convenience and needs. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the bank's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed transaction. November 21, 1979. SUMMARY OF REPORT BY ATTORNEY GENERAL Heritage Bancorporation does not have offices in either Atlantic County or Cape May County, where Bank operates its five offices. The closest offices of the two institutions are approximately 25 miles apart. Al though Heritage Bancorporation does operate two of fices in the "Hammonton market" (as defined by the Philadelphia Federal Reserve Bank), it operates none in the adjacent "Atlantic City market" where Bank's two Atlantic County offices are located. Hence, the merger would not eliminate any significant existing competition between the institutions. New Jersey law permits de novo branching through out the state, and Atlantic and Cape May counties are attractive areas for expansion. However, in view of Bank's market share in those counties (2 percent and 10.9 percent) and Heritage Bancorporation's unsuc cessful experience in branching in Pleasantville, N.J., it does not appear that the merger will have a signifi cantly adverse effect on potential competition. We conclude that the merger would not have signifi cant adverse effects upon competition. * JIA, THE FIRST NATIONAL EXCHANGE BANK OF VIRGINIA, Roanoke, Va., and Eagle Rock Bank, Inc., Eagle Rock, Va. Banking offices Names of banks and type of transaction Total assets Eagle Rock Bank, Inc., Eagle Rock, Va., with and The First National Exchange Bank of Virginia, Roanoke, Va. (2737), had 37), which wf merged January 25, 1980, under the charter and title of latter bank (2737). 2737). The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Eagle Rock Bank, Inc., Eagle Rock, Va. (Bank), into and under the charter of The First National Ex change Bank of Virginia, Roanoke, Va. (Exchange). This application was filed on July 18, 1979, and rests on an agreement signed by the proponents on June $ 3,851,000 1,090,470,000 1,094,350,000 In operation To be operated 1 35 36 19, 1979. As of March 31, 1979, Bank and Exchange had total deposits of $4.3 million and $866.1 million, respectively. Exchange serves as the lead bank for its parent corporation, Dominion Bankshares Corporation (Dominion), a registered bank holding company. Dominion is the fourth largest banking organization in Virginia and controls 8.7 percent of total domestic de posits in the state. 11 As a result of this merger, Exchange will continue to provide the banking public in the Eagle Rock area with continued and uninterrupted convenient banking serv ices. Additionally, Exchange will provide new and ex panded banking services that are beyond the abilities and resources of Bank to provide. These services in clude trust services, FHA and VA loans, bank credit cards, equipment leasing (through an affiliate com pany) and investment services. These are positive considerations on the issue of convenience and needs. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that Ex change's record of helping to meet the credit needs of its entire community, including low and moderate in come neighborhoods, is less than satisfactory. This is the prior written approval required for the ap plicants to proceed with the proposed merger. December 14, 1979. The relevant geographic market is the Botetourt County portion of the Roanoke SMSA. Roanoke is about 34 miles from Eagle Rock, which is in the rural northern part of Botetourt County. The closest office of Exchange to Bank is its Hollins headquarters office, 26 miles from Bank's sole office. Although Roanoke and Eagle Rock are connected by a main highway, they are separated by rugged terrain, and there are inter vening communities. If the proposed merger is con summated, Exchange will continue to rank as the larg est commercial bank in the Roanoke SMSA, and it would increase its share of the deposits in the SMSA by a modest 0.5 percent to a total of 42.6 percent. The Comptroller finds that the proposed merger would eliminate only a negligible amount of existing competi tion between Bank and Exchange, and the overall competitive effects of this proposal are not likely to substantially lessen competition or otherwise be a vio lation of antitrust standards found in the Bank Merger Act. The financial and managerial resources of Exchange are satisfactory. The financial and managerial re sources of Bank are unsatisfactory, and the future prospects of the institution due to its distressed finan cial condition are extremely limited. The future pros pects of Exchange and the combined bank are favor able. * SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have an adverse effect upon competition. * * THE CITIZENS NATIONAL BANK AND TRUST COMPANY, Wellsville, N.Y., and The State Bank of Belmont, Belmont, N.Y. Banking offices Names of banks and type of transaction Total assets The Citizens National Bank and Trust Company, Wellsville, N.Y. (4988), with and The State Bank of Belmont, Belmont, N.Y., which had merged January 31, 1980, under the charter and title of "The Citizens National Bank and Trust Company." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on the application to merge The State Bank of Belmont, Belmont, N.Y. (Bel mont Bank), into and under the charter of The Citizens National Bank and Trust Company, Wellsville, N.Y. (CNB). The application was accepted for filing on Oc tober 15, 1979, and is based on a written agreement executed by the proponents on May 24, 1979. CNB is a national bank that had total deposits of $96.9 million as of June 30, 1979. It operates a main office and five branch offices in Allegany County and .one additional branch office in Cattaraugus County. Belmont Bank, a state-chartered bank, had total de posits of $3 million as of June 30, 1979. It presently operates a single banking office in Belmont, the county seat of Allegany County. Belmont Bank does not ac cept any interest-bearing deposits. Belmont is in central Allegany County in Amity Town ship. Because of its small size, Belmont Bank serves only the village of Belmont and its immediate environs. In fact, the applicants maintain that a substantial por- 12 $112,347,000 3,224,000 115,570,000 In operation To be operated 1 7 8 tion of the bank's demand deposits come from the principals of the bank, Belmont (population approxi mately 1,100) and from Allegany County. Belmont Bank states that it carries out virtually all of its business in Belmont and Amity Township. This geographic area is approximated by a circle around Belmont with a ra dius of about 3 miles. Consequently, the relevant geo graphic market for analysis of this proposal is a 3-mile radius around Belmont. Within this market, Belmont is the only commercial bank. There are only three com mercial banks in Allegany County. The largest is First Trust Union Bank of Wellsville, a subsidiary of Security New York State Corporation, a billion dollar banking or ganization headquartered in Rochester. CNB is the second largest, and Belmont is the smallest. The bank ing office nearest to Belmont Village is First Union's Friendship branch, approximately 6 miles away. First Union has another branch 8 miles from Belmont, and CNB's closest branch is in Wellsville, 9 miles away. Because of Belmont Bank's small size, lack of inter est-bearing deposits and low loan limit (approximately $50,000), citizens of Belmont must travel to other banking offices for the services not offered in their vil lage. Consequently, other banks do have business within Belmont Bank's geographic market area. This is business that Belmont Bank is unwilling or unable to serve. It can be hardly considered business won by the vigors of competition but, rather, is business by default. In the case of applicant CNB, it obtains $370,000, or less than 2 percent of its total demand deposits, from Belmont's market and has extended loans totaling $1.4 million, or less than 2 percent of its total loans in this market. The amount held by First Union is not known. In light of the foregoing and the additional fact that Belmont Bank offers its customers little more than convenience, which is, itself, a product not of com petition but of New York's home office protection law, the Comptroller finds that consummation of this proposal would eliminate minimal competition between appli cants. On the other hand, consummation of this merger will be in the best interest of Belmont and the surrounding area. Home office protection will be eliminated, making Belmont available for branching if that possibility be comes economically feasible. Interest-bearing ac counts will be available without a lengthy commute. Trust services and credit cards will be available for the first time. The Comptroller finds that the adverse ef fects, if any, due to a loss of competition between Beimont Bank and CNB, are greatly outweighed by the convenience and needs factors which would result from the merger, including increased competitive op portunities for other banks in Belmont. The financial and managerial resources of both banks are satisfactory. The future prospects of Bel mont Bank are limited due to its small size. The future prospects of the combined bank are good. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the bank's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this merger. December 31, 1979. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have an adverse effect upon competition. ELLIS NATIONAL BANK OF TAMPA, Tampa, Fla., and Ellis National Bank of Davis Islands, unincorporated Hillsborough County, Fla., and Ellis National Bank of West Hillsborough, unincorporated Hillsborough County, Fla., and Ellis National Bank of North Tampa, unincorporated Hillsborough County, Fla. Banking offices Names of banks and type of transaction Total assets Ellis National Bank of Tampa, Tampa, Fla. (14932), with and Ellis National Bank of Davis Islands, unincorporated Hillsborough County, Fla. (16459) with . . . . and Ellis National Bank of West Hillsborough, unincorporated Hillsborough County, Fla. (16438) with and Ellis National Bank of North Tampa, unincorporated Hillsborough County, Fla., which had merged February 1, 1980, under the charter and title of "Ellis National Bank of Tampa." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Ellis National Bank of Davis Islands, unincorpo rated Hillsborough County, Fla., Ellis National Bank of West Hillsborough, unincorporated Hillsborough County, Fla., Ellis National Bank of North Tampa, unin corporated Hillsborough County, Fla., and Ellis Na tional Bank of Tampa, Tampa, Fla. This application was accepted for filing on May 1, 1979, and is based on a written agreement executed by the applicants on March 15, 1979. All four banks are subsidiaries of Ellis Banking Cor poration, Bradenton, Fla. Ellis Banking Corporation is motivated to consolidate its operations in Hillsborough County by a recent change in Florida banking law which permits county-wide branching. Consummation of the merger will have no effect on competition in any market in which the holding company competes. $30,262,000 4,820,101 4,827,000 4,038,159 43,883,369 In To be operation operated 1 1 1 1 4 The financial and managerial resources and the fu ture prospects of all four banks are satisfactory. The future prospects for the continuing bank are favorable. Consummation of the merger will result in a more effi cient corporate structure that will allow the continuing bank to more efficiently serve the banking needs of its community. This should result in increased conven ience and greater satisfaction of community financial needs. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibility revealed no evidence that the ap plicants' records of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the applicants to proceed with the merger. November 30, 1979. 13 SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are all wholly owned subsidiaries of the same bank holding company. As such, their pro posed merger is essentially a corporate reorganization and would have no effect on competition. BAYBANK FIRST EASTHAMPTON, NATIONAL ASSOCIATION, Easthampton, Mass., and Mohawk Bank and Trust Company, Greenfield, Mass. Banking offices Names of banks and type of transaction Total assets Mohawk Bank and Trust Company, Greenfield, Mass., with was purchased February 16, 1980, by Baybank First Easthampton, National Association, Easthampton, Mass. (428), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION On February 16, 1980, application was made to OCC for prior written approval for Baybank First Easthamp ton, National Association, Easthampton, Mass. (As suming Bank), to purchase certain of the assets and assume certain of the liabilities of Mohawk Bank and Trust Company, Greenfield, Franklin County, Mass. (Mohawk). Mohawk was a state bank operating a single office with deposits of approximately $5 million. On February 16, 1980, Mohawk was declared insolvent, and the Federal Deposit Insurance Corporation (FDIC) was ap pointed as receiver. The present application is based on an agreement, which is incorporated herein by ref erence, by which the FDIC, as receiver, has agreed to sell certain of Mohawk's assets to Assuming Bank, and Assuming Bank has agreed to assume certain of the former liabilities of Mohawk. For the reasons stated hereafter, Assuming Bank's application is approved, and the purchase and assumption transaction may be consummated immediately. Under the Bank Merger Act, 12 USC 1828(c), the Comptroller cannot approve a purchase and assump tion transaction which would have certain anticompeti tive effects unless these anticompetitive effects are found to be 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. Also, the Comptroller is directed to consider the financial and managerial resources and future prospects of the existing and proposed institution, and, in addition, the convenience and needs of the community to be served. When necessary, however, to prevent the evils associated with the failure of a bank, the Comptroller can dispense with the standards appli cable to usual acquisition transactions and need not 14 In operation To be operated $ 5,483,500 14,811,500 20,295,000 consider reports on the competitive consequences of the transaction ordinarily solicited from the Department of Justice and other banking agencies. In such cir cumstances, the Comptroller is authorized to act im mediately to approve an acquisition and to authorize the immediate consummation of the transaction. The proposed transaction will prevent disruption of banking services to the community and potential losses to a number of uninsured depositors. Assuming Bank has the financial and managerial resources to absorb Mohawk and to enhance the banking services available in the Greenfield banking market. The Comptroller thus finds that the proposed trans action will not result in a monopoly, be in furtherance of any combination or conspiracy to monopolize or at tempt to monopolize the business of banking in any part of the United States, and that the anticompetitive effects of the proposed transaction, if any, are clearly outweighed in the public interest by the probable ef fect of the proposed transaction in meeting the con venience and needs of the community to be served. For these reasons, Assuming Bank's application to as sume the liabilities and purchase certain assets of Mo hawk as set forth in the agreement executed with the FDIC as receiver is approved. The Comptroller further finds that the failure of Mohawk requires immediate action, as contemplated by the Bank Merger Act, to prevent disruption of banking services to the commu nity. The Comptroller thus waives publication of notice, dispenses with the solicitation of competitive reports from other agencies, and authorizes the transaction to be consummated immediately. February 16, 1980. Due to the emergency nature of the situation, no Attor ney General's report was requested. BANCOHIO NATIONAL BANK, Columbus, Ohio, and The Citizens Bank of Shelby, Shelby, Ohio Banking offices Names of banks and type of transaction Total assets The Citizens Bank of Shelby, Shelby, Ohio, with and BancOhio National Bank, Columbus, Ohio (5065), which had merged February 29, 1980, under charter and title of the latter bank (5065). The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge The Citizens Bank of Shelby, Shelby, Ohio (Bank), into and under the charter of BancOhio Na tional Bank, Columbus, Ohio (BONB). This application was accepted by this Office on October 17, 1979, and is based on an agreement signed by the participants on September 11, 1979. Bank operates two full-service offices and one drivein facility in Shelby. It operates no offices outside Shelby. It reported total deposits of $24 million on June 30, 1979. BONB operates over 200 offices in approximately 40 counties in Ohio. It reported total deposits of $3.5 bil lion on June 30, 1979, and ranks as the second largest banking organization in Ohio with approximately 9.2 percent of the total commercial bank deposits. Bank is in northwestern Richland County. Because of its small size, it competes only in Shelby and its im mediate environs. It obtains 85 percent of its deposits and extends virtually all of its loans within a 3-mile ra dius of the city. Therefore, the relevant geographic market for analysis of the competitive effects of this proposal is a 3-mile radius around Shelby. Bank is the smaller of two commercial banks operat ing in this market with approximately 42 percent of the market's commercial bank deposits. BONB operates no offices in this market or Richland County and re ports that it has extended no loans and obtained only a nominal $60,000 in deposits from the market area. The closest offices of the two banks are approximately 40 miles apart. BONB does operate offices in adjacent Knox County and under Ohio branching law could establish branches in Shelby. The city has a stable population of less than 10,000 and is already served by two com mercial banks operating six offices. Additional finan cial services are provided by a savings and loan asso ciation and four credit unions. There have been no new entrants into the Shelby or Richland County bank ing markets in the last 4 years. It is unlikely that BONB $ 27,019,000 4,730,831,000 4,753,000,000 In operation To be operated 3 222 225 would choose to establish a de novo office in Shelby in the foreseeable future. There is no significant existing competition between the two banks, and it is unlikely that any significant competition between the two banks will develop in the near future. Therefore, consummation of the merger would have no significant effect on competition. Addi tionally, BONB's share of commercial bank deposits in Ohio would be increased by a modest 0.06 percent, and the merger would not adversely affect a concen tration of banking services in Ohio. The financial and managerial resources of BONB are satisfactory. The financial and managerial re sources of Bank, although limited, are generally satis factory. The future prospects of Bank are also limited in view of its relatively small size. The future prospects of the resultant bank are good. The Shelby banking community should benefit from the expanded and additional banking services that BONB will offer. These services include a significantly larger legal lending limit, accounts receivable financ ing, leasing, agricultural leasing, real estate construc tion loans and trust services. These are positive con siderations on the issue of convenience and needs. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that BONB's record of helping to meet the credit needs of its entire community, including low and moderate in come neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed merger. BONB is also authorized to operate all former offices and facilities of Bank and branches and facilities of BONB. January 7, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have an adverse effect upon competition. 15 NATIONAL BANK OF NORTH AMERICA, New York, N.Y., and Sixteen Branches of Bankers Trust Company, New York, N.Y. Banking offices Total assets Names of banks and type of transaction Sixteen Branches of Bankers Trust Company, New York, N.Y., with.. were purchased March 10, 1980, by National Bank of North America, had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION This is the Comptroller's decision on an application filed by National Bank of North America, New York (P.O. Jamaica), N.Y. (NBNA), to purchase the assets and assume the liabilities of 16 branches of Bankers Trust Company, New York, N.Y. (Bankers). This appli cation was accepted on October 24, 1979, and is based on an agreement executed by the proponents on July 31, 1979. NBNA had total domestic deposits of approximately $3.7 billion on June 30, 1979, and operated its main office and 136 branches in New York City, Long Island and Westchester County. NBNA is a subsidiary of Na tional Westminster Bank, Ltd., London, England. Bankers is a subsidiary of Bankers Trust New York Corporation, New York, N.Y., a registered bank hold ing company with total deposits of $18.4 billion. The relevant market in which to evaluate the com petitive consequences of the proposed acquisition is the metropolitan New York City banking market com prised of the New York City SMSA and the NassauSuffolk SMSA. There are 106 domestic commercial banks operating 2,125 offices and holding $122 billion in deposits within this market. NBNA proposes to ac quire 10 branches in Westchester County, three in Bronx County, two on Staten Island (Richmond County), and one in New York City. These 16 branches have total deposits of approximately $177 million. Within the New York City banking market, NBNA ranks as the 10th largest bank controlling 2 percent of the market's total commercial bank deposits, and Bankers ranks as the 6th largest bank with almost 8 percent of the total market deposits. Approval of this application would not alter either Bankers' or NBNA's 16 $ 177,301,000 16 4,477,000,000 4,643,301,000 138 York, N.Y. (7703), which 154 relative ranking in the market and would add only 0.10 percent of total market deposits to that presently con trolled by NBNA. Consummation of this proposal would not eliminate any meaningful existing competi tion between Bankers and NBNA and would have little impact on the concentration of banking resources within the market. There is little potential for additional competition de veloping between the proponents within the foresee able future since Bankers has publicly announced in tention to sell its retail banking offices. The financial and managerial resources of both NBNA and Bankers are generally satisfactory, and the future prospects of both banks appear good. NBNA's operation of Bankers' 16 branches will provide the bank ing public with a continued and uninterrupted conve nient source of banking services. This is a positive factor on convenience and needs considerations and lends considerable weight toward approval of the application. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that NBNA's record of helping to meet the credit needs of its entire community, including low and moderate in come neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this proposed transfer of bank deposits and assets. NBNA is also authorized to oper ate Bankers' 16 offices as branches of NBNA. January 11, 1980. The Attorney General's report was not received. * In To be operation operated FIRST NATIONAL BANK OF MANSFIELD, Plymouth, Ohio, and Buckeye State Bank, Galion, Ohio Banking offices Total assets Names of banks and type of transaction Buckeye State Bank, Galion, Ohio, with and First National Bank of Mansfield, Plymouth, Ohio (2577), which had merged March 12, 1980, under the charter of the latter (2577) and title "First Buckeye Bank, N.A.' The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge the Buckeye State Bank, Galion, Ohio (Buckeye Bank), into the First National Bank of Mansfield, Plym outh, Ohio (FNB), with the surviving institution assum ing the title of "First Buckeye Bank, N.A." This applica tion was filed on September 19, 1979, and is based on an amended agreement executed by the proponents on September 12, 1979. The merger application incor porates an application for change of name to be effec tive on consummation of the merger. As of June 30, 1979, FNB had total deposits of $198.3 million, and Buckeye Bank had total deposits of $120.9 million. FNB operates 19 offices, and all but one are in Rich land County. Its primary office and six branches are in Mansfield, the major city of Richland County. Using ZIP code analysis, FNB determined that 75 percent of its deposits originate in the Mansfield, Lexington, On tario and Crestline ZIP codes. A similar analysis of Buckeye Bank's deposits shows 86 percent originating in the southeast corner of Crawford County, which is the Galion ZIP code. Buckeye Bank's head office and two branches are in this geographic area. The deposit data, standing alone, would tend to indicate that the banks operate in separate geographic markets. Com muting patterns and economic interchange data sup port this conclusion and have led Rand McNally to place Galion and Mansfield in separate Rand McNally areas. Further, Galion banks charge lower mortgage interest rates and maintain shorter banking hours than the Mansfield banks. This data caused the Federal Re serve Bank of Cleveland to conclude that the propo nents serve separate, adjacent banking markets. The Comptroller agrees with this conclusion. Since applicants do not compete in the Galion mar ket, this merger would merely replace Buckeye Bank with FNB in that market. As such, it is a market exten sion merger for FNB. FNB could legally enter this mar $ 24,205,000 238,028,000 In operation To be operated *3 on 262,233,000 °3 ket by a de novo branch, however, the Federal Re serve Bank of Cleveland found the probability of this to be fairly small, citing Gallon's slow population growth* and the lack of excess profits in existent Galion banks.t The financial and managerial resources of FNB are satisfactory. The financial and managerial resources of Buckeye Bank are uncertain. It has had a below peer rate of return for the last 3 years and now faces, as its sole competitor in Galion, the third largest holding company in Ohio.$ The future prospects of the com bined bank are good. The combined bank will be much better equipped to compete with the First Na tional Bank of Galion. It will offer services such as trust and electronic banking, not now offered by Buckeye Bank. The needs and convenience of customers in Galion will be better served by two strong competitors than by one strong and one weak competitor. The review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that FNB's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this merger. The proposed name change is approved conditioned upon consum mation of the merger. February 11, 1980. The Attorney General's report was not received. * Population grew from 18,244 in 1960 to 18,525 in 1970. f The Federal Reserve Bank reports return on assets as be tween 2 and 29 percent below banks of similar size in Ohio in the period of June 1975 to 1978. $ The only other bank in Galion, the First National Bank of Galion, was recently acquired by National City Corporation. 17 FIRST NATIONAL BANK OF NEW JERSEY, Totowa, N.J., and South Amboy Trust Company, South Amboy, N.J. Banking offices Names of banks and type of transaction Total assets South Amboy Trust Company, South Amboy, N.J., with was purchased March 21, 1980, by First National Bank of New Jersey, Totowa, N.J. (329), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION $ 23,439,000 1 743,879,000 763,792,000 25 To be operated 26 with total deposits of less than $50 million, available for acquisition by outside organizations. The financial and managerial resources of both First and Amboy are satisfactory. The future prospects of the two banks, independently and in combination, are favorable. After consummation of this transaction, the addi tional capabilities of First will be available to the present customers of Amboy. Additional services to be made available include statement savings, long-term savings certificates, overdraft checking, credit cards, trust services and a substantially large legal lending limit. These are positive considerations on the issue of convenience and needs. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that First's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required for the ap plicants to proceed with the proposed purchase and assumption. February 20, 1980. This is the Comptroller's decision on the application of First National Bank of New Jersey, Totowa, N.J. (First), to purchase the assets and assume the liabilities of South Amboy Trust Company, South Amboy, N.J. (Am boy). This application was accepted for filing on No vember 2, 1979, and is based on a written agreement executed by the proponents on September 10, 1979. First had total deposits of $659 million on June 30, 1979. It operates 25 branches in Passaic, Bergen and Morris counties. Amboy, a unit bank in Middlesex County, had total deposits of $20 million on June 30, 1979. The relevant geographic market is South Amboy and neighboring Sayreville. There are four commercial banks serving this market. The two largest banks con trol, respectively, 54 percent and 24 percent of the market's deposits. Amboy, the third largest, holds 18 percent of the deposits. First does not have any branches in the market and would merely succeed to Amboy's share of the market. The closest offices of the two banks are approximately 40 miles apart, and there are two heavily populated counties with numerous banking alternatives separating the distinct markets served by the two banks. There is no significant com petition between First and Amboy. The market is heav ily banked and would not present a likely target for de novo entry by First. Even after this merger, there would be 12 independent commercial banks, including five * In operation SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have a significantly adverse ef fect upon competition. * * SOCIETY NATIONAL BANK OF CLEVELAND, Cleveland, Ohio, and First National Bank of Clermont County, Bethel, Ohio Banking offices Names of banks and type of transaction Total assets Society National Bank of Cleveland (14761), Cleveland, Ohio, with and First National Bank of Clermont County (5627), Bethel, Ohio, which had merged March 21, 1980, under charter of the former (14761) and title of "Society National Bank." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge First National Bank of Clermont County, Bethel, Ohio (First), into Society National Bank of Cleveland, Cleveland, Ohio (Society). This application was filed on July 12, 1979, and is based on an agreement exe cuted between the applicants on May 10, 1979. As of 18 $1,644,175,000 29,779,000 1,673,954,000 In operation To be operated 42 1 43 April 30, 1979, First had total deposits of $26.5 million, and Society had total deposits of $1.2 billion. Society is a subsidiary of Society Corporation, Cleveland. On February 7, 1979, the Federal Reserve Bank of Cleveland, acting pursuant to authority delegated by the Federal Reserve Board, approved an application for Society Corporation, Cleveland, to acquire the suc cessor by merger to First. On March 14, 1979, OCC approved an application to merge First into First Bank of Clermont County, N.A., a bank being organized by Society Corporation. Effective at the close of business on April 13, 1979, the merger was consummated, and First became a wholly owned commercial banking subsidiary of Society Corporation. Since both First and Society are subsidiaries of the same bank holding company, this application is merely a corporate reorganization whereby Society Corporation is realigning and consolidating a portion of its banking interests throughout the state. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). Additionally, a review of the fi nancial and managerial resources and future pros pects of the existing and proposed institutions and convenience and needs of the community to be served has disclosed no information why this applica tion should not be approved (12 USC 1828(c)(5)). Finally, OCC considered this application in light of the Community Reinvestment Act (CRA) (12 USC 2091). CRA requires that OCC assess the Applicants' records of helping to meet the credit needs of their en tire communities, including low and moderate income neighborhoods, consistent with their safe and sound operations, and to take their records into account in evaluating this application (12 USC 2903). This review included a thorough consideration of protests filed by the Union-Miles Community Coalition and the Buck eye-Woodland Congress (collectively, Protestants), in formation presented at a public hearing and informa tion available to this Office as part of its supervisory responsibilities.* Based on this review and on positive indications from Society that promised future improve ments will be achieved, approval of this merger appli cation was found to be in the public interest, and the application was approved on February 8, 1980. Community Reinvestment Act Supplement This supplement discusses in detail the Comptroller's assessment of Society National Bank's (Society) rec ord under the Community Reinvestment Act (CRA). Particular coverage is given to the CBCT branch appli cations approval with general discussion of the merger decision. In deciding the applications, the OCC is required to * In addition to this merger, Society filed five applications to establish customer-bank communications terminal (CBCT) branches in Fisher-Fazio Food Stores in Mentor-on-the-Lake, Mentor, Painesville Twp., Wicklifte and Willowick, Ohio, dur ing the period this merger was pending. Protestants filed ob jections to these branch applications and requested a public hearing which was held October 20, 1979. Because Protes tants' objections dealt with Society's CRA performance, pro cessing of the merger application was conducted simultane ously with CBCT branch applications. During this processing, Society and Protestants had considerable dia logue and were able to reach a mutually agreeable under standing. The OCC considers this joint effort a positive ex ample of how a bank can work effectively with its community and has attached a special CRA supplement to this decision which addresses CRA aspects of Protestants' objections against CBCT branch applications in particular and this mer ger in general. evaluate Society's record in helping to meet the credit needs of its community (12 USC 2903). A regular con sumer examination starting February 20, 1979, re vealed no serious problems with Society's perform ance under the CRA at that time. Subsequently, CRA protests to Society's CBCT applications were filed with the OCC on July 26 and 31, 1979, by the Union-Miles Community Coalition (UMCC) and the BuckeyeWoodland Congress (BWC), collectively, "Protes tants, " t A public hearing under the provisions of 12 CFR 5 was held on October 20, 1979. The basic is sues raised by the Protestants at the hearing centered on faulty communications by Society with elements of its community and on allegations of discriminatory lending practices. Society contended that its obligations and therefore principal efforts are aimed at meeting the credit needs of its entire community and, that in so doing, it is possi ble or even probable that certain neighborhoods or geographical areas within the community may be served less than other areas. The Protestants, on the other hand, contended that the bank cannot serve its "entire community" without serving each individual neighborhood, including the neighborhood which they represent. The contention was not that applications for credit had been denied for discriminatory reasons but rather that very few ap plications had been submitted from the neighborhoods in question because of a perception by their residents that Society did not or would not serve these areas. The issue, therefore, became the extent to which Soci ety has an obligation to promote the filing of more credit applications. A second matter of emphasis by the Protestants was Society's practice of having concentrated heavily on indirect dealer paper in minority neighborhoods in meeting home improvement credit needs, while mak ing direct home improvement loans in other areas. The evaluation of Society's record of performance, for purposes of this opinion, will focus on the following assessment factors contained in the regulations which implement the CRA. The first factor focuses on activities conducted by the bank to ascertain the credit needs of its commu nity. Society's efforts in this regard consist primarily of membership in community and professional organiza tions. These efforts have not included significant con tact with citizen organizations concerned with neigh borhood disinvestment or with the credit needs of low and moderate income areas, such as those repre sented by the neighborhood groups which pursued this issue at the hearing. Society has undertaken ef forts to strengthen this area of performance, including the appointment of a community affairs director who appears to be knowledgeable of and acceptable to the community. The second assessment factor concerns the bank's marketing and special credit-related programs to t An application was accepted by OCC on July 12, 1979, to merge First National Bank of Clermont County into and under the charter of Society National Bank of Cleveland. This appli cation was also reviewed under the CRA. 19 make members of the community aware of its credit services. The lack of an effective marketing program to inform the community of the credit services offered by Society was exhibited throughout the hearing and was one of the focal points of the complaint by the Protes tants. Society has agreed to undertake measures to strengthen its marketing program. It will, for example, carry a specific form of advertisement on a monthly basis in specified general-distribution newspapers. Reprints of those advertisements will be furnished to UMCC for its newsletter, with Society providing finan cial assistance to UMCC for the reprints. Society has also agreed to make real estate brokers and devel opers aware of its willingness to extend creditworthy loans for worthwhile projects. A third relevant assessment factor deals with prac tices intended to discourage applications for types of credit set forth in the bank's CRA statement. While there is no evidence of any intent by Society to dis courage applications, it does appear that Society's past emphasis on indirect dealer-originated home im provement loans may unwittingly have had the effect of discouraging applications for direct credit. Subse quently, Society has agreed to (a) provide a clear in dication on the indirect loan credit application form that the individual has an option to apply for a direct loan, (b) better advise would-be indirect loan cus tomers of Society's willingness to help resolve disputes with the contractors and (c) consult with UMCC as to complaints against specific contractors. A fourth factor is the geographic distribution of the bank's credit extensions, credit applications and credit denials. The assessment factors require a comparison of the bank's performance in low and moderate in come areas to its activities in its entire community. The geographical distribution of Society's credit extensions was criticized by the Protestants. A majority of Society's real estate mortgage lending has been in the suburban areas of its entire community, with a smaller volume in the older, central city areas. The uneven geographic distribution of Society's loans appears to result from the combination of the community percep tions of the bank as described above, with patterns re sulting from branch locations and uneven levels of ec onomic activity among the areas in question. The assessment factors require an analysis of any evidence of prohibited discriminatory or other illegal credit practices. In this case, there is no evidence of prohibited or other illegal credit practices. However, Society's past indirect home improvement lending practices are perceived by the community to be dis criminatory. The bank has agreed to advertise and so licit direct home improvement loans in the Union-Miles area. A sixth area of assessment focuses on the bank's origination of residential mortgage loans, rehabilitation loans, home improvement loans and small business loans. The Protestants' challenge is based primarily on Society's residential lending activities, and the Protes tants, Society and the OCC have accordingly concen trated on residential mortgage loans and home im provement loans. The assessment factors emphasize the importance of extending housing-related credit. 20 Data for all institutional lenders in Cuyahoga County in 1977 generally indicates that Society has as good a record in Cleveland as any other lender. In the UnionMiles area, Society's volume of housing-related loans is low in comparison to other lenders. Society has granted fewer residential mortgage and direct home improvement loans in the Union-Miles area than it has in other parts of its total community, notably the subur ban areas. Society has no branch office within the Un ion-Miles area and has received a very limited number of applications for such loans from that area. There is no evidence, however, of direct discouragement of the filing of such applications or of unreasonable adverse decisions on applications filed. This same assessment factor also includes "the pur chase of such loans originated in its community." Soci ety has historically relied on purchased loans (indirect, dealer-originated paper) for the financing of home im provements. However, the Protestants have raised concerns regarding the effects which the use of this fi nancing mechanism has had on the community's per ception of Society. Society has responded positively to these concerns by agreeing to advertise and solicit direct home im provement loans and to notify each indirect home im provement loan customer that the completion certifi cate should not be signed until the contracted work has been done according to the terms of the contract. These activities are viewed as positive factors in evalu ating these applications. Finally, the assessment reviewed the bank's ability to meet various community credit needs based on its financial condition and size, legal impediments, local economic conditions and other factors. The OCC has determined that Society's condition is excellent, and within constraints imposed by the overall condition of the economy on the volume of loanable funds, the bank is well-equipped to meet the credit needs of its community. The OCC has examined the submissions of the Prot estants and Society regarding the issues raised by the Protestants. It has also taken into consideration contin ued meetings since the hearing between Society and the UMCC which resulted in an understanding in prin ciple on all remaining points of contention on Decem ber 18, 1979. On January 7, 1980, Society and UMCC finalized this understanding to the satisfaction of both parties. The OCC believes that Society has responded to the concerns of the Protestants very positively, as evi denced by the bank's decision to enter into an agree ment with them and by other recent actions and com mitments which the bank has made. This responsiveness has been taken into consideration and, along with the bank's past record of performance, was the basis for the OCC's action approving the mer ger and branch application on February 8, 1980. The OCC believes that the improved community access to bank credit which has resulted and will result from the hearing must be continued to be effective. The contin uance in good faith of all promised actions will be monitored through the examination process. Society has reassessed its indirect home improve- ment loan policies and practices and has agreed to better conform this program to the needs of the com munity and, at the same time, make would-be borro wers aware of their access to direct bank credit. Fa vorable consideration of requests for the specific types of credit raised by the protesting community groups have been agreed to by Society, although without spe cific dollar floors or limits. Society has agreed to do a better job of advertising and communicating its credit services. However, the bank cannot guarantee that in dividuals will submit loan applications. Society agrees to show its willingness to realtors and developers to extend creditworthy loans for worthwhile projects. The OCC feels that the changes and improved ac cess to bank credit which have been and will be brought about by the hearing and the understanding reached by both Society and the Protestants, must be continued to be effective. * On February 8, 1980, the merger and branch appli cations were approved with the understanding to Soci ety and to the Protestants that the continuance in good faith of all promised actions will be monitored through the examination process. March 21, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Society National Bank of Cleveland would become a subsidiary of Society Corporation, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institu tion; as such, and without regard to the acquisition of the surviving bank by Society Corporation, it would have no effect on competition. * * PACIFIC NATIONAL BANK OF WASHINGTON, Seattle, Wash., and American Commercial Bank, Spokane, Wash. Banking offices Names of banks and type of transaction Total assets American Commercial Bank, Spokane, Wash., with was purchased March 24, 1980, by Pacific National Bank of Washington, Seattle, Wash. (3417), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION This is the Comptroller's decision on an application of Pacific National Bank of Washington, Seattle, Wash. (PNB), to purchase the assets and assume the liabili ties of American Commercial Bank, Spokane, Wash. (Bank). This application was accepted by this Office on October 2, 1979, and is based on an agreement signed by the participants on August 28-29, 1979. As of June 30, 1979, PNB and Bank had total commercial bank deposits of $1.3 billion and $47.8 million, respec tively. PNB is the third largest commercial bank in Washington and is a subsidiary of Western Bancorporation, Los Angeles, Calif., a registered multibank holding company. The relevant geographic market for consideration in this proposal is Spokane County. There are 10 com mercial banks that operate 69 offices and have total commercial bank deposits of $1.1 billion in the market. PNB ranks as the sixth largest commercial bank in the market and controls 3.4 percent of the market's total commercial bank deposits. Bank is the seventh largest bank in its market and controls 3.2 percent of the total commercial bank deposits. The resultant bank would rank as the fourth largest bank in the market. The par ticipants' closest offices are 6 miles apart. Only three of PNB's 72 banking offices are in Spokane County. Bank operates six of its seven offices in Spokane County and one branch in Pend Oreille County. The market is dominated by Old National Bank with total market deposits of $278.7 million and 22 offices; $ 54,228,000 1,717,120,000 1,764,169,000 In To be operation operated 7 73 80 Seattle-First National Bank, total market deposits of $397.8 million; and Washington Trust Bank, total mar ket deposits of $163.8 million. These three banks con trol in excess of 81 percent of the market's total com mercial bank deposits, and the resultant bank would rank a distant fourth with approximately 6.6 percent. Approval of this application would not substantially les sen competition in the market because of the relatively small market share held by each proponent, the fact that only one of PNB's offices is in Spokane (the other two branches are in Longview, Wash.) and the fact that both PNB and Bank experience direct competition in the market from both the largest commercial banks and largest mutual savings banks in the state and from other financial institutions. The financial and managerial resources of both PNB and Bank are satisfactory. The future prospects of PNB are good. The future prospects of Bank are somewhat limited in view of its relatively small size and the fact that it experiences direct competition from substantially larger competitors. The future prospects of the resultant bank are good, and the resultant bank should invigorate the competitive atmosphere of the Spokane market by being a more meaningful banking alternative. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that PNB's record of helping to meet the credit needs of the entire community, including low and moderate in come neighborhoods, is less than satisfactory. 21 This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the participants to proceed with the proposal. February 21, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have a substantial competitive impact. THE HUNTINGTON NATIONAL BANK, Columbus, Ohio, and The Farmers and Merchants Bank, Milford Center, Ohio Banking offices Names of banks and type of transaction Total assets The Huntington National Bank, Columbus, Ohio (7745), with and The Farmers and Merchants Bank, Milford Center, Ohio (368), which had merged March 29, 1980, under charter and title of "The Huntington National Bank." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge The Farmers and Merchants Bank, Milford Cen ter, Ohio (F&M), into and under the charter of The Hun tington National Bank, Columbus, Ohio (Huntington). This application was filed on December 7, 1979, and is based on an agreement executed by the proponents on February 13, 1979. As of September 30, 1979, F&M had total deposits of $13 million and operated two banking offices. On June 29, 1979, this Office granted preliminary approval to organize Huntington. The new bank char ter was organized by principals of Huntington's corpo rate parent, Huntington Bancshares Incorporated, Co lumbus, Ohio (Bancshares), a registered bank holding company, to facilitate a corporate reorganization of Bancshares. On November 27, 1979, this Office granted approval for Bancshares to merge 15 of its banking subsidiaries into Huntington. The resultant bank has total deposits of almost $2 billion. F&M is headquartered in Milford Center and has one branch approximately 7 miles northeast of its main of fice in Marysville, the county seat of Union County. It is the smallest of three banks in Union County, Ohio, the relevant geographic market area for analysis of com petitive issues in this application. It obtains virtually all of its deposits from Union County and controls approx imately 19 percent of this market's commercial bank deposits. Huntington obtains approximately $1.8 mil lion in deposits from the F&M's market area. The largest competitor in Union County is BancOhio National Bank with 47 percent of the market's de posits. It has two branches in Marysville with total de posits of $31.3 million. BancOhio is the second largest commercial banking organization in Ohio. The second largest bank in the market, The Richmond Banking Company, has total deposits of $22.5 million, repre senting 33.7 percent of the market's total deposits. 22 $2,463,535,000 15,342,000 2,508,403,000 In operation To be operated 105 2 107 Consummation of this merger would not eliminate a significant amount of existing competition between the applicants. Consummation of the merger would result in the substitution of Huntington for the smallest bank in the market. Huntington is headquartered in Franklin County, which is adjacent to Union County. Under Ohio branching laws, the two banks could branch into each other's markets. The likelihood of F&M branching into Huntington's market within the foreseeable future is re mote, given its relatively small size. Likewise, it does not appear likely that Huntington would choose to en ter Union County on a de novo basis since there are already three banks with six offices serving the county's 25,000 residents. The financial and managerial resources of both banks are satisfactory. The future prospects of the two banks, both separately and merged, are good. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that Huntington's record of helping to meet the credit needs of its entire community, including low and mod erate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed merger. February 11, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Farmers and Merchants Bank would become a subsid iary of Huntington Bancshares Incorporated, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisi tion of the surviving bank by Huntington Bancshares Incorporated, it would have no effect on competition. SECURITY PACIFIC NATIONAL BANK, Los Angeles, Calif., and Inyo-Mono National Bank, Bishop, Calif. Banking offices Names of banks and type of transaction Total assets Inyo-Mono National Bank, Bishop, Calif. (15398), with and Security Pacific National Bank, Los Angeles, Calif. (2491), which had merged March 30, 1980, under charter and title of the latter (2491). The merged bank at date of merger had COMPTROLLER'S DECISION 23,600,445,000 To be operated 1 602 603 present, its ability to attract highly qualified and com petent management and its ability to provide a myriad of financial and banking resources is limited. Accord ingly, Bank's future prospects are considered limited in view of its relatively small size and the fact that it ex periences direct competition from the largest commer cial bank in California. The future prospects of the re sultant bank are good. As a result of this merger, Security will provide new and expanded banking services to the present bank ing customers of Bank. Among these services are bank credit cards, overdraft checking, a variety of per sonal asset management services (including trust services), estate planning and investment advice. Also, the banking community should benefit from the stimulated competitive environment which should de velop in the Inyo-Mono market with the introduction of Security into the area. These are positive consider ations on the issue of convenience and needs and lend additional weight toward approval of the applica tion. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities, revealed no evidence that the applicants' records of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the merger. Additionally, Security is also authorized to operate, as branches of Security, all former offices of Bank. January 14, 1980. This is the Comptroller's decision on an application to merge Inyo-Mono National Bank, Bishop, Calif. (Bank), into and under the charter of Security Pacific National Bank, Los Angeles, Calif. (Security). This ap plication was accepted on November 8,1979, and is based on an agreement signed by the participants on October 15, 1979. On June 30, 1979, Security had to tal commercial bank deposits of $16.2 billion, and Bank's total deposits were $21.6 million. The relevant geographic market for analysis of this proposed merger is Inyo and Mono counties, Calif. This market, which lies along the California-Nevada border, has a mountainous terrain and is geographi cally isolated and sparsely populated. There are two banks in this market, Bank of America, NT. & S.A. (B of A) and Bank. B of A and Bank operate a total of 11 banking offices in the market. B of A is by far the larger of the two banks in the market and has total market de posits of $72.1 million, which represents over 77 per cent of the market's total commercial bank deposits. Bank is a distant second and controls about 23 per cent of the market's deposits. There is no existing competition between Security and Bank because they compete in separate markets and the nearest offices of the two banks are separated by 75 miles of desert. Consequently, approval would have no adverse effect on existing competition. With prior regulatory approval, Security could enter the Inyo-Mono market de novo by establishing a branch. However, this market is not considered attrac tive for de novo entry, and there is no recorded evi dence that any of the banking needs of this market are going unmet. Additionally, there is no reason to believe that Security would enter the market absent this pro posal. The financial and managerial resources of Security are satisfactory. Although the financial and managerial resources of Bank are generally satisfactory at $ 28,129,000 23,573,033,000 In operation SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have a substantial competitive impact. * 23 THE COMMONWEALTH NATIONAL BANK Harrisburg, Pa., and The First National Bank of Shippensburg, Shippensburg, Pa. Banking offices Names of banks and type of transaction Total assets The First National Bank of Shippensburg, Shippensburg, Pa. (834), with and The Commonwealth National Bank, Harrisburg, Pa. (580), which had merged April 1, 1980, under the charter and title of the latter bank (580). The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on the application to merge The First National Bank of Shippensburg, Ship pensburg, Pa. (Shippensburg Bank), into and under the charter of The Commonwealth National Bank, Har risburg, Pa. (Commonwealth National). The application was accepted for filing on September 20, 1979, and is based on a written agreement executed by the propo nents on March 14, 1979. Commonwealth National is a national bank that had total deposits of $796.2 million as of June 30, 1979. It operates 43 banking offices: 14 in Lancaster County, nine in Dauphin County, eight in Cumberland County, 10 in York County and one in both Lebanon and Perry counties. Shippensburg Bank had total deposits of $44.4 mil lion on June 30, 1979. It operates a main office and one branch office in Cumberland County and two ad ditional branch offices in Franklin County. Shippensburg is on the western edge of Cum berland County and is divided into two parts by the Cumberland-Franklin County line. The Shippensburg Bank originates approximately 85 percent of its total deposits and extends a majority of its loans within five townships in western Cumberland County and three townships in eastern Franklin County. Therefore, the relevant geographic market for analysis of the compet itive effects of the proposed merger consists of these townships in the two counties of the Shippensburg area. Shippensburg Bank is the largest of the four com mercial banks operating in this market with 44 percent of the market's commercial bank deposits. Common wealth National has no banking offices in this market and would merely succeed to Shippensburg Bank's share of the market. The closest banking offices of the two banks are some 20 miles apart. The area between these offices is sparsely populated, rural and predomi nantly agricultural. Therefore, there is no significant ex isting competition between Commonwealth National and Shippensburg Bank. 24 $ 48,712,000 1,035,853,000 In To be operation operated 4 48 1,085,206,000 52 Applicable state banking statutes permit branching by a commercial bank within its home office county and all counties immediately contiguous. As a result, Commonwealth National could only branch into a part of Shippensburg Bank's market, western Cumberland County, and cannot legally establish branches in Franklin County. The likelihood that Commonwealth National would expand into western Cumberland County de novo is remote since this area is predomi nantly agricultural with a relatively slow economic growth rate and low population density. The financial and managerial resources of both Commonwealth National and Shippensburg Bank are satisfactory. The future prospects of the two banks, in dependently and in combination, appear favorable. After consummation of this transaction, the addi tional capabilities of Commonwealth National will be made available to the present customers of Shippens burg Bank in such areas as full trust services, bank credit cards, additional expertise in agricultural lend ing, statement savings accounts and a substantially larger legal lending limit. These are positive consider ations on the issue of convenience and needs. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the banks' records of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this merger. Because Pennsyl vania law would not permit Commonwealth to operate offices in Franklin County, this approval is conditioned on either the relocation or disposal of Shippensburg Bank's two banking offices in Franklin County. January 25, 1980. The Attorney General's report was not received. THE PIERRE NATIONAL BANK, Pierre, S. Dak., and The Badlands State Bank, Kadoka, S. Dak., and Vivian State Bank, Vivian, S. Dak. Banking offices Total assets Names of banks and type of transaction The Badlands State Bank, Kadoka, S. Dak., with and Vivian State Bank, Vivian, S. Dak., with were purchased April 1, 1980, by The Pierre National Bank (4104), Pierre, S. Dak., which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION This is the Comptroller's decision on an application of The Pierre National Bank, Pierre, S. Dak. (PNB), to pur chase the assets and assume the liabilities of The Badlands State Bank, Kadoka, S. Dak. (Kadoka), and Vivian State Bank, Vivian, S. Dak. (Vivian). This appli cation was filed on November 30, 1979, and is based on an agreement executed by the proponents on Oc tober 9, 1979. On June 30, 1979, the participants had total de posits as follows: PNB, $44.1 million; Kadoka, $8.2 mil lion; and Vivian, $3.7 million. PNB is a subsidiary of a one-bank holding company, South Dakota Bancshares, Inc. The three banks operate in separate and distinct markets. Vivian is 35 miles from Pierre and 70 miles from Kadoka. Kadoka is approximately 100 miles from Pierre. PNB's market includes Hughes and Stanley counties where it is the largest of five commercial banks with approximately 42 percent of the market's total commercial bank deposits. Vivian's market area is Lyman County with no other commercial bank located in that area. Kadoka Bank is headquartered in Jackson County where it operates two offices and is one of three commercial banks serving the Jackson County banking market. Because of the distance separating the three banks, there appears to be only negligible existing competi tion among the proponents. Additionally, all three banks are under common ownership and control, and In To be operation operated $ 9,073,000 4,028,000 49,667,000 62,364,000 there is little possibility for increased competition among the proponents within the foreseeable future. This application is essentially a corporate reorganiza tion. The resultant bank would rank as the 13th largest in South Dakota and would control less than 2 percent of the state's total commercial bank deposits. The financial and managerial resources of all three banks are satisfactory. The future prospects of Vivian and Kadoka are limited due to their small size. The fu ture prospects of the resultant bank are far more favor able, as it will |pe better able to meet the banking needs of the communities now served by Kadoka and Vivian. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that PNB's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this proposal. PNB is authorized to operate all former offices of Vivian and Kadoka Bank as branches of PNB. February 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have an adverse effect on com petition. LA SALLE NATIONAL BANK, Chicago, III., and Hartford Plaza Bank, Chicago, Banking offices Names of banks and type of transaction Total assets In operation To be operated La Salle National Bank, Chicago, III. (13146), with $1,051,407,000 and Hartford Plaza Bank, Chicago, III., which had 35,335,000 merged April 21, 1980, under charter and title of the former bank (13146). The merged bank at date of merger had 1,081,781,000 COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Hartford Plaza Bank, Chicago, III. (Hartford), into La Salle National Bank, Chicago (La Salle), and under the charter of La Salle National Bank, Chicago. This application was filed with this Office on February 1, 1980, and is based on an agreement executed by the participants on January 4, 1980. As of December 31, 1979, La Salle had $781 million and Hartford had $34 million in commercial bank deposits.* * La Salle National Bank was recently acquired by Algemene Bank Nederland N.V., a bank headquartered in the Nether lands. 25 competition with the largest Chicago banks. La Salle's present detached facility at Jackson Boulevard serves 9,500 customers and holds 12 percent of La Salle's to tal retail accounts. If La Salle is unable to move to a comparable location, it will be even less able to com pete with the very large Chicago banks. In sum, the convenience and needs of Cook County residents will be better served by approval of this merger. The financial and managerial resources of La Salle and Hartford are satisfactory. The future prospects of Hartford are restricted due to its small size in relation to the relatively large banks found in the central busi ness district. The future prospects of La Salle will be enhanced by avoiding the loss of its present detached facility. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that La Salle's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the required prior written approval of the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed merger. March 14, 1980. La Salle and Hartford are in the central business dis trict of Chicago in an area commonly called "the loop." The portion of the loop in which these banks are lo cated is a focal point for transportation to and from downtown Chicago. Consequently, both banks serve large numbers of commuters from Cook County and the Chicago SMSA. In fact, ZIP code analysis shows that 79 percent of the total deposits for La Salle and 89 percent of Hartford's are generated from Cook County. Although the banks are in direct competition in Cook County, both are small when compared to large Chi cago banks. For example, La Salle holds only 1.63 percent of Cook County commercial bank deposits and Hartford holds only 0.08 percent. The Comptroller finds that the merger of these banks will not substan tially lessen competition in Cook County or any rele vant market in which they compete. Illinois permits banks to operate no more than two extended facilities in addition to their main offices. La Salle operates one such facility at 335 West Jackson Boulevard in Chicago in a building which will be de molished in the immediate future. To maintain its com petitive position in the central business district of Chi cago, La Salle must move to a location which offers commuters nearly equal convenience. Hartford Plaza's location and physical plant meet this need. When merged with La Salle, Hartford will offer its customers a wide range of services not now available. Among these services are trust, data processing and auto matic savings to checking account transfers. The com bined bank will be better equipped to offer aggressive * SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have a significantly adverse ef fect upon competition. * * SECOND NATIONAL BANK OF GREENVILLE, Greenville, Ohio, and Fort Recovery Banking Company, Fort Recovery, Ohio Banking offices Names of banks and type of transaction Total assets Fort Recovery Banking Company, Fort Recovery, Ohio, with and Second National Bank of Greenville, Greenville, Ohio (2992), which had merged April 30, 1980, under charter of the latter and title of "Second National Bank." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on the application to merge the Fort Recovery Banking Company, Fort Re covery, Ohio (Fort Recovery Bank), into the Second National Bank of Greenville, Greenville, Ohio (Green ville Bank). The application was accepted for filing on December 19, 1979, and is based on a written agree ment executed by the proponents on November 28, 1979. Greenville Bank operates six offices in Darke County, Ohio, with four in Greenville. Darke County is in the western portion of Ohio along the Indiana bor der. As of June 30, 1979, Greenville Bank held $49.4 million in deposits. Fort Recovery Bank has one office in Fort Recovery which is in Mercer County north of Darke County and also coterminous with the Indiana border. As of June 30, 1979, Fort Recovery Bank had deposits of $15.2 26 $16,848,000 58,094,000 76,345,000 In operation To be operated 1 6 7 million, representing 5.9 percent of Mercer County de posits. Fort Recovery and Greenville are 24 miles apart and connected by a two-lane road. The distance between these cities, the banks' small size and their rural loca tion indicate that the banks serve different markets. According to data submitted in the application, cus tomer loan and deposit overlap within Fort Recovery Bank's and Greenville Bank's primary service areas is minimal.* The Federal Reserve Bank of Cleveland con curred with the applicants' analysis and found that they do not compete to any significant degree. We agree with this finding. Although Greenville Bank could branch into Mercer County, the present ratio of banking offices to popula* In fact, Greenville Bank shows only deposit customers to taling $69,000 in Fort Recovery Bank's primary service area. tion does not make this likely. In any case, Fort Recov ery Bank's small share of this market makes this mer ger a foothold entry for Greenville Bank and serves to strengthen competition in this market. The financial and managerial resources of both banks are satisfactory. The future prospects of Fort Recovery Bank are limited due to its small size. The fu ture prospects of the combined bank are good. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the Greenville Bank's record of helping to meet the credit needs of its entire community, including low and mod erate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this merger. March 27, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have an adverse effect upon competition. BRANCH COUNTY BANK, Coldwater, Mich., and Hickory National Bank of Michigan, Fawn River, Mich. Banking offices Names of banks and type of transaction Total assets Hickory National Bank of Michigan, Fawn River, Mich. (9497), with and Branch County Bank, Coldwater, Mich., which had consolidated May 1, 1980, under charter of Hickory National Bank of Michigan and under title of "Branch County Bank, N.A." with headquarters in Coldwater. The consolidated bank at date of consolidation had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to consolidate Hickory National Bank of Michigan, Fawn River (P.O. Sturgis), Mich. (Hickory), and Branch County Bank, Coldwater, Mich. (Branch), under the charter of Hickory National Bank of Michigan and the title of "Branch County Bank, N.A.," with headquarters in Coldwater. This application was filed on September 7, 1979, and is based on an agreement signed by the participants on April 9, 1979, and amended July 20 and 30, 1979. Hickory was organized in 1909 with the title of "First National Bank of Burr Oak." In 1976, its head office was relocated from Burr Oak to Fawn River, adjacent to Sturgis, Mich. It retained the Burr Oak office as a branch and operates a second branch in Nottawa, Mich. On September 30, 1979, Hickory had total de posits of approximately $15 million. Branch's main office is in Coldwater. Three operat ing branch offices and one approved, but unopened, office are also in that community. It has another branch in the village of Reading, approximately 15 miles east of Coldwater. On September 30, 1979, Branch had to tal deposits of approximately $55 million. Hickory obtains virtually all of its deposits from the eastern half of St. Joseph County and a small portion of southwestern Branch County near its Burr Oak of fice. This area is the relevant market for analysis of the competitive effects of this proposed consolidation. Hickory is the smallest of three banks headquar tered in its market. These three banks operate a total of 10 offices. Additionally, four banks headquartered outside of the market each operate a single branch within the market. All 14 banking offices had a total of $141 million in deposits on June 30, 1979. The two largest banks in the market had, in the aggregate, 64 In To be operation operated $15,805,000 62,793,000 78,598,000 percent, and Hickory was the third largest with approx imately 11 percent of these deposits. Branch has no offices in this market. The closest offices of the two banks are 18 miles apart, and Branch competes in Hickory's market only in the vicinity of the small village of Bronson in western Branch County. Branch has approximately $1.5 million, and Hickory has approximately $1.7 million in deposits from this area. The applicants have estimated that six banks have in total approximately $18 million in de posits originating from the vicinity of Bronson. Con summation of this proposal would eliminate only a nominal amount of competition in the Bronson area, and overall consolidation of the two banks would not have a substantially adverse effect on competition in Hickory's market. Michigan banking law permits branching into adja cent counties within 25 miles of a bank's head office except that a bank may not branch into incorporated cities, towns or villages in which a bank or branch is already in operation. Branch could, therefore, legally establish branches inside the perimeter of Hickory's market. It has the resources to expand de novo into this market. However, it is unlikely that competitors in St. Joseph County would expect Branch to signifi cantly expand its operations there or that Branch would, in fact, expand its operations in view of the home office protection provisions of the Michigan Banking Code and the rural nature of the areas into which it could legally branch. Branch's financial and managerial resources are satisfactory, and its future prospects are favorable. Hickory's extremely limited financial and managerial resources severely restrict its ability to meet the ex panding needs of its customers. Its future prospects are limited, but the future prospects of the resulting bank are favorable. 27 The consolidation offers an opportunity to improve service for residents of Hickory's market area. The re sultant bank will possess sufficient resources and management expertise to serve the convenience and needs of the communities in which it will operate. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicants' records of helping to meet the credit needs of their entire communities, including low and moder ate income neighborhoods, is less than satisfactory. This merger may not be consummated until a $32,943 liability of certain directors to Hickory National Bank of Michigan is repaid. This decision is the required prior written approval of the Bank Merger Act, 12 USC 1828(c), in order for the applicants to proceed with the merger. April 1, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have an adverse effect on com petition. REPUBLIC NATIONAL BANK OF NEW YORK, New York, N.Y., Twelve Branches of Bankers Trust Company, New York, N.Y. Banking offices Total assets Names of banks and type of transaction Twelve Branches of Bankers Trust Company, New York, N.Y., with were purchased May 27, 1980, by Republic National Bank of New York, New York, N.Y. (15569), which had After the purchase was effected, the receiving bank h a d . . . COMPTROLLER'S DECISION This is the Comptroller's decision on ttfe application of Republic National Bank of New York, New York, N.Y. (Republic), to purchase the assets and assume certain liabilities of 12 branches of Bankers Trust Company, New York, N.Y. (BTC). The application was accepted for filing on February 5, 1980, and is based on a writ ten agreement executed by the proponents on Sep tember 30, 1979. Republic is a national bank that had total deposits of $2.6 billion as of June 30, 1979. It is headquartered in New York City and operates 19 offices in the metropol itan area. BTC is a state-chartered banking subsidiary of Bankers Trust New York Corporation. BTC held $18.3 billion in deposits on June 30, 1979, and was the eighth largest commercial bank in the United States and the sixth largest in New York State. Recently, BTC has decided to divest itself of much of its retail bank ing business and to concentrate its resources on cor porate banking, trusts, money market and securities business. Therefore, BTC has reached agreement with five banks to purchase 80 of its 103 branches. Repub lic has agreed to purchase 12 of these branches with assets valued at $150.5 million. Of the 12 branches to be purchased, 10 are in Manhattan, one in Brooklyn and one in the Bronx. The New York City metropolitan area extends over the city, its immediate environs and portions of New Jersey and Connecticut. Within this area, goods, serv ices and population flow freely and frequently. It is an identifiable economic unit and for these reasons, the Federal Reserve Bank of New York has defined it to be a relevant banking market. This Office feels this is an appropriate market for analysis of this transaction. In 28 $ 150,728,000 3,679,275,000 3,821,403,000 In operation To be operated 1° 90 32 this market, 195 commercial banks operate 2,340 banking offices. Republic ranks 13th with 1.17 percent of the total deposits. BTC ranks sixth with 6.83 percent of deposits. Approval of this transaction would not change Republic's rank and would raise its share of market deposits nominally. The impact on competition would be inconsequential. Viewing this transaction from the more narrow New York State portion of this market does not change this conclusion. In the more narrow market, the purchase and assumption will only raise Republic's share of deposits from 1.22 to 1.33 percent. Consequently, this Office finds the proposal does not violate the competitive provisions of the Bank Merger Act. The financial and managerial resources of Republic and BTC are satisfactory. The future prospects of Re public, with the addition of the 12 branches proposed for purchase, are good. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that Republic's record of helping to meet the credit needs of its entire community, including low and moderate in come neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this merger. March 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have an adverse effect upon competition. THE FIRST NATIONAL BANK OF, ASHLAND, Ashland, Ohio, and Polk State, Polk, Ohio Banking offices Names of banks and type of transaction Total assets The First National Bank of Ashland, Ashland, Ohio (183), with and Polk State Bank, Polk, Ohio, which had merged May 30, 1980, under charter and title of the former bank (183), The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Polk State Bank, Polk, Ohio (PSB), into and un der the charter of The First National Bank of Ashland, Ashland, Ohio (First). The application was filed on No vember 29, 1979, and is based on an agreement exe cuted by the proponents dated October 1, 1979. PSB is one of the 10 smallest banks in Ohio. It held only $4.4 million in deposits as of December 31, 1978. PSB's sole office is in Polk which had a 1976 popula tion of 504 and is located in the northeast section of Ashland County, Ohio. First is headquartered in Ashland City, the county seat of Ashland County. As of December 31, 1978, First held $53 million in deposits. First is a subsidiary of National City Corporation, a $2.9 billion deposit holding company. First's four branches are in central and southern Ashland County. It controls 39 percent of the commercial bank deposits in the county and is the county's largest commercial bank. A commercial bank's geographical market is the area within which its customers can practically turn for the services it offers (United States v. Philadelphia Bank, 374 U.S. 321, 1962 at 359). Banks frequently rely on ZIP code analysis of customer accounts to de termine their geographic markets. ZIP codes are usually small enough geographic units to give suffi ciently precise gradients of market share. They are also easily processed by EDP equipment, making them an inexpensive and quick guide to market deline ation. However, in this application, ZIP codes are not useful. The ZIP code data submitted by the applicants does not permit the relevant market to be defined with comfortable certainty. Applicant's data shows both banks with significant deposits in ZIP code 44805. Ashland and 40 percent of the land area of the county is in ZIP code 44805 which extends to within 1 mile of Polk. And yet, Polk and Ashland are 8 miles apart. PSB's limited hours, small number of services, low lending limit and low growth all indicate an extremely local orientation. The deposits it holds in ZIP code 44805 are most likely on the very fringe of the ZIP code closest to the village of Polk. A county or ZIP code 44805 market would clearly be inappropriate, as Polk is simply too small to com pete over such a wide area. First's closest branch is about 6 miles from Polk on the outskirts of Ashland. A branch office usually serves an area of about 3 to 5 miles in radius, with the excep tion of highly urbanized locations where a branch's $71,100,000 5,097,000 76,197,000 In operation To be operated 5 1 6 service area is considerably smaller, sometimes even a few blocks. PSB can only serve very small loan needs due to its $25,000 legal lending limit. Consequently, it does not compete at all for loans over $25,000. Because of its limited services, it can only attract deposit customers who prize the convenience of PSB's location over First's closest branch. Since First offers these cus tomers more of every banking service, except conven ience, and they have not shifted, it follows that, absent a branch in Polk, First cannot really compete for Polk's core deposit customers. The area of competitive over lap, if any, between these banks would be in the rural area midway between Polk and First's closest branch. The ascertainable facts concerning the applicants, combined with the experience of this Office, leads to the conclusion that the actual direct competition be tween them is probably quite small. Consequently, the loss of this competition through merger would not be substantial and does not violate the Bank Merger Act. Assuming, arguendo, that this merger would sub stantially lessen competition, then it should not be ap proved unless this Office finds that the anticompetitive effects of the proposed transaction are clearly out weighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served (12 USC 1828(c)(5)(B)). The citizens of Polk are now served by a bank which offers little more than a checking account. PSB does not use modern electronic data processing; checks are cleared and posted manually. In recent years, de posits have grown very slowly. The bank's chief oper ating officer is preparing for retirement after 36 years of service. PSB's current lending limit is $25,000, an amount which cannot meet modern mortgage or agri cultural equipment needs. PSB does not offer credit cards. Certificates of deposit over $100,000 are not accepted. Advantages of computerized banking are not available. All these services, and more, will be available if this merger is approved. Polk is so small that construction of a new branch bank is not cost feasible. There is barely enough busi ness to keep PSB operating and certainly not enough to justify a new entry. Growth prospects are minimal. The banking needs of Polk's citizens will be much bet ter served by a branch of a large bank where the cost of providing services can be distributed throughout the system. Consequently, the OCC finds that this merger meets the convenience and needs test of the Bank Merger Act assuming, but not finding, that the merger has substantial anticompetitive effects. 29 First's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this' merger. April 23, 1980. The financial and managerial prospects of First are favorable. The financial and managerial prospects of PSB are unclear due to its small size, isolated location and impending management turnover. The financial and managerial prospects of the combined bank are good. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that The Attorney General's report was not received. FIRST NATIONAL BANK OF NEW JERSEY, Totowa, N.J., and Commonwealth Bank of Metuchen, Metuchen, N.J. Banking offices Names of banks and type of transaction Total assets Commonwealth Bank of Metuchen, Metuchen, N.J., with was purchased June 23, 1980, by First National Bank of New Jersey, Totowa, N.J. (329), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION i OR 27 SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have a significantly adverse ef fect upon competition. * 30 To be operated conclusion. For example, in the market selected by the FDIC, a 10-mile radius around Metuchen, consumma tion of this proposal would raise FNB's market share from 2.5 to 7 percent of deposits. In the market, as de fined by the Federal Reserve Bank of New York, the in crease would be from 1.9 to 5.4 percent. The financial and managerial resources of both banks are satisfactory. The future prospects of the combined bank are good. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that FNB's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this purchase and assumption. May 23, 1980. This application was accepted for filing on March 7, 1980, and is based on an agreement executed by the proponents on November 13, 1979. First National Bank of New Jersey, Totowa, N.J. (FNB), is a national bank which held $657.3 million in deposits as of December 31, 1979. FNB operates 26 offices including 20 in Passaic, four in Bergen and one each in Morris and Middlesex counties. Commonwealth Bank of Metuchen, Metuchen, N.J. (CBM), is a state-chartered bank which held $39 mil lion in deposits as of December 31, 1979. It operates two offices in the borough of Metuchen. Metuchen is in northern Middlesex County, N.J. CBM's market is Metuchen and its immediate environs, an area wherein its customers can conveniently reach CBM's offices for banking services. FNB's nearest of fice is in Perth Amboy, 7 miles southeast of Metuchen. There are numerous offices of large statewide banks in the intervening area. Although the Federal Deposit In surance Corporation (FDIC) and the Federal Reserve Bank of New York defined different markets for CBM, both found a lack of market concentration and a mini mal impact on competition. This Office agrees with that $ 43,189,000 730,985,000 768,191,000 In operation * FIRST NATIONAL STATE BANK—EDISON, South Plainfield, N.J., and Three Branches of Franklin State Bank, Somerset, N.J. Banking offices Names of banks and type of transaction Total assets Three Branches of Franklin State Bank, Somerset, N.J., with were purchased June 27, 1980, by First National State Bank—Edison, South Plainfield, N.J. (15845), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION $ 16,485,000 3 244,870,000 263,355,000 21 To be operated 24 case is a Bancorporation office within the same town ship or borough as the Purchased Branches and, in all cases, there are intervening offices of competing banks. In light of the foregoing, this Office finds that there is virtually no direct competition, and this pur chase and assumption would not substantially lessen competition. This purchase and assumption will enhance the needs and convenience of the customers of the Pur chased Branches. Edison Bank will pay the maximum rate on savings accounts which is not now offered to Franklin customers. Edison Bank has available, through Bancorporation, a large and sophisticated trust department. International banking services will also be available. The financial and managerial resources of Edison Bank and the Purchased Branches are both satisfac tory. The future prospects of the combined entity are good. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that Edi son Bank's record of helping to meet the credit needs of its entire community, including low and moderate in come neighborhoods, is less than satisfactory. This decision.is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this merger. April 21, 1980. This is the Comptroller's decision on the application of the First National State Bank—Edison, South Plainfield, N.J. (Edison Bank), to purchase the assets and as sume certain liabilities of three branches of Franklin State Bank, Somerset, N.J. (Purchased Branches and Franklin Bank, respectively). The application was ac cepted for filing on February 5, 1980, and is based on a written agreement executed by the proponents on November 20, 1979. Edison Bank is a subsidiary of First National State Bancorporation (Bancorporation). As of June 29, 1979, it had $204.4 million in deposits. Edison Bank has 21 offices, 10 in Middlesex County, four in Monmouth County and seven in Ocean County. Franklin is a state-chartered bank which had as of June 29, 1979, $371 million in deposits. Franklin is sell ing the Purchased Branches to enhance its capital po sition to sustain present and future growth. As of June 29, 1979, the Purchased Branches held total deposits of $19.8 million. Two branches are in Ocean and Free hold in Monmouth County; one is in East Windsor in Mercer County. Although Bancorporation is present in Monmouth and Mercer counties, its share of county-wide deposits in both is small: 2.4 percent in Monmouth and 6 per cent in Mercer. Franklin Bank's Monmouth County branches would add 0.8 percent to Bancorporation's total in the county. In Mercer County, Franklin's East Windsor branch would add only 0.3 percent to Bancorporation's total. Bancorporation's nearest office to any of the Purchased Branches is 8.5 miles. In no * In operation The Attorney General's report was not received. * * KEY BANK OF SOUTHEASTERN NEW YORK, N.A., Chester, N.Y., and The Valley National Bank, Wallkill, N.Y., Walden, N.Y. Banking offices Names of banks and type of transaction Total assets Key Bank of Southeastern New York, N.A., Chester, N.Y. (1349), with and The Valley National Bank, Wallkil, N.Y., Walden, N.Y., (10155), which had merged June 27, 1980, under charter and title of the former bank (1349). The merged bank at date of merger had COMPTROLLER'S DECISION The application was filed on February 5, 1980, and is based on an agreement signed by the participants on November 13, 1979. $ 79,028,000 40,466,000 119,495,000 In operation To be operated 1 13 14 Key Bank of Southeastern New York, N.A., Chester, N.Y., is a subsidiary of Key Banks, Inc., Albany, N.Y. (Key Banks). Key Banks controls six subsidiary banks that operated 130 offices in eastern and central New York at year-end 1978. On June 30, 1979, its banking 31 subsidiaries had total deposits of approximately $1.6 billion. Based on deposit size, it is the 15th largest commercial banking organization in the state with ap proximately 1 percent of the commercial bank de posits. Consummation of this proposal would not have a material effect on the concentration of banking re sources in New York. On December 31, 1979, The Valley National Bank, Wallkill, N.Y., Walden, N.Y. (Valley), had total deposits of approximately $36 million. It operates three offices in northern Orange County and two offices in the southern portion of Ulster County. Because of its small size and the location of its of fices, Valley is an effective competitor only in southern Ulster County in the vicinity of Wallkill and Madura and in northern Orange County in the vicinity of Walden, Scotts Corners and Chrenamen Valley. The application states that within this market seven commercial banks operate a total of 22 offices. Valley is the fifth largest with 12 percent of the deposits. The four largest com mercial banks have 59 percent of the deposits. In aggregate, the 22 commercial banking offices in the market served by Valley had $279 million in de posits on June 30, 1978. Key Banks has no offices in this market, and it obtains only $8 million in deposits from the market. Key Banks' closest office is over 6 miles from any office of Valley. There are offices of competing institutions conveniently located in the inter vening area. Consummation of this proposal is unlikely to have a significant effect on competition in the por tions of Ulster and Orange counties presently served by Valley. The financial and managerial resources of the two banks, both separately and merged, are satisfactory. If the merger is consummated, the larger resources of Key Banks will be conveniently available to satisfy ad ditional banking needs of the communities served by Valley. A review of the record of this application and other information available to this Office as part of its regula tory responsibility revealed no evidence that the appli cants' records of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. The application is approved. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the applicants to proceed with the proposed merger. May 20, 1980. The Attorney General's report was not received. FIRST NATIONAL BANK IN BELLAIRE, Bellaire, Ohio, and The Union Savings Bank of Bellaire, Bellaire, Ohio Banking offices Names of banks and type of transaction Total assets First National Bank in Bellaire, Bellaire, Ohio (13914), with and The Union Savings Bank of Bellaire, Bellaire, Ohio, which had consolidated June 30, 1980, under the charter of the former bank (13914) and with the title "First-Union Bank, N.A." The consolidated bank at date of consolidation had COMPTROLLER'S DECISION This is the decision of the Comptroller on an applica tion to consolidate The Union Savings Bank of Bellaire, Bellaire, Ohio (Union), and the First National Bank in Bellaire, Bellaire (First). This application was filed on September 14, 1979, and is based on an agreement signed by the participants on August 8, 1979. On June 30, 1979, Union had total deposits of $12 million, and First had total deposits of $16 million. Un ion operates one office in Bellaire and one office in Shadyside, Ohio. First operates two offices in Bellaire. Bellaire is in Belmont County which is included in the Wheeling, W. Va., SMSA. Bellaire is adjacent to Wheel ing, although the two cities are separated by the Ohio River. The area exhibits many characteristics of a uni fied metropolitan area with substantial numbers of people commuting between the Ohio and West Vir ginia portions of the SMSA for shopping, employment and transaction of business. The applicants contend that the SMSA is the rele vant market to determine the competitive effects of the 32 In operation To be operated $18,269,000 14,752,000 32,840,000 proposal. The Wheeling SMSA includes Marshall County and Ohio County in West Virginia and Belmont County in Ohio. Within this three-county area, First is the 14th largest, and Union is the 17th largest of 23 commercial banks. The consolidated bank would rank as the 12th largest with approximately 4 percent of the market's commercial bank deposits. Both the Federal Reserve System and the Federal Deposit Insurance Corporation have defined markets that are smaller than the market defined by the appli cants. Both agencies, however, included portions of the West Virginia counties of the SMSA. Because of the small size of the two banks and the large number of banks competing in the markets selected neither agency concluded that consummation of the proposal would have a substantially adverse effect on competi tion. Although the applicants have presented substantial evidence in support of their contention that the rele vant market should include the entire SMSA, the Ohio and West Virginia portions of the SMSA are separated by the Ohio River. Because of this and the small size of the two banks, a market definition that includes the West Virginia portion of the SMSA may be too large to accurately assess the probable effects of the proposal on competition. Therefore, in considering this applica tion, the banking structure in Belmont County was also analyzed. The applicants are the sixth and eighth largest of 11 commercial banks in Belmont County. The consoli dated bank would rank as the fifth largest with 10 per cent of the county's commercial bank deposits. The four largest banks have from 13 to 23 percent of the county's commercial bank deposits. In aggregate, these four control 69 percent. Even if the relevant mar ket includes only Belmont County, the consolidated bank's nominal increase in its market share is unlikely to have a significant effect on banking competition. Any apparent anticompetitive effects of the proposal are mitigated by the affiliated relationship that now ex ists between the two banks. Shareholders owning a majority of the shares of First also own a majority of the shares of Union. While the banks do not have common directors or management, it is unlikely that any vig orous competition now exists between them or will de velop. Although limited by their small size, the financial and managerial resources of both banks are generally sat isfactory. Their future prospects are generally favor able, although the future prospects of the combined bank are considerably better than the prospects of ei ther bank individually. The consolidated bank will have a larger legal lend ing limit and will be able to satisfy additional credit needs of its community. Additionally, economies of scale will enable the bank to offer additional and im proved services to its community. These positive con siderations on the issue of convenience and needs are consistent with approval of the application. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that First's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. The application is approved. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the banks to proceed with the proposed consolidation. The consolidated bank is au thorized to operate all offices of the applicant banks. April 25, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL Belmont County (1977 population of 83,200) is located in southeast Ohio directly across the Ohio River from Wheeling, W. Va., (1977 population 43,200). While there is a toll bridge across the Ohio River at Bellaire, the principal free bridge into downtown Wheeling is at Bridgeport, 3.5 miles north of Bellaire. The county's two main population centers appear to be (1) a string of towns along the Ohio River and (2) the area around St. Clairsville and to the west. The two largest river towns in Ohio, Martins Ferry (1977 population 10,222) and Bellaire (1977 population 8,726), have lost 5 and 9.6 percent of their population, respectively, since 1970. Applicant and Bank are direct competitors; both have offices at the corner of 32nd and Belmont Streets in downtown Bellaire. It is thus apparent that the pro posed merger will eliminate substantial existing com petition between Applicant and Bank. The area within which it is appropriate to measure the competitive ef fects of the proposed merger appears to be eastern Belmont County, Ohio, including St. Clairsville, Powha tan Point and Martins Ferry, plus western Ohio County, W. Va. Fifteen banking organizations operate offices in this area. Banking is relatively unconcentrated there; the top four banks hold approximately 52 percent of the area's deposits. Applicant holds approximately 3.1 percent and Bank holds approximately 1.9 percent of the total deposits held by the banking offices in the area, the 10th and 13th largest shares. If the proposed merger is consummated the resulting bank would hold approximately 5 percent of the area's deposit, the ninth largest share. We conclude the proposed transaction will have an adverse effect on competition. BARNETT BANK OF PORT CHARLOTTE, N.A., Port Charlotte, Fla., and Barnett Bank of Sarasota, N.A., Sarasota, Fla. Banking offices Names of banks and type of transaction Total assets Barnett Bank of Port Charlotte, N.A., Port Charlotte, Fla. (15923), with and Barnett Bank of Sarasota, N.A., Sarasota, Fla. (16206), which had merged July 1, 1980, under charter and title of the latter. The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Barnett Bank of Port Charlotte, N.A., Port Char lotte, Fla., into Barnett Bank of Sarasota, N.A., Sara sota, Fla., under the charter and title of the latter. The In operation To be operated $39,362,000 19,265,000 60,046,000 application was filed on March 21, 1980, and is based on an agreement executed by the applicant banks on February 20, 1980. With the exception of directors' qualifying shares, the two banks are wholly owned and controlled by Barnett Banks of Florida Incorporated, a registered 33 bank holding company. This proposed merger is a corporate reorganization which would have no effect on competition. A review of the financial and manage rial resources and future prospect of the existing and proposed institutions and the convenience and needs of the community to be served has disclosed no rea son why this application should not be approved. The record of this application and other information available to this Office as a result of its regulatory re sponsibilities reveals no evidence that the banks' rec ords of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the merger. The merger may not be consummated prior to July 1, 1980. May 20, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are both wholly owned subsidi aries of the same bank holding company. As such, their proposed merger is essentially a corporate reor ganization and would have no effect on competition. THE FIRST NATIONAL BANK AND TRUST COMPANY OF HAMILTON, Hamilton, Ohio, and First National Bank of Middletown, Monroe, Ohio Banking offices Names of banks and type of transaction Total assets The First National Bank and Trust Company of Hamilton, Hamilton, Ohio (56), with and First National Bank of Middletown, Monroe, Ohio (14565), which had consolidated July 1, 1980, under the charter of the former (56) and title "First National Bank of Southwestern Ohio." The consolidated bank at date of consolidation had On March 27, 1980, the OCC approved this applica tion. As of June 30, 1979, First National Bank of Middletown, Monroe, Ohio (Middletown Bank), had total deposits of $116.6 million. As of March 31, 1979, The First National Bank and Trust Company of Hamilton, Hamilton, Ohio (Hamilton Bank), had total deposits of $153.9 million. The banks are in Butler County and are approximately 13 miles apart. Applicants submitted extensive statistical sampling which indicate that the banks' primary service areas (the areas where the banks drew 80 percent of their loans and deposits) did not substantially overlap geo graphically. The data submitted show that Hamilton Bank draws only 1.5 percent of its loan accounts, .95 percent of its dollars lent, .89 percent of its deposits and 1.06 percent of its deposit dollars from the primary service area of Middletown Bank. Middletown Bank draws only 2.87 percent of its loan accounts, 1.3 per cent of its dollars lent, 1.78 of its depositors and 1.43 of its deposit dollars from the primary service area of Hamilton Bank. The banks are different Federal Reserve banking markets and each is in different Rand McNally metro- 34 To be operated 12 7 373,840,000 19 politan areas. Hamilton and Middletown each have newspapers with no cross-circulation. Butler County is between the Cincinnati and Dayton urban areas. Ham ilton is generally included in the greater Cincinnati ur ban area, while Middletown is just outside the greater Dayton urban area. Each bank is oriented towards the nearest urban area rather than to Butler County as a whole. Recent changes in Ohio banking law open Butler County for the first time to entry by Cincinnati and Day ton banks. Applicants submitted evidence that this type of entry is imminent. Although the two banks could branch into each other's trade area, the loss of that possibility is not deemed significant in light of the number and size of potential new entrants into Butler County from Cincinnati and Dayton. In sum, the Comp troller finds that the facts summarized above do not in dicate a violation of the Bank Merger Act. The OCC finds the financial and managerial resources and fu ture prospects of both banks to be satisfactory and that each bank's record of meeting the credit needs of its respective community, including low and moderate income neighborhoods, is satisfactory. COMPTROLLER'S DECISION * $220,784,000 153,056,000 In operation The Attorney General's report was not received. * * RAINIER NATIONAL BANK, Seattle, Wash., and Bank of Everett, Everett, Wash. Banking offices Names of banks and type of transaction Total assets Bank of Everett, Everett, Wash., with and Rainier National Bank, Seattle, Wash. (4375), which had merged July 21, 1980, under charter and title of the latter (4375). The merged bank at date of merger had COMPTROLLER'S DECISION This application was accepted for filing on February 1, 1980, and is based on an agreement executed by the proponent banks on October 18, 1979. As of June 30, 1979, Rainier National Bank, Seattle, Wash. (Rainier), held $3.2 billion in deposits, and the Bank of Everett, Everett, Wash. (B of E), held $107 million in deposits. B of E has 10 offices, all in Snohomish County. Sno homish County is rectangular in shape with a length of approximately 66 miles, east to west, and a width of 27 miles. The bulk of the population is concentrated in Ev erett and the southwest portion of the county which is an extension of the northern suburbs of Seattle. The re mainder of the county has thinly populated areas with a number of small towns and large areas of wilderness and mountains which are virtually uninhabited. The relevant geographic markets in which the com petitive effects of this merger must be measured are the markets in which B of E, the bank to be acquired, operates. B of E's 10 offices operate in several non contiguous markets. Four small B of E offices operate in Granite Falls, Monroe, Marysville and Snohomish. The deposits held by B of E offices in these four towns constitute 31.5 percent of its total deposits. Each of these towns is a self-contained banking market. Rainier does not have an office in any of these towns. Accordingly, consummation of this merger would not affect any actual competition therein.* B of E has five offices in the Everett metropolitan area which constitutes a separate relevant geographic market.t Rainier has established no branch offices in that area and, assuming it had the intention to do so, would be prevented from doing so by Washington's re strictive branching law. The applicants' ZIP code data show that 80 percent of the deposits held by B of E's five offices in Everett are derived from the Everett met- * It should be noted that the branch banking law of Washing ton, RCW 30. 40. 020., restricts de novo branching to the city and the unincorporated area of the county in which a bank's main office is located. The only permissible manner in which a branch can be established outside a bank's home county is by acquiring an existing bank or the branch of an existing bank operating in an incorporated city or town in a county outside of its home county. t The metropolitan area of Everett consists of the city and narrow strips of residential area just outside the city limits. Everett is an old, established city with an industrial and com mercial base separate and distinct from that of Seattle. B of E's deposits in this market constitute 62.5 percent of its total deposits. $ 119,124,000 4,635,806,000 4,752,942,000 In To be operation operated 10 124 134 ropolitan area. These deposits totaled approximately $47 million and constituted approximately 21,000 ac counts. Although Rainier has deposit customers in the Everett metropolitan area, the amount is insignificant, and its ability to compete there is severely circum scribed by its inability to establish ofe novo branch of fices under state law.J Both Rainier and B of E have offices in the portion of southwest Snohomish County which is an extension of the Seattle metropolitan area. B of E's one office there holds 6 percent of the bank's total deposits, approxi mately $6 million. Data submitted by applicants show that the penetration of this office does not extend be yond 11/2 miles in a southerly direction towards Seattle. Rainier's two offices in this portion of Snohomish County are 6 miles south of the B of E office. A sub stantial number of banking offices lie between those of Rainier and B of E, and there would appear to be mini mal competition between Rainier's and B of E's offices in this market. This Office finds that all of these data tend to sup port the applicants' claim that B of E and Rainier are not in significant direct competition in any relevant market.§ The lack of significant actual competition between B of E and Rainier may be due, in part, to the state's re strictive branching law. Moreover, since Rainier is headquartered in King County, state law further pre vents it from being considered a perceived or actual potential entrant into the Everett metropolitan area. Consequently, this merger will have no effect on po tential competition in the markets in which B of E now operates. The financial and managerial resources of B of E and Rainier are satisfactory, and their future pros pects are favorable. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities, revealed no evidence that Rainier's record of helping to meet the credit needs of its entire community, including low and moderate in come neighborhoods, is less than satisfactory. $ Rainier's deposit data are based on the census tracts, while B of E's are based on ZIP codes. Rainier's data show 966 accounts totaling $1.9 million in the Everett metropolitan area. § Rainier does maintain an office in the ferry terminal at Mukilteo, population 1,423, located on Puget Sound west of Ev erett. The small deposit accounts held by both Rainier and B of E in this town and the geographic barriers to commutation between Mukilteo and Everett, make this competitive overlap inconsequential to the overall transaction. 35 This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed merger. June 19, 1980. the fifth largest, control 12.4 percent and 5.6 percent of those deposits. If the merger is consummated, Ap plicant would be the third largest bank in Snohomish County, controlling 18 percent of the county's de posits. Concentration among the four largest banks in the county in terms of local deposits would increase from 80.1 percent to 85.6 percent. We note that because of their proximity to Seattle, in King County, it may be appropriate to exclude the communities in the southwestern corner of Snohomish County from the area within which the primary impact of the proposed merger would be felt. Applicant's of fice in Mukilteo is its only office in Snohomish County outside of its southwestern corner. That office holds approximately $11 million in deposits, which repre sents 1.7 percent of the total deposits held in bank of fices located in the portion of Snohomish County ex clusive of its southwestern corner. Bank's offices in that area hold deposits of approximately $100 million, which represents 15 percent of the area's deposits. Washington law prevents Applicant from establish ing de novo branches in the city of Everett, the major population center in Snohomish County. There are six banks operating a total of 17 offices in the city of Ever ett. Bank controls 16 percent, the third largest share, of the deposits held in these offices; the largest and second largest share of deposits held in bank offices in Everett are 39.5 percent and 31.4 percent. While it would be preferable from a competitive standpoint for Applicant to enter Everett by acquiring a smaller share of deposits, there is some question whether that is a reasonably feasible alternative to the present proposal. We conclude that the proposed merger would have adverse competitive effects. SUMMARY OF REPORT BY ATTORNEY GENERAL Snohomish County (1970 population 265,236) is lo cated on Puget Sound immediately north of King County, in which Seattle is located. Everett (1970 pop ulation 53,622), the principal city in Snohomish County, has a diversified and growing economic base which is primarily industrial. Outside of Everett, Snohomish County is sparsely populated; most of the county is mountainous forest land, although the southwestern portion of the county appears to be a growing residen tial area. Applicant operates two offices in Snohomish County. Its Mukilteo office, located just beyond the city limits of Everett, is only 4 miles from Bank's closest office, and Applicant's office in Edmonds, in the southwestern portion of the county, is only 6 miles from Bank's office in Lynnwood. It therefore appears that the proposed transaction would eliminate some existing competition between Applicant and Bank. The area within which it appears appropriate to assess the competitive effects of the proposed merger is approximated by Snohomish County. There are 12 banks operating a total of 58 offices in Snohomish County. The largest share of the county's deposits is held by Seattle-First National Bank, the state's largest banking organization, which controls approximately 37 percent of the county's deposits. Bank, the third larg est bank in terms of county deposits, and Applicant, * * STUART NATIONAL BANK, Stuart, Fla., and Port Salerno National Bank, Port Salerno, Fla., and Florida National Bank of Martin County, Stuart, Fla. Banking offices Names of banks and type of transaction Total assets Stuart National Bank, Stuart, Fla. (15991), with and Port Salerno National Bank, Port Salerno, Fla. (16160), with and Florida National Bank of Martin County, Stuart, Fla. (Organizing), which had merged August 1, 1980, under the charter and title of "Florida National Bank of Martin County" (15991). The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on the application to merge Stuart National Bank, Stuart, Fla. (Stuart), and Port Salerno National Bank, Port Salerno, Fla. (Port Sa lerno), into Florida National Bank of Martin County (Or ganizing), Stuart, Fla. (Florida National), under the charter and title of Florida National Bank of Martin County. This application was accepted for filing on March 31, 1980, and is based on a written agreement executed by the proponents on March 24, 1980. 36 In operation To be operated $109,516,000 22,735,000 12,500,000 156,986,000 Florida National is being organized by individuals associated with Florida National Banks of Florida, Inc. (FNBF), a registered bank holding company. The mer ger is part of a process whereby FNBF will acquire 100 percent (less directors' qualifying shares) of Stuart and Port Salerno. It will have no effect on competition. The financial and managerial resources of Stuart, Port Salerno and Florida National are satisfactory. Their future prospects, both separately and combined, are favorable. After consummation of this transaction, the addi tional capabilities of FNBF will be made available to the present customers of Stuart and Port Salerno. These services include expanded trust and funds management services, revolving line of credit with overdraft protection and automatic teller machines. These are positive considerations on the issue of con venience and needs. A review of the record of this application and other information available to this Office as a result of its reg- ulatory responsibilities revealed no evidence that the banks' records of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required in order for the applicants to proceed with the proposed merger. June 11, 1980. The Attorney General's report was not received. PEOPLES NATIONAL BANK OF WASHINGTON, Seattle, Wash., and Columbia Bank, N.A., Kennewick, Wash. Banking offices Names of banks and type of transaction Total assets Columbia Bank, N.A., Kennewick, Wash. (15741), with was purchased August 7, 1980, by Peoples National Bank of Washington, Seattle, Wash. (14394), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION This application is based on an agreement executed on January 17, 1980, and filed with this Office on March 26, 1980. Peoples National Bank of Washing ton, Seattle, Wash. (Peoples), has offices throughout the state and held $1.2 billion in deposits as of De cember 31, 1979. Columbia Bank, N.A., Kennewick, Wash. (Columbia Bank), maintains offices in Kenne wick and Richland, Benton County, in southeast Wash ington on the south side of the Columbia River. Colum bia Bank held $33.6 million in deposits as of December 31, 1979. Peoples maintains one branch in Pasco. Pasco is across the Columbia River from Kennewick, but is in Franklin County. Applicants argue that the Columbia River forms a natural barrier separating Kennewick and Richland from Pasco, which results in separate banking markets. The Federal Reserve Bank of San Francisco, on the other hand, defines Pasco, Kenne wick and Richland as a single economic unit and banking market. This area is commonly known as the "Tri-Cities area" and forms the urban heart of the Co lumbia River basin. If applicant's market definition is correct, there is vir tually no competitive overlap between Peoples and Columbia Bank. If the Tri-Cities area is taken as the market, Peoples ranks fifth holding 5.3 percent of mar ket deposits, and the Columbia Bank ranks fourth with 7.8 percent of market deposits. The combined bank * $ In operation 37,607,000 5 1,488,461,000 1,515,829,000 79 To be operated 84 would rank fourth with 13.1 percent. Seattle First Na tional Bank would continue as first with 40 percent and Rainier National Bank second with 27 percent. The Of fice finds that this result, while producing some lessen ing of competition, would not violate the standards found in the Bank Merger Act, 12 USC 1828(c). This is especially true in light of Washington's restrictive branching law which prevents Peoples from branching into Kennewick and Richland or Columbia Bank from branching into Pasco. The financial and managerial resources of both pro ponents are satisfactory, and their future prospects are favorable. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities, revealed no evidence that the applicants' records of helping to meet the credit needs of their entire communities, including low and moder ate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed merger. July 7, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have an adverse effect upon competition. * 37 THE FIRST JERSEY NATIONAL BANK, Jersey City, N.J., and Home State Bank, Teaneck, N.J. Banking offices Names of banks and type of transaction Total assets Home State Bank, Teaneck, N.J., with and The First Jersey National Bank, Jersey City, N.J. (374), which had merged August 15, 1980, under the charter and title of the latter (374). The merged bank at date of merger had COMPTROLLER'S DECISION This application is based on an agreement between the proponents executed February 1, 1980, and ac cepted for filing on March 26, 1980. The First Jersey National Bank, Jersey City, N.J. (First Jersey), oper ates 27 branches in six New Jersey counties. As of December 31, 1979, it held $617 million in deposits. Home State Bank, Teaneck, N.J. (Home State), has one office, which is in Teaneck in southeastern Bergen County, N.J. As of December 31, 1979, it held $24.5 million in deposits. Eighty-three percent of Home State's deposits are drawn from Teaneck and surrounding municipalities in south and central Bergen County. This is the market in which Home State operates. First Jersey has one office in Hasbrouck Heights, which is within this market area. A total of 26 banks have offices in the market. Home State ranks 19th with less than 1 percent of market de posits. First Jersey's one office holds a minimal 0.34 percent of the market, and after consummation of the proposed merger, First Jersey would rank 18th with 1.24 percent of market deposits. This Office finds that consummation of this merger would have a negligible impact on competition. $ 26,761,000 785,046,000 810,435,000 In To be operation operated 1 28 29 The financial and managerial resources of the appli cants are satisfactory, and their future prospects are favorable. Home State's future prospects are en hanced by the proposed merger due to the competi tive environment in Bergen County, which includes the largest New Jersey banking institutions and is im pacted by the large New York City banking institutions. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that First Jersey's record of helping to meet the credit needs of its entire community, including low and moderate neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed merger. July 14, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have an adverse effect on com petition. FIRST NATIONAL BANK NORTHWEST OHIO, Bryan, Ohio, and Tiffin Valley National Bank, Archbold, Ohio Banking offices Names of banks and type of transaction Total assets First National Bank Northwest Ohio, Bryan, Ohio (13899), with and Tiffin Valley National Bank, Archbold, Ohio (15227), which had merged September 8, 1980, under charter and title of the former (13899). The merged bank at date of merger had COMPTROLLER'S DECISION This application was filed with OCC on April 22, 1980, and is based on an agreement executed by the appli cants on February 4, 1980. As of year-end 1979, First National Bank Northwest Ohio, Bryan, Ohio (First), had total deposits of $41.9 million, and Tiffin Valley National Bank, Archbold, Ohio (Tiffin Valley Bank), had total de posits of $26.1 million. First is headquartered in Bryan. Bryan is in Williams County, which forms the northwest corner of Ohio bor dering Michigan and Indiana. First's offices are all in 38 In To be operation operated $48,901,000 31,511,000 80,746,000 Williams County, with two in Bryan, one in Stryker and an approved, but unopened, office in Edgerton. Tiffin Valley Bank has four offices, all located in Fulton County which is adjacent to Williams County on its eastern border. Two of Tiffin Valley Bank's offices are in Archbold; one is in Fayette; and one is in Pettisville. Archbold is approximately 5 miles east of Stryker where the nearest branch of First is located. Data sub mitted by applicants indicate that Tiffin Valley Bank's market lies in central and western Fulton County. This data shows that First obtains less than 1 percent of its deposits from Archbold and the immediate environs. The Federal Reserve Bank of Cleveland found the two banks to be operating in separate but contiguous mar kets. OCC concurs with this conclusion and finds no significant direct competition between these banks. Al though First could legally branch into Fulton County, this is unlikely because, inter alia, Fulton County's ra tios of population and income per banking office are substantially below the average for counties of similar size in Ohio.* Consequently, this Office finds no likeli hood that First would branch into Fulton County. The financial and managerial resources of First are satisfactory, and its future prospects are favorable. * See report of the Federal Reserve Bank of Cleveland to the OCC regarding this application, p. 4. The financial and managerial resources of Tiffin Valley Bank are unclear due to capital, asset and liquidity problems. The future prospects of the combined bank are favorable. A review of the record of this application and other information available to OCC as a result of its regula tory responsibilities revealed no evidence that the ap plicants' records of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed merger. August 8, 1980. The Attorney General's report was not received. METRO BANK OF HUNTINGTON, INC., Huntington, W. Va., and Heritage National Bank, Huntington, W. Va. Banking offices Names of banks and type of transaction Total assets Metro Bank of Huntington, Inc., Huntington, W. Va., with was purchased September 13, 1980, by Heritage National Bank, Huntington, W. Va. (11893), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION On September 13, 1980, application was made to OCC for prior written approval for Heritage National Bank, Huntington, W. Va. (Assuming Bank), to purchase certain of the assets and assume certain of the liabili ties of Metro Bank of Huntington, Inc., Huntington (Metro Bank). On September 12, 1980, Metro Bank was a statechartered, nonmember bank, operating through one office with deposits of approximately $22 million. At the close of business on September 12, 1980, Metro Bank was declared insolvent by the state's Commissioner of Banking. It was placed in receivership, with the Fed eral Deposit Insurance Corporation (FDIC) acting as receiver. The present application is based on an agreement, which is incorporated herein by reference, by which the FDIC, as receiver, has agreed to sell cer tain of Metro Bank's assets in consideration of the as sumption of certain of Metro Bank's liabilities by the Assuming Bank. For the reasons stated hereafter, the Assuming Bank's application is approved, and the purchase and assumption transaction may be con summated immediately. Under the Bank Merger Act, 12 USC 1828(c), the Comptroller cannot approve a purchase and assump tion transaction which would have certain anticompeti tive effects unless it is found that these effects are clearly outweighed in the public interest by the proba ble effect of the transaction in meeting the conven ience and needs of the community to be served. Addi tionally, the Comptroller is directed to consider the In To be operation operated $23,000,000 2,000,000 25,000,000 financial and managerial resources and future pros pects of the existing and proposed institution and also the convenience and needs of the community to be served. When necessary, however, to prevent the evils attendant on the failure of a bank, the Comptroller can dispense with the standards applicable to usual acqui sition transactions and need not consider reports on the competitive consequences of the transaction ordi narily solicited from the Department of Justice and other banking agencies. The Comptroller is authorized in such circumstances to immediately approve an ac quisition and to authorize the immediate consumma tion of the transaction. The proposed transaction will prevent disruption of banking services to the community and potential losses to a number of uninsured depositors. The As suming Bank has sufficient financial and managerial resources to absorb Metro Bank and enhance the banking services it offers in the Huntington community. The Comptroller thus finds that the anticompetitive effects of the proposed transaction, if any, are clearly outweighed in the public interest by the probable ef fect of the proposed transaction in meeting the con venience and needs of the community to be served. For these reasons, the Assuming Bank's application to purchase certain of the assets and acquire certain of the liabilities of Metro Bank, as set forth in the agree ment executed with the FDIC as receiver, is approved. The Comptroller further finds that the failure of Metro Bank requires him to act immediately, as contem plated by the Bank Merger Act, to prevent disruption of banking services to the community. The Comptroller 39 September 13, 1980. thus waives publication of notice, dispenses with solic itation of competitive reports from other agencies and authorizes the transaction to be consummated imme diately. * Due to the emergency nature of the situation, no Attor ney General's report was requested. * * FIRST EASTERN BANK, NATIONAL ASSOCIATION Wilkes-Barre, Pa., and South Side National Bank, Catawissa, Pa., and North Scranton Bank and Trust Company, Scranton, Pa. Banking offices Names of banks and type of transaction Total assets South Side National Bank, Catawissa, Pa. (4548), with and North Scranton Bank and Trust Company, Scranton, Pa., with and First Eastern Bank, National Association, Wilkes-Barre, Pa. (30), which had merged September 19, 1980, under charter and title of the latter bank (30). The merged bank at date of merger had COMPTROLLER'S DECISION This application is based on agreements executed on December 19, 1979, between First Eastern Bank, Na tional Association, Wilkes-Barre, Pa. (First Eastern), and the banks to be acquired, South Side National Bank, Catawissa, Pa., and North Scranton Bank and Trust Company, Scranton, Pa. (South Side Bank and North Scranton Bank). It is, in reality, two proposed mergers combined into a single application. First East ern is headquartered in Wilkes-Barre, Luzerne County. It operates 27 offices in the northeastern Pennsylvania counties of Luzerne (15 offices), Columbia (six offices) and Monroe (six offices). As of December 31, 1979, it held total deposits of $556 million. South Side Bank operates its main office and one branch in Catawissa with an additional branch office 6 miles south of Cata wissa in Numidia, Pa. As of December 31, 1979, South Side Bank held total deposits of $24 million. North Scranton Bank operates its main office and one branch in the northern metropolitan area of Scranton. As of December 31, 1979, it held total deposits of $60 million. Catawissa has a population of about 1,500 and is in mountainous terrain along the east side of the Susque hanna River. Largely because of topography, South Side Bank's market area tends to run east and south away from the Susquehanna River. The applicants assert there is little competition be tween South Side Bank's offices and First Eastern's two offices in Bloomsburg, Pa., which is across the Susquehanna River about 6 miles northwest of Cata wissa. The Comptroller's field examiner confirmed this assertion by reviewing First Eastern's internally gener ated data. The examiner found that First Eastern had $209,533 in savings and $93,923 in checking ac counts in South Side Bank's trade area. This is equiva lent to 1.5 percent of South Side Bank's deposits. The OCC finds that the elimination of this small degree of competition would not be significant. As noted above, the North Scranton Bank's two of fices are in the northern metropolitan area of Scranton which is the county seat of Lackawanna County. First 40 $ 25,454,000 70,348,000 704,270,000 789,831,000 In To be operation operated 3 2 28 33 Eastern's closest office to North Scranton Bank is in Wyoming, Pa., about 15 miles southwest of Scranton in adjacent Luzerne County. There does not appear to be any significant degree of competition between First Eastern and North Scranton Bank. Consequently, this merger would not violate the standards found in the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of First East ern, South Side Bank and North Scranton Bank are satisfactory, and their future prospects are favorable. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities, revealed no evidence that the applicants' records of helping to meet the credit needs of their entire communities, including low and moder ate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicants to proceed with the proposed merger. August 20, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The effect of the proposed merger between First East ern and North Scranton will be felt primarily in Lack awanna County. Lackawanna County is located in northeastern Pennsylvania (Scranton is the county seat), and its economy is based on manufacturing and retailing. The closest offices of the banks (First Eastern's branch in Wyoming, Luzerne County and North Scranton's main office in Scranton) are 15 miles apart, and there are a number of offices of other banks in the intervening area. It therefore appears that the pro posed merger between First Eastern and North Scran ton would not eliminate a significant amount of direct competition. In addition, while First Eastern could be permitted, under Pennsylvania law, to establish de novo branches in Lackawanna County, it does not ap pear that the proposed merger would eliminate a sig nificant degree of potential competition. Banking is not highly concentrated in Lackawanna County (the four largest banking organizations there together hold 57 percent of local deposits), and North Scranton is the ninth largest bank in Lackawanna County, in terms of local deposits, holding 4.3 percent of those deposits. The effect of the proposed merger between First Eastern and South Side will be felt primarily in the area approximately surrounding Bloomsburg and Catawissa (both located in Columbia County) which the Federal Reserve Bank of Philadelphia has designated as the Bloomsburg market area. Located in Central Pennsylvania, the area includes Columbia and Mon tour counties and portions of North Cumberland and Luzerne counties. The closest offices of the banks (First Eastern's two offices in Bloomsburg and South Sides' two offices in Catawissa) are approximately 5 miles apart and sepa rated by the Susquehanna River. There are no offices of other banks in the intervening area, but there is one other bank in Catawissa and two other banks in Bloomsburg. It therefore appears that the proposed merger will eliminate a significant amount of existing competition between First Eastern and South Side. There are 17 banks operating 38 offices in the Bloomsburg market; the top four banks in terms of lo cal deposits hold approximately 45 percent of those deposits. First Eastern holds the second largest share, 12.5 percent, and South Side holds the 10th largest share, 4.1 percent of local deposits. If the proposed merger is consummated, the resulting bank would rank first in the area with about 16.6 percent of local deposits, and concentration among the four leading banks in this area would increase from 45.2 percent to 49.3 percent. We conclude that the proposed merger of First East ern and North Scranton will not adversely affect com petition, but that the proposed merger between First Eastern and South Side will adversely affect competi tion. SOCIETY NATIONAL BANK OF CLEVELAND, Cleveland, Ohio, and First National Bank of Harrison, Harrison, Ohio Banking offices Names of banks and type of transaction Total assets First National Bank of Harrison, Harrison, Ohio (8228), with and Society National Bank of Cleveland, Cleveland, Ohio (14761), which had merged September 19, 1980, under charter of latter bank (14761) and with the title "Society National Bank." The merged bank at date of merger had COMPTROLLER'S DECISION This application was filed with OCC on March 25, 1980, and is based on an agreement executed by the participants on November 15, 1979. As of December 31, 1979, First National Bank of Harrison, Harrison, Ohio (First), had deposits of approximately $23.4 mil lion and Society National Bank of Cleveland, Cleve land, Ohio (Society), had deposits of approximately $1.3 billion. Society is the lead bank of Society Corporation. Both the bank and the holding company are headquartered in Cleveland. Society recently merged with The First National Bank of Clermont County, a wholly owned subsidiary which held six offices in Clermont County, which is immediately to the east of Hamilton County where Cincinnati is located. Society has recently re ceived approval to open two new branches in Hamil ton County. One of these branches is in downtown Cincinnati and the other in the northeastern section of the county. First operates its head office and one branch in Harrison. Harrison is in the northwest portion of Hamil ton County about 15 miles from downtown Cincinnati. Harrison is developing as a bedroom community to Cincinnati. First also operates a branch in Monfort Heights about 8 miles from Society's newly opened downtown Cincinnati branch. However, due to First's $ 28,004,000 1,963,587,000 1,961,844,000 In operation To be operated 3 44 47 small size and stated policy of local service and the existence of numerous competing financial institutions between applicants' offices, there is little or no com petitive overlap between the two banks. Although the Federal Reserve Bank of Cleveland found the market to be the Cincinnati SMSA, it concluded that within this market the applicants do not compete.* The Comptrol ler agrees with this conclusion. According to the Cleveland Federal Reserve Bank, there will be six independent banks subsequent to this merger with market shares under 2 percent available as entry vehicles for other bank holding companies. Consequently, application of potential competition ar guments is inappropriate to this merger. The financial and managerial resources of both banks are satisfactory, and their future prospects are favorable. First's future prospects will be especially en hanced by the increased lending limit and ability to make residential loans in the rapidly developing west ern Cincinnati suburbs. A review of the record of this application and other information available to this Office as a result of its reg- * The Federal Reserve Bank reported that Society's share of this market would reach 1 percent after the proposed mer ger, and the resulting bank would rank 15th in this market. 41 ulatory responsibilities revealed no evidence that the applicants' records of helping to meet the credit needs of their entire communities, including low and moder ate income neighborhoods, are less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this merger. July 3, 1980. MICHIGAN NATIONAL BANK—STERLING, Sterling Heights, Mich., and Sterling Heights Office of Michigan National Bank of Detroit, Detroit, Mich. Banking offices Names of banks and type of transaction Total assets Sterling Heights Office of Michigan National Bank of Detroit, Detroit, Mich. (14948), with was purchased October 14, 1980, by Michigan National Bank—Sterling, Sterling Heights, Mich. (16707), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION This is the Comptroller's decision on the application of Michigan National Bank—Sterling, Sterling Heights, Mich. (Sterling) to purchase certain assets and as sume certain liabilities of the Sterling Heights branch office of Michigan National Bank of Detroit, Detroit, Mich. (Detroit). This application was accepted for filing on April 4, 1980, and is based on an agreement exe cuted by the proponents on March 19, 1980. Sterling had total deposits of $17.5 million on Janu ary 3 1 , 1980. Its four branches are all in Sterling Heights. Detroit had total deposits of $1.3 billion on January 31, 1980. Detroit operates 45 branches in Wayne, Macomb and Oakland counties. Its only branch in Sterling Heights had total deposits of $19 million on January 31, 1980. Both Sterling and Detroit are wholly owned subsidi aries, except for directors' qualifying shares, of Michi gan National Corporation, a multibank holding com pany. This application is merely a corporate reorganization whereby Michigan National Corporation is realigning and consolidating its banking operations in Sterling Heights. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). Additionally, a review of the financial and managerial resources and future prospects of the existing and proposed institutions and of the convenience and 42 In operation To be operated $19,295,000 21,160,000 40,455,000 needs of the community to be served has disclosed no information why this application should not be ap proved. A review of the record of this application and infor mation available to this Office as a result of its regula tory responsibilities revealed no evidence that Ster ling's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required for the ap plicants to proceed with the proposed purchase and assumption. However, due to the substantial increase in assets and liabilities of Sterling after the transaction, this approval is conditioned on Michigan National Cor poration's injection of $350,000 of equity capital and $350,000 of long-term debt as stated in the March 19, 1980, agreement. This approval is also expressly con ditioned on an assumption, with no change in terms, of the existing Sterling Heights branch office leases by Sterling. September 10, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The banks are both wholly owned subsidiaries of the same bank holding company. As such, the proposed transaction is essentially a corporate reorganization and would have no effect on competition. SUN BANK OF WILTON MANORS, NATIONAL ASSOCIATION, Wilton Manors, Fla., and Sun Bank of Lauderdale Beach, Lauderdale-by-the-Sea, Fla.; and Sun Bank of Broward County, Tamarac, Fla. Banking offices Names of banks and type of transaction Total assets Sun Bank of Lauderdale Beach, Lauderdale-by-the-Sea, Fla., with and Sun Bank of Broward County, Tamarac, Fla., with and Sun Bank of Wilton Manors, National Association, Wilton Manors, Fla. (14732), which had merged October 24, 1980, under charter of the latter and with the title "Sun Bank/Broward, National Association." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Sun Bank of Lauderdale Beach, Lauder dale-by-the-Sea, Fla., and Sun Bank of Broward County, Tamarac, Fla., into Sun Bank of Wilton Manors, National Association, Wilton Manors, Fla., under the charter of the latter and with the title of "Sun Bank/ Broward, National Association." The application was filed on March 21, 1980, and is based on a written agreement executed by the applicant banks on Febru ary 14, 1980. The three banks are wholly owned, with the excep tion of directors' qualifying shares, and controlled by Sun Banks of Florida, Inc., Orlando, Fla., a registered bank holding company. Consummation of this corpo rate reorganization would have no effect on competi tion. A review of the financial and managerial re sources and future prospects of the existing and proposed institutions and the convenience and needs To be In operation operated $ 65,008,000 25,926,000 99,418,000 192,596,000 of the community to be served has disclosed no rea son why this application should not be approved. The record of this application and other information available to this Office as a result of its regulatory re sponsibilities, reveals no evidence that the Sun Bank of Broward County's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than sat isfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the merger. July 1, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are all wholly owned subsidiaries of the same bank holding company. As such, their pro posed merger is essentially a corporate reorganization and would have no effect on competition. FIRST & MERCHANTS NATIONAL BANK, Richmond, Va., and The Bank of Chatham, Chatham, Va. Banking offices Names of banks and type of transaction Total assets The Bank of Chatham, Chatham, Va., with and First & Merchants National Bank Richmond Va (1111) which had merged October 31, 1980, under charter and title of the latter. The merged bank at date of merger had COMPTROLLER'S DECISION This application was filed with OCC on July 11, 1980, and is based on an agreement executed by the appli cants on June 18, 1980. As of March 31, 1980, The Bank of Chatham, Chatham, Va. (Chatham Bank), had total deposits of $16.8 million, and First & Merchants National Bank, Richmond, Va. (F&M), had total de posits of $1.8 billion. F&M is headquartered in Richmond, Va., and oper ates 98 banking offices in 28 counties and cities in Vir ginia. Chatham Bank maintains its sole office in Cha tham, the county seat of Pittsylvania County, which is in the south central portion of the state contiguous with the border between Virginia and North Carolina. $ 20,828,000 2,130,169,000 2,144,879,000 In To be operation operated 1 102 103 Savings customers represent the largest category of deposit accounts held in Chatham Bank. The appli cants selected a random sample of Chatham Bank's regular savings customers, and using this sample, de termined that 75 percent of Chatham Bank's deposits are derived from a circular area surrounding Chatham with a radius of approximately 9 miles. The Comptroller finds that this is a reasonable market delineation, typi cal of isolated rural communities like Chatham.* Within its market area, Chatham Bank holds $16.5 million in deposits, or approximately 27 percent of total market * F&M's nearest branch is in Danville, 15 miles from Chatham and clearly outside Chatham Bank's market area. 43 deposits. Within this same area, F&M holds $2.88 mil lion in deposits, or 4.7 percent of market deposits. Chatham is also served by branches of United Virginia Bank and Fidelity American Bank, both of which are major banking organizations with offices throughout the state. The Comptroller finds that the loss of the present degree of competition between Chatham Bank and F&M will not substantially lessen competition in the Chatham market in violation of the Bank Merger Act, 12 USC 1828(c). Furthermore, the replacement of a weak and relatively ineffective bank facing competi tion from large statewide institutions with a strong insti tution should enhance competition. The financial and managerial resources of the appli cants are satisfactory, and their future prospects are favorable, although Chatham Bank's future prospects are hampered by its small size. The prospects of the combined institution are good. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that F&M's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicants to proceed with the proposed merger. September 29, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL Pittsylvania County, in which the independent city of Danville is located, is situated in the southwestern por tion of Virginia. The county's 1970 population was 58,789; Danville's 1970 population was 45,000. The county's economy is chiefly agricultural, though Dan ville is the center for industrial development in the area. Applicant's closest office to Bank is its North Danville office, 13.5 miles from Chatham; Applicant's other five Pittsylvania County offices are located within 18.5 miles of Bank's only office in Chatham. There are offices of other banks in Danville and Chatham and in the intervening area between Bank's office and Applicant's offices. The application indicates that Ap plicant draws some business from Bank's primary service area; it draws $2.9 million in IPC demand de posits (3.2 percent of total deposits of Applicant's of fices in the primary service area) and $2.7 million in loans from that area. Eleven banks operate 24 offices in Pittsylvania County. Applicant is the largest, holding total deposits in its Pittsylvania county offices of $83.4 million, and Bank is the ninth largest, holding total deposits of $16.5 million, 23.8 percent and 4.7 percent, respec tively, of the deposits held in Pittsylvania County bank offices. If the merger is consummated, the resulting in stitution would hold 28.5 percent of the total Pittsylva nia County deposits, and the share of those deposits held by the three largest banking organizations in Pitt sylvania County would increase from 60.1 percent to 64.8 percent. We conclude that the proposed merger would have an adverse effect on competition. FIRST NATIONAL BANK OF ATLANTA, Atlanta, Ga., and Cobb County Bank, Powder Springs, Ga. Banking offices Total assets Names of banks and type of transaction Cobb County Bank, Powder Springs, Ga., with and First National Bank of Atlanta, Atlanta, Ga. (1559), which had merged October 31, 1980, under charter and title of the latter. The merged bank at date of merger had COMPTROLLER'S DECISION This application was filed with this Office on June 18, 1980, and is based on an agreement executed by the applicants on June 13, 1980. As of December 31, 1979, First National Bank of Atlanta, Atlanta, Ga. (FNB), held $1.9 billion in deposits and Cobb County Bank, Powder Springs, Ga. (CCB), held $24 million in deposits. FNB operates 61 banking offices in Georgia with the greatest proportion, 53, in the Atlanta metro politan area counties of Fulton and DeKalb. CCB oper ates all eight of its offices in Cobb County, which is ad jacent to Fulton County and the northwest portion of Atlanta. Cobb County is separated from Fulton County by the Chattahoochee River. Applicants state that CCB draws over 80 percent of its deposits from Cobb County. For this reason, they 44 $ 29,722,000 2,564,326,000 2,662,272,000 In operation To be operated 8 62 70 assert that Cobb County is the relevant geographic market. Considering CCB's small size and low loan limits, as well as its deposit penetration, the OCC finds that Cobb County approximates the market of the bank to be acquired.* However, Cobb County's proximity to the Atlanta metropolitan area cannot be ignored. Al though banks headquartered in Fulton County, which includes the downtown area of Atlanta, cannot branch * The Atlanta Federal Reserve Bank found the market to be the Atlanta banking market, an eight-county area. Within this market, the Atlanta Federal Reserve Bank concluded that the addition of CCB's 0.3 percent to FNB's 22 percent would have only a marginal impact. Assuming this was the correct market, the OCC concurs in the Atlanta Federal Reserve Bank's finding and would approve the merger on competitive grounds. into Cobb County, their presence is felt. Commuting patterns and advertising efforts contribute to this ef fect. Additionally, several Cobb County banks are al ready part of Atlanta-based holding companies.t Applicants have addressed the issue raised by the proximity of Atlanta banks by assuming the Cobb County market includes deposits from the major At lanta banks that do not have branch offices in Cobb County. There are four banks in addition to FNB that are large enough to affect the competitive situation. Of these, FNB has recent figures for itself and one other. Assuming that the other four banks have a percentage of deposits equivalent to that found for FNB and the other bank for which there are figures, applicants have reconstructed the Cobb County market taking these four additional Atlanta banks' deposit shares into the county deposit calculations. Using these figures, this merger would combine the fifth (FNB) and ninth (CCB) largest banks for a combined deposit share of 12 per cent. The OCC finds that this is not sufficient to cause a violation of the standards found in the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of CCB and FNB are generally satisfactory, and the future pros pects of both banks appear good. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that FNB's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicants to proceed with the proposed merger. September 18, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL f Indeed, the Atlanta Federal Reserve Bank had noted that CCB is part of a chain commonly owned and controlled and that, even after the merger, the chain would continue as a competitor in the Atlanta market. We have reviewed this proposed transaction and con clude that it would not have a significantly adverse ef fect upon competition. FLORIDA FIRST NATIONAL BANK OF JACKSONVILLE, Jacksonville, Fla., and Florida First National Bank at Fernandina Beach, Fernandina Beach, Fla. Banking offices Names of banks and type of transaction Total assets Florida First National Bank at Fernandina Beach, Fernandina Beach, Fla. (4558), with and Florida First National Bank of Jacksonville Jacksonville Fla (8321) which had merged October 31, 1980, under charter of the latter and with the title "Florida National Bank of Jacksonville.'' The merged bank at date of merger had .... COMPTROLLER'S DECISION Florida First National Bank at Fernandina Beach, Fernandina Beach, Fla., and Florida First National Bank of Jacksonville, Jacksonville, Fla., are majorityowned and controlled by Florida National Banks of Florida, Inc., Jacksonville, a registered bank holding company. This proposed merger is a corporate reor ganization which would have no effect on competition. A review of the financial and managerial resources and future prospects of the existing and proposed in stitutions and the convenience and needs of the com munity to be served has disclosed no reason why this application should not be approved. The record of this application and other information available to this Office as a result of its regulatory re $ 28,032,000 466,493,000 503,518,000 In operation To be operated o 13 15 sponsibilities reveals no evidence that the banks' rec ords of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, are less than satisfactory. This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the applicants to proceed with the merger. September 9, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are both wholly owned subsidi aries of the same bank holding company. As such, their proposed merger is essentially a corporate reor ganization and would have no effect on competition. 45 FLORIDA NATIONAL BANK OF MIAMI Miami, Fla., and Florida Bank at Fort Lauderdale, Fort Lauderdale, Fla. Banking offices Names of banks and type of transaction Total assets Florida Bank at Fort Lauderdale, Fort Lauderdale, Fla., with and Florida National Bank of Miami, Miami, Fla. (13570), which had merged October 31, 1980, under charter and title of the latter. The merged bank at date of merger had COMPTROLLER'S DECISION Florida Bank at Fort Lauderdale, Fort Lauderdale, Fla:, and Florida National Bank of Miami, Miami, Fla., are majority-owned and controlled by Florida National Banks of Florida, Inc., Jacksonville, Fla., a registered bank holding company. This proposed merger is a corporate reorganization which would have no effect on competition. A review of the financial and managerial resources and future prospects of the existing and proposed in stitutions and the convenience and needs of the com munity to be served has disclosed no reason why this application should not be approved. The record of this application and other information available to this Office as a result of its regulatory re In operation To be operated $ 36,416,000 433,332,000 465,117,000 11 sponsibilities reveals no evidence that the banks' rec ords of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the applicants to proceed with the merger. September 25, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are both wholly owned subsidi aries of the same bank holding company. As such, their proposed merger is essentially a corporate reor ganization and would have no effect on competition. WATSEKA FIRST NATIONAL BANK, Watseka, III., and Iroquois County Trust Company, Watseka, Banking offices Names of banks and type of transaction Total assets Iroquois County Trust Company, Watseka, III., with and Watseka First National Bank, Watseka, III. (10522), which had merged October 31, 1980, under charter and title of the latter. The merged bank at date of merger had COMPTROLLER'S DECISION Iroquois County Trust Company, Watseka, III. (Trust Company), is presently a wholly owned subsidiary of Watseka First National Bank, Watseka (Bank). This ap plication is a prerequisite to converting Trust Company into a department of Bank. A merger plan of reorgani zation is being pursued, rather than liquidation, since there is no feasible answer under Illinois state law to the question of who would succeed Trust Company as executor, administrator or trustee of estates. The appli cation presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and mana gerial resources of Bank and its wholly owned Trust Company are satisfactory, and the future prospects of the combined entity are favorable. 46 $ In operation To be operated 1,000 17,515,000 17,512,000 A review of the record ot this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicants' records of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this merger. September 17, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it is essentially a corporate reorganization and would have no effect on competition. AMOSKEAG NATIONAL BANK & TRUST CO., Manchester, N.H., and Amherst Bank & Trust Company, Amherst, N.H. Banking offices Names of banks and type of transaction Total assets Amherst Bank & Trust Company, Amherst, N.H., with and Amoskeag National Bank & Trust Co., Manchester, N.H. (574), which had merged November 1, 1980, under charter and title of the latter. The merged bank at date of merger had In operation To be operated $ 13,392,000 88,586,000 102,486,000 10 COMPTROLLER'S DECISION SUMMARY OF REPORT BY ATTORNEY GENERAL This application was filed with this Office on April 3, 1980, and is based on an agreement executed by the applicants on January 2, 1980. As of September 30, 1979, Amoskeag National Bank & Trust Co. (Amoskeag), had total deposits of $54 million and Amherst Bank & Trust Company (Amherst Bank), had total deposits of $10.8 million. Amoskeag's main office and four branches are in Manchester, N.H. It operates one office in Bedford, Goffstown and Hooksett, all of which are contiguous to Manchester. Amherst Bank has its head office in Amherst, N.H., and one branch in Bedford which ad joins Amherst. Data submitted by the applicants show that, with the exception of their offices in Bedford, they serve separate and distinct markets approximated by Manchester and Amherst. Both the Federal Deposit In surance Corporation and the Federal Reserve Bank of Boston in their competitive factor reports note that the deposit overlap in Bedford is minimal and that its loss would not substantially lessen competition.* The OCC finds that the banks are in different markets except in Bedford where the loss of competition is not signifi cant. The financial and managerial resources of both pro ponents are satisfactory, and their future prospects are favorable. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the record of Amoskeag in helping to meet the credit needs of its entire community, including low and mod erate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed merger. July 30, 1980. Hillsborough County (1970 population 223,941) is lo cated in south central New Hampshire adjacent to the Massachusetts border. Manchester, the state's largest city (1978 population 93,257) and a major industrial center, is located on the northern edge of the county. Nashua, the state's second largest city (1970 popula tion 61,800), is located on the southern edge of the county, about 15 miles south of Manchester. Bedford, which is contiguous to Manchester, is located on Route 101 about 5 miles southwest of Manchester. Amherst, about 10 miles further southwest on Route 101, is approximately 15 miles northwest of Nashua, and there appears to be a substantial amount of com muting from Amherst into Nashua. The population of southern New Hampshire has grown rapidly since 1970, and its economy continues to undergo a healthy period of expansion. Thirteen commercial banks operate a total of 58 of fices in Hillsborough County. In the greater Manches ter area (which includes Manchester, Hooksett, Goffs town and Bedford), there are eight commercial banks which operate a total of 27 branch offices. Applicant and Bank's Bedford offices are only 2 miles apart, and given the not insignificant amount of business which, according to the Application, the parties draw from Bedford, it appears that the merger would eliminate a substantial amount of direct competition. Banking is highly concentrated in the greater Manchester area, with the top three banks accounting for 78.8 percent of the area's commercial deposits. Applicant is the third largest, with 15.8 percent, and Bank is the smallest, with .39 percent. While the proposed merger may have somewhat less of an impact on competition due to Bank's relatively small size and its weak financial his tory, nevertheless it appears that elimination of direct competition in such a highly concentrated market would have an adverse effect upon existing competi tion. We conclude that the merger will have an adverse effect on competition. * Each bank holds roughly $2 million in deposits in its Bed ford office. 47 SUN FIRST NATIONAL BANK OF ORLANDO, Orlando, Fla., and Sun Bank of Osceola County, St. Cloud, Fla.: and Sun Bank of Seminole, National Association, Fern Park, Fla. Banking offices Names of banks and type of transaction , Total assets Sun First National Bank of Orlando, Orlando, Fla. (14003), with and Sun Bank of Osceola County, St. Cloud, Fla., with and Sun Bank of Seminole, National Association, Fern Park, Fla. (16108), which had merged November 14, 1980, under charter of the latter and with the title "Sun Bank, N.A." Headquarters will be in Orlando. The merged bank at date of merger had COMPTROLLER'S DECISION Sun First National Bank of Orlando, Orlando, Fla., Sun Bank of Osceola County, St. Cloud, Fla., and Sun Bank of Seminole, National Association, Fern Park, Fla., are majority-owned and controlled by Sun Banks of Flor ida, Inc., Orlando, a registered bank holding company. This proposed merger is a corporate reorganization which would have no effect on competition. A review of the financial and managerial resources and future prospects of the existing and proposed in stitutions and the convenience and needs of the com munity to be served has disclosed no reason why this application should not be approved. The record of this application and other information available to this Office as a result of its regulatory re $ 943,699,000 56,587,000 89,380,000 In To be operation operated 16 3 3 1,064,112,000 22 sponsibilities reveals no evidence that the banks' rec ords of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the applicants to proceed with the merger. September 10, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are all wholly owned subsidiaries of the same bank holding company. As such, their pro posed merger is essentially a corporate reorganization and would have no effect on competition. FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, Ogden, Utah, and First Security Bank of Logan, National Association, Logan, Utah Banking offices Names of banks and type of transaction Total assets First Security Bank of Logan, National Association, Logan, Utah (16241), with $ 9,373,000 and First Security Bank of Utah, National Association, Ogden, Utah (2597), which had 1,672,758,000 merged November 21, 1980, under the charter and title of the latter bank (2597). The merged bank at date of merger had 1,682,131,000 COMPTROLLER'S DECISION First Security Bank of Logan, National Association, Lo gan, Utah (Logan), and First Security Bank of Utah, National Association, Ogden, Utah (Security), are both wholly owned subsidiaries of First Security Corporation (FSC). FSC is a multibank holding company with com mercial bank subsidiaries in three states and is the largest banking corporation headquartered in Utah. Security intends to acquire all the outstanding stock of Logan by exchanging 3.35 shares of Security stock for each share of Logan stock. Logan was established in 1973 by agents of FSC as a de novo unit bank to serve the Cache County area where Security already had four branch offices operating. It was chartered as a de novo unit bank solely because the home office protection provided by state law prevented branching in Logan because of the existence there of a local unit bank, First National Bank of Logan. State law does, 48 In To be operation operated 1 68 69 however, specifically allow the acquisition of a cfe novo unit bank which has been in existence 5 years and the subsequent operation of it as a branch of the acquiring bank (Utah Code Ann. 7-3-6). Accordingly, this pro posal is a corporate reorganization and will have no adverse competitive effect on the performance of the financial institution in Logan or in Cache County. On the other hand, the establishment of Logan as a branch of Security will allow Logan to transcend var ious regulatory and size restrictions that limit the activi ties and responsiveness of a small de novo bank and will thereby enable it to offer a wider range of banking services to the community on a more convenient basis. In addition, the elimination of one'of the two unit banks in Logan by this merger increases the chances that the city may be opened to branching in the near future. To that extent, this is a potentially procompetitive affiliation. Indeed, this merger, and the merger of First National Bank of Logan, the second of the two unit banks in Logan, with Zions First National Bank, which was judicially sanctioned by the U.S. District Court in Utah on August 14, 1980, will end "home of fice protection" in Logan and will allow other commer cial banks to branch into the city. The financial and managerial resources of both banks and the future prospects of Security are favor able. A review of the record of this application and other information available to this Office as a result of its regulatory responsibilities revealed no evidence that the banks' records of helping to meet the credit needs of their communities, including low and moder ate income areas, is less than satisfactory. Accordingly, this merger application is approved in accordance with the Bank Merger Act, 12 USC 1828(c). October 8, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are both wholly owned subsidi aries of the same bank holding company. As such, their proposed merger is essentially a corporate reor ganization and would have no effect on competition. ELLIS NATIONAL BANK OF VOLUSIA COUNTY, DeBary, Fla., and Ellis Bank of Seminole County, Altamonte Springs, Fla. Banking offices Names of banks and type of transaction Total assets Ellis Bank of Seminole County, Altamonte Springs, Fla., with and Ellis National Bank of Volusia County DeBary Fla. (15348) which had merged December 1, 1980, under charter and title of the latter bank (15348). The merged bank at date of merger had COMPTROLLER'S DECISION Ellis Bank of Seminole County, Altamonte Springs, Fla., and Ellis National Bank of Volusia County, DeBary, Fla., are majority-owned and controlled by Ellis Bank ing Corporation, Bradenton, Fla., a registered bank holding company. This proposed merger is a corpo rate reorganization which would have no effect on competition. A review of the financial and managerial resources and future prospects of the existing and proposed in stitutions and the convenience and needs of the com munity to be served has disclosed no reason why this application should not be approved. The record of this application and other information available to this Office as a result of its regulatory re $ 5,671,000 21,578,301 In operation To be operated 1 2 3 26,423,542 sponsibilities reveals no evidence that the banks' rec ords of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the applicants to proceed with the merger. October 6, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are both wholly owned subsidi aries of the same bank holding company. As such, their proposed merger is essentially a corporate reor ganization and would have no effect on competition. THE HUNTINGTON NATIONAL BANK, Columbus, Ohio, and The First National Bank of Burton, Burton, Ohio Banking offices Names of banks and type of transaction Total assets The First National Bank of Burton, Burton, Ohio (6249), with and The Huntington National Bank, Columbus, Ohio (7745), which had merged December 5, 1980, under charter and title of the latter bank (7745). The merged bank at date of merger had COMPTROLLER'S DECISION This application was accepted for filing on July 14, 1980, and is based on an agreement between the pro ponent banks dated April 9, 1980. As of March 31, 1980, The First National Bank of Burton, Burton, Ohio $ 79,764,000 2,594,001,000 2,751,981,000 In operation To be operated 6 108 114 (Burton), had total deposits of $65.3 million, and The Huntington National Bank, Columbus, Ohio (Hunt ington), had total deposits of $2 billion. Huntington is the primary subsidiary of Huntington Bancshares, Inc., a one-bank holding company which ranks fifth largest 49 in the state with nearly 5 percent of total commercial bank deposits. The relevant geographic market for the purposes of competitive analysis is Geauga County and the adja cent village of Chagrin Falls in Cuyahoga County. As of the application date, Burton derived more than 80 percent of its total deposits from this area. Moreover, all of Burton's six offices and one approved, but un opened, branch are within Geauga County. Huntington operates 105 offices statewide, but none in Geauga County. However, two of these offices are in an area defined by the Board of Governors of the Federal Re serve System as the Cleveland, Ohio, banking market, which includes Geauga County. There appears to exist little, if any, direct competi tion between the proponents within the relevant geo graphic market. Even if they are considered direct competitors within the aforementioned Cleveland banking market, the proposed merger would have no significant competitive effect. A total of 32 banking or ganizations are in this area, and the combined market share of the proposed banks would be less than 1 per cent. Moreover, the merger would have no meaningful effect on the concentration of banking resources in the state, with Huntington's share remaining less than 5 percent. Similarly, there is nothing in the application * which would tend to support a conclusion that the pro posed merger would eliminate significant prospects for future competition between the banks. This Office therefore concludes that the proposed merger would not violate the standards found in the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of Burton and Huntington are satisfactory, and their future pros pects, together with those of the combined bank, are favorable. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicants' records of helping to meet the credit needs of their entire communities, including low and moder ate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed merger. October 30, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have a substantial competitive impact. * * THE CITIZENS AND SOUTHERN NATIONAL BANK OF SOUTH CAROLINA, Charleston, S.C, and Colonial State Bank, Inc., Marion, S.C. Banking offices Names of banks and type of transaction Total assets Colonial State Bank, Inc., Marion, S.C, with was purchased December 8, 1980, by The Citizens and Southern National Bank of South Carolina, Charleston, S.C. (14425), with After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION This is the Comptroller's decision on an application of The Citizens and Southern National Bank of South Car olina, Charleston, S.C., (C & S), to purchase the assets and assume the liabilities of Colonial State Bank, Inc., Marion, S.C. (Colonial). This application was accepted for filing on August 12, 1980, and is based on an agreement signed by the participants on July 25, 1980. C & S is a wholly owned subsidiary of The Citizens and Southern Corporation, a one-bank holding com pany, and is the second largest commercial bank in the state. At year-end 1979, C & S had assets of $916.9 million and deposits of $751.2 million. On the same date, Colonial was the second largest bank in its market with assets of $21 million and deposits of $16.8 million. The area for assessing the competitive effects of this proposal consists of Marion and Mullins, Marion County, S.C. Colonial operates two offices in Marion and has received approval to open a third office in 50 In operation $ 20,935,000 2 916,938,000 934,431,000 92 To be operated 94 Mullins. There are five banks operating in the MarionMullins market with total deposits of $63 million. C & S operates no offices within Marion County, and its clos est office is in Florence, S.C, some 22 miles distant. C & S could enter Colonial's market de novo by es tablishing a branch. However, there is no evidence on the record that any of the banking needs of this market are not being met, and there is no reason to believe that C & S would enter the market absent this pro posal. There is no existing competition between C & S and Colonial, and approval of this proposal would not reduce the number of competitors in the market. Con sequently, approval would not have a significantly ad verse effect on existing competition. The financial and managerial resources of both C & S and Colonial are satisfactory. The future prospects of both banks are good, although Colonial's immediate future expansion is somewhat limited due to the bank's present capital structure. The future prospects of the resultant bank are favorable, and the resultant bank should provide a stronger and more diversified bank ing alternative in the Marion-Mullins market. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that C & S's record of helping to meet the credit needs of its entire community, including low and moderate income neigh borhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this proposal. C & S is autho rized to operate all former offices of Colonial as branches of C & S. November 7, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have a substantial competitive impact. THE SPRINGFIELD BANK, Springfield, Ohio, and The Xenia National Bank, Xenia, Ohio Banking offices Names of banks and type of transaction Total assets The Springfield Bank, Springfield, Ohio, with and The Xenia National Bank, Xenia, Ohio (2932), which had merged December 13, 1980, under the charter of the latter and with the title "Society National Bank of the Miami Valley," with headquarters in Springfield. The merged bank at date of merger had COMPTROLLER'S DECISION Both The Springfield Bank, Springfield, Ohio, and The Xenia National Bank, Xenia, Ohio, are wholly owned subsidiaries of Society Corporation, Cleveland, Ohio, a registered bank holding company. This application represents a corporate reorganization of two subsidi aries of the same holding company and will result in no direct impact on competition. A review of the financial and managerial resources, the future prospects of both the existing and proposed institutions and the convenience and needs of the community to be served has revealed no reason why this application should not be approved. The record of this application and other information available to this Office as a result of its regulatory re In operation To be operated $153,063,000 52,627,000 202,690,000 sponsibilities reveals no evidence that the banks' rec ords of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the applicants to proceed with the merger. November 5, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are wholly owned subsidiaries of the same bank holding company. As such, their pro posed merger is essentially a corporate reorganization and would have no effect on competition. FIRST BRISTOL COUNTY NATIONAL BANK, Taunton, Mass., and The National Bank of Wareham, Wareham, Mass. Banking offices Names of banks and type of transaction Total assets The National Bank of Wareham, Wareham, Mass. (1440), with and First Bristol County National Bank, Taunton, Mass. (2232), which had merged December 15, 1980, under charter and title of the latter bank. The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge The National Bank of Wareham, Wareham, Mass. (Wareham), into and under the charter of First Bristol County National Bank, Taunton, Mass. (First Bristol). This application was accepted on August 21, 1980, and is based on an agreement signed by the participants on May 30, 1980. On June 30, 1980, $ 25,316,000 157,266,000 182,928,000 In operation To be operated 1 17 18 Wareham had total commercial bank deposits of $21.1 million, and First Bristol's total deposits were $131.4 million. The relevant geographic market for analysis of this proposal is Bristol and Plymouth counties in southeast ern Massachusetts. Wareham is one of eight commer cial banks in Plymouth County and controls approxi mately 2.5 percent of the market's deposits. Wareham 51 operates branches in Marion and Carver. First Bristol is the largest of 12 banks in Bristol County with a total market share of 15.6 percent. First Bristol operates 13 offices in the county. There is no existing competition between Wareham and First Bristol since they com pete in separate markets; the nearest branches of the banks are separated by a 10-mile wide, largely unde veloped "green belt." Approval of this proposal would not have a significantly adverse effect on existing com petition. First Bristol could enter Wareham's market de novo by establishing a branch. However, that market is not considered attractive for de novo entry, and there is no evidence in the record that any of the banking needs of this market are not being met. Additionally, there is no reason to believe that First Bristol would enter the market absent this proposal. The financial and managerial resources of both banks are considered satisfactory. However, the future prospects of Wareham are limited due to its relative position in the Plymouth County market and its unag gressive nature. The future prospects of the combined entity are good and will be further enhanced by the availability of expanded banking services to Wareham's market, including money market certificates, in dividual retirement accounts and a complete line of fi duciary services, which are not presently offered by Wareham. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicants' records of helping to meet the credit needs of their entire communities, including low and moder ate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with this merger. November 7, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL We have reviewed this proposed transaction and con clude that it would not have a significantly adverse ef fect upon competition. FLINT OFFICE OF MICHIGAN NATIONAL BANK, Lansing, Mich., and Michigan National Bank—Mid Michigan, Burton, Mich. Banking offices Names of banks and type of transaction Total assets Flint Office of Michigan National Bank, Lansing, Mich. (14032), with was purchased December 22, 1980, by Michigan National Bank—Mid Michigan, Burton, Mich. (16234), which had After the purchase was effected, the receiving bank had COMPTROLLER'S DECISION Michigan National Bank—Mid Michigan, Burton, Mich. (Mid Michigan), has made application to purchase certain assets and assume certain liabilities of the Flint Office of Michigan National Bank, Lansing, Mich. (Lansing). This application was accepted for filing on July 10, 1980, and is based on an agreement exe cuted by the proponents on June 18, 1980. Mid Michigan had total deposits of $77 million on April 30, 1980. It operates 13 offices, none of which are in Flint. Lansing had total deposits of $1.3 billion on April 30, 1980; its one Flint office had total deposits of $149 million on April 30, 1980. Both Mid Michigan and Lansing are majority-owned and controlled by Michigan National Corporation, a registered bank holding company. This application is merely a corporate reorganization whereby Michigan National Corporation is realigning and consolidating its banking operations in a common primary service area. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). Additionally, a re view of the financial and managerial resources and fu ture prospects of the existing and proposed institu tions and of the convenience and needs of the 52 In operation $172,782,000 1 84,236,000 260,136,000 15 To be operated 16 community to be served has disclosed no information why this application should not be approved. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that Mid Michigan's record of helping to meet the credit needs of its entire community, including low and moderate in come neighborhoods, is less than satisfactory. This is the prior written approval required for the ap plicants to proceed with the proposed purchase and assumption. However, due to the substantial increase in the assets and liabilities of Mid Michigan after the transaction, this approval is conditioned upon the in jection, by Michigan National Corporation, of $15.5 mil lion of equity capital into Mid Michigan as indicated in the application. December 5, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The banks are both wholly owned subsidiaries of the same bank holding company. As such, the proposed transaction is essentially a corporate reorganization and would have no effect on competition. NATIONAL BANK OF DEFIANCE, Defiance, Ohio, and National Bank of Paulding, Paulding, Ohio Names of banks and type of transaction Total assets National Bank of Defiance, Defiance, Ohio (15512), with and National Bank of Paulding, Paulding, Ohio (14300), which had merged December 26, 1980, under charter of the latter and with the title "Maumee Valley National Bank," with headquarters in Defiance. The merged bank at date of merger had COMPTROLLER'S DECISION An application was filed on June 24, 1980, with this Of fice pursuant to the Bank Merger Act, 12 USC 1828(c), by National Bank of Paulding, Paulding, Ohio (Pauld ing Bank), for approval to merge with National Bank of Defiance, Defiance, Ohio (Defiance Bank), under the charter of National Bank of Paulding and with the title "Maumee Valley National Bank." The application is based on a written agreement executed by the banks on May 13, 1980. Financial Institutions Involved Defiance, the bank to be acquired, was organized as a national banking institution in 1965. As of Decem ber 31, 1979, it had total deposits of $31.6 million. It presently operates its two offices, including its main of fice, in Defiance, Defiance County. It recently received approval for an additional temporary branch in Defi ance to serve its customers north of the Maumee River until the river bridge is repaired. Paulding, the acquiring bank, was established as a national bank in 1934. In January 1979, it was ac quired by Toledo Trustcorp, Inc., Toledo, Ohio (Toledo). Paulding, a unit bank, is headquartered ap proximately 21 miles southwest of Defiance in Pauld ing, Paulding County, which is contiguous to Defiance County. It held total deposits of $21.8 million as of year-end 1979. Toledo Trustcorp was formed in 1970 by Toledo Trust Company. It became a multibank holding com pany in 1974 by acquiring Northwest Ohio Bank, Bowl ing Green. Since that time, it has acquired six addi tional banks and presently has an application pending before the Federal Reserve System to acquire Farmers and Merchants State and Savings Bank, Montpelier ($9.8 million in deposits). Toledo, the 12th largest multibank holding company in Ohio, had consolidated deposits of $828 million, representing 2.10 percent of the total commercial bank deposits in the state as of December 3 1 , 1979. After the proposed merger, Toledo would remain the 12th largest multibank hold ing company, and its share of commercial bank de posits in Ohio would be 2.18 percent.1 1 1n April 1980, the Board of Governors of the Federal Re serve System denied an application by Toledo Trustcorp to acquire Defiance Bank as a subsidiary. This denial was based on a finding that Paulding Bank (already owned) and Defiance Bank competed in the same market, which the Board defined as all of Defiance County, except Hicksville; all of Paulding County, except Carryall; Flatrock and Pleas $35,306,000 28,232,000 Banking offices In To be operation operated 2 2 68,108,000 4 Defiance Bank's Service Area Defiance, the county seat with a 1977 population of 15,827, serves as a manufacturing and retail center for Defiance County, which is primarily an agricultural area. Defiance Bank's service area, from which its two of fices drew 81.1 percent of its deposits (and 95 percent of its loans) as of May 12, 1980, is essentially confined to Defiance and Jewell. The only other commercial bank in the area, State Bank and Trust Company (State Bank), is a $58.5 million deposit bank that oper ates four of its six offices, including its main office, in Defiance and drew approximately 88 percent of its de posits from Defiance Bank's service area. First Federal Savings and Loan Association ($188.9 million total de posits) and Home Savings and Loan Association (total deposits of $119.9 million) also compete in this area. As of March 31, 1979, these two savings and loan as sociations derived $139.5 million in deposits from Defi ance Bank's service area, 65 percent more than the $84.8 million in deposits derived by Defiance Bank and State Bank from this area. In addition, Defiance Bank, with 32 percent of its loans in real estate, faces significant direct competition from these depository in stitutions for its loan business. By comparison, Paulding Bank derived only 3.2 per cent ($795,000) of its total deposits (and 4 percent of its loans) from Defiance Bank's service area which is less than 1 percent of the combined deposits of all fi nancial offices (commercial banks and savings and loan associations) in this area. Moreover, nearly 70 percent of these deposits is attributable to only four customers.2 ant in Henry County; and Monroe and Perry in Putnam County. 2 No other subsidiary of Toledo significantly competes with Defiance Bank in its service area. In addition to National Bank of Paulding, Toledo Trustcorp owns two banks with of fices within 30 mijes of Defiance—Liberty State Bank, Liberty Center (branch office in Napoleon) and National Bank of Fulton County, Delta (branch office in Wauseon)—and has an application pending with the Federal Reserve Board to acquire a third bank—Farmers and Merchants State and Savings Bank, Montpelier. The three banks combined drew a total of $90,000 in deposits from the service area of National Bank of Defiance, or 0.1 percent of total deposits of the banking offices in that area; each of the three banks derived less than 0.6 percent of its deposits from the Defiance area. Similarly, National Bank of Defiance drew a total of $466,000, or 1.5 percent of its deposits, from the service areas of the two current and proposed Toledo Trustcorp subsidiaries. 53 Paulding Bank's Service Area Paulding County is also a rural area whose economy is primarily dependent on agriculture. It had an esti mated 1977 population of 20,470 while Paulding, the county seat, numbered 2,923. As of May 8, 1980, approximately 82.1 percent of Paulding Bank's deposits (and 93 percent of its loans) originated from an area centered around Paulding in cluding Cecil, Haviland, Latty and Payne, a service area which essentially incorporates all of Paulding County. Sixty-six percent of these deposits came solely from Paulding. The sole office of Union State Bank, Payne, with $15.2 million in deposits, and the re cently opened (September 1979) branch of State Bank are the only other commercial banks within Paulding Bank's service area. A branch of Home Savings and Loan Association, with $19.8 million in deposits, is also in this area and would appear to compete directly and substantially with Paulding Bank for deposits and real estate loans which make up approximately 50 percent of Paulding Bank's loan portfolio. Defiance Bank drew only 2.1 percent ($643,000) of its total deposits (and 2.7 percent of its loans) from within this service area, a figure that represents less than 2 percent of the combined deposits of the com mercial banks and savings and loan associations in the area. Moreover, approximately one-half of Defi ance Bank's deposits in Paulding Bank's service area is attributable to 10 customers. Banking Structure in Ohio The banking structure in Ohio is characterized by a number of strong, large bank holding company sys tems, which by and large have been regional in nat ure.3 A review of merger applications filed with this Of fice since January 1, 1979, indicates an emerging pattern of statewide acquisition activity whereby hold ing companies are not only penetrating each other's markets but small rural areas as well where there are no holding companies present. We believe this has re sulted in increased competition among larger banking organizations more capable of offering a full range of services, particularly in small towns. This proposed ac quisition is consistent with this procompetitive trend. These deposits amount to 0.66 percent, 0.03 percent, and 0.003 percent of total deposits, respectively, of banking of fices in the service areas of Liberty State Bank, National Bank of Fulton County, and Farmers and Merchants State and Savings Bank. 3 As of year-end 1979, the 10 largest multibank holding com panies, with deposits ranging between $1 and $3 billion, held only 56 percent of the total commercial bank deposits in the state (BancOhio Corporation, $3.8 billion in deposits, 9.4 percent; AmeriTrust Corp., $3.5 billion, 8.8 percent; National City Corp., $3.1 billion, 7.8 percent; Society Corp., $2.4 bil lion, 6 percent; BancOne Corp., $2.1 billion, 5.2 percent; Centran Corp., $1.9 billion, 4.8 percent; Huntington Bancshares, Inc., $1.8 billion, 4.6 percent; Central Bancorporation, $1.6 billion, 4.1 percent; First National Cincinnati Corp., $1.3 billion, 3.3 percent; Union Commerce Corp., $1 billion, 2.6 percent). This reflects one of the lowest statewide de posit concentration ratios. 54 In addition to expansion through holding company acquisition, commercial banks have been permitted since January 1979, with regulatory approval, to estab lish de novo branches in counties continguous to the county in which their main office is located and to branch statewide by acquisition. 4 Prior to this time, Ohio only allowed unrestricted county-wide branching. Beginning January 1989, banks will be permitted to establish de novo branches statewide, It should also be noted that federally chartered savings and loan as sociations are allowed, with regulatory approval, to branch statewide. 5 Commencing January 1, 1981, state-chartered savings and loan associations will ac quire this same ability. At the present time, state asso ciations are limited to establishment of branches within a 100-mile radius of their main offices. Effective January 1, 1981, savings and loan associa tions in Ohio and nationwide, will be able to engage in certain activities historically reserved for commercial banks. Pursuant to the Depository Institutions Deregu lation and Monetary Control Act, all savings and loan associations will be able to offer NOW accounts (nego tiable orders of withdrawal). Federally chartered sav ings and loan associations gain new consumer lending powers, including the ability to offer credit cards and overdraft services and expanded real estate lending powers essentially akin to those enjoyed by commer cial banks. Moreover, a federally chartered savings and loan association may offer trust services and es tablish remote service units pursuant to regulations prescribed by the Federal Home Loan Bank Board. In addition, the investment powers of federally chartered savings and loan associations are expanded to in clude, inter alia, the ability to invest in commercial pa per, corporate debt securities and residential^ related government obligations. Competitive Analysis The threshold question in determining whether the proposed acquisition will violate the Clayton and Bank Merger Acts is whether Paulding Bank and Defiance Bank engage in substantial, direct competition. The Federal Reserve Board has argued that the banks are in direct competition in the same market, namely, the Defiance banking market, and that the proposed mer ger will thereby result in a substantial lessening of competition.6 There may be some support for the prop- 4 Thus far, two bank holding companies have realigned and consolidated their banking interests throughout the state. BancOhio Corporation has merged its 39 banking subsidi aries into and under the charter of The Ohio National Bank of Columbus. Similarly, Huntington BancShares Incorporated has merged its 15 subsidiaries into the Huntington National Bank. 5 First Federal Savings and Loan Association operates under a federal charter. 6 As required by the Bank Merger Act, the Comptroller has received reports on the competitive factors involved in the proposed transaction from the Board of Governors of the Federal Reserve System (Board), the Federal Reserve Bank of Cleveland (Reserve Bank) acting on behalf of the Board of Governors of the Federal Reserve System, the Federal De- osition that there is one market which encompasses both Defiance and Paulding Counties. The presence of State Bank and Home Savings and Loan Association in both Defiance and Paulding Counties may be seen as such evidence. Accordingly, if Paulding Bank and Defiance Bank are operating substantially in the same single market, this affiliation, viewed from the perspec tive of market shares, does raise troublesome antitrust issues. However, the facts presented in the application refute a finding that Defiance Bank and Paulding Bank are substantial, direct competitors. In the area from which Paulding Bank derived 82.1 percent of its deposits and 93 percent of its loans, De fiance Bank drew only 2.1 percent of its total deposits and 2.7 percent of its loans. Similarly, Paulding Bank derived only 3.2 percent of its total deposits and 4 per cent of its loans from the area that produced approxiposit Insurance Corporation (FDIC) and the Attorney General of the United States (Department of Justice). In its advisory report, the Reserve Bank initially determined that "although the service areas of Applicant [Paulding] and Bank [Defiance] do not presently overlap they operate in the same banking market," to with "the Defiance banking market [which] includes all of Defiance County except the Township of Hicksville, all of Paulding County except the Township of Carryall; the Townships of Flatrock and Pleasant in western Henry County; and the Townships of Monroe and Perry in northwestern Putnam County." The Reserve Bank concluded that the merger would have an adverse effect on competition since it "would combined [sic] the second and third largest banking organizations and thereby increase the concentra tion in the market." Significantly, however, the Reserve Bank, stating that "in this case . . . thrifts should be considered as full competitors of banks because the makeup of their [com mercial banks] deposits and loan structure is similar to that of thrift institutions," found that "the anticompetitive effect of the proposed merger would be mitigated to a large extent by the significant presence of thrift institutions in the market." The Board submitted, as its report, a copy of its decision on Toledo's application to acquire Defiance Bank as a sub sidiary. In that statement, the Board, delineating the relevant geographic market as that set forth in the Reserve Bank's re port concluded that "consummation of this proposal would have substantially adverse effects on competition in the rele vant market." The Board, in its transmittal letter of August 6, 1980, noted that the recently enacted Depository Institutions Deregulation and Monetary Control Act will enable the thrift institutions "to compete more vigorously with commercial banks." The report received from the Department of Justice con cluded that "the proposed merger would have a significantly adverse effect on competition." Similarly, this finding was premised on a determination that Defiance Bank and Pauld ing Bank operate in the same banking market, adopting the Board's delineation of that market. The FDIC found that "the effect of the proposed transac tion on competition would be adverse" because it "would eliminate existing competition and the potential for increased future competition. It would also serve to reduce the number of banking alternatives in the local area and increase the area's concentration of banking resources." The FDIC found the relevant geographic market within which to analyze the competitive effects of the merger to be the market area in which Paulding operates, which, it determined, "consists of nearly all of Paulding County and extends into Defiance County to include the City of Defiance." mately 81.1 percent of Defiance Bank's deposits and 95 percent of its loans. Thus, although some direct competition between Paulding and Defiance Banks does exist, it is not substantial, and its elimination does not constitute a substantial lessening of competition in any relevant market. Even if we were to assume that the Defiance bank ing market, as defined by the Federal Reserve Board, were the relevant market, this affiliation would not result in a substantial lessening of competition in view of several important factors. First, the banks involved in the proposed merger are relatively small in size and hardly capable of dominating locally limited consumer financial services in the market. Second, the presence of aggressive savings and loan associations exerts a procompetitive influence on the commercial banks therein. Third, the introduction of Toledo Trustcorp into the market by this merger will improve the quality of services available to the market and directly enhance its competitive performance. Finally, there currently ex ists a large pool of potential entrants throughout the state (e.g., there are 13 other multibank holding com panies in Ohio with a total of 84 banks) which may ex pand their activities into this market. On the other hand, since we find that Paulding Bank and Defiance Bank do not significantly compete within the same geographic market, this transaction may be viewed as a geographic market extension merger. In that respect, it is our judgment that even assuming arguendo that Paulding Bank is a potential entrant into Defiance County, its elimination as a potential de novo entrant into the county will not harm the performance or future competitive structure of this market due to the presence of a significant number of remaining poten tial entrants throughout the state after the merger. Banking Factors We find the financial and managerial resources of Defiance Bank and Paulding Bank to be satisfactory. The future prospects of the proponent banks, indepen dently and in combination, are considered favorable. As a result of this merger, Paulding Bank intends to make available new and expanded banking services to the present customers of Defiance Bank, including, but not limited to, trust services, increased lending ca pability and expertise in farm lending and investment securities. These facts are positive considerations with respect to the issue of convenience and needs, and this Office is unaware of any negative factors relating to this issue. Community Reinvestment Act A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the banks' records of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. We have carefully considered the application pursu ant to the Bank Merger Act, 12 USC 1828(c), as well as the reports received by this Office from the Depart55 ment of Justice, the Federal Reserve Board, the Fed eral Reserve Bank of Cleveland and the FDIC. We con clude that the proposed merger will not violate Section 7 of the Clayton Act, will be in the public interest and will, therefore, otherwise satisfy the requirements of the Bank Merger Act. Accordingly, the application of Na tional Bank of Paulding to merge with National Bank of Defiance under the charter of National Bank of Pauld ing with the title "Maumee Valley National Bank" is ap proved. December 12, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL Defiance County (estimated population 37,200) is lo cated in northwestern Ohio along the Indiana border. Although it has experienced negligible population growth during the 1970's, it still has the largest popula tion among the seven counties in northwestern Ohio. The town of Defiance (estimated population 15,800) is the largest town in this region. The nearest cities larger than Defiance are Lima and Toledo, more than 50 miles distant, and Fort Wayne, Ind., more than 40 miles distant. Paulding County (estimated population 19,400) is lo cated immediately south of Defiance County. It has ex perienced a 4.5 percent population growth during the 1970's. The town of Paulding (estimated population 3,000) is the principal community in the county. Applicant's sole office in Paulding is approximately 18 miles southwest of Bank's offices in Defiance. In addition, Liberty State Bank, another Toledo Trustcorp subsidiary, has an office in Napoleon in Henry County, approximately 15 miles northeast of Bank's offices in Defiance. There are no bank offices in the area between Paulding and Defiance, and there is only one other bank, State Bank and Trust Co., in each of these two towns. According to the application, Bank draws $643,000 in deposits and $624,000 in loans from Applicant's service area, as defined in the application (approximately 2.9 percent and 4.4 percent, respec tively, of Applicant's total deposits and net loans), and Applicant draws $795,000 in deposits and $563,000 in loans from Bank's service area, as defined in the appli cation (approximately 2.6 percent and 2.5 percent, re spectively, of Bank's total deposits and net loans). It therefore appears that the proposed merger would eliminate a significant amount of existing competition between Applicant and Bank. The area within which it appears appropriate to assess the competitive effects of the proposed merger includes all of Defiance County, except the township of 56 Hicksville, all of Paulding County, except the township of Carryall, the townships of Flatrock and Pleasant in Henry County and the townships of Monroe and Perry in Putnam County.* Banking is highly concentrated in this market; the four largest of the eight banks operat ing there control 75.8 percent of the total deposits held in bank offices in the area. Bank is the second largest, and Applicant is the third largest bank in the area, controlling 19.5 percent and 12.9 percent, respec tively, of the area's total deposits (on the basis of June 30, 1979, branch office deposit data). If the proposed merger is consummated, Applicant would control al most one-third of the area's bank deposits, 32.4 per cent, the second largest share of local deposits (the largest share, 34.5 percent, is held by State Bank and Trust Co.), and concentration among the four largest banks would increase from 75.8 percent to 83.5 percent.f Under Ohio law, a bank may establish de novo branches in the county within which its home office is located and in counties adjacent to its home office county. Thus, Toledo Trustcorp, through its subsidi aries, Applicant and Liberty State Bank, may enter De fiance County de novo. Similarly, Bank may enter Paulding County and Henry County (in which Liberty State Bank is located) by de novo branching. The ap plication states (p. 38), moreover, that Defiance could support additional branches. The proposed merger would therefore eliminate the potential for increased future competition between Toledo Trustcorp's subsid iaries and Bank through de novo branching as well as through increased promotional efforts by the parties. We conclude that the proposed merger would have a significantly adverse effect on competition. * This is the market within which the Federal Reserve Board assessed the competitive effects of Toledo Trustcorp's pro posed acquisition of Bank in denying an earlier application to acquire Bank. t Applicant and its parent, Toledo Trustcorp, have urged several other areas as markets both in this application and in the application the Federal Reserve Board denied. Based upon a field survey conducted by the Federal Reserve Bank of Cleveland, the Board rejected the contention, renewed in this application, that Defiance County and Paulding County constitute separate markets. The board also rejected a much broader market urged by the parties consisting of Defiance and Paulding Counties, the western half of Henry County and the northwestern portion of Putnam County. We note that in this broader market Bank and Toledo Trustcorp would be the third and fifth largest banking organizations, controlling 12.4 percent and 9.5 percent, respectively, of the area's total bank deposits. CITIZENS AND SOUTHERN NATIONAL BANK, Savannah, Ga., and The Citizens and Southern Emory Bank, Decatur, Ga., and The Citizens and Southern Bank of Fulton County, East Point, Ga., and The Citizens and Southern DeKalb Bank, Avondale Estates, Ga., and C & S Interim National Bank, Savannah, Ga. Banking offices Total assets Names of banks and type of transaction The Citizens and Southern National Bank, Savannah, Ga. (13068), with $3,673,476,000 and The Citizens and Southern Emory Bank, Decatur, Ga., with 264,427,000 and The Citizens and Southern Bank of Fulton County, East Point, Ga., with 154,085,000 and The Citizens and Southern DeKalb Bank, Avondale Estates, Ga., with 95,949,000 and C & S Interim National Bank, Savannah, Ga. (Organizing), which had 240,000 merged December 31, 1980, under the charter of the latter bank (13068) and title "The Citizens and Southern National Bank." The merged bank at date of merger had 3,964,706,000 COMPTROLLER'S DECISION Citizens and Southern Interim National Bank, Savan nah, Ga., is being organized by Citizens and Southern Holding Company, Atlanta, Ga., a bank holding com pany and a wholly owned subsidiary of The Citizens and Southern National Bank. The Citizens and South ern Emory Bank, Decatur, Ga., The Citizens and Southern Bank of Fulton County, East Point, Ga., and The Citizens and Southern DeKalb Bank, Avondale Es tates, Ga., are wholly owned subsidiaries of Citizens and Southern Holding Company. The merger of The Citizens and Southern National Bank, The Citizens and Southern Emory Bank, The Citizens and Southern Bank of Fulton County and The Citizens and Southern De Kalb Bank into C&S Interim National Bank is part of a process of corporate reorganization whereby the structure of the Citizens and Southern group will be substantially realigned, causing the resulting bank, The Citizens and Southern National Bank, to become a subsidiary of Citizens and Southern Holding Company. Since this merger is a vehicle for a bank holding com pany reorganization and merely combines four existing commercial bank affiliates of that holding company with a nonoperating bank, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c), and, consequently, will have no effect on competition. In To be operation operated 86 13 6 2 0 107 A review of the financial and managerial resources and future prospects of the existing, organizing and proposed institutions and the convenience and needs of the community to be served has disclosed no rea son why this application should not be approved. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicants' records of helping to meet the credit needs of their entire communities, including low and moder ate income neighborhoods, was less than satisfactory. The proposed merger may not be consummated un til evidence of compliance with 12 USC 215a(2) is sub mitted to this Office. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the proposed transaction. November 18, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are all wholly owned subsidiaries of the same bank holding company. As such, their pro posed merger is essentially a corporate reorganization and would have no effect on competition. FIRST NATIONAL BANK OF SOUTH JERSEY, Egg Harbor Township, N.J., and First National State Bank of Central Jersey, Trenton, N.J. Banking offices Names of banks and type of transaction Total assets First National Bank of South Jersey, Egg Harbor Township, N.J. (1326), with and First National State Bank of Central Jersey Trenton N J (13039) which had merged December 31, 1980, under the charter of the latter bank (13039) and title of "First National State Bank of South Jersey." The merged bank at date of merger had .. COMPTROLLER'S DECISION An application was filed on February 17, 1978, with OCC according to the Bank Merger Act, 12 USC 1828(c), by First National State Bank of Central Jersey, Trenton, N.J. (Central), for approval to merge with First $633,293,000 120,888,000 754,181,000 In operation To be operated o 45 48 National Bank of South Jersey, Egg Harbor Township, N.J. (South), under the charter of First National State Bank of Central Jersey and with the title "First National State Bank of South Jersey" (FNSJ). The application, which is based on a written agreement executed by 57 the banks on January 5, 1978, was amended on Octo ber 11, 1978, and provides for the divestiture of certain offices by South and by First National State Bank of West Jersey, Burlington, N.J. (West). Central and West are wholly owned subsidiaries of First National State Bancorporation, Newark, N.J. (Bancorp). Financial Institutions Involved South, the institution to be acquired, was organized as a national banking association in 1907 and holds 2 percent, approximately $520 million, of the state's total commercial bank deposits. It presently operates 45 of fices in seven counties in southern New Jersey, includ ing 22 in Atlantic, nine in Gloucester, five in Cape May, three each in Salem and Burlington, two in Camden and one in Cumberland. South's relative position in southern New Jersey has shown a marked decline in recent years, notwithstanding its acquisition of seven southern New Jersey banks between 1969 and 1975. South's nonaggressive competitive stance is exempli fied by its 40 percent loan-to-deposit ratio and the fact that 60 percent of its earning assets are investment se curities, both factors which result in limiting the amount of credit available to its communities. In addition, South pays less than 5 percent interest on regular sav ings accounts and is the only one of the nine banks in Atlantic County which does not offer free checking. As a part of this transaction, South proposes to sell two of its five offices in Atlantic City, with approxi mately $37 million in deposits, to large institutions not presently in that market. Their sale will reduce South's percentage of total commercial bank deposits in the county from 46.1 to 40.8 percent and in the city from 50.7 to 45 percent.1 In addition, South proposes to sell two of its three offices in Burlington County, located at Bordentown and holding approximately $18 million in deposits, to a banking organization which is not pres ently represented in that area. Central, the acquiring bank, was organized as a na tional banking association in 1927. In 1972, Security National Bank of Trenton, Trenton, merged into Cen tral, and the resulting bank was acquired by Bancorp. Central is the smallest bank in the holding company, operating four offices in the Trenton area with deposits of approximately $84.9 million and assets of $93 mil lion. Although Central, a relatively small banking entity by itself, is requesting approval to merge with South un der Central's charter, the merger has been analyzed as if Bancorp, the holding company which owns Cen tral and West and will own the resulting bank (FNSJ), were a single consolidated entity. Bancorp was incor porated under New Jersey law on July 10, 1969. On January 15, 1970, it acquired all of the outstanding stock of the First National State Bank of New Jersey, Newark, and began operations as a one-bank holding company. On December 21, 1970, it became a multi- bank holding company by acquiring four national banks. It is now the largest banking organization head quartered in the state with six member banks in the system operating 106 offices. As of December 31, 1977, those six banks had approximately $2.1 billion in deposits representing 8.01 percent of the total com mercial bank deposits in the state. After the proposed merger and divestiture, Bancorp's share of commer cial bank deposits in the state would be 9.74 percent. West, another Bancorp subsidiary, with $201 million in deposits, operates in the southern portion of the state and is relevant to the competitive analysis of the proposed transaction. It has three offices in Atlantic County which it acquired in November 1974. These of fices hold deposits of approximately $20.3 million, rep resenting 3 percent of the commercial bank deposits in the county. Bancorp proposes to remove its pres ence from the county prior to the merger by selling these three West offices to two new market entrants. West also has offices in Burlington County with ap proximately $93.6 million in deposits, representing 10.6 percent of that county's commercial bank de posits. The divestiture of South's four offices and West's three offices will reduce the geographic markets served by each. Except for South's single $15.6 million deposit office in the Philadelphia-Camden market area of Burlington County, neither Bancorp or South will have offices in the same market area within New Jer sey. New Jersey and the Local Markets Since 1973, New Jersey has been one of the 16 states which permit statewide branching. It is the least concentrated of these states and would remain so af ter consummation of this transaction. As of December 31, 1977, the five largest banking organizations in New Jersey controlled approximately 32 percent of the state's commercial bank deposits. In addition to Ban corp, United Jersey Banks had 7.71 percent of the to tal state deposits with $1.98 billion; Midlantic Banks, Inc., had 6.77 percent with $1.74 billion; Fidelity Union Bancorporation had 5.72 percent with $1.47 billion; and Heritage Bancorporation had 3.91 percent with $1.01 billion. There are at least 11 other commercial banking organizations with deposits in excess of $500 million which control approximately 29 percent of the state's commercial bank deposits.2 In addition to this low degree of deposit concentration, the competitive banking environment in New Jersey is also affected significantly by its physical proximity to New York and Pennsylvania. New Jersey is comprised of 12 counties and, ac cording to the economic staff of the Federal Reserve Board, 19 banking markets. Section 7 of the Clayton Act and of the Bank Merger Act refer to "any section of the country" as the appropriate geographic market to measure the competitive effects of a merger. To date, 1 These figures assume that all deposits associated with a divested office will remain with that office, an assumption that is not necessarily so. At the same time, it should be rec ognized that FNSJ will probably lose some customers as a result of the loss of its local identification. 58 2 Of additional note, applicable New Jersey statutes limit the aggregate deposits of any one banking organization to no more than 20 percent of the total average deposits of all commercial banks in the state. the focus of the Supreme Court in banking cases has been on local markets. Accordingly, this application has been analyzed in terms of the seven counties in which South is located and certain other arguably rele vant markets. Atlantic County In Atlantic County, there are nine commercial bank ing organizations operating 51 offices. South operates 22 of its offices there and ranks first in deposits held with $322.2 million, representing 46.1 percent of the county's total commercial bank deposits. West oper ates three offices in the county and ranks 11th with $20.3 million in deposits, representing 2.9 percent of the county's total commercial bank deposits. The development of banking in Atlantic County over the last 10 years reveals a marked trend toward deconcentration. Between 1968 and 1978, the number of competitors in the county increased from five to 10, and at the same time, South's share of the commercial bank deposit market declined 17 percent. Between June 30, 1975, and June 30, 1978, Guarantee Bank and Trust Company, the second largest bank in Atlan tic County, increased its total deposits by at least $45 million, and Atlantic National Bank, the third largest bank in the county, increased its total deposits by $27 million. During this same period, however, the total market share of three leading banks in the county de clined. Within Atlantic County, there are two relevant submarkets. In the first, the Atlantic City market, eight banks operate, with South having approximately 50.7 percent of the deposit market, compared to Bancorp's (West) 2.7 percent. The largest competitor after South, Guarantee Bank and Trust Company, has 19.1 percent of the deposit market, and the three largest banks in Atlantic City control some 79 percent of the total com mercial bank deposits there. In the other submarket, the Hammonton market, South controls approximately 48.4 percent of the total deposits with $27.5 million, compared to 2.8 percent controlled by Bancorp (West). The three largest banks control 72 percent of this market. In assessing existing market structure data in Atlan tic County, it should be recognized that in recent years the prospects of the county, particularly Atlantic City, have not been bright. Once a mecca for tourists and conventioneers, the city has fallen on hard times. How ever, since the passage of legislation by the New Jer sey state legislature authorizing casino gambling in the city, the future prospects for Atlantic City and sur rounding areas are viewed as being vastly improved. Burlington County Seventeen commercial banking organizations oper ate 83 offices in Burlington County and hold $880 mil lion in deposits. Six of those commercial banks are af filiated with holding companies. Bancorp (West) operates 11 offices in Burlington County and is the second largest bank there with approximately $93.6 million in deposits, representing 10.6 percent of the county's total commercial bank deposits. South operates three offices in the county and ranks 11th in deposits with $33.6 million, representing 3.8 percent of the total county commercial bank deposits. With the divestiture of two of South's three offices in Burlington County, Bancorp's share of the county's de posits after the merger would increase to 12.4 percent, or $109.2 million. The merged bank, FNSJ, would rank second in the county behind Burlington County Trust Company which holds 20 percent of the county's de posits. Burlington County stretches between and includes portions of two important submarkets: the Greater Trenton market and the Philadelphia-Camden market. South operates two offices in the Greater Trenton mar ket in northwest Burlington County (Bordentown) which are approximately 6 miles from several offices of Cen tral in Mercer County and West in Burlington County. In Mercer County, where Central is headquartered and operates all of its four offices, there are 14 commercial banks with 68 offices. Central holds $84.9 million in deposits, representing 5.8 percent of the county's total commercial bank deposits. Six other banks hold larger shares of the county's deposits, the largest held by New Jersey National Bank, Trenton, at $546 million in deposits, representing 37 percent of the total. In the Greater Trenton market, Bancorp's subsidi aries hold 4.9 percent of the estimated $2.7 billion in commercial bank deposits there, making Bancorp fifth among the 42 banks with offices in the area. South ranks 31st in deposits held in this market with $18 mil lion, representing 0.6 percent of the total. The pro posed merger would not affect Bancorp's share of the Greater Trenton market, and Bancorp would continue to rank fifth in the market area since South will sell its two offices to a banking organization not presently in the area. In the Philadelphia-Camden market, some 51 banks operate with $15.7 billion in deposits. West and South each have 0.3 percent of the total commercial bank deposits in the market, ranking them 24th and 25th, re spectively. The merged bank (FNSJ) would rank 20th with 0.64 percent of the total commercial bank de posits in the market. Cape May, Gloucester, Salem, Cumberland and Camden Counties Bancorp is not presently represented by offices in any of these five southern New Jersey counties; how ever, Central's merger with South would result in Ban corp assuming South's market position in each county. South operates five offices in Cape May County with approximately $70.8 million in deposits, representing 18.4 percent of the $385.9 million in commercial bank deposits there. Seven other banks operate 25 offices in the county. Marine National Bank of Wildwood, Wildwood, N.J., ranks first in county deposits with 22.7 per cent. First Peoples Bank of New Jersey, Westmount, N.J., a $747 million deposit bank has four offices in the county which hold $44.1 million in deposits. There are no other holding companies currently operating in the county. There are 15 commercial banks operating 58 offices in Gloucester County. National Bank and Trust Com- 59 pany of Gloucester County, with 13 offices, ranks first in county deposits with $159.4 million, representing 29.6 percent of the county's total commercial bank de posits. South has nine offices in the county and ranks third in deposits with approximately $55.9 million, rep resenting 10.4 percent of the county's total commercial bank deposits. A major portion of Gloucester County falls within the Philadelphia-Camden market area where South holds only 0.32 percent of the market. In Salem County, nine commercial banks operate 23 offices. South operates three offices there and ranks third in deposits with $31.2 million, representing 15.2 percent of the county's $205.7 million in commercial bank deposits. City National Bank and Trust Company of Salem and Penns Grove National Bank and Trust Company hold more with 18.3 percent and 16 percent, respectively. First Peoples Bank of New Jersey con trols 11.6 percent of the county's total commercial bank deposits, and Midlantic Banks, Inc., the third largest holding company in New Jersey, is repre sented in Salem County by a bank holding 8.2 percent of the commercial bank deposits there. In the Greater Wilmington market area, which in cludes a portion of Salem County, South has an esti mated $29 million in deposits, representing 1.45 per cent of the market and ranking it as the 11th largest commercial bank there. Ten banks operate 43 offices in Cumberland County. South has one office there and controls the smallest share of market deposits, ranking 10th with $2.4 million. In addition to First Peoples Bank of New Jersey, three other banks which are all subsidiaries of large bank holding companies operate 24 offices in the county. Cumberland County, with the exception of the southern-most tip, is included in the PhiladelphiaCamden market area along with most of Gloucester and Burlington counties. In Camden County there are 15 commercial banks with 91 offices. South has two offices there and holds $4.9 million in deposits, representing 0.3 percent of the county's total commercial bank deposits. Five large holding companies and First Peoples Bank of New Jersey are represented in Camden County. Each has market shares greater than South. Competitive Analysis As the advisory competitive reports submitted by the Justice Department and the other commercial bank regulatory agencies reflect,3 the prospect of the larg3 As required by the Bank Merger Act, the Comptroller has received reports on the competitive factors involved in the merger transaction from the Attorney General of the United States, the Federal Reserve Board (FRB), and the Federal Deposit Insurance Corporation (FDIC). The report received from the Department of Justice (Jus tice) concludes that the proposed merger will have a "signifi cantly adverse effect on competition." The report seems to suggest four separate theories of law to support that conclu sion. Justice argues first that the proposed merger would eliminate some direct competition between Bancorp and South; second, that the proposed merger would eliminate potential competition in certain markets between the two; 60 est banking organization in the state acquiring the largest bank in a certain market area (Atlantic County) suggests troublesome questions under the antitrust laws. Nevertheless, our judgment is that the proposed acquisition will, in fact, not result in a lessening of com petition but will be procompetitive and will lead to an immediate enhancement of market performance. We believe that this view is consistent with the realities of competition in the marketplace and the case law which has evolved under the Bank Merger and Clayton acts. The Bank Merger Act requires this Office to consider whether the effect of the proposed merger transaction could substantially lessen competition in any section of the country. If such anticompetitive effects are identi fied, the transaction may be approved only if: the anticompetitive effects of the proposed trans action are clearly outweighed in the public interest by the probable effect of the transaction in meet ing the convenience and needs of the community to be served. The act (12 USC 1828(c)(5)) provides that in every case the Comptroller must take into account the tradi tional banking factors: the financial and managerial re sources and future prospects of the existing and pro posed institutions and the convenience and needs of the community to be served.4 In addition, according to third, that the level of concentration would eventually in crease due to the entrenchment and establishment of a dominant banking force (Bancorp) in certain market areas; and finally, that the developing trend of concentration in the relevant markets should prohibit this merger. In its advisory report, the Board of Governors of the Fed eral Reserve System concluded that the proposal would have adverse effects on competition since it " . . . would result in the largest banking organization in New Jersey gain ing control of the bank which ranks first in two markets hold ing more than one-third of the commercial bank deposits in the Hammonton market and over one-half of the commercial bank deposits in the Atlantic City market." Lastly, the Board of Directors of the FDIC found that the ef fect of the proposed merger transaction on competition would be substantially adverse, since " . . . Bancorp and its subsidiary banks have the managerial and financial re sources to expand operations through de novo branching activities or by means of less anticompetitive merger pro posals with banks that are not dominant in their local mar kets." FDIC also stressed that the " . . . continued trend to ward concentration is not looked upon as being desirable, and poses a growing threat to the competitive structure of commercial banking in the state." 4 The requirements of 12 USC 1828(c)(5) are: (5) The responsible agency shall not approve — (A) any proposed merger transaction which would result in a monopoly, or which would be in furtherance of any combination or conspiracy to monopolize or to at tempt to monopolize the business of banking in any part of the United States, or, (B) any other proposed merger transaction whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint of trade, unless it finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the the Community Reinvestment Act regulations,5 which were enacted pursuant to the requirements of the act,6 the Comptroller must take into account, among other factors, a merger applicant's record of performance in meeting the credit needs of the local communities in which it is chartered. In applying the Clayton and Bank Merger acts, courts and the agencies have addressed both trans actions involving firms competing directly in the same geographic markets and transactions involving geo graphic market extensions. As the facts and the advi sory reports reflect, the proposed transaction is a hy brid from the point of view of competitive analysis. At the present time, there exists some direct compe tition between certain offices of Bancorp banks (Cen tral and West) and South. However, in light of the small degree of direct competition in the relevant markets7 and the divestitures by Bancorp and South8 that will result in the addition of new entrants into heretofore concentrated markets, the elimination of current direct competition between the two firms does not constitute grounds for a violation of the antitrust laws 9 and, hence, a basis for denial of the application to merge. Indeed, we believe that the merger will not damage the structure of competition in the relevant markets but will, in fact, enhance the competitive performance in those areas. The advisory opinions, however, raise more serious questions regarding Bancorp's extension of its geo graphical market area through this acquisition. Ac cordingly, in light of the insignificant amount of existing direct competition and the divestiture of seven offices by Bancorp and South, we have analyzed the pro posed transaction primarily as a geographic market extension case even though South and Bancorp are presently competing directly to a certain extent. public interest by the probable effect of the transaction in meeting the convenience and needs of the commu nity to be served. In every case, the responsible agency shall take into con sideration the financial and managerial resources and future prospects of the existing and proposed institutions and the convenience and needs of the community to be served. 5 12CFR25.8. 6 12 USC 2901 etseq. 7 See discussion earlier. 8 See discussion earlier. 9 The standard set forth by the Supreme Court defining a "substantial lessening of competition" under Section 7 in such circumstances is as follows: (A) merger which produces a firm controlling an undue percentage of the relevant market, and results in a sig nificant increase in the concentration of firms in that market, is so inherently likely to lessen competition sub stantially that it must be enjoined in the absence of evi dence clearly showing that the merger is not likely to have such anticompetitive effects. (See United States v. Philadelphia Nat'l Bank, 374 U.S. at 363) In addition, divestiture prior to merger is an acceptable technique to avoid an antitrust violation. FTC v Atlantic Richfield Co., 549 F.2d 289, 299 (4th Cir. 1977); United States v. Connecticut Nat'l Bank, 362 F.Supp. 268, 286; 418 U.S. 656, 659. Although the Supreme Court suggested as early as 1963 in the Philadelphia National Bank case, supra, that a merger's probable future, and its present effects must be addressed in applying Section 7 of the Clay ton Act, it did not fully examine the potential competi tion doctrine in a banking case until United States v. Marine Bancorporation, Inc., 418 U.S. 602 (1974). Prior to Marine, a number of unsuccessful suits ° had been initiated by Justice challenging bank mergers as Sec tion 7 violations on the basis of its developing theory of potential competition. Consequently, it was thought that the decision in Marine would directly address and resolve the issues presented by the potential competi tion doctrine in the banking field. However, after Marine, the law remained unsettled. Because of the weight which the other agencies have attached to the potential competition theory and because of the interest of merger applicants generally, we believe it appropriate to review briefly the status of the law in this difficult area. In Marine, the court held that "geographic market extension mergers must pass muster under the poten tial competition doctrine." (See 418 U.S. at 627) How ever, the court carefully distinguished two different branches of the potential competition doctrine—the "perceived potential entrant" or "wings effect" theory and the "actual potential entrant" theory11—and spe- 10 United States v. Deposit Guaranty Nat'l Bank of Jackson, 373 F.Supp. 1230 (S.D. Miss. 1974); United States v. United Virginia Bankshares, Inc., 347 F.Supp. 891 (E.D. Va. 1972); United States v. First Nat'l Bancorporation, Inc., 329 F.Supp. 1003 (D. Colo. 1971), aff'd per curiam, 410 U.S. 577 (1973); United States v. Idaho First Nat'l Bank, 315 F.Supp. 261 (D. Idaho 1970); United States v. First Nat'l Bank of Maryland, 310 F.Supp. 157 (D. Md. 1970); United States v. First Nat'l Bank of Jackson, 301 F.Supp. 1161 (S.D. Miss. 1969); United States v. Crocker-Anglo Nat'l Bank, 277 F.Supp. 133 (N.D. Ca. 1967). The difficulty associated with this doctrine is reflected in the statement of a Justice Department attorney, who later be came Assistant Attorney General of the Antitrust Division, which succinctly summarized the Justice Department's the ory and its incidence of success: Accordingly, the Department of Justice has filed several recent cases to enjoin state-wide leaders from acquiring banks with leading local market positions. * * * * * These cases have generally rested on the theory that the acquiring bank would be eliminated as a potential entrant into the market of the acquired bank and that the acquired bank's leading local market position would be entrenched by the merger. * * * * * . . . So far, however, the Department of Justice has not yet secured a victory on this theory in the banking field. Not to say we won't but the issues are close and diffi cult. (See United States v. Deposit Guaranty Nat'l Bank of Jackson, 373 F.Supp. at 1233-34) 11 Justice Powell described these two facets of Justice's ar gument as follows: The United States bases its case exclusively on the po tential-competition doctrine under Section 7 of the 61 cifically limited its holding to the first. Relying on United States v. Falstaff Brewing Corp., 410 U.S. 526 (1973), the court said of the "perceived potential en trant" theory: " . . . the principal focus of the doctrine is on the likely effects of the premerger position of the acquiring firm on the fringe of the target market. . . ."12 (See 418 U.S. at 624) While making abundantly clear that "(T)he elimination of . . . present procompetitive effects may render a merger unlawful under Section 7" (See 418 U.S. at 625), the court indicated that its deci sion did not go beyond the application of the "per ceived potential entrant" or "wings effect" theory. (See 418 U.S. at 639) In so doing, the court expressly re served judgment as to the vitality of the "actual poten tial entrant theory" under the potential competition doctrine.13 Thus, in analyzing this transaction as a geographic market extension, we are bound to find a violation of Section 7 of the Clayton Act and of the Bank Merger Act only if the case runs afoul of the "perceived poten tial entrant" theory. We believe it would be inappro priate to consider denial of a merger based on a the ory of illegality (i.e., the "actual potential entrant" Clayton Act. It contends that if the merger is prohibited, the acquiring bank would find an alternate and more competitive means for entering the Spokane area and that the acquired bank would ultimately develop by in ternal expansion or mergers with smaller banks into an actual competitor of the acquiring bank and other large banks in sections of the state cutside Spokane. The gov ernment further submits that the merger would terminate the alleged procompetitive influence that the acquiring bank presently exerts over Spokane banks due to the potential for its entry into that market. (See 418 U.S. at 605) 12 In further explanation of the "perceived potential entrant" theory, the court stated: (T)he court has interpreted Section 7 as encompassing what is commonly known as the "wings effect"—the probability that the acquiring firm prompted premerger procompetitive effects within the target market by being perceived by the existing firms in that market as likely to enter de novo. Falstaff, supra, at 531-537. The elimina tion of such present procompetitive effects may render a merger unlawful under Section 7. (See 418 U.S. at 625) 13 The court stated: The court has not previously resolved whether the po tential-competition doctrine proscribes a market exten sion merger solely on the ground that such a merger eliminates the prospect for long-term deconcentration of an oligopolistic market that in theory might result if the acquiring firm were forbidden to enter except through a de novo undertaking or through the acquisition of a small existing entrant (a so-called foothold or toehold acquisition). (See 418 U.S. at 625) And further: Indeed, since the preconditions for that theory are not present, we do not reach it, and therefore we express no view on the appropriate resolution of the question re served in Falstaff. We reiterate that this case concerns an industry in which new entry is extensively regulated by the state and federal governments. (See 418 U.S. at 639) 62 theory) whose validity is in doubt. Nevertheless, al though our perception of the future competitive effects of this transaction departs from those enunciated by the other agencies in their advisory reports, we believe that it may be appropriate to examine this merger within the framework of the "actual potential entrant" theory as well a^ the "perceived potential entrant" the ory. In Marine, the court identified three criteria neces sary for finding illegality under the Clayton Act using the "wings effect" theory of potential competition: The court has recognized that a market extension merger may be unlawful if the target market is substantially concentrated, if the acquiring firm has the characteristics, capacities and economic incentives to render it a perceived potential de novo entrant, and if the acquiring firm's premerger presence on the fringe of the target market in fact tempered oligopolistic behavior on the part of ex isting participants in that market. (See 418 U.S. at 624) Since Bancorp is presently in the principal market areas under consideration, application of the "wings effect" test to a case such as this, notwithstanding the impending divestiture, is not precise. The basic notion underpinning the "wings effect" theory is that the per formance of the market in question is adversely af fected as a result of the removal of the tempering ef fect of a perceived potential entrant on a market which, but for its influence, would be characterized by oligopolistic behavior. Thus, in applying this concept to the facts at hand, the merger might appropriately be denied only if it could be shown that the loss of any premerger procompetitive effects which Bancorp ex erted on the market because of the possible expan sion of its existing presence would substantially dam age the performance of these markets. Although Bancorp's potential for expansion in the relevant markets, particularly Atlantic City, may exert a procompetitive force, important factors indicate that the elimination of the potential for aggressive cfe novo expansion by Bancorp will not result in damage to the performance of the market. These include the pres ence of other leading banks about to enter the market; the competitive impact of out-of-state banks; the role of thrift and other financial institutions in New Jersey; the apparent decline of South as a dominant banking force in the market; and the continual decrease of the level of concentration in the Atlantic County market.15 The substitution of Bancorp for South coupled with the entry of new competing banks after the divestitures 14 Clearly, the Atlantic County market presents the more challenging issues, if not the only ones, with respect to po tential competition. Accordingly, the applicability and signifi cance of the doctrine will be primarily discussed with re spect to the facts and markets found in Atlantic County. Any potential competition questions which might arise in other relevant markets will be adequately addressed by that dis cussion. 15 Supra. will, in our opinion, lead to substantially better perform ance in the Atlantic County market. The merged entity intends to offer more competitive pricing practices, better interest rates and additional community credit facilities. In addition, the possible alienation of portions of South's customer base because of the insertion of a new, unfamiliar franking entity should encourage exist ing banks in the area to vie for these customers and stimulate increased competition. Assuming that the "wings effect" test could be extended to cover the facts at hand, we cannot find that the elimination of the threat of Bancorp's expansion in the relevant markets would violate the Clayton or Bank Merger Acts. As indicated, the Supreme Court in Falstaff and Marine expressly reserved decision as to whether the po tential competition doctrine proscribes a market exten sion merger solely on the ground that it eliminates the prospect for long-term deconcentration of an oligopo listic market that might result if the acquiring firm were compelled to enter de novo or through the acquisition of a small existing entrant.16 Responding to Justice's assertions in Marine, the court stated: Two essential preconditions must exist before it is possible to resolve whether the Government's theory, if proved, establishes a violation of Section 7. It must be determined: (i) that . . . (the bank) has available feasible means for entering the . . . market other than by acquiring . . . (the target bank); and (ii) that those means offer a substan tial likelihood of ultimately producing deconcentra tion of that market or other significant procompetitive effects. The parties are in sharp disagreement over the existence of each of these preconditions in this case. . . . The controversy turns on what methods of entry are realistically possible and on the likely effect of various methods on the charac teristics of the . . . commercial banking market. (See 418 U.S. at 633) In the case before us, the first of these preconditions may be met, assuming there are no substantial legal or regulatory barriers to Bancorp's further expansion. We should note, however, that for practical business and regulatory reasons Bancorp could not be expected to compete in the relevant markets on the scale contem plated by this merger in the near future, if ever. In ad dition, although it can be argued that expansion of Bancorp's existing operations or the de novo entry of other institutions would be procompetitive and would ultimately lead to deconcentration (thereby conceiv ably satisfying the second precondition), these as sumptions are highly speculative and cannot form the basis for a finding of illegality. In contrast, we know that the proposed transaction involves the acquisition of a bank which holds a signifi cant share of its market and demonstrates noncompet itive pricing policies and practices. We also know that the divestiture of seven offices by the applicants will lead to the introduction of several new banks into the markets and will provide immediate and tangible cornSupra, footnote 13. petitive benefits there. Moreover, the existence of a number of other potential entrants and the reality of competition in the Atlantic City area posed by savings banks, other financial institutions and New York and Philadelphia banks assures that, once created, vig orous competition in Atlantic County will remain via ble. 17 A different conclusion might well be appropriate if Bancorp were dominant in New Jersey, if there were a paucity of other strong potential entrants or if South were itself a strong and viable competitor in the mar ket. However, these factors which would suggest harm to the future competitive structure in Atlantic County are not present. For the same reasons, we find Justice's other two ar guments involving the future competitive structure in the relevant markets without merit. Justice argued that the acquisition of South by Bancorp would entrench Bancorp in a dominant position which would deter other potential entrants from a de novo or foothold en try in the market and that the merger would hasten an illegal trend of concentration in the state or in the geo graphic markets under consideration. The vital com petitive structure in New Jersey provides a ready re sponse. The number of New Jersey banks ready, willing and able to compete vigorously with Bancorp assures that it will not entrench itself in a dominant po sition in Atlantic County or elsewhere and that current levels of competition will be enhanced after this mer ger. This is reinforced by the attractiveness of the At lantic City market resulting from the revitalization that legalized gambling is likely to engender, a fact re cently underscored by the proposed acquisition of At lantic National Bank by Midlantic Bank, Inc. It is further insured by the divestitures in this transaction which will bring still other new competitors into the markets and the fact that many markets in the state, including those relevant to this analysis, will undergo substantial deconcentration as statewide branching systems evolve in New Jersey. Finally, we cannot ignore the significant long-term effect of New York and Philadelphia banks on the structure of banking in New Jersey and the competitive viability of New Jersey-based banks at present and in the future. Banking Factors Since we find that this proposed merger will not sub stantially lessen competition and is, therefore, not a vi olation of Section 7, the defense of convenience and 17 Although one might describe an even more desirable sce nario of transactions, the Bank Merger Act and the Clayton Act do not contemplate regulatory or judicial speculation to divine and shape the optimal banking structure in a given market. Such a standard, in our judgment, would be almost impossible to administer. The Clayton Act deals with reason able probabilities, not ephemeral possibilities. Moreover, we believe that a requirement that every transaction be optimal in terms of future competition is inconsistent with the thrust of the antitrust laws whose object is to prevent substantial anti competitive behavior. The transaction before us is procom petitive and will lead to immediate tangible enhancement of the structure and performance of the markets in question. Therefore, it is not illegal and should not be disapproved. 63 needs is not necessary. However, such an analysis is still required since in every bank merger case, the Comptroller must "take into consideration the financial and managerial resources and future prospects of the existing and proposed institutions, and the conven ience and needs of the community to be served." (See 12 USC 1828(c)(5)). For the following reasons, we conclude that the pro posed merger will better serve the convenience and needs of the communities involved and, therefore, will be in the public interest. First, as we have indicated, the divestitures will intro duce new banking entrants into the primary markets under consideration which will immediately increase the public's banking alternatives in those areas and, at the same time, be of sufficient size and character to ef fectively compete with the merged bank and other pro minent banking forces in those markets. Second, South's conservative operating philosophy will be replaced by a more competitive and aggressive style which should benefit the banking public. In this respect, FNSJ intends to significantly increase the loan-to-deposit ratio from the current 40-percent level that South has maintained and, thus, make an addi tional $100 million in credit available immediately for commercial and consumer lending in the market areas. It also intends to offer free checking and higher interest yields on savings accounts. Naturally, it will be able to offer greater amounts of credit through partici pation agreements with its affiliates, as well as a signif icant number of additional banking services and de partments: international, leasing and equipment financing, commercial finance, cash management, lock box rental, government banking, payments serv ices, home improvement lending, coin and currency operations, methods and systems data processing, money market operations and investment securities. In addition, Bancorp and FNSJ are committed to the es tablishment of the First National State Bancorporation Community Development Corporation which will take an active role in community affairs and provide credit and counseling services to small businessmen, con sumers and homeowners. Third and last, the presence of FNSJ in the primary market areas in question will substantially enhance the overall atmosphere of financial competition that cur rently exists between commercial banks, credit unions, savings and loan associations and other financial serv ice corporations.18 Because of this level of increased competitive activity between commercial banks and other financial institutions, the proposed merger will clearly have a positive competitive effect in the rele vant market areas. 18 In Atlantic County in 1976, there were 10 commercial banks having $578 million in deposits. At the same time, there were five thrift institutions with $428 million in deposits. Two of those commercial banks had over $100 million in de posits, as did two of the thrift institutions. In addition, there was significant competition presented by the presence of 15 credit unions, two insurance premium finance companies and 10 small loan companies. 64 Similarly, the southern New Jersey area constitutes but a part of the developing east coast banking corri dor that stretches between the prominent banking markets of New York and Philadelphia. Within that con text, the proposed merger will help provide New Jer sey with a banking force which can effectively com pete with the powerful New York and Philadelphia banks for larger commercial and industrial customers and will, therefore, increase competition in that east coast corridor, while at the same time directly enhanc ing and enlarging the banking services which should be made available in southern New Jersey. We have considered the financial and managerial resources of Bancorp, its subsidiary banks and South and find these to be satisfactory. The future prospects of the proponent banks, independently and in combi nation, are considered favorable. Community Reinvestment Act This application was filed for consideration prior to the November 6, 1978, effective date of the Comptroller's Community Reinvestment Act regula tions now codified in 12 CFR 25. However, consistent with the spirit of the Community Reinvestment Act (Public Law 95-128), a review of the record of this ap plication and other information available to this Office as a result of its regulatory responsibilities revealed no evidence that the banks' records of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. We have carefully considered the application pursu ant to the Bank Merger Act, 12 USC 1828(c), in light of the issues raised in the reports received by the Comp troller from Justice, FRB and FDIC. We conclude that the proposed merger will not violate Section 7 of the Clayton Act, will be in trie public interest and will, therefore, otherwise satisfy the requirements of the Bank Merger Act. Accordingly, the application of First National State Bank of Central Jersey to merge with First National Bank of South Jersey under the charter of First National State Bank of Central Jersey with the title "First National State Bank of South Jersey" is ap proved. As we have indicated, the application before us con templates divestiture of certain offices. Since we have reviewed the proposed transaction in this context, we will consider the facts and conditions of the application complete and complied with, and thus approval valid, on the execution by Bancorp (West) and South of good faith binding contracts (subject to the appropri ate regulatory approvals required by law) for the dives titure of the offices specified in the application to non affiliated banking institutions or organizations not previously operating or represented in the market areas. Disapproval of any of the specific divestiture contracts by an appropriate regulatory body will not vi tiate the parties' responsibilities and duties to contract for divestiture and seek to consummate the transaction as submitted. May 8, 1979. SUMMARY OF REPORT BY ATTORNEY GENERAL The staff has carefully reviewed the supplemental in formation provided by Applicant and has reexamined the competitive factors involved in the proposed ac- quisition in light of such information. We nevertheless continue to adhere to the views and the conclusion ex pressed in our letter of April 19, 1978, regarding the effects of this merger on competition in various New Jersey banking markets. GULFSTREAM FIRST BANK AND TRUST, N.A., each, National Association, Boynton Beach, Fla., and GulfBoca Raton, Fla., and Gulfstream Bank of Boynton Beach, stream American Bank and Trust, N.A., Fort Lauderdale, Fla. Banking offices Names of banks and type of transaction Total assets Gulfstream Bank of Boynton Beach, National Association, Boynton Beach, each, IFla. (16224), with and Gulfstream American Bank and Trust, N.A., Fort Lauderdale, Fla.i. (147< (14741), with whicf had and Gulfstream First Bank and Trust, N.A., Boca Raton, Fla. (15421),, which ind title merged December 31, 1980, under the charter of the latter (15421) and title "Gulfstream Bank, N.A." The merged bank at date of merger had COMPTROLLER'S DECISION Gulfstream Bank of Boynton Beach, National Associa tion, Boynton Beach, Fla., Gulfstream American Bank and Trust, N.A., Fort Lauderdale, Fla., and Gulfstream First Bank and Trust, N.A., Boca Raton, Fla., are majority-owned and controlled by Gulfstream Banks, Inc., Boca Raton, a registered bank holding company. This proposed merger is a corporate reorganization which would have no effect on competition. A review of the financial and managerial resources and future prospects of the existing and proposed in stitutions and the convenience and needs of the com munity to be served has disclosed no reason why this application should not be approved. The record of this application and other information $ 45,961,000 183,088,000 302,303,000 574,441,000 In operation To be operated 2 6 6 14 available to this Office as a result of its regulatory re sponsibilities reveals no evidence that the banks1 rec ords of helping to meet the credit needs of their entire communities, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the applicants to proceed with the merger. November 24, 1980 SUMMARY OF REPORT BY ATTORNEY GENERAL The merging banks are all wholly owned subsidiaries of the same bank holding company. As such, their pro posed merger is essentially a corporate reorganization and would have no effect on competition. 65 II. Mergers consummated, involving a single operating bank SOUTHWEST NATIONAL BANK, San Antonio, Tex., and Wurzbach Road National Bank, San Antonio, Tex. Banking offices Names of banks and type of transaction Total assets Wurzbach Road National Bank (Organizing), San Antonio, Tex. (16209), with and Southwest National Bank, San Antonio, Tex. (16209), which had merged February 1, 1980, under the charter of the former (16209) and title of "Southwest National Bank." The merged bank at date of merger had COMPTROLLER'S DECISION $ 240,000 24,563,000 In operation To be operated 0 1 25,473,000 1 more effectively serve the convenience and needs of its community. A review of the records of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community, including low and moderate in come neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cant to proceed with this proposed merger. December 17, 1979. This is the Comptroller's decision on an application to merge Southwest National Bank, San Antonio, Tex. (Southwest), into and under the charter of Wurzbach Road National Bank, San Antonio (Road Bank). This application is a part of a process whereby Republic of Texas Corporation, Dallas, Tex. (Republic), a regis tered multibank holding company, is acquiring 100 percent (less directors' qualifying shares) of South west. Road Bank has been organized by Republic solely to facilitate the acquisition of Southwest. On November 16, 1979, the Federal Reserve Board approved Republic's application under the Bank Hold ing Company Act, 12 USC 1841, et seq., to acquire 100 percent (less directors' qualifying shares) of the successor institution by merger to Southwest. This merger merely combines a nonoperating bank with an existing bank and has no effect on competition. The financial and managerial resources of both en tities are satisfactory. Their future prospects, both sep arately and consolidated, are favorable. After the mer ger, Southwest will draw on the financial and managerial resources of Republic. This will permit it to SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Southwest National Bank would become a subsidiary of Republic of Texas Corporation, a bank holding com pany. The instant merger, however, would merely com bine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Republic of Texas Corporation, it would have no effect on competition. * * FIRST NATIONAL BANK OF McMINNVILLE, McMinnville, Oreg., and The First National Interim Bank of McMinnville, McMinnville, Oreg. Banking offices Names of banks and type of transaction Total assets First National Bank of McMinnville, McMinnville, Oreg. (3399), with $34,271,000 and The First National Interim Bank of McMinnville (Organizing), McMinnville, Oreg. (3399), which had 120,000 merged February 4, 1980, under charter of latter bank (3399) and title of "The First National Bank of McMinnville." The merged bank at date of merger had -33,416,000 COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge First National Bank of McMinnville, McMinnville, Oreg. (FNB), into and under the charter of The First National Interim Bank of McMinnville, McMinnville, Oreg. (Interim Bank). This application is one part of a process whereby Pacwest Bancorp, a proposed bank holding company, will acquire 100 percent (less direc66 In operation To be operated 1 0 1 tors' qualifying shares) of FNB. As a part of this process, Pacwest Bancorp sponsored a charter appli cation for a new national bank which was given prelim inary approval by this Office on August 22, 1979. This merger is therefore a vehicle for a bank holding com pany acquisition and merely combines a corporate shell with an existing bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the merger. This merger may not be consum mated until proof of compliance with 12 USC 215a(a)(2) is submitted to this Office. November 30, 1979. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank of McMinnville would become a subsidiary of Pacwest Bancorp, a bank holding com pany. The instant merger, however, would merely com bine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Pacwest Bancorp, it would have no effect on competition. HARDIN NATIONAL BANK, Kenton, Ohio, and F.B.G. National Bank of Kenton, Kenton, Ohio Banking offices Names of banks and type of transaction Total assets Hardin National Bank, Kenton, Ohio (3505), with and F.B.G. National Bank of Kenton (Organizing), Kenton, Ohio (3505), which had merged February 6, 1980, under the charter of the latter bank (3505) and title "Bank One of Kenton, N.A." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Hardin National Bank, Kenton, Ohio (Hardin), into and under the charter of F.B.G. National Bank of Kenton (Organizing), Kenton, Ohio (F.B.G.). This mer ger application is one part of a process whereby Banc One Corporation (formerly first BancGroup of Ohio, Inc.), Columbus, Ohio (Corp.), a registered multibank holding company, will acquire 100 percent (less direc tors' qualifying shares) of the successor institution by merger to Hardin. F.B.G. has been organized by prin cipals of Banc One Corp. solely to facilitate the acqui sition of Hardin by Corp. On June 30, 1979, Hardin had total commercial bank deposits of $21.7 million. F.B.G. was given pre liminary approval to organize by this Office on October 22, 1979, and, to date, has engaged in no revenue producing activities. This merger merely combines a nonoperating corporate shell with an existing bank and would not adversely affect competition. The financial and managerial resources of both pro ponents are satisfactory. Their future prospects, both separately and combined, are favorable. After the mer ger, Hardin will draw on the financial and managerial In operation To be operated $24,757,000 470,000 25,356,000 resources of Banc One Corp. and will more effectively serve the convenience and needs of its banking com munity. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities, revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the proponent to proceed with this merger. January 7, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Hardin National Bank would become a subsidiary of Banc One Corporation, a bank holding company. The instant merger, however, would merely combine an ex isting bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Banc One Corporation, it would have no effect on competition. 67 THE MOUNTAIN NATIONAL BANK OF CLIFTON FORGE, Clifton Forge, Va., and Colonial American National Bank—Clifton Forge, Clifton Forge, Va. Banking offices Names of banks and type of transaction Total assets The Mountain National Bank of Clifton Forge, Clifton Forge, Va. (14180), with and Colonial American National Bank—Clifton Forge (Organizing), Clifton Forge, Va. (14180), which had merged February 25, 1980, under charter of the latter bank (14180) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION $18,629,000 2 50,000 0 18,691,000 To be operated 2 more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cants to proceed with the merger. January 23, 1980. This is the Comptroller's decision on an application to merge The Mountain National Bank of Clifton Forge, Clifton Forge, Va. (Merging Bank), into and under the charter of Colonial American National Bank—Clifton Forge (Organizing), Clifton Forge (Charter Bank), and with the title of "The Mountain National Bank of Clifton Forge." This application was filed on December 13, 1979, and is based on an agreement executed by the proponents on December 11, 1979. The proposal is part of a process whereby Colonial American Bankshares Corporation, a registered bank holding com pany, will acquire 100 percent of the outstanding shares (less directors' qualifying shares) of the suc cessor institution. This merger merely combines a nonoperating bank with an existing commercial bank and has no effect on competition. The financial and managerial resources of both pro ponents are satisfactory. The future prospects of the resulting bank are favorable. After the merger, Merg ing Bank will draw on the financial and managerial re sources of its corporate parent. This will permit it to * In operation SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Mountain National Bank of Clifton Forge would be come a subsidiary of Colonial American Bankshares Corporation, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as suchr, and with out regard to the acquisition of the surviving bank by Colonial American Bankshares Corporation, it would have no effect on competition. * * ATLANTIC NATIONAL BANK, Atlantic City, N.J., and Midlantic National Bank/Atlantic, Atlantic City, N.J. Banking offices Names of banks and type of transaction Total assets' Atlantic National Bank, Atlantic City, N.J. (15781), with and Midlantic National Bank/Atlantic (Organizing), Atlantic City, N.J. (15781), which had merged March 1, 1980, under charter of the latter bank (15781) and title "Atlantic National Bank." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on the application to merge Atlantic National Bank, Atlantic City, N.J. (ANB), into and under the charter of Midlantic National Bank/ Atlantic, Atlantic City (Interim Bank). This application is one part of a process whereby Midlantic Banks Inc., West Orange, N.J., a registered bank holding com pany, will acquire 100 percent (less directors' qualify ing shares) of ANB. As a part of this process, Midlantic Banks, Inc., sponsored a charter application for a new national bank which was given preliminary approval by 68 $101,308,937 127,225 101,436,000 In operation To be operated 7 0 7 this Office on October 29, 1979. To date, Interim Bank has no operating history. This merger is a vehicle for a bank holding company acquisition and merely combines a corporate shell with an existing bank. As such, it presents no competi tive issues under the Bank Merger Act, 12 USC 1828(c). A review of the financial and managerial re sources and future prospects of the existing and pro posed institutions and the convenience and needs of the community to be served has disclosed no reason why this application should not be approved. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities, revealed no evidence that the bank's record of helping to meet the credit needs of the entire community, including low and moderate in come neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the merger. This approval is conditioned on the approval by the Federal Reserve Board of an applica tion filed under the Bank Holding Company Act, 12 USC 1841, et seq., for Midlantic Banks Inc. to acquire the successor institution by merger to ANB. This mer ger may not be consummated prior to the expiration of the 13th day after the approval of the bank holding company application. January 7, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Atlantic National Bank would become a subsidiary of Midlantic Banks, Inc., a bank holding company. The instant merger, however, would merely combine an ex isting bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Midlantic Banks, Inc., it would have no effect on competition. PITTSFIELD NATIONAL BANK, Pittsfield, Mass., and Old Colony Bank of Berkshire County, National Association, Pittsfield, Mass. Banking offices Names of banks and type of transaction Total assets Pittsfield National Bank, Pittsfield, Mass. (1260), with and Old Colony Bank of Berkshire County, National Association (Organizing), Pittsfield, Mass. (1260), which had merged March 17, 1980, under charter and title of the latter bank (1260). The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Pittsfield National Bank, Pittsfield, Mass. (Pitts field), into and under the charter of Old Colony Bank of Berkshire County, National Association (Organizing), Pittsfield (New Bank). This application is one part of a process whereby First National Boston Corporation, Boston, Mass. (Boston Corp), a registered multibank holding company, will acquire 100 percent (less direc tors' qualifying shares) of Pittsfield. As a part of this process, Boston Corp sponsored an application for a new national bank charter for New Bank which was given preliminary approval by this Office on August 9, 1979. To date, New Bank has engaged in no revenue producing activities. This merger is a vehicle for a bank holding company acquisition and merely com bines a corporate shell with an existing bank. As such, it presents no competitive issues under the Bank Mer ger Act, 12 USC 1828(c). The financial and managerial resources of both pro ponents are satisfactory, and their future prospects, both separately and combined, are favorable. After the merger, Pittsfield will draw on the financial and mana gerial resources of Boston Corp. This will permit it to In operation To be operated $21,477,000 247,000 21,724,000 more efficiently serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community, including low and moderate in come neighborhoods, is less than satisfactory. This decision is the prior written approval necessary for the applicant to proceed with the merger and is conditioned on the approval of the acquisition of the successor by merger to Pittsfield by the Federal Re serve Board. February 13, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Pittsfield National Bank would become a subsidiary of First National Boston Corporation, a bank holding com pany. The instant merger, however, would merely com bine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by First National Boston Corporation, it would have no effect on competition. 69 BUSEY FIRST NATIONAL BANK, Urbana, III., and Urbaha National Bank, Urbana, III. Banking offices Names of banks and type of transaction Total assets Busey First National Bank, Urbana, III. (14521), with and Urbana National Bank (Organizing), Urbana, III. (14521), which had merged March 20, 1980, under charter of the latter (14521) and title of "Busey First National Bank." The merged bank at date of merger had COMPTROLLER'S DECISION 3 0 135,746,000 3 bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the bank's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This is the required prior written approval necessary for the applicant to proceed with the merger. February 19, 1980. This is the Comptroller's decision on an application to merge Busey First National Bank, Urbana, III. (Ur bana), into and under the charter of Urbana National Bank (Organizing), Urbana (New Bank). This applica tion is one part of a process whereby First Busey Cor poration, Urbana (First Busey), will acquire 100 per cent (less directors' qualifying shares) of Urbana. As part of this process, First Busey sponsored an applica tion for a new national bank charter for New Bank which was preliminarily approved by this Office on January 23, 1979. To date, New Bank has no operat ing history. On September 17, 1979, the Federal Reserve Board approved First Busey's application under the Bank Holding Company Act, 12 USC 1841, et seq., for for mation of a bank holding company through acquisition of 100 percent (less directors' shares) of the succes sor by merger to Urbana. This merger is therefore a vehicle for a bank holding company formation and merely combines a corporate shell with an existing * $135,367,000 250,000 In To be operation operated SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Busey First National Bank would become a subsidiary of First Busey Corporation, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the sur viving bank by First Busey Corporation, it would have no effect on competition. * * FIRST NATIONAL BANK IN SIOUX CITY, Sioux City, Iowa, and First National Interim Bank, Sioux City, Iowa Banking offices Names of banks and type of transaction Total assets First National Bank in Sioux City, Sioux City, Iowa (13538), with and First National Interim Bank (Organizing), Sioux City, Iowa (13538), which had merged March 31, 1980, under charter of the latter (13538) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on the application to merge First National Bank in Sioux City, Sioux City, Iowa, into First National Interim Bank (Organizing), Sioux City, under the charter of First National Interim Bank and with the title of "First National Bank in Sioux City." First National Interim Bank is being organized by Banks of Iowa, Inc., Cedar Rapids, Iowa, a bank hold ing company. This application is part of a process whereby the holding company will acquire 100 percent of the voting shares (less directors' qualifying shares) of First National Bank in Sioux City. The merger would 70 $153,017,000 240,000 153,282,000 In To be operation operated 3 0 3 combine a nonoperating bank with an existing com mercial bank and would have no effect on competition. The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. Consummation of the proposal will result in a more efficient corporate organization, promoting the convenience and needs of the community. A review of the record of this application and other information available to this Office as a result of its reg ulatory activities revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the applicant to proceed with the merger. February 27, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank in Sioux City would become a sub sidiary of Bank of Iowa, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the sur viving bank by Banks of Iowa, Inc., it would have no ef fect on competition. BANK OF NEW HAMPSHIRE, NATIONAL ASSOCIATION, Manchester, N.H., and New Hampshire Bank, National Association, Manchester, N.H. Banking offices Names of banks and type of transaction Total assets Bank of New Hampshire, National Association, Manchester, N.H. (1059), with and New Hampshire Bank, National Association (Organizing), Manchester, N.H. (1059), which had. . merged April 30, 1980, under charter of the latter bank (1059) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Bank of New Hampshire, National Association, Manchester, N.H. (Merging Bank), into and under the charter of New Hampshire Bank, National Association (Organizing), Manchester (Charter Bank). This appli cation was filed on December 17, 1979, and is based on an agreement executed on November 28, 1979. The proposal is part of a process whereby Bank of New Hampshire Corporation will become a bank hold ing company by acquiring 100 percent of the out standing shares (less directors' qualifying shares) of the successor. This merger merely combines a nonop erating bank with an existing commercial bank and will have no effect on competition. The financial and managerial resources of both en tities are satisfactory, and their future prospects ap pear favorable. After the merger, Merging Bank will draw on the financial and managerial resources of its corporate parent, Bank of New Hampshire Corpora tion. This will permit the bank to more effectively serve the convenience and needs of its community. $254,274,000 240,000 254,274,000 In operation To be operated ift ID n u ifi A review of the record of this application and other information available to this Office as a result of its reg ulatory authority revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cant to proceed with the proposed merger. March 25, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Bank of New Hampshire, National Association, would become a subsidiary of Bank of New Hampshire Cor poration, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Bank of New Hampshire Corporation, it would have no effect on competition. 71 THE POMEROY NATIONAL BANK, Pomeroy, Ohio, and Bank One of Pomeroy, N.A., Pomeroy, Ohio Banking offices Names of banks and type of transaction Total assets Bank One of Pomeroy, N.A. (Organizing), Pomeroy, Ohio (1980), with and The Pomeroy National Bank, Pomeroy, Ohio (1980), which had merged June 2, 1980, under charter and title of the former bank (1980). The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge The Pomeroy National Bank, Pomeroy, Ohio (Pomeroy), into and under the charter of Bank One of Pomeroy, N.A. (Organizing), Pomeroy (Bank One). This application was filed with this Office on March 25, 1980, and is baged on an agreement executed by the participants on February 15, 1980. Bank One is being organized by individuals associ ated with Banc One Corporation, a registered bank holding company. The merger of Pomeroy into Bank One is one part of a process whereby Banc One Cor poration will acquire 100 percent (less directors' quali fying shares) of Pomeroy. This merger is a vehicle for a bank holding company acquisition and merely com bines a corporate shell with an existing bank. As such, it presents no competitive issues under the Bank Merging Act, 12 USC 1828(c). The financial and managerial resources of both pro ponents are satisfactory, and their future prospects, both separately and combined, are favorable. After the merger, Pomeroy will draw on the financial and mana gerial resources of its corporate parent, permitting it to $ 120,000 33,299,000 In To be operation operated 0 3 33,419,000 3 more effectively serve the convenience and needs of its community. A review of the record of this applica tion and other information available to this Office as a result of its regulatory responsibilities revealed no evi dence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than sat isfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. May 2, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Pomeroy National Bank would become a subsidiary of Banc One Corporation, a bank holding company. The instant merger, however, would merely combine an ex isting bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Banc One Corporation, it would have no effect on competition. THE MARINE NATIONAL BANK OF WILDWOOD, Wildwood, N.J., and Horizon Marine National Bank, Wildwood, N.J. Banking offices Names of banks and type of transaction Total assets Horizon Marine National Bank (Organizing), Wildwood, N.J. (6278), with and The Marine National Bank of Wildwood, Wildwood, N.J. (6278), which had merged June 4, 1980, under charter of the former (6278) and title of the latter. The merged bank at date of merger had $ 60,000 106,640,000 In To be operation operated 0 5 106,700,000 COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge The Marine National Bank of Wildwood, Wildwood, N.J., into Horizon Marine National Bank (Orga nizing), Wildwood, under the charter of Horizon Marine National Bank and with the title of "The Marine National Bank of Wildwood," Wildwood. Horizon Marine National Bank (interim bank) is being organized by Horizon Bancorp, Morristown, N.J., a registered bank holding company. This application is part of a process whereby the holding company will acquire 100 percent (except directors' qualifying 72 shares) of the voting stock of The Marine National Bank of Wildwood. The merger would combine a nonoperating bank with an existing commercial bank and would have no effect on competition. The financial and managerial resources of both banks and the future prospects of the resulting bank are favorable. Consummation of the proposal will result in a more efficient corporate organization which will promote the convenience and needs of the commu nity. A review of the record of the application and other information available to this Office as a result of its reg ulatory authority revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community, including low or moderate in come areas, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act, 12 USC 1828(c), for the appli cant to proceed with the merger. May 5, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Marine National Bank of Wildwood would become a subsidiary of Horizon Bancorp, a bank holding com pany. The instant merger, however, would merely com bine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Horizon Bancorp, it would have no effect on competition. GATEWAY NATIONAL BANK OF BEAUMONT, Beaumont, Tex., and New Gateway National Bank of Beaumont, Beaumont, Tex. Banking offices Names of banks and type of transaction Total assets New Gateway National Bank of Beaumont (Organizing), Beaumont, Tex. (14871), with and Gateway National Bank of Beaumont Beaumont Tex (14871) which had merged June 6, 1980, under charter of the former (14871) and with the title "Gateway National Bank of Beaumont." The merged bank at date of merger h a d . . . . ... COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Gateway National Bank, Beaumont, Tex. (Gate way), into New Gateway National Bank of Beaumont (Organizing), Beaumont, under the charter of New Gateway National Bank of Beaumont and with the title of "New Gateway National Bank of Beaumont." This application was filed with this Office on January 23, 1980, and is based on an agreement executed by the participants on December 3, 1979. As of December 31, 1978, Gateway had total commercial bank de posits of $25.4 million. This application is one part of a process whereby First City Bancorporation of Texas, Inc., a registered bank holding company, will acquire 100 percent (less directors' qualifying shares) of Gateway. As part of this process, First City Bancorporation of Texas, Inc., sponsored a charter application for a new national bank which was given preliminary approval by this Of fice on October 1, 1979. This merger is therefore a ve hicle for a bank holding company acquisition and merely combines a corporate shell with an existing bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both pro ponents are satisfactory, and their future prospects, $ 300,000 32,740,000 32,985,000 In To be operation operated n 1 1 both separately and combined, are favorable. After the merger, Gateway will draw on the financial and mana gerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this applica tion and other information available to this Office as a result of its regulatory responsibilities revealed no evi dence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than sat isfactory. This decision is the required prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. April 9, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Gateway National Bank of Beaumont would become a subsidiary of First City Bancorporation of Texas, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonop erating institution; as such, and without regard to the acquisition of the surviving bank by First City Bancor poration of Texas, Inc., it would have no effect on com petition. 73 BANK OF IDAHO, N.A., Boise, Idaho, and New Bank of Idaho, N.A., Boise, Idaho Banking offices Names of banks and type of transaction Total assets Bank of Idaho, N.A., Boise, Idaho (16237), with and New Bank of Idaho, N.A. (Organizing), Boise, Idaho (16237), which had consolidated June 30, 1980, under charter and title of the former bank (16237). The consolidated bank at date of consolidation had COMPTROLLER'S DECISION New Bank of Idaho, N.A., Boise, Idaho, is being orga nized by Western Bancorporation, Los Angeles, Calif., a bank holding company. The consolidation of Bank of Idaho, N.A., Boise, with New Bank of Idaho, N.A., is part of a process whereby Western Bancorporation will acquire 100 percent (less directors' qualifying shares) of Bank of Idaho, N.A. The consolidation is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. $540,283,000 240,000 In To be operation operated 38 0 38 540,527,000 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. May 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidations are parts of plans through which the existing banks will become subsidi aries of Western Bancorporation, a bank holding com pany. Each of these transactions, however, will merely combine existing banks with nonoperating institutions; as such, and without regard to the acquisition of the surviving banks by Western Bancorporation, they would have no effect on competition. THE CONRAD NATIONAL BANK OF KALISPELL, Kalispell, Mont., and New Conrad National Bank of Kalispell, Kalispell, Mont. Banking offices Names of banks and type of transaction Total assets The Conrad National Bank of Kalispell, Kalispell, Mont. (4803), with and New Conrad National Bank of Kalispell (Organizing), Kalispell, Mont. (4803), which had consolidated June 30, 1980, under the charter and title of the former bank (4803). The consolidated bank at date of consolidation had COMPTROLLER'S DECISION New Conrad National Bank of Kalispell, Kalispell, Mont., is being organized by Western Bancorporation, Los Angeles, Calif., a bank holding company. The con solidation of The Conrad National Bank of Kalispell, Kalispell, with New Conrad National Bank of Kalispell is part of a process whereby Western Bancorporation will acquire 100 percent (less directors' qualifying shares) of The Conrad National Bank of Kalispell. The consolidation is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank 74 $85,996,000 120,000 86,118,000 In To be operation operated o n 2 will draw on the financial and managerial resources of its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. May 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidations are parts of plans through which the existing banks will become subsidi- aries of Western Bancorporation, a bank holding com pany. Each of these transactions, however, will merely combine existing banks with nonoperating institutions; as such, and without regard to the acquisition of the surviving banks by Western Bancorporation, they would have no effect on competition. FIRST NATIONAL BANK, Fort Collins, Colo., and New First National Bank, Fort Collins, Colo. Banking offices Total assets Names of banks and type of transaction First National Bank, Fort Collins, Colo. (14146), with and New First National Bank, Fort Collins (Organizing), Fort Collins, Colo. (14146), which had consolidated June 30, 1980, under the charter and title of the former bank (14146). The consolidated bank at date of consolidation had $192,068,000 240,000 In To be operation operated o n u 192,312,000 2 COMPTROLLER'S DECISION New First National Bank, Fort Collins, Colo., is being organized by Western Bancorporation, Los Angeles, Calif., a bank holding company. The consolidation of First National Bank, Fort Collins, with New First Na tional Bank is part of a process whereby Western Bancorporation will acquire 100 percent (less directors' qualifying shares) of First National Bank. The consoli dation is a vehicle for a bank holding company acqui sition and combines a nonoperating bank with an ex isting commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that ap plicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. May 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidations are parts of plans through which the existing banks will become subsidi aries of Western Bancorporation, a bank holding com pany. Each of these transactions, however, will merely combine existing banks with nonoperating institutions; as such, and without regard to the acquisition of the surviving banks by Western Bancorporation, they would have no effect on competition. FIRST NATIONAL BANK OF ARIZONA, Phoenix, Ariz., and New First National Bank of Arizona, Phoenix, Ariz. Names of banks and type of transaction Banking offices Total assets First National Bank of Arizona, Phoenix, Ariz. (3728), with $3,288,031,000 and New First National Bank of Arizona (Organizing), Phoenix, Ariz. (3728), which had 240,000 consolidated June 30, 1980, under the charter and title of the former bank (3728). The consolidated bank at date of consolidation had 3,288,275,000 COMPTROLLER'S DECISION New First National Bank of Arizona, Phoenix, Ariz., is being organized by Western Bancorporation, Los Angeles, Calif., a bank holding company. The consoli dation of First National Bank of Arizona, Phoenix, with New First National Bank of Arizona is part of a process In To be operation operated 142 0 142 whereby Western Bancorporation will acquire 100 per cent (less directors' qualifying shares) of First National Bank of Arizona. The consolidation is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). 75 The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. May 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidations are parts of plans through which the existing banks will become subsidi aries of Western Bancorporation, a bank holding com pany. Each of these transactions, however, will merely combine existing banks with nonoperating institutions; as such, and without regard to the acquisition of the surviving banks by Western Bancorporation, they would have no effect on competition. FIRST NATIONAL BANK OF CASPER, Casper, Wyo., and New First National Bank of Casper, Casper, Wyo. Banking offices Names of banks and type of transaction Total assets First National Bank of Casper, Casper, Wyo. (6850), with and New First National Bank of Casper (Organizing) Casper Wyo (6850) which had consolidated June 30, 1980, under the charter and title of the former bank (6850). The consolidated bank at date of consolidation had COMPTROLLER'S DECISION New First National Bank of Casper, Casper, Wyo., is being organized by Western Bancorporation, Los Angeles, Calif., a bank holding company. The consoli dation of First National Bank of Casper, Casper, with New First National Bank of Casper is part of a process whereby Western Bancorporation will acquire 100 per cent (less directors' qualifying shares) of First National Bank of Casper. The consolidation is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. 76 $256,224,000 120,000 256,346,000 In operation To be operated 1 0 1 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. May 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidations are parts of plans through which the existing banks will become subsidi aries of Western Bancorporation, a bank holding com pany. Each of these transactions, however, will merely combine existing banks with nonoperating institutions; as such, and without regard to the acquisition of the surviving banks by Western Bancorporation, they would have no effect on competition. FIRST NATIONAL BANK OF OREGON, Portland, Oreg., and New First National Bank of Oregon, Portland, Oreg. Banking offices Names of banks and type of transaction Total assets First National Bank of Oregon, Portland, Oreg. (1553), with and New First National Bank of Oregon (Organizing), Portland, Oreg. (1553), which had consolidated June 30, 1980, under the charter and title of the former bank (1553). The consolidated bank at date of consolidation had COMPTROLLER'S DECISION New First National Bank of Oregon, Portland, Oreg., is being organized by Western Bancorporation, Los Angeles, Calif., a bank holding company. The consoli dation of First National Bank of Oregon, Portland, with New First National Bank of Oregon is part of a process whereby Western Bancorporation will acquire 100 per cent (less directors' qualifying shares) of First National Bank of Oregon. The consolidation is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. $4,663,501,000 240,000 In operation To be operated 156 0 4,663,745,000 156 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. May 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidations are parts of plans through which the existing banks will become subsidi aries of Western Bancorporation, a bank holding com pany. Each of these transactions, however, will merely combine existing banks with nonoperating institutions; as such, and without regard to the acquisition of the surviving banks by Western Bancorporation, they would have no effect on competition. SANTA FE NATIONAL BANK, Santa Fe, N.M., and New Santa Fe National Bank, Santa Fe, N.M. Banking offices Names of banks and type of transaction Total assets Santa Fe National Bank, Santa Fe, N.M. (14543), with and New Santa Fe National Bank (Organizing), Santa Fe, N.M. (14543), which had consolidated June 30, 1980, under the charter and title of the former bank (14543). The consolidated bank at date of consolidation had COMPTROLLER'S DECISION New Santa Fe National Bank, Santa Fe, N.M., is being organized by Western Bancorporation, Los Angeles, Calif., a bank holding company. The consolidation of Santa Fe National Bank, Santa Fe, with New Santa Fe National Bank is part of a process whereby Western Bancorporation will acquire 100 percent (less direc tors' qualifying shares) of Santa Fe National Bank. The consolidation is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). In operation To be operated $90,473,000 120,000 90,595,000 The financial and managerial resources of both banks and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial re sources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the 77 Bank Merger Act for the applicant to proceed with the proposed merger. May 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidations are parts of plans through which the existing banks will become subsidi aries of Western Bancorporation, a bank holding com pany. Each of these transactions, however, will merely combine existing banks with nonoperating institutions; as such, and without- regard to the acquisition of the surviving banks by Western Bancorporation, they would have no effect on competition. FIRST NATIONAL BANK OF TOLEDO, Toledo, Ohio, and Toledo National Bank, Toledo, Ohio Banking offices Names of banks and type of transaction Total assets First National Bank of Toledo, Toledo, Ohio (14586), with and Toledo National Bank (Organizing), Toledo, Ohio (14586), which had merged July 1, 1980, under charter of the latter (14586) and with the title "First National Bank of Toledo." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge First National Bank of Toledo, Toledo, Ohio (First), into Toledo National Bank (Organizing), Toledo (Toledo), under the charter of Toledo National Bank and with the title of "First National Bank of Toledo." This application was filed on March 10, 1980, and is based on an agreement executed by the participants on February 27, 1980. Toledo is being organized by individuals associated with First Ohio Bancshares, Inc., a proposed bank holding company. The merger of First into Toledo is part of a process whereby First Ohio Bancshares, Inc., will acquire 100 percent (less directors' qualifying shares) of First. The merger is a vehicle for a bank holding company acquisition and merely combines a corporate shell with an existing bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both pro ponents are satisfactory, and their future prospects, both separately and combined, are favorable. After the merger, First will draw on the financial and managerial 78 $495,564,000 240,000 496,734,000 In To be operation operated 26 0 26 resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of the community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities, revealed no evidence that First's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. May 13, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank of Toledo would become a subsidi ary of First Ohio Bancshares, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institu tion; as such, and without regard to the acquisition of the surviving bank by First Ohio Bancshares, Inc., it would have no effect on competition. GARDEN STATE NATIONAL BANK, Paramus, N.J., and New Garden State National Bank, Paramus, N.J. Banking offices Total assets Names of banks and type of transaction Garden State National Bank, Paramus, N.J. (15570), with and New Garden State National Bank (Organizing), Paramus, N.J. (15570), which had consolidated July 7, 1980, under the charter (15570) and title of the former bank (15570). The consolidated bank at date of consolidation had COMPTROLLER'S DECISION This is the Comptroller's decision on the application to consolidate Garden State National Bank, Paramus, N.J. (Garden State), and New Garden State National Bank, Paramus (Interim Bank), under the charter of and with the title of "Garden State National Bank." This application is one part of a process whereby Fidelity Union Bancorporation, Newark, N.J., a registered bank holding company, will acquire 100 percent (less direc tors' qualifying shares) of Garden State. As a part of this process, Interim Bank is being organized by rep resentatives of the holding company. This consolida tion is a vehicle for a bank holding company acquisi tion and merely combines a corporate shell with an existing bank. As such, it presents no competitive is sues under the Bank Merger Act, 12 USC 1828(c). A review of the record of this application and other information available to this Office as a result of its reg $838,491,000 125,000 856,603,000 In To be operation operated 36 0 36 ulatory responsibilities revealed no evidence that the bank's record of helping to meet the credit needs of the entire community, including low and moderate in come neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the consolidation. June 5, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidation is part of a plan through which Garden State National Bank would become a subsidiary of Fidelity Union Bancorporation, a bank holding company. The instant transaction, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Fidelity Union Bancorporation, it would have no effect on competition. SUMMIT NATIONAL BANK, Fort Worth, Tex., and West Freeway National Bank, Fort Worth, Tex. Banking offices Names of banks and type of transaction Total assets Summit National Bank, Fort Worth, Tex. (16422), with and West Freeway National Bank (Organizing), Fort Worth, Tex. (16422), which had merged July 8, 1980, under charter (16422) of the latter and with the title "Summit National Bank." The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge Summit National Bank, Fort Worth, Tex. (Sum mit), into and under the charter of West Freeway Na tional Bank, Fort Worth, Tex. (Freeway). This applica tion was filed with this Office on October 17, 1979, and is based on an agreement executed by the partici pants on September 14, 1979. As of June 30, 1979, Summit had total commercial bank deposits of $31.7 million. This application is one part of a process whereby Summit Bancshares, Inc., a proposed bank holding company, will acquire 100 percent (less directors' qualifying shares) of Summit. As a part of this process, Summit Bancshares, Inc., sponsored a charter appli In To be operation operated $43,759,000 240,000 44,971,000 cation for a new national bank which was given prelim inary approval by this Office on August 20, 1979. This merger is therefore a vehicle for a bank holding com pany acquisition and merely combines a corporate shell with an existing bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both pro ponents are satisfactory, and their future prospects, both separately and combined, are favorable. After the merger, Summit will draw on the financial and mana gerial resources of its corporate parent. This will permit it to more efficiently serve the convenience and needs of its community. A review of the record of this application and other 79 information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the required prior written approval of the Bank Merger Act for the applicants to proceed with the proposed merger. May 20, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Summit National Bank would become a subsidiary of Summit Bancshares, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the sur viving bank by Summit Bancshares, Inc., it would have no effect on competition. PENINSULA NATIONAL BANK, Cedarhurst, N.Y., and 516 Central Avenue National Bank, Cedarhurst, N.Y. Banking offices Names of banks and type of transaction Total assets Peninsula National Bank, Cedarhurst, N.Y. (11854), with and 516 Central Avenue National Bank (Organizing), Cedarhurst, N.Y. (11854), which had merged July 31, 1980, under charter of the latter (11854) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION The 516 Central Avenue National Bank, Cedarhurst, N.Y., is being organized by United Bank Corporation of New York, Albany, N.Y., a bank holding company. The merger of Peninsula National Bank, Cedarhurst, into 516 Central Avenue National Bank is part of a process whereby United Bank Corporation of New York will acquire 100 percent (less directors' qualifying shares) of Peninsula National Bank. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing com mercial bank. As such, it presents no competitive is sues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its entire commu nity. $114,757,366 120,000 In operation To be operated 11 0 114,877,000 11 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that ap plicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. June 30, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Peninsula National Bank would become a subsidiary of United Bank Corporation of New York, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institu tion; as such, and without regard to the acquisition of the surviving bank by United Bank Corporation of New York, it would have no effect on competition. BANK OF INDIANA, NATIONAL ASSOCIATION, Gary, Ind., and Indiana Interim National Bank, Gary, Ind. Banking offices Total assets Names of banks and type of transaction Bank of Indiana, National Association, Gary, Ind. (15455), with and Indiana Interim National Bank (Organizing), Gary, Ind. (15455), which had merged September 18, 1980, under charter of the latter (15455) and with the title of the former bank. The merged bank at date of merger had COMPTROLLER'S DECISION This application is essentially a corporate reorganiza tion whereby Money Management Corporation, hold ing company for Bank of Indiana, National Association, Gary, Ind., will acquire 100 percent of Bank of Indiana, 80 $270,199,000 240,000 264,955,000 In operation To be operated 1^ n 13 National Association. It was filed with this Office on April 16, 1980, and is based on an agreement exe cuted by the participants on March 27, 1980. As part of the reorganization, Money Management Corporation sponsored a charter application for a new national bank which received preliminary approval from this Of fice on October 20, 1978. This merger completes the process of reorganization and presents no competi tive, financial or managerial issues under the Bank Merger Act, 12 USC 1828(c). A similar application was disapproved on November 2, 1979, because this Office concluded the bank's rec ord of performance under the Community Reinvest ment Act (CRA), 12 USC 2901 etseq., was unsatisfac tory. The Office has prepared, as a supplement to this decision, an opinion which addresses the CRA as pects of this application and describes the conditions under which it is now being approved. The supple ment is an intrinsic part of this decision which is the prior written permission required by the Bank Merger Act for the applicant to proceed with the transaction. Community Reinvestment Act Supplement This supplement discusses the OCC's assessment of Bank of Indiana, National Association's (bank) record of performance under the Community Reinvestment Act (CRA). The CRA requires that the OCC evaluate a bank's record of meeting the credit needs of its com munity and consider that record when deciding certain applications for structural change. The bank has applied for permission to reorganize its corporate structure. The current application was protested by the Gary Human Relations Commission, which indicated that, while they had seen improvement in the bank's consumer services, they had no evi dence that there had been or would be improvement in the commercial loan area. A similar application was disapproved on November 2, 1979, because OCC concluded the bank's record of performance under the factors contained in the CRA regulation (12 CFR 25) was unsatisfactory. OCC exam inations of the bank revealed a lack of lending within neighborhoods in Gary, little evidence of meaningful communication with members of the community re garding banking services and no marketing or special credit-related programs to inform Gary residents of the types of credit available at the bank. At the time of the original denial, OCC noted that the bank had recently taken steps to improve its perform ance. However, OCC concluded that the recent actions taken by the bank were not sufficient to war rant approval of the application. The bank was, how ever, encouraged to follow through on its recent and proposed actions in response to CRA and to review other areas where improvements could be made. The bank was advised that the results of subsequent ex aminations would determine when approval of future applications would be warranted. The OCC recently completed another examination of the bank to determine its compliance with consumer laws and regulations and to evaluate its record of per formance in meeting community credit needs. This supplement discusses the bank's CRA record and is based primarily on the results of the recent examina tion. For a bank to serve effectively the needs of a com munity, it must know what those needs are. For this reason, part of the CRA assessment of all banks is a review of their efforts to ascertain community credit needs. The bank has undertaken a number of activities to determine the credit needs of its community. Since May 1979, the bank has been meeting with community and civic leaders to discuss credit needs and de scribe available bank services. In addition, the bank hired an outside firm to survey a sample of 3,000 Gary area households. As a result of the survey, the bank is considering implementation of alternative branch banking hours. In December 1979, the bank estab lished regional advisory boards of local community residents for each of its branches. The regional advi sory boards will assist bank management in its efforts fo ascertain community credit needs. Moreover, the bank plans to establish a citizens advisory group to provide feedback to and from the community regard ing consumer complaints. The bank has also undertaken marketing efforts to increase its lending activities in Gary. These efforts have included minority newspaper advertising, bill boards and direct mail solicitations. Additionally, in January 1980, the bank held the first of a planned se ries of seminars and workshops for proprietors of small businesses in Gary. These forums are designed to provide technical expertise in marketing, advertising, accounting and financial planning for small business proprietors. The CRA evaluation process also considers the geo graphic distribution of the bank's credit extensions, credit applications, credit denials and evidence of pro hibited discriminatory or other illegal credit practices. The recent evaluation of the bank's lending practices revealed no evidence of discrimination. The previous loan policies and procedures which had discriminatory effects had been corrected prior to denial of the pre vious application, and the bank is now developing in ternal audit and control procedures to assure compli ance with the Equal Credit Opportunity Act. The previous evaluation had disclosed a significant dispar ity between credit extensions made in Gary and its suburbs. As noted earlier, the bank has made efforts to increase its loan penetration in Gary. While it is too early to make a complete evaluation of the results of these efforts, loan volume at the bank's downtown of fices exceeded the bank's original projections at the time of our recent evaluation. The CRA assessment also reviews bank participa tion in community development projects. The bank has committed $10 million in credit for revitalization of downtown Gary in connection with a federal urban development action grant project undertaken by the city with private sector support. This commitment is subject to completion of three construction projects now underway or planned. The bank has also committed to lend funds to reha bilitate 21 homes in a Gary neighborhood located in a low and moderate income census tract. Management has expressed interest in working with other neighbor hood groups to develop similar programs. Another aspect of CRA performance is extension of housing-related credit. Due to loan portfolio factors and recent economic conditions, the bank is not ex tending 1-4 family real estate loans. Management 81 plans, instead, to emphasize consumer and commer cial lending, including small business credit. Mean while, all applicants for 1-4 family mortgages are be ing referred to Calumet Securities, a mortgage banking corporation. The OCC believes that the mora torium on single family mortgage lending is a reason able management decision. However, management must be careful to apply this policy to all types of mort gage applicants and fulfill the plan to increase small business and consumer loan volume in its community. Management's intention to accomplish these objec tives is evidenced by a mail solicitation of installment loan applicants from Gary for debt consolidation loans and small business forums which may result in estab lishing small business lending relationships. In addi tion, an SBA loan committee has been recently estab lished to assist in a budgeted $2 million increase in SBA-guaranteed loans. At the time of our previous assessment, the bank's investment security portfolio contained only $300,000 in city issues, and no bids had been placed on Gary tax anticipation warrants. Since then, the bank has purchased nearly $10 million in securities of local mu nicipalities and placed a competitive bid on a $7.75 million city issue. In a letter dated May 13, 1980, the Gary Human Re lations Commission expressed opposition to approval of the application. The letter stated: While the Commission has been able to see con siderable improvement in the bank's consumer services, there is no evidence that there has or will be improvement in the commercial loan area. The OCC has reviewed the protest and determined that the bank has made a good faith effort to improve its commercial and installment lending performance in Gary. This effort, because of the time frame involved and general economic conditions, may not have yet resulted in significant expansion in the bank's Garyoriginated loan portfolio. This Office believes that close monitoring of the bank's continued efforts in the com mercial and installment loan areas, which is one of the stipulations of this decision, will ensure continued pro gress. In summary, our assessment revealed that the bank has made substantial efforts to ascertain the credit needs of its community. Further, while the results of these efforts have not yet been fully realized, progress had been made in helping to meet local credit needs. Overall, the bank has been responsive to the sugges tions of the examiner and to the comments contained 82 in the Comptroller's opinion explaining the decision to deny the bank's previous application. We believe that the bank's response must be considered favorably un der CRA, even though its actions may not yet have re sulted in substantial expansion of actual lending in Gary. The bank has responded positively to the CRA since the denial of the original application in Novem ber 1979, and the OCC believes the bank's record of performance and good faith efforts have been suffic ient to warrant conditional approval of the merger ap plication. This decision is made with the understanding that additional and continued progress is expected and necessary for approval of future applications from the bank. The board of directors and management are in structed to develop and submit an affirmative CRA plan acceptable to the OCC prior to the planned reor ganization. Specific areas to be addressed in the plan include, but are not limited to: • Continue efforts to market the availability of commercial and installment loans to Gary resi dents and to review the bank's SBA lending policy; • Develop a reporting system showing home mortgage applicants referred to Calumet Secu rities, and when the bank lifts its current mora torium on 1-4 family mortgages, an affirmative program to market these loans to areas which were adversely affected by the bank's previous loan policies and procedures for housingrelated credit; • Continue affirmative marketing efforts, espe cially those that encourage dialogue between the bank and segments of its community, in cluding local government and organizations which are representative of the diverse Gary community; • Continue efforts to use the Gary Regional Advi sory Boards to help ascertain community credit needs and follow through with plans to estab lish the citizens advisory group to provide feed back to and from the community; and • Complete planned written operating and control procedures to ensure compliance with the Equal Credit Opportunity Act. The OCC will closely monitor the bank's progress in carrying out the affirmative CRA plan through quarterly reports and future examinations. August 18, 1980. No Attorney General's report was received. COUNTY NATIONAL BANK OF ORANGE, Orange, Tex., and County Bank, National Association, Orange, Tex. Banking offices Names of banks and type of transaction Total assets County National Bank of Orange, Orange, Tex. (14884), with and County Bank, National Association (Organizing), Orange, Tex. (14884), which had consolidated September 18, 1980, under charter and title of the former bank (14884). The consolidated bank at date of consolidation had To be operated 1 0 44,969,934 1 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed consolidation. August 18, 1980. COMPTROLLER'S DECISION County Bank, National Association, Orange, Tex., is being organized by Southwest Bancshares, Inc., Houston, Tex., a bank holding company. The consoli dation of County National Bank of Orange, Orange, and County Bank, National Association, is part of a process whereby Southwest Bancshares, Inc., will ac quire 100 percent (less directors' qualifying shares) of County National Bank of Orange. The consolidation is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing com mercial bank. As such, it presents no competitive is sues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. * $44,848,110 121,824 In operation SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidation is part of a plan through which County National Bank of Orange would become a subsidiary of Southwest Bancshares, Inc., a bank holding company. The instant transaction, however, would merely combine an existing bank with a nonop erating institution; as such, and without regard to the acquisition of the surviving bank by Southwest Banc shares, Inc., it would have no effect on competition. * * FIRST NATIONAL BANK OF SOUTH CENTRAL MICHIGAN, Quincy, Mich., and SCM National Bank, Quincy, Mich. Banking offices Names of banks and type of transaction Total assets SCM National Bank (Organizing), Quincy, Mich. (2550), with and First National Bank of South Central Michigan, Quincy, Mich. (2550), which had consolidated September 29, 1980, under charter and title of the latter bank (2550). The consolidated bank at date of consolidation had COMPTROLLER'S DECISION SCM National Bank, Quincy, Mich., is being organized by First American Bank Corporation, Kalamazoo, Mich., a bank holding company. The consolidation of First National Bank of South Central Michigan, Quincy, with SCM National Bank is part of a process whereby First American Bank Corporation will acquire 100 per cent (less directors' qualifying shares) of The First Na tional Bank of South Central Michigan. The consolida tion is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). $ 870,000 51,558,000 53,726,000 In operation To be operated 0 4 4 The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required 83 by the Bank Merger Act for the applicant to proceed with the proposed consolidation. August 29, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank of South Central Michigan would become a subsidiary of First American Bank Corpora tion, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by First Ameri can Bank Corporation, it would have no effect on com petition. AMERICAN NATIONAL BANK, Omaha, Nebr., and ANB Bank, N.A., Omaha, Nebr. Banking offices Names of banks and type of transaction Total assets American National Bank, Omaha, Nebr. (15435), with and ANB Bank, N.A. (Organizing), Omaha, Nebr. (15435), which had merged September 30, 1980, under charter of the latter (15435) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION ANB Bank, N.A., Omaha, Nebr., is being organized by American National Corporation, Omaha, a proposed bank holding company. The merger of American Na tional Bank, Omaha, into ANB Bank, N.A., is part of a process whereby American National Corporation will acquire 100 percent (less directors' qualifying shares) of American National Bank. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of ts corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other In To be operation operated $69,825,000 240,000 69,825,000 information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. August 18, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which American National Bank would become a subsidiary of American National Corporation, a bank holding com pany. The instant merger, however, would merely com bine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by American National Corporation, it would have no effect on competition. FIRST NATIONAL BANK OF WOODSTOCK, Woodstock, III., and FNW National Bank, Woodstock, Banking offices Names of banks and type of transaction Total assets First National Bank of Woodstock, Woodstock, III. (14137), with and FNW National Bank (Organizing), Woodstock, III., which had merged September 30, 1980, under charter of the latter (14137) and title "First National Bank of Woodstock." The merged bank at date of merger had COMPTROLLER'S DECISION FNW National Bank, Woodstock, III., is being orga nized by First Woodstock Corp., Woodstock, a pro posed bank holding company. The merger of First Na tional Bank of Woodstock, Woodstock, into FNW 84 In To be operation operated $61,647,0,00 120,000 72,680,000 National Bank is part of a process whereby First Woodstock Corp. will acquire 100 percent (less direc tors' qualifying shares) of First National Bank of Wood stock. The merger is a vehicle for a bank holding com pany acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. August 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank of Woodstock would become a subsidiary of First Woodstock Corp., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institu tion; as such, and without regard to the acquisition of the surviving bank by First Woodstock Corp., it would have no effect on competition. BANK ONE OF FAIRBORN, N.A., Fairborn, Ohio, and The First National Bank of Fairborn, Fairborn, Ohio Banking offices Names of banks and type of transaction Total assets Bank One of Fairborn, N.A. (Organizing), Fairborn, Ohio (9675), with and The First National Bank of Fairborn, Fairborn, Ohio (9675), which had consolidated October 1, 1980, under charter of the latter bank (9675) and title of the former. The consolidated bank at date of consolidation had COMPTROLLER'S DECISION Bank One of Fairborn, N.A., Fairborn, Ohio, is being organized by BancOne Corporation, Columbus, Ohio, a bank holding company. The consolidation of The First National Bank of Fairborn, Fairborn, with Bank One of Fairborn, N.A., is part of a process whereby BancOne Corporation will acquire 100 percent (less direc tors' qualifying shares) of The First National Bank of Fairborn. The consolidation is a vehicle for a bank holding company acquisition and combines a nonop erating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of the corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. In operation To be operated $45,371,000 120,000 47,249,000 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed consolidation. August 18, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidation is part of a plan through which First National Bank of Fairborn would become a subsidiary of BancOne Corporation, a bank holding company. The instant transaction, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisi tion of the surviving bank by BancOne Corporation, it would have no effect on competition. 85 THE FIRST NATIONAL BANK OF MADISONVILLE, MadisonvJlle, Tex., and New First National Bank, Madisonville, Tex. Banking offices Names of banks and type of transaction Total assets The First National Bank of Madisonville, Madisonville, Tex. (6356), with and New First National Bank (Organizing), Madisonville, Tex. (6356), which had merged October 1, 1980, under charter of the latter (6356) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION New First National Bank, Madisonville, Tex., is being organized by First City Bancorporation of Texas, Inc., Houston, Tex., a bank holding company. The merger of The First National Bank of Madisonville, Madison ville, into New First National Bank is part of a process whereby First City Bancorporation of Texas, Inc., will acquire 100 percent (less directors' qualifying shares) of The First National Bank of Madisonville. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other In To be operation operated $41,388,000 60,000 43,734,000 information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. August 28, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank of Madisonville would become a subsidiary of First City Bancorporation of Texas, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonop erating institution; as such, and without regard to the acquisition of the surviving bank by First City Bancor poration of Texas, Inc., it would have no effect on com petition. LIBERTY NATIONAL BANK AND TRUST COMPANY OF LOUISVILLE, Louisville, Ky., and Liberty Bank of Louisville, National Association, Louisville, Ky. Banking offices Names of banks and type of transaction Total assets Liberty National Bank and Trust Company of Louisville, Louisville, Ky. (14320), with and Liberty Bank of Louisville, National Association (Organizing), Louisville, Ky. (14320), which had . merged October 1, 1980, under charter of the latter (14320) and title of the former. The merged bank at date of merger had $931,916,000 252,000 932,161,000 In To be operation operated IR n ^R COMPTROLLER'S DECISION Liberty Bank of Louisville, National Association, Louis ville, Ky., is being organized by Liberty National Ban corp, Inc., Louisville, a proposed bank holding com pany. The merger of Liberty National Bank and Trust Company of Louisville, Louisville, into Liberty Bank of Louisville, National Association, is part of a process whereby Liberty National Bancorp, Inc., will acquire 100 percent (less directors' qualifying shares) of Lib erty National Bank and Trust Company of Louisville. This merger is a vehicle for a bank holding company acquisition and merely combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). 86 The financial and managerial resources of both pro ponents are satisfactory, and their future prospects, both separately and combined, are favorable. After the merger, Liberty National Bank of Louisville will draw on the financial and managerial resources of its corporate parent. This will permit it to more efficiently serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the required prior written approval of Liberty National Bank and Trust Company of Louisville would become a subsidiary of Liberty National Ban corp, Inc., a bank holding company. The instant mer ger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Lib erty National Bancorp, Inc., it would have no effect on competition. the Bank Merger Act for the applicant to proceed with the proposed merger. August 18, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which * * * O'HARE INTERNATIONAL BANK, NATIONAL ASSOCIATION, Chicago, III., and O'Hare National Bank, Chicago, III. Banking offices Names of banks and type of transaction. Total assets O'Hare International Bank, National Association, Chicago, III. (14888), with and O'Hare National Bank (Organizing), Chicago, III. (14888), which had merged October 20, 1980, under charter of the latter (14888) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION 2 0 153,541,000 2 information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. August 28, 1980. O'Hare National Bank, Chicago, III., is being organized by O'Hare Banc Corp., Chicago, a proposed bank holding company. The merger of O'Hare International Bank, National Association, Chicago, into O'Hare Na tional Bank, is part of a process whereby O'Hare Banc Corp. will acquire 100 percent (less directors' qualify ing shares) of O'Hare International Bank, National As sociation. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other * $156,261,000 240,000 In To be operation operated SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which O'Hare International Bank, N.A., would become a sub sidiary of O'Hare Banc Corp., a bank holding com pany. The instant merger, however, would merely com bine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by O'Hare Banc Corp., it would have no effect on competition. * * THE COMMERCIAL NATIONAL BANK OF LITTLE ROCK, Little Rock, Ark., and Commercial National Bank of Little Rock, Little Rock, Ark. Banking offices Names of banks and type of transaction Total assets The Commercial National Bank of Little Rock, Little Rock, Ark. (14000), with and Commercial National Bank of Little Rock (Organizing), Little Rock, Ark. (14000), which had merged October 21, 1980, under the charter and title of the latter bank (14000). The merged bank at date of merger had COMPTROLLER'S DECISION Commercial National Bank of Little Rock, Little Rock, Ark., is being organized by Commercial Bankstock, Inc., Little Rock, a bank holding company. The merger of The Commercial National Bank of Little Rock, Little $363,729,000 240,000 363,729,000 In To be operation operated 13 0 13 Rock, into Commercial National Bank of Little Rock is part of a process whereby Commercial Bankstock, Inc., will acquire 100 percent (less directors' qualifying shares) of The Commercial National Bank of Little Rock. The merger is a vehicle for a bank holding com87 This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. September 9, 1980. pany acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will be in a position to draw on the financial and managerial resources of its new corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that Com mercial National Bank of Little Rock's record of helping to meet the credit needs of its entire community was less than satisfactory. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which The Commercial National Bank of Little Rock would become a subsidiary of Commercial Bankstock, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonop erating institution; as such, and without regard to the acquisition of the surviving bank by Commercial Bankstock, Inc., it would have no effect on competition. THE FIRST NATIONAL BANK OF COLUMBUS, Columbus, Ga., and New Columbus National Bank, Columbus, Ga. Banking offices Names of banks and type of transaction Total assets The First National Bank of Columbus, Columbus, Ga. (2338), with and New Columbus National Bank (Organizing), Columbus, Ga. (2338), which had consolidated November 3, 1980, under charter and title of the former bank (2338). The consolidated bank at date of consolidation had COMPTROLLER'S DECISION 88 202,470,000 To be operated 11 0 11 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. October 3, 1980. New Columbus National Bank, Columbus, Ga., is be ing organized by First South Bancorp, Columbus, Ga., a bank holding company. The consolidation of The First National Bank of Columbus, Columbus, with New Columbus National Bank is a part of a process whereby First South Bancorp will acquire 100 percent (less directors' qualifying shares) of The First National Bank of Columbus. The consolidation is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. * $190,592,000 252,000 In operation SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidation is part of a plan through which First National Bank of Columbus would become a subsidiary of First South Bankcorp, a bank holding company. The instant transaction, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisi tion of the surviving bank by First South Bancorp, it would have no effect on competition. * * THE CITIZENS NATIONAL BANK AND TRUST COMPANY, Wellsville, N.Y., and Key Bank of Western New York N.A., Wellsville, N.Y. Banking offices Names of banks and type of transaction Total assets The Citizens National Bank and Trust Company, Wellsville, N.Y. (4988), with and Key Bank of Western New York N.A. (Organizing), Wellsville, N.Y. (4998), which had merged November 7, 1980, under charter and title of the latter (4988). The merged bank at date of merger had COMPTROLLER'S DECISION Key Bank of Western New York N.A., Wellsville, N.Y., is being organized by Key Banks Inc., Albany, N.Y., a bank holding company. The merger of The Citizens National Bank and Trust Company, Wellsville, into Key Bank of Western New York N.A. is part of a process whereby Key Banks Inc., will acquire 100 percent (less directors' qualifying shares) of The Citizens National Bank and Trust Company. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. In operation To be operated $123,174,424 60,000 123,176,224 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. October 6, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Citizens National Bank and Trust Company would be come a subsidiary of Key Banks Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institu tion; as such, and without regard to the acquisition of the surviving bank by Key Banks Inc., it would have no effect on competition. THE CITY NATIONAL BANK AND TRUST COMPANY OF SALEM, Salem, N.J., and Second City National Bank and Trust Company of Salem, Salem, N.J. Banking offices Total assets Names of banks and type of transaction The City National Bank and Trust Company of Salem, Salem, N.J. (3922), with and Second City National Bank and Trust Company of Salem (Organizing), Salem, N.J. (3922), which had merged November 17, 1980, under charter of the latter (3922) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION Second City National Bank and Trust Company of Sa lem, Salem, N.J., is being organized by Heritage Bancorporation, Cherry Hill, N.J., a bank holding com pany. The merger of The City National Bank and Trust Company of Salem, Salem, into Second City National Bank and Trust Company of Salem is part of a process whereby Heritage Bancorporation will acquire 100 per cent (less directors' qualifying shares) of The City Na tional Bank and Trust Company of Salem. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing In operation $43,296,000 6 120,000 0 43,416,000 To be operated 6 commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. 89 This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. October 17, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which City National Bank and Trust Company of Salem would become a subsidiary of Heritage Bancorporation, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Heritage Bancor poration, it would have no effect on competition. FIRST NATIONAL BANK AND TRUST COMPANY OF RACINE, Racine, Wis., and 1st Bank and Trust Company of Racine, N.A., Racine, Wis. Banking offices Names of banks and type of transaction Total assets First National Bank and Trust Company of Racine, Racine, Wis. (457), with and 1st Bank and Trust Company of Racine, N.A. (Organizing), Racine, Wis. (457), which had merged November 21, 1980, under charter of the latter bank (457) and title of former. The merged bank at date of merger had COMPTROLLER'S DECISION This is the Comptroller's decision on an application to merge First National Bank and Trust Company of Ra cine, Racine, Wis. (Merging Bank), into and under the charter of 1st Bank and Trust Company of Racine, N.A. (Organizing), Racine (Charter Bank). This application was filed on December 7, 1979, and is based on an agreement executed by the proponents on November 27, 1979. The proposal is part of a process whereby The Marine Corporation, Milwaukee, Wis., a registered bank holding company, will acquire 100 percent (less directors' qualifying shares) of the successor institu tion. Charter Bank is being organized by The Marine Corporation solely to facilitate the acquisition of Merg ing Bank. The merger would combine a nonoperating bank with an existing commercial bank and have no effect on competition. The financial and managerial resources of both banks are satisfactory, and their future prospects ap pear favorable. After the merger, Merging Bank will more effectively serve the convenience and needs of its community by drawing on the financial and mana gerial resources of its corporate parent. 90 In To be operation operated $139,236,000 240,000 139,476,000 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required of this Office by the Bank Merger Act, 12 USC 1828(c), for the applicant to proceed with the proposed merger. October 6, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank and Trust Company of Racine would become a subsidiary of Marine Corporation, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonop erating institution; as such, and without regard to the acquisition of the surviving bank by Marine Corpora tion, it would have no effect on competition. THE NATIONAL BANK OF NORTHERN NEW YORK, Watertown, N.Y., and Key Bank of Northern New York N.A., Watertown, N.Y. Banking offices Names of banks and type of transaction Total assets The National Bank of Northern New York, Watertown, N.Y. (2657), which had and Key Bank of Northern New York N.A. (Organizing), Watertown, N.Y. (2657), which had merged November 28, 1980, under charter and title of latter bank (2657). The merged bank at date of merger had COMPTROLLER'S DECISION Key Bank of Northern New York N.A., Watertown, N.Y., is being organized by Key Banks Inc., Albany, N.Y., a bank holding company. The merger of The National Bank of Northern New York, Watertown, into Key Bank of Northern New York N.A. is a part of a process whereby Key Banks Inc., will acquire 100 percent (less directors' qualifying shares) of The National Bank of Northern New York. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. $255,154,000 120,000 In To be operation operated 16 0 255,157,000 16 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. October 6, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which National Bank of Northern New York would become a subsidiary of Key Banks Inc., a bank holding com pany. The instant merger, however, would merely com bine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Key Banks Inc., it would have no ef fect on competition. HARBOR NATIONAL BANK OF BOSTON, Boston, Mass., and New Harbor National Bank, Boston, Mass. Names of banks and type of transaction Total assets Harbor National Bank of Boston, Boston, Mass. (15483), with and New Harbor National Bank (Organizing), Boston, Mass. (15483), which had merged December 5, 1980, under charter of the latter (15483), and with the title "Harbor National Bank of Boston." The merged bank at date of merger had COMPTROLLER'S DECISION New Harbor National Bank, Boston, Mass., is being or ganized by Patriot Bancorporation, Boston, a pro posed bank holding company. The merger of Harbor National Bank of Boston into New Harbor National Bank is part of a process whereby Patriot Bancorpora tion will acquire 100 percent (less directors' qualifying shares) of Harbor National Bank of Boston. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are $19,216,000 240,000 Banking offices In To be operation operated 3 0 19,216,000 favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that ap plicant's record of helping to meet the credit needs of the entire community, including low and moderate in come neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. August 21, 1980. 91 SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Harbor National Bank of Boston would become a sub sidiary of Patriot Bancorporation, a bank holding com pany. The instant merger, however, would merely com bine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Patriot, Bancorporation, it would have no effect on competition. NORTHPARK NATIONAL BANK OF DALLAS, Dallas, Tex., and National Bank of NorthPark, Dallas, Tex. Banking offices Names of banks and type of transaction Total assets NorthPark National Bank of Dallas, Dallas, Tex. (15529), with and National Bank of NorthPark (Organizing), Dallas, Tex. (15529), which had merged December 11, 1980, under charter of the latter (15529) and title of "NorthPark National Bank of Dallas." The merged bank at date of merger had COMPTROLLER'S DECISION National Bank of NorthPark, Dallas, Tex., is being or ganized by NorthPark National Corporation, Dallas, a bank holding company. The merger of NorthPark Na tional Bank of Dallas, Dallas, into National Bank of NorthPark is part of a process whereby NorthPark Na tional Corporation will acquire 100 percent (less direc tors' qualifying shares) of NorthPark National Bank of Dallas. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. $199,948,000 240,000 In To be operation operated -j n 1 199,774,000 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community was less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicants to proceed with the proposed merger. October 31, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which NorthPark National Bank of Dallas would become a subsidiary of NorthPark National Corporation, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisi tion of the surviving bank by NorthPark National Cor poration, it would have no effect on competition. SECURITY NATIONAL BANK, Lynn, Mass., and Security Bank, N.A., Lynn, Mass. Banking offices Names of banks and type of transaction Total assets Security Bank, N.A., Lynn, Mass. (Organizing), with and Security National Bank, Lynn, Mass. (7452), which had consolidated December 11, 1980, under charter and title of the latter bank (7452). The consolidated bank at date of consolidation had COMPTROLLER'S DECISION Security Bank, N.A., Boston, Mass., is being organized by Security Bancorp, Inc., Boston, a proposed bank holding company. The consolidation of Security Na tional Bank, Lynn, Mass., and Security Bank, N.A., is part of a process whereby Security Bancorp, Inc., will acquire 100 percent (less directors' qualifying shares) of Security National Bank. The consolidation is a vehi 92 $ 250,000 108,002,000 108,752,000 In To be operation operated 0 11 11 cle for a bank holding company acquisition and com bines a nonoperating bank with an existing commer cial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the consolidation, the resulting bank will draw on the financial and managerial resources of may not be consummated prior to the expiration of the 30th day after the approval of the bank holding com pany application. August 21, 1980. its corporate parent. This will permit it to more effec tively serve the convenience and needs of its commu nity. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicants to proceed with the proposed consolidation. This approval is con ditioned on the approval by the Federal Reserve Board of an application filed under 12 USC 1841, et sec?., for Security Bancorp, Inc., to acquire the successor insti tution by merger to Security Bank, N.A. This merger * SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed consolidation is part of a plan through which Security National Bank would become a subsidi ary of Security Bancorp, Inc., a bank holding com pany. The instant transaction, however, would merely combine an existing bank with a nonoperating institu tion; as such, and without regard to the acquisition of the surviving bank by Security Bancorp, Inc., it would have no effect on competition. * * THE CITY NATIONAL BANK OF FORT SMITH, Fort Smith, Ark., and Third National Bank of Fort Smith, Forth Smith, Ark. Banking offices Total assets Names of banks and type of transaction The City National Bank of Fort Smith, Fort Smith, Ark. (10609), with and Third National Bank of Fort Smith (Organizing), Fort Smith, Ark. (10609), which had merged December 15, 1980, under charter of the latter (10609) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION Third National Bank of Fort Smith, Fort Smith, Ark., is being organized by First City Corp., Fort Smith, a bank holding company. The merger of The City National Bank of Fort Smith, Fort Smith, into Third National Bank of Fort Smith is part of a process whereby First City Corp. will acquire 100 percent (less directors' qualify ing shares) of The City National Bank of Fort Smith. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other In operation To be operated $157,350,000 240,000 156,122,000 information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. November 13, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which City National Bank of Fort Smith would become a sub sidiary of First City Corp., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisition of the sur viving bank by First City Corp., it would have no effect on competition. 93 THE FIRST NATIONAL BANK OF DES PLAINES, Des Plaines, III., and Prairie Lee National Bank, Des Plaines, III. Banking offices Names of banks and type of transaction Total assets The First National Bank of Des Plaines, Des Plaines, III. (10319), with and Prairie Lee National Bank (Organizing), Des Plaines, III. (10319), which had merged December 19, 1980, under charter of the latter (10319) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION 2 0 245,330,000 2 information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. November 19, 1980. Prairie Lee National Bank, Des Plaines, III., is being or ganized by First Des Plaines Corporation, Des Plaines, a bank holding company. The merger of The First Na tional Bank of Des Plaines, Des Plaines, into Prairie Lee National Bank is part of a process whereby First Des Plaines Corporation will acquire 100 percent (less directors' qualifying shares) of The First National Bank of Des Plaines. The merger is a vehicle for a bank holding company acquisition and will combine a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other * $245,083,000 247,000 In To be operation operated SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank of Des Plaines would become a subsidiary of First Des Plaines Corporation, a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisi tion of the surviving bank by First Des Plaines Corpora tion, it would have no effect on competition. * * NATIONAL BANK OF COMMERCE OF BIRMINGHAM, Birmingham, Ala., and Commerce Bank, N.A., Birmingham, Ala. Banking offices Names of banks and type of transaction Total assets National Bank of Commerce of Birmingham, Birmingham, Ala. (15303), with and Commerce Bank, N.A., Birmingham (Organizing), Birmingham, Ala. (15303), which had merged December 29, 1980, under the charter of the latter (15303) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION Commerce Bank, N.A., Birmingham, Ala., is being or ganized by National Commerce Corporation, Birming ham, a bank holding company. The merger of National Bank of Commerce of Birmingham, Birmingham, into Commerce Bank, N.A., is part of a process whereby National Commerce Corporation will acquire 100 per cent (less directors' qualifying shares) of National Bank of Commerce of Birmingham. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing com mercial bank. As such, it presents no competitive is sues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will 94 $48,070,000 240,000 55,696,000 In To be operation operated 4 0 4 draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. November 24, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which National Bank of Commerce of Birmingham would be come a subsidiary of National Commerce Corporation, a bank holding company. The instant merger, how ever, would merely combine an existing bank with a * nonoperating institution; as such, and without regard to the acquisition of the surviving bank by National Commerce Corporation, it would have no effect on competition. * * THE FIRST NATIONAL BANK OF DECATUR, Decatur, III., and Third National Bank of Decatur, Decatur, III. Banking offices Names of banks and type of transaction Total assets The First National Bank of Decatur, Decatur, III. (4920), with and Third National Bank of Decatur (Organizing), Decatur, III. (4920), which had merged December 31, 1980, under the charter of the latter bank (4920) and title "The First National Bank of Decatur." The merged bank at date of merger had $191,061,000 240,000 In operation To be operated 3 0 190,978,000 3 COMPTROLLER'S DECISION Third National Bank of Decatur, Decatur, III., is being organized by First Decatur Bancshares, Inc., Decatur, a bank holding company. The merger of The First Na tional Bank of Decatur, Decatur, into Third National Bank of Decatur is part of a process whereby First De catur Bancshares, Inc., will acquire 100 percent (less directors' qualifying shares) of The First National Bank of Decatur. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. December 1, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank of Decatur would become a sub sidiary of First Decatur Bancshares, Inc., a bank hold ing company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisi tion of the surviving bank by First Decatur Bancshares, Inc., it would have no effect on competition. FIRST NATIONAL BANK OF McDONOUGH, McDonough, Ga., and First National Interim Bank of McDonough, McDonough, Ga. Banking offices Names of banks and type of transaction Total assets First National Bank of McDonough, McDonough, Ga. (7969), with and First National Interim Bank of McDonough (Organizing), McDonough, Ga. (7969), which had . . . merged December 31, 1980, under the charter of the latter (7969) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION First National Interim Bank of McDonough, McDonough, Ga., is being organized by Trust Company of Georgia, Atlanta, Ga., a bank holding company. The merger of First National Bank of McDonough, McDo nough, into First National Interim Bank of McDonough is part of a process whereby Trust Company of Geor In operation To be operated $39,665,000 250,000 39,665,000 gia will acquire 100 percent (less directors' qualifying shares) of First National Bank of McDonough. The mer ger is a vehicle for a bank holding company acquisi tion and combines a nonoperating bank with an exist ing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). 95 Bank Merger Act for the applicant to proceed with the proposed merger. November 19, 1980. The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its community, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which First National Bank of McDonough would become a subsidiary of Trust Company of Georgia, a bank hold ing company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisi tion of the surviving bank by Trust Company of Geor gia, it would have no effect on competition. THE LAREDO NATIONAL BANK, Laredo, Tex., and New Laredo National Bank, Laredo, Tex. Banking offices Names of banks and type of transaction Total assets The Laredo National Bank, Laredo, Tex. (5001), with and New Laredo National Bank (Organizing), Laredo, Tex. (5001), which had merged December 31, 1980, under charter of the latter (5001) and title of the former. The merged bank at date of merger had $433,728,000 240,000 In To be operation operated 1 0 433,728,000 COMPTROLLER'S DECISION information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of its community, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. November 24, 1980. New Laredo National Bank, Laredo, Tex., is being or ganized by Laredo National Bancshares, Inc., Laredo, a bank holding company. The merger of The Laredo National Bank, Laredo, into New Laredo National Bank is part of a process whereby Laredo National Banc shares, Inc., will acquire 100 percent (less directors' qualifying shares) of The Laredo National Bank. The merger is a vehicle for a bank holding company acqui sition and combines a nonoperating bank with an ex isting commercial bank. As such, it presents no com petitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other * 96 SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Laredo National Bank would become a subsidiary of Laredo National Bancshares, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institu tion; as such, and without regard to the acquisition of the surviving bank by Laredo National Bancshares, Inc., it would have no effect on competition. * * SECURITY NATIONAL BANK, Houston, Tex., and Allied Bank—West Loop, N.A., Houston, Tex. Banking offices Names of banks and type of transaction Total assets Security National Bank, Houston, Tex. (16440), with and Allied Bank—West Loop, N.A. (Organizing), Houston, Tex. (16440), which had merged December 31, 1980, under the charter and the title of latter bank (16440). The merged bank at date of merger had COMPTROLLER'S DECISION Allied Bank—West Loop, N.A., Houston, Tex., is being organized by Allied Bancshares, Inc., Houston, a bank holding company. The merger of Security National Bank, Houston, into Allied Bank—West Loop, N.A., is part of a process whereby Allied Bancshares, Inc., will acquire 100 percent (less directors' qualifying shares) of Security National Bank. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other In To be operation operated $62,217,000 2,000,000 64,217,000 information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. November 13, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Security National Bank would become a subsidiary of Allied Bancshares, Inc., a bank holding company. The instant merger, however, would merely combine an ex isting bank with a nonoperating institution; as such, and without regard to the acquisition of the surviving bank by Allied Bancshares, Inc., it would have no ef fect on competition. THE TALLADEGA NATIONAL BANK, Talladega, Ala., and First Alabama Bank of Talladega County, N.A., Ala. Banking offices Names of banks and type of transaction Total assets The Talladega National Bank, Talladega, Ala. (7558), with and First Alabama Bank of Talladega County, N.A. (Organizing), Talladega, Ala. (7558), which had . merged December 31, 1980, under charter and title of the latter (7558). The merged bank at date of merger had COMPTROLLER'S DECISION First Alabama Bank of Talladega County, N.A., Talla dega, Ala., is being organized by First Alabama Banc shares, Inc., Montgomery, Ala., a bank holding com pany. The merger of The Talladega National Bank, Talladega, into First Alabama Bank of Talladega County, N.A., is part of a process whereby First Ala bama Bancshares, Inc., will acquire 100 percent (less directors' qualifying shares) of The Talladega National Bank. The merger is a vehicle for a bank holding com pany acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en In operation To be operated $40,446,000 122,000 40,568,000 tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. A review of the record of this application and other information available to this Office as a result if its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the entire community, including low and moderate income neighborhoods, is less than-satisfactory. This decision is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. November 20, 1980. 97 SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which Talladega National Bank would become a subsidiary of First Alabama Bancshares, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institu tion; as such, and without regard to the acquisition of the surviving bank by First Alabama Bancshares, Inc., it would have no effect on competition. WEST SIDE NATIONAL BANK OF SAN ANGELO, San Angelo, Tex., and New West Side National Bank of San Angelo, San Angelo, Tex. Banking offices Names of banks and type of transaction Total assets West Side National Bank of San Angelo, San Angelo, Tex. (14995), with and New West Side National Bank of San Angelo (Organizing), San Angelo, Tex. (14995), which had merged December 31, 1980, under the charter of the latter bank (14995) and title of the former. The merged bank at date of merger had COMPTROLLER'S DECISION New West Side National Bank of San Angelo, San Angelo, Tex., is being organized by West Side Banc shares, Inc., San Angelo, a bank holding company. The merger of West Side National Bank of San Angelo, San Angelo, into New West Side National Bank of San Angelo is a part of a process whereby West Side Bancshares, Inc., will acquire 100 percent (less direc tors' qualifying shares) of West Side National Bank of San Angelo. The merger is a vehicle for a bank holding company acquisition and combines a nonoperating bank with an existing commercial bank. As such, it presents no competitive issues under the Bank Merger Act, 12 USC 1828(c). The financial and managerial resources of both en tities and the future prospects of the resulting bank are favorable. After the merger, the resulting bank will draw on the financial and managerial resources of its corporate parent. This will permit it to more effectively serve the convenience and needs of its community. 98 In To be operation operated $44,853,000 1 240,000 0 45,093,000 1 A review of the record of this application and other information available to this Office as a result of its reg ulatory responsibilities revealed no evidence that the applicant's record of helping to meet the credit needs of the community, including low and moderate income neighborhoods, is less than satisfactory. This is the prior written approval required by the Bank Merger Act for the applicant to proceed with the proposed merger. October 27, 1980. SUMMARY OF REPORT BY ATTORNEY GENERAL The proposed merger is part of a plan through which West Side National Bank of San Angelo would become a subsidiary of West Side Bancshares, Inc., a bank holding company. The instant merger, however, would merely combine an existing bank with a nonoperating institution; as such, and without regard to the acquisi tion of the surviving bank by West Side Bancshares, Inc., it would have no effect on competition. Enforcement Actions Civil M o n e y P e n a l t i e s 1. Bank with assets of less than $25 million A specialized examination disclosed four violations of 12 USC 84. The documentation concerning two of the Section 84 violations indicated that the approving bank officers and the board of directors should have known that the cited extension of credit would violate Section 84. The regional office recommended that civil money penalties be assessed for these violations. The remaining Section 84 violations were less serious in nature as they involved standby letters of credit under which no funds had been disbursed. Due to the less serious nature of those violations, the regional office recommended that they not serve as the basis of a civil money penalty assessment. In addition, the pre vious report of examination disclosed 10 Section 84 vi olations. At that time the regional office instructed the bank to adopt procedures designed to prevent the re currence of Section 84 violations. All violations were corrected shortly after the close of the examination. In light of the recurring nature of the Section 84 vio lations, the Comptroller assessed a $2,000 Civil Money Penalty against the bank. The Comptroller agreed with the region's recommendation to base the assessment only on the more serious Section 84 violations. 2. Bank with assets of less than $25 million A specialized examination of the bank disclosed four violations of 12 USC 84 and two violations of 12 USC 375b(2). In addition, two of the three prior exami nations disclosed Section 84 violations. The two violations of 12 USC 375b(2) concerned ex tensions of credit to the interests of a member of the board of directors which did not receive prior board approval. One of the Section 84 violations involved ex tensions of credit to a corporation in which both a di rector and the bank's chief executive officer (CEO) had substantial financial interests. In addition, this credit was classified substandard. The other Section 84 violation did not involve bank insiders. The Comptroller considered the Section 84 violation and the two 12 USC 375b(2) violations involving bank insiders to be serious and to evidence a general disre gard for the law. Therefore, the Comptroller issued the following Civil Money Penalty assessments: (1) The bank was assessed a $5,000 penalty; (2) The CEO was assessed a $10,000 penalty, but based on the CEO's financial resources the Comptroller suspended $8,000 of this penalty; and (3) The director involved in the insider violations was assessed a $10,000 penalty, but based on the director's financial resources the Comptroller suspended $8,000 of this penalty. 3. Bank with assets of $75 to $100 million A general examination of the bank revealed viola tions of statutes and regulations which appeared, in certain instances, to be intentional. Four violations of 12 USC 84 were cited in the report. These violations were continuous and principally involved the bank's chief executive officer (CEO). One of these violations was corrected prior to November 10, 1978 and, thus, was not a proper basis for the assessment of civil money penalties. The regional office recommended that civil money penalties be assessed for the remain ing three violations. The bank and its CEO admitted the violations of 12 USC 84. The bank indicated that it had arranged par ticipations of the amount in excess of its lending limit but, in practice, would only finalize the participations if the examiners discovered the violations. The bank informed the OCC that these practices would be discontinued and that the CEO would resign and be replaced within several weeks. In total, the bank demonstrated that it was taking swift and serious steps to comply with the letter and spirit of the law and to eliminate any deficient policies and procedures cited in the report of examination. In light of the bank's improvement and the CEO's agreement to resign, the Comptroller assessed Civil Money Penalties against the bank for $10,000 and against its CEO for $2,000. Both penalties were con sented to simultaneously with the issuance of the Or der of Assessment. 4. Bank with assets of less than $25 million* The accounts of a director and principal shareholder and his related interests were overdrawn on a regular basis over a substantial period of time. Though techni cally overdrawn, this status was not normally reflected on the bank's books—insufficient funds checks were continuously carried as cash items. By failing to return these checks in a timely manner, the bank became lia ble for them. That practice resulted in the bank's ex tending credit greatly in excess of its lending limit with out any compensation. A later CPA review revealed that the accounts averaged an overdraft balance of $85,000 for prolonged intervals over a 5-year period. These extensions of credit to a director and principal shareholder were an unsafe and unsound banking practice and constituted violations of 12 USC 84 and 375(b) and 12 CFR 215.4(a) through (d). The Comptroller issued an Order to Cease and De sist requiring the bank to discontinue its practice of ex tending credit to insiders by honoring checks not cov ered by sufficient deposit balances. The bank was * This bank was also the subject of an administrative action during 1980. 99 also ordered to develop and implement policies and procedures to prevent a recurrence of those problems. The director involved was required to reimburse the bank for interest and other charges which should have been collected for extensions of credit comparable to those resulting from the bank's treatment of his insuffi cient funds checks. Preliminary reviews indicate that reimbursement of approximately $15,000 will be made. A Civil Money Penalty of $10,000 was assessed against the director whose accounts were overdrawn. The bank's president and chairman of the board of di rectors was assessed a penalty of $10,000. He was dominant in the affairs of the bank and was responsi ble for its treatment of the director's overdrafts. The vice president and cashier, who was also a director, was assessed a penalty of $2,500. She was aware of the practice and took no action to stop it. Two outside directors were not penalized. They first learned of the situation in an audit report, and voiced strong objec tion to it. The problem was remedied shortly thereafter. 5. Bank with assets of $25 to $50 million After a history of generally sound operations, the most recent examination report of the bank revealed a significantly deteriorated condition. Specifically, the quality of assets had declined considerably, insider abuse was in evidence and the institution was suffer ing from a variety of less serious operational deficien cies. Violations of law principally involved bank in siders and included violations of 12 USC 84, 375a and 371c and 12 CFR 2 (credit life insurance). In order to remedy these conditions, a written Formal Agreement pursuant to 12 USC 1818(b) was being ne gotiated. Among other corrective measures, the Agreement would have required certain insiders (who were also controlling shareholders) to restore to the bank significant amounts which they received in viola tion of the credit life insurance regulation. While negoti ations over the Formal Agreement were actively under way but before the issuance of a Notice of Charges, the bank converted to state charter. After the conversion to state charter, the OCC pro ceeded under its authority to assess fines for violations occurring while the bank operated under national charter. On this basis, the OCC assessed a Civil Money Penalty of $5,000 against the bank for viola tions of 12 CFR 2 and 12 USC 84, 375a and 371c. The two insiders who had illegally received the credit life insurance proceeds each were fined $5,000 and each reimbursed $10,000 to the bank in wrongfully acquired credit life insurance proceeds. (Substantial credit life insurance proceeds had previously been reimbursed by these individuals during settlement negotiations.) A lesser bank officer was also fined $2,000 for violations of 12 USC 375a and 371c. Because of that officer's depleted financial condition, $1,000 of the assessed penalty was suspended. 6. Bank with assets of $25 to $50 million* The bank had made little effort to remedy previously criticized banking practices and violations of law. * This bank was also the subject of an administrative action during 1980. 100 Classified assets had increased to 56 percent of gross capital funds from 33 percent at the preceding exami nation. The past dues stood at 9.5 percent of gross loans. Even that excessively high percentage was un derstated in light of the bank's program of granting "catch up" loans to customers who were seriously de linquent. The allowance for possible loan losses was seriously inadequate, equalling 0.62 percent of total loans. The board failed to adequately supervise man agement. The chairman and vice chairman of the board received excessive salaries. Although earnings were above averages for the bank's peer group, li quidity, at 9.9 percent of net deposits, was strained. The investment portfolio, which consisted primarily of extended issues with heavy depreciation equal to 49 percent of adjusted capital funds, provided little sup port to overall liquidity. The bank had consistently vio lated the provisions of 12 USC 84 even though the re gional office had warned the board on several occasions that the continuation of such violations could result in the assessment of civil money penalties. The consumer and commercial examinations also dis closed numerous other violations of law, rule or regula tion, including 12 USC 85, 375b and 371d; 12 CFR 7.3025; 12 CFR 202 (Regulation B); and reimbursable violations of 12 CFR 226 (Regulation Z). An Order to Cease and Desist required the bank to correct each cited violation of law, rule or regulation and to adopt procedures to prevent the recurrence of similar violations. The bank was directed to comply with the restitution provisions of Section 608 of the Truth in Lending Simplication and Reform Act, 15 USC 1607, with respect to the reimbursable Regulation Z violations cited in the consumer report. The bank was also directed to adjust the accounts of all borrow ers who had been charged interest in an amount ex ceeding the maximum permissible under 12 USC 85. The bank was also required to obtain and maintain current and satisfactory credit information on all exten sions of credit and to correct each collateral excep tion. The order directed that the bank immediately in crease its allowance for possible loan losses to an amount equal to not less than 1 percent of loans out standing. In addition, the bank was ordered to develop a program to improve its liquidity position. As part of that program, the bank was required to maintain mini mum liquidity of 15 percent, computed according to the Comptroller's formula. The order also required the bank to maintain sufficient documentation to fully dis close all of its affiliate relationships. The requirements that the order placed on the board included (1) the de velopment and implementation of controls prohibiting management from restoring charge-offs to an active status except in strict conformance with OCC guide lines, (2) the adoption and implementation of a written program designed to eliminate all assets from a criti cized status, (3) the adoption of a system for identify ing and monitoring problem loans, (4) the assessment of the staffing needs of the bank's collection depart ment and the correction of any identified collection de partment staffing deficiencies, (5) the conduct of quar terly reviews of the allowance for possible loan losses and the establishment of a program designed to main- tain the allowance at an adequate level, and (6) the amendment of the bank's lending and collection poli cies as necessary to improve the lending function. Fi nally, the order restricted the salaries, fees, bonuses and expenses paid by the bank to the board's chair man and vice chairman to an amount commensurate with the value of the services they actually performed. As a result of the repetitive and continuous nature of the violations of 12 USC 84, a Civil. Money Penalty of $5,000 was assessed against the bank. The bank did not contest the assessment and paid the penalty in full. 7. Bank with assets of $25 to $50 million In the course of misappropriating bank funds and making false statements in violation of federal criminal laws, the bank's chief executive officer, also a board member, caused, handled and approved excessive loans to his own related corporate interests and failed to report to the board his extensive borrowings from other banks. Credit was extended by this bank to three corporations which were in fact the related interests of the chief executive officer. Those extensions of credit were handled by the chief executive officer and, when aggregated with other outstanding extensions to his related interests, exceeded the bank's legal lending limit, thereby violating the restrictions on executive offi cer borrowing under 12 USC 375b(1). These exten sions of credit were not approved in advance by the bank's board of directors, although the amount ex ceeded $25,000, thereby violating 12 USC 375b(2). Later, also under the auspices of the same chief exec utive officer, the bank renewed loans to the related in terests and failed to cause them to come into compli ance with the lending limits and, thus, violated 12 CFR 215.6a. When these activities came to light, the individual re signed from the bank. He was indicted and pleaded guilty to violations of 18 USC 656 (misappropriation) and 18 USC 1014 (false statements). He is presently in prison. The OCC concluded that the bank and its directors had taken significant actions to prevent the recurrence of similar unlawful conduct by adopting and imple menting corrective procedures. Additionally, the direc tors had reimbursed the bank $7,000 of these loans from their personal assets. No assessment was made against them or the bank. However, due to the serious misconduct on the part of the former chief executive officer, he was assessed a Civil Money Penalty of $25,000. Because of his depleted financial resources, all but $1,000 of the penalty was suspended. Administrative Actions 1. Bank with assets of less than $25 million The Comptroller issued an Order to Cease and De sist requiring the bank to discontinue its practice of ex tending credit to insiders through honoring of checks not covered by sufficient deposit balances. The bank was also ordered to develop and implement policies and procedures to prevent a recurrence of these prob lems. The entire summary of this action may be found at #4 under the Civil Money Penalty heading. 2. Bank with assets of less than $25 million Preferential treatment to insiders, violations of law and regulation, and insider abuse by the chief execu tive officer caused the problems. Self-dealing and con flicts of interest were noted, and a general disregard for the banking statutes was apparent. Classified as sets amounted to 20 percent of gross capital, and overdue paper exceeded 6 percent of gross loans. Two violations of 12 USC 84, three violations of 12 USC 375a and four other violations were disclosed. A Formal Agreement required correction of the viola tions of law and regulation, initiation of a written policy regarding conflicts of interest and self-dealing by in siders, a full review of extensions of credit which ac crued to the benefit of the chief executive officer and reimbursement of income lost as a result of preferential treatment. A compliance committee consisting of at least three directors, a majority of whom are not offi cers, was formed on the date of the Agreement. Sixtyday compliance reports were required. 3. Bank with assets of $50 to $75 million The bank was operating under an Agreement. That Agreement required, among other things, an adequate asset and liability management plan, a program to im prove the bank's earnings, no payment of dividends without the prior written approval of the regional ad ministrator, a plan to meet the present and future capi tal needs of the bank, the maintenance of an adequate allowance for possible loan losses, an adequate writ ten investment policy, a program to improve credit files and to eliminate assets from criticized status, an ap praisal of the fair market rental value of one of the bank's branches, and a justification of the salaries and expenses paid to executive officers of the bank. The bank complied with very few of the articles of the Agreement. As a result, the capital of the bank deterio rated to the point where the bank's future viability was threatened. In addition, the bank's reliance on ratesensitive funds continued at an excessive level, its earnings did not improve, its allowance for possible loan losses was not maintained adequately, and the bank continued to increase the salaries of its top offi cers without justification. It was also discovered that the bank's supposed leasing arrangement for its branch was simply a method of disguising the bank's actual investment in the branch in violation of 12 USC 371 d. A Notice of Charges and a Temporary Order to Cease and Desist were issued against the bank and its top management. They refused to consent to the is suance of a final Order to Cease and Desist. The mat ter was litigated at an administrative hearing before an administrative law judge. The judge's findings, based on the hearing and the briefs submitted by both sides, found almost all of the allegations contained in the No tice of Charges to be supported by substantial evi dence. He consequently adopted the Order to Cease and Desist proposed by counsel for the Comptroller. The Comptroller of the Currency, in his final review of 101 the case, confirmed the judge's findings and recom mendations in all respects. The matter is currently be ing appealed to the circuit court of appeals. 4. Bank with assets of $25 to $50 million The bank had been a matter of supervisory concern because of an ineffective board of directors. The bank entered into a Formal Agreement in 1976 and, since that time, had been in substantial compliance. How ever, major problems were identified including high asset classifications due to inadequate loan adminis tration, poor earnings, insufficient capital, uncontrolled growth, weak internal controls and internal audit pro cedures, apparent self-dealing by the board and the control group, and a disregard for national banking laws and regulations. A Formal Agreement required correction and elim ination of existing violations of law and regulation, and procedures to ensure that similar violations did not oc cur in the future. The board was to submit a capital program covering the next 5 years of operation, and was to submit a plan for a $2 million equity capital in jection by year-end. Further, the bank was to prepare a detailed budget along with assumptions used in de veloping the forecast. The board was to adopt a pro gram to eliminate the grounds of criticism of each as set criticized at the last examination. The bank was to obtain and maintain satisfactory credit information and collateral documentation. Additional credit to borrow ers whose loans had been criticized was prohibited unless that action would be substantially and critically detrimental to the best interests of the bank. The bank was not to renew or extend credit to insiders unless it was made on substantially the same terms as those for comparable transactions, did not involve more than the normal risk of repayment, and was approved in ad vance by a majority of the board. The board of direc tors was to review and revise the bank's lending pol icy; they were to perform a study of current management and adopt a written management plan; they were to conduct a review of the adequacy of the bank's allowance for possible loan losses; they were to adopt a liquidity, asset and liability management pol icy; and they were to develop an audit program which was to address the deficiencies cited at the last exami nation. Detailed reports of all expenses claimed by di rectors and officers were to be reported to the board on a monthly basis for review and approval. Addition ally, a review was to take place on the bank's practice of payment of consulting, management and other fees. A committee was to be formed to review the bank's correspondent bank relationships. The board of direc tors was to monitor and ensure compliance with the provisions of the Agreement. 5. Bank with assets of less than $25 million Mismanagement of the investment portfolio caused heavy losses and culminated with the resignation of several senior officers, including the chief executive of ficer (CEO). One of the bank's directors, with little banking experience, assumed the role of CEO. Under that individual's leadership, further problems occurred, resulting in losses and straining capital. The bank had several violations of the statutory lending limit and 12 102 USC 375a. The bank had a high level of criticized as sets and lacked adequate credit information on nu merous loans. The bank was also failing to maintain its allowance for possible loan losses at a level reflecting the risk inherent in the bank's loan portfolio. A Formal Agreement required the board to inject capital and to submit a capital plan and maintain the bank's capital at an adequate level. The board was further required to initiate actions to improve earnings, including developing a comprehensive budget and an analysis of the pricing of all bank services and the cost of funds, along with specific plans to control operating expenses. The board was required to remedy the vio lations of 12 USC 84 and any other violations of law, rule or regulation, and to take action to protect its inter ests with regard to criticized assets. The bank was also required to refrain from extending any credit to a borrower whose credit was criticized. The board was directed to take all steps necessary to obtain and maintain current and satisfactory credit information and to refrain from granting credit without first obtain ing adequate credit information. The board was di rected to review the allowance for possible loan losses at least quarterly and to augment that allowance to re flect the bank's potential for loss. The board was fur ther required to adopt procedures to ensure compli ance with its written loan policy and to adopt and implement a policy regarding liquidity and funds man agement. The board was also required to evaluate the performance of its chief executive officer and to report the findings of that evaluation to the regional adminis trator, along with its recommendations. The board was further required to reduce concentrations of credit and to form a compliance committee, the majority of which would be nonofficer directors. The compliance com mittee was charged with submitting reports to the re gional administrator detailing the bank's compliance with the terms of the Agreement. 6. Bank with assets of $75 to $100 million An examination in 1979 reflected rapid loan growth, lack of qualified management and inability of manage ment to handle problem credits which resulted in an excessive volume of classified assets, heavy loan losses, inadequate capital and marginal liquidity. The bank was placed on a monthly reporting basis so that problems could be monitored. Additionally, a $2 mil lion equity capital injection was requested by the OCC. The subsequent general examination reflected dete rioration in the overall condition of the bank. The qual ity of the loan portfolio was becoming worse, and most of the bank's lending deficiencies were repeated criti cisms. Although the bank had an adequate loan pol icy, it was not being followed by the lending officers nor was it being enforced by management or the board. Credit and collateral exceptions were high. Many loans lacked well-defined repayment programs, and liberal renewal and extension policies were being followed. The bank did not maintain an internal prob lem loan list. The president was servicing a credit in which he had a financial interest. The allowance for possible loan losses was considered inadequate based on the bank's loan loss history, low recovery success and excessive volume of classified assets. Al- though no directors' loans were criticized, several of their credits lacked well-defined repayment programs. Net liquid assets were low in comparison to net de posits, and liquidity was considered marginal. The in vestment portfolio's extended maturity structure and a shift in asset mix away from investments and toward loans were major causes for the low liquidity. The long maturity structure of the investment portfolio had re sulted in a relatively large depreciation. The portfolio was not considered an adequate reserve for second ary liquidity. Deposits had increased rapidly and were considered volatile. Growth in deposits came primarily from rate-sensitive money market certificates and cer tificates of deposit of $100,000 and more. Although the bank had a reasonably good return on assets, the earnings were clouded by a practice of re newing notes without a reduction in principal or a pay ment of interest. It was evident that rapid growth in loans and assets had not been supported by a similar growth in capital and, as a result, capital was consid ered inadequate. The $2 million equity capital applica tion was in process. The bank's internal controls were considered medio cre. The external audit of the bank was of limited scope and the CPA firm had not issued an opinion on the audit because several audit functions had been omitted and did not cover all areas of the bank. Management was rated as poor because of its in ability to deal effectively with identified problem assets and to comply with the bank's lending policies. There was no program for management succession. A Formal Agreement was issued to assist the bank in returning to a safe, sound and more profitable con dition. The Agreement required the board to perform a study of the bank's present and future requirements regarding management and, once the study had been completed, to form a management plan. The board was to ensure that the $2 million equity capital issue was consummated and that the funds were injected into the bank's equity accounts by year-end. The Agreement required the board to adopt a program to eliminate criticized assets. The bank was not to lend money to any borrower whose loan had become criti cized unless that loan had been collected or unless such action would be detrimental to the best interests of the bank. The board was required to review and re vise the bank's loan policy, and several areas to be considered were incorporated into the Agreement. The bank was to obtain and maintain satisfactory credit in formation and collateral documentation. The Agree ment required the board to adopt a liquidity, asset and liability policy; several areas to be addressed by the policy were incorporated in the Agreement. The direc tors were to review the adequacy of the bank's allow ance for possible loan losses. A budget was to be de veloped. Violations of law and regulation were to be corrected, and procedures were to be adopted to en sure that similar violations did not occur in the future. A compliance committee was to be adopted to monitor the Agreement. 7. Bank with assets of $25 to $50 million The growth rate of the bank had been rapid, with as set and loan growth exceeding capital retention. Clas sified assets were high, 75 percent of gross capital funds; an additional 32 percent were subject to special mention. Loan losses were substantial and equalled approximately twice the allowance for possible loan losses. Providing an adequate allowance for possible loan losses will significantly impact earnings. A capital shortfall existed. Loans not supported by current and satisfactory credit and collateral information and over due loans exceeded prudent banking standards. Loans had been renewed and extended on liberal terms and there had been only nominal adherence to the bank's lending policy. Violations of 12 USC 161, 282 and 371 d and 12 CFR 2, 18 and 7.3025 were cited. A Formal Agreement required correction of the stat utory violations and required procedures to be adopted to prevent future violations. The bank was re quired to employ a qualified loan administration officer to supervise lending. Additionally, the bank was to: (1) formulate and submit a capital plan including provi sions for an equity injection; (2) submit a budget; (3) establish a loan committee to enforce the lending pol icy; (4) implement procedures to obtain satisfactory credit and collateral documentation; (5) establish and maintain an adequate allowance for possible loan losses; (6) implement a written program to eliminate all assets from criticized status; and (7) develop a written audit program and employ an auditor. The bank was also required to establish a committee to ensure the compliance of the bank with the articles of the Agree ment. 8. Bank with assets of less than $25 million Poor supervision by a board of directors exacer bated the bank's problems. The board had recently hired its fourth president in its brief history. Classified assets had increased to 40 percent of gross capital funds; overdue loans had reached a staggering 27 percent of gross loans. The bank's lending officer re signed between examinations rendering loan collec tions and lending activities nonexistent. The allowance for possible loan losses was replenished during the examination but remained inadequate. The bank suf fered a net loss in 1979. The presence of an unskilled, untrained staff placed a tremendous burden on al ready weak internal controls and audit procedures. A Formal Agreement was executed which directed the board to clarify the authority of the new chief exec utive officer (CEO); designate a qualified senior opera tions officer; establish procedures to govern board ac tivities; establish a committee to evaluate the performance of the board, the new CEO and the COB; and review the performance of all bank personnel and develop a comprehensive personnel policy and orga nization chart. The bank was also required to establish written operating procedures, auditing procedures and internal controls; formulate a program to eliminate classified assets; establish a written lending policy; adopt a written program to improve collection efforts; take all necessary steps to obtain current and satisfac tory credit information on all loans; correct collateral exceptions; develop a broader deposit base; develop a written investment policy; develop a procedure to 103 ensure timely review of the allowance for possible loan losses; and submit monthly reports to the regional ad ministrator. 9. Bank with assets of less than $25 million Lack of proper direction from the board of directors and management resulted in substantial deterioration in the quality of the lending function, depletion of the loan loss reserve, and poor funds management and accounting procedures. Loan quality had deteriorated primarily due to liberal lending to marginal and out-ofarea borrowers and expansion of the loan portfolio be yond the abilities of one lending officer to supervise. Additionally, loan documentation has been poor, re payment terms were not established at the inception of a loan, and collection efforts were weak. Four viola tions of 12 USC 84 and one violation each of 12 USC 375b, 12 CFR 21, and 31 CFR 103 were cited. A Formal Agreement between the bank and the OCC required the directorate to formulate and imple ment written programs to (1) remove each asset from a criticized status; (2) provide a written loan policy to correct the lending deficiencies set forth in the exami nation report; (3) document quarterly reviews of the al lowance for possible loan losses; (4) establish written funds management guidelines; and (5) adopt a written program designed to augment and strengthen the bank's capital structure. The Agreement further re quired the board of directors to take steps to obtain and maintain current and satisfactory credit informa tion on all loans and establish procedures to prevent recurrence of violations of law. Subject to the approval of the regional administrator, the directorate is to pro vide the bank with a new senior lending officer within 90 days and employ the services of a qualified CPA firm to audit the bank. 10. Bank with assets of less than $25 million An examination of the bank reflected substantial de terioration in the volume of classified assets, particu larly in the doubtful and loss categories; numerous vio lations of the lending limits, some of which are sizable in amount indicating a disregard and lack of under standing of the applicable statutes; lack of funds man agement policy; and an unacceptable external audit. The bank operated on a cash accounting basis and did not have a reserve for possible loan losses. Man agement was considered inept and the board of direc tors did not provide satisfactory supervision. Earnings were satisfactory, but a downward trend was antici pated due to loan losses and the lack of a formalized asset/liability management policy. Under existing man agement, the future prospects were not good. A Formal Agreement required management to (1) correct the violations of law and implement procedures to prevent future violations; (2) develop procedures which were designed to eliminate all assets from a crit icized status; (3) provide the bank with a new, capable senior lending officer; and (4) employ a qualified CPA firm to review accounting records and procedures and conduct a "full scope directors' examination." 11. Bank with assets of less than $25 million A change of ownership, resulting in a change in 104 banking philosophies from conservative to aggressive, led to a significant increase in the bank's notecase. Accompanying the increase was a lack of managerial experience and size of staff sufficient to properly su pervise the loan portfolio. Further aggravating sizable loan growth and lack of adequate staff was the new owner's anxiety for income. Those factors led to classi fied assets equalling 82 percent of gross capital funds. Accompanying problems included numerous loans not supported by satisfactory credit information, excessive delinquencies, high volume of out-of-territory credits, below average earnings, and marginal capital. Viola tions of several banking laws were noted, including 12 USC 84, and 375a and 375b, 31 USC or 31 CFR, and 12 CFR 217 and 221. A Formal Agreement required the directorate to for mulate and implement written programs to (1) remove all assets from a criticized status and establish and maintain adequate credit files, (2) implement policies and procedures to prevent future violations of law, and (3) strengthen and maintain an adequate capital struc ture. The Agreement further specified that deviations from loan policy must be reported to the board monthly, that no dividends could be paid unless in conformance with law and with the regional administrator's approval, and that monthly progress re ports must be submitted to the regional administrator indicating corrective actions taken and the results of those actions. Subject to the approval of the regional administrator, the board was to employ an experi enced senior lending officer for the bank within 90 days. A new chief executive officer will be requested if substantial improvement in the bank's condition and compliance with the Agreement is not evident within 6 months. 12. Bank with assets of less than $25 million During 1979 the bank grew by 25 percent, funded primarily by the purchase of rate-sensitive funds. The examination disclosed an increase in criticized assets from 33 to 88 percent of gross capital funds. The in crease in criticized assets was attributed to aggressive lending policies of management and depressed local agricultural conditions. Equity growth, 10 percent in 1979, did not keep pace with the accelerated asset growth. Equity capital to total assets was between 5.0 and 5.5 percent at year-end 1979 compared to the peer group average of 8.71 percent. Liquidity declined from 21 percent at the prior examination to 11 percent with average liquidity at approximately 13 percent. Rate-sensitive funds equalled 44 percent of total de posits and the bank was in a net borrowed position 343 days in the preceding 12 months. Violations of 12 USC 375b, 12 CFR 7.6120, and 31 CFR 103.33 were cited. A Formal Agreement required the bank to (1) correct all violations and adopt procedures to ensure viola tions did not recur; (2) establish a committee of at least three nonofficer directors to ensure strict compliance with the lending policy and give prior approval on all extensions of credit in excess of $75,000; (3) develop a written program to improve the administration and supervision of the loan portfolio; (4) develop a written program to strengthen and improve funds management and submit weekly liquidity and market rate analysis reports; (5) prepare an analysis of the bank's present and future capital needs and formulate a 3-year capital plan; (6) increase equity capital by not less than $50,000; (7) conduct quarterly reviews of the allow ance for possible loan losses; and (8) submit monthly reports. 13. Bank with assets of less than $25 million The overall condition of the bank continued to deteri orate over recent years primarily because of lax ad ministration by the chief executive officer and ineffec tive board supervision. The examination disclosed criticized assets at 80 percent, compared to 56 per cent at the prior examination. Supervision of the loan portfolio was extremely lax with credit exceptions rep resenting 24 percent of loans and past due loans of 12 percent. The classified assets involved a high volume of loss and doubtful loans which resulted in an inade quate allowance for possible loan losses. Supervision of bank operations and internal controls were consid ered poor. Violations of 12 USC 29, 375a and 375b and 12 CFR 1.4, 1.8, 7.3025, 23.3, 209.3, 217.1 and 221.3(a) were cited. A Formal Agreement required the bank to (1) correct all violations and adopt procedures to ensure viola tions do not recur; (2) develop a written program to im prove administration and supervision of the bank's loan portfolio; (3) immediately increase the allowance for possible loan losses to 1.5 percent of total loans and review the allowance quarterly; (4) prepare a com prehensive written analysis of its internal operations; (5) implement a formal, written internal loan review pro gram; and (6) submit monthly reports. 14. Bank with assets of $50 to $75 million A specialized examination revealed a significant breakdown in the bank's credit administration activities as evidenced by substantial increases in the volume of risk assets, volume of loans not supported by current financial data, overdue loans, and the increase of clas sified assets from 10 to 66 percent of gross capital. The bank had acquired investment securities in ex cess of the limitations of 12 USC 24, and subsequently incurred a loss on the sale of the excess. There were two violations of 12 USC 84 and violations of 12 USC 29. A Formal Agreement required the bank to correct all existing violations of law and ensure that future viola tions would be prevented. The bank was required to review and amend its written loan policy. It was also required to submit a plan for the disposal of the min eral rights held in violation of 12 USC 29. Additionally, it was required to obtain the opinion of special counsel as to the liability of the directors for the loss on the 12 USC 24 violation. The board agreed to establish and implement written programs to (1) augment and strengthen the capital structure; (2) achieve and main tain a liquidity position of not less than 20 percent, ex cluding purchased funds; (3) restore the allowance for possible loan losses to a final amount; and (4) elimi nate all assets from criticized status. 15. Bank with assets of $25 to $50 million Classified assets were high, 80 percent of gross capital funds, and little progress had been accom plished in improving loans classified at the previous examination. The heavy losses identified at the exami nation exceeded the allowance for possible loan losses. Loans not supported by current and satisfac tory credit information and delinquent loans exceeded prudent banking standards. The development of a comprehensive lending policy, which was recom mended at the previous examination, was finally com pleted during the current examination. A material de cline in earnings was the result of high loan losses, high occupancy expenses (new premises), and a de crease in the bank's net interest margin. The bank had a capital shortfall. Violations of 12 USC 29, 74, 371 d and 375a; 12 CFR 21.4(a) and 21.5(a); and 31 CFR 103.33 were cited in the commercial examination. Vio lations of 12 CFR 202, 217 and 226; provisions of a state consumer credit code; and OCC Banking Issu ances were cited in the consumer affairs examination. A Formal Agreement required correction of the stat utory violations and required adoption of procedures to prevent future violations. The board of directors was required to (1) employ a loan administration officer to supervise lending activities, (2) formulate and imple ment a written program to eliminate all assets from crit icized status, (3) establish procedures to assure com pliance with the newly adopted lending policy, (4) maintain an adequate allowance for possible loan losses, and (5) ensure that the bank obtains current and satisfactory information on all loans lacking such information and refrain from granting or renewing loans until said information has been gathered. The board was also required to develop and submit to the re gional administrator (1) a written capital plan which in cluded a provision for an injection of equity capital, (2) a comprehensive budget, and (3) written guidelines governing liquidity and asset/liability management. 16. Bank with assets of less than $25 million Ineffective supervision by the board of directors and chief executive officer (CEO) caused the deterioration in the bank's condition. Classified assets jumped from 20 percent of gross capital funds to 65 percent. Sub stantial loan losses totalling $688,000 offset more than one-third of the bank's capital structure. After amend ing official reports, the fiscal loss stood at $262,000. Capital was inadequate. Internal controls were weak and no internal audit plan existed. Several violations of law were noted. A Formal Agreement was executed requiring the board and the bank to (1) clarify the authority and re sponsibility of the new CEO; (2) establish a program to reduce criticized assets; (3) develop a written lending policy and a program to improve loan administration; (4) conduct a quarterly review of the allowance for possible loan losses; (5) develop a written investment policy; (6) correct internal control deficiencies and es tablish an internal audit function; (7) monitor liquidity on a monthly basis; (8) submit a written capital plan and an earnings plan, including a 1980 budget; (9) 105 correct all violations of law; and (10) submit monthly compliance reports to the regional administrator. 17. Bank with assets of $50 to $75 million An examination of the bank's commercial and con sumer departments revealed significant deterioration in the bank's overall condition and disclosed possible insider abuses by the bank's president. In addition, the examination revealed that the president had been re ceiving credit life insurance commissions in violation of 12 CFR 2.4. The examination also cited several other violations of law and regulation and significant defi ciencies in the administration of the bank's consumer department. The overall quality of the loan portfolio was satisfactory, but the volume of low quality loans and the amount charged off showed an increase. The investment portfolio reflected adequate quality and risk diversification, but market depreciation equalled a sizeable proportion of adjusted capital funds. Liquidity was marginal, with net liquid assets of 14.5 percent of net deposits. Rate-sensitive deposits comprised 39 percent of total deposits. The allowance for possible loan losses was considered inadequate at 0.46 per cent of total loans. Internal controls were deficient be cause a separation of duties was not required for many of the bank's functions. Credit information ex ceptions were excessive at 12.5 percent of gross loans. A written Formal Agreement required the bank to ap point a compliance committee. The compliance com mittee was required to appoint independent legal counsel and an independent certified public account ant to investigate and issue a written report on whether the president or any other employee, officer, or direc-. tor of the bank had engaged in improper or abusive transactions with the bank. The bank was required to act upon all findings and recommendations contained in said report within 30 days of its completion. The committee was also required to ensure that the provi sions of the Agreement were adhered to. The Agree ment required the bank to correct all violations of law and regulation and to adopt procedures to prevent re currences of similar violations. The bank agreed to adopt a written policy prohibiting conflicts of interest and specifying the means by which transactions in volving insiders and their interests were to be ap proved and handled. The bank was to take the neces sary steps to obtain and maintain satisfactory credit information on all loans and to correct the imperfec tions pertaining to the securing of collateral, and to es tablish an internal loan review. The board was to re view, the adequacy of the bank's allowance for possible loan losses. The bank agreed to correct the deficiencies in its internal controls and to implement a written program to formulate and implement a written funds management policy. Finally, the board agreed to appoint an experienced and capable consumer com pliance officer. 18. Bank with assets of $25 to $50 million Poor loan administration, coupled with a 22 percent, 3-year average loan growth rate, resulted in a signifi cant escalation of classified assets to equal 76 percent of gross capital funds. Loans not supported by current 106 and satisfactory credit information, delinquent loans and inadequate collateral files were contributing fac tors. The bank had traditionally waited for the examiners to request most charge-offs. Heavy losses identified at the examination depleted the allowance for possible loan losses and required an additional charge to earn ings to replenish the reserve to an adequate level. The bank had already lost as much as it earned during the previous year as a result of that provision expense. Loss potential is significant due to the high volume of doubtful loans. Also, the bank's historical recovery re cord has not been good, with only 23 percent of the last 4 years' losses recovered. Consequently, the bank is now undercapitalized. Rate-sensitive funds increased from 8 to 31 percent of total deposits. Money market certificates of deposit funded 76 percent of the loan growth in 1979. That is partially offset by the relatively short-term nature of the loan portfolio. Violations of 12 USC 29; 12 CFR 18 and 7.3025; and numerous violations of 31 CFR 103.33 were cited in the commercial examination. A Formal Agreement required correction of the stat utory violations and stipulated adoption of procedures to prevent future violations. The board of directors agreed to (1) employ a loan administration officer to supervise lending activities, (2) formulate and imple ment a written program to eliminate all assets from crit icized status, (3) revise lending policy and establish procedures to ensure compliance and improvement of overall loan administration, (4) maintain an adequate allowance for possible loan losses, and (5) ensure that the bank obtains current and satisfactory information on all loans lacking such information and refrain from granting or renewing loans until said information has been ascertained. The board was also required to develop and submit to the regional administrator (1) a written capital plan which included a provision for an injection of equity capital, (2) a comprehensive budget, (3) written guide lines governing liquidity and asset/liability manage ment, and (4) a written audit program to correct inter nal control and audit deficiencies. 19. Bank with assets of less than $25 million Poor supervision by a complacent board and selfserving on the part of the chief executive officer caused the problems. Classified assets exceeded 72 percent of gross capital, the reserve for possible loan losses was inadequate, overdue paper was approxi mately 7 percent of gross loans, and numerous viola tions of law and regulation were disclosed—including four violations of 12 USC 84 and violations of 12 USC 375a. Thirty-four other violations were reported. A Formal Agreement required correction of the viola tions of law and regulation and reimbursement to the bank for all lost income which resulted from violations of law and regulation. In addition, the Agreement re quired action to reduce criticized assets and improve collections, revision of loan policies, regular monitoring of the allowance for possible loan losses, employment of an outside CPA firm to conduct an audit, adoption of a comprehensive investment and liquidity policy, sub mission of a written equity capital plan, correction of internal control deficiencies, and expansion of the fivemember board for the purpose of achieving wider community representation. A compliance committee was formed on the date of the Agreement. Virtually all violations were corrected and the bank had been reim bursed for lost income at the time the Agreement was signed. Sixty-day compliance reports are required. 20. Bank with assets of less than $25 million A specialized examination conducted early in 1980 reflected deterioration in the bank's overall condition. There was a high dependence upon rate-sensitive de posits, especially public funds and individual certifi cates of deposit of more than $100,000. There was an increase in the doubtful and loss classifications. There had been no action taken on capital injection. There was noncompliance with a written Formal Agreement. In addition, several top officers resigned, leaving the chairman of the board in charge of bank affairs. Unfor tunately, this person was the prime cause for the bank's overall poor condition. Before the examination had ended, a Notice of Charges and Temporary Order to Cease and Desist were placed on the bank. Subse quently, new management was hired and the chairman of the board no longer was managing the daily affairs of the bank. A final Order to Cease and Desist required the board to submit a 5-year capital plan which included the injection of $1 million in equity capital by year-end. If the injection was not consummated by year-end, the board was to submit a written proposal for sale or mer ger of the bank. The bank was to maintain an ade quate liquidity position by collateralizing all public funds and maintaining liquid assets of not less than 20 percent, exclusive of short-term borrowings. Because of the bank's precarious liquidity position, the bank could not make any loans unless the board certified that there was adequate liquidity to support the loan. The board was to develop contingency plans for the payment of large certificates of deposit, including pub lic deposits, as they matured. In developing these plans, the board was to consider as a goal the elimina tion of the bank's overdependence upon rate-sensitive deposits. The board was also to consider liquid assets and core deposits of the bank. The bank was to cor rect and eliminate all violations of law, rule or regula tion and to ensure that the bank suffered no losses on any loan granted in contravention of 12 USC 84. If nec essary, this action was to include indemnification of the bank by the directors who approved of the credit. The board was to regularly review the adequacy, competency and effectiveness of bank management and to make the improvements necessary to provide capable management for the bank. The board was to review the adequacy of the bank's allowance for possi ble loan losses, and was to establish a program to maintain an adequate allowance. The bank was to adopt and implement a written program for the elimi nation of all assets from criticized status, and was not to lend any additional money to any borrower whose loan had been criticized, unless the criticism had been eliminated. The bank was to take the necessary steps to obtain and maintain current and satisfactory credit information and to correct all collateral exceptions listed in the latest report of examination. No new loans were to be made unless they were supported by cur rent and satisfactory credit information and were prop erly collateralized. The board was to review the bank's written loan policy annually and make any necessary modifications. The board was to develop a written au dit program designed to correct the deficiencies in the bank's internal control and audit procedures. A person was to be employed or appointed to implement the au dit program. The board was to submit complete written reports to the regional administrator on a monthly basis detailing the actions taken to correct the criti cisms in the report of examination, the progress real ized in strengthening, reducing, or eliminating each criticized asset, the action taken by the bank to com ply with the order, and the results of those actions. 21. Bank with assets of $25 to $50 million The bank's criticized loan volume had increased substantially. Delinquencies and credit exceptions were also inordinate. Loan losses were excessive. In ternal audit controls were unsatisfactory. The board of directors of the bank was required, through a written Formal Agreement, to adopt plans addressing managerial assessment, loan portfolio and internal audit and control. The bank further agreed to develop plans for eliminating criticized assets, improv ing its lending function and establishing an adequate allowance for possible loan losses. The bank was fur ther required to monitor liquidity and capital needs. The bank was also required to establish and imple ment internal audit and control functions. 22. Bank with assets of less than $25 million A specialized examination of this bank revealed se rious deterioration in its financial condition, as well as a large number of violations of law. Classified assets equalled 137 percent of gross capital; past due loans constituted 19 percent of all loans; and 27 percent of loans lacked satisfactory credit information. Net liquid assets were 10 percent of net liabilities, and the bank had inadequate capital, poor earnings, an inadequate allowance for possible loan losses, and violations of 12 USC 84. A Notice of Charges and a Temporary Order to Cease and Desist were served upon the bank. An Order to Cease and Desist, like the previous Temporary Order, required the correction of all viola tions of 12 USC 84 and prohibited additional exten sions of credit in excess of the bank's lending limits. The board was required to take necessary actions, in cluding immediate indemnification by the responsible directors, to ensure that the bank suffered no loss on a specific line of credit which violated Section 84. The bank was prohibited from extending additional credit to any borrower whose loan was criticized and also prohibited all extensions of credit unless the bank had acquired current and satisfactory credit information and had perfected its interest in any collateral. The al lowance for possible loan losses was to be maintained at 1.5 percent of total loans. Loan and investment poli cies were to be adopted. The bank was required to 107 take all action necessary to recover past due loans, and was prohibited from extending additional credit to any borrower whose loan was past due. The bank was ordered to reduce its dependence on rate-sensitive funds, and maintain net liquid assets equal, at least, to 15 percent of net liabilities. The bank was prohibited from declaring any dividends except with the written permission of the regional administrator. The board was required to inject $400,000 into the bank's equity capital accounts and to provide for additional subse quent augmentation of up to $250,000. A detailed budget was also required. The internal control defi ciencies were to be corrected. 23. Bank with assets of $25 to $50 million* The bank was operating under a written Formal Agreement when a subsequent examination revealed significant increases in total criticized assets, loans without adequate credit information, overdue loans, and the number and seriousness of violations of law, rules and regulations. Heavy loan losses resulted in a strained capital position. In addition, the president and chairman of the board of the bank, an attorney, was re ceiving an excessively high salary and was billing the bank for excessive legal fees for legal work which the OCC alleged was unnecessary for the bank, was per formed by someone other than the president or, in fact, was not performed at all. Expenses for automo biles and other perquisites were very high and, de spite an extremely high net interest margin, the bank was only marginally profitable. Loan losses were ex tremely high, particularly with regard to significant vio lations of the bank's lending limits. A Notice of Charges was served on the bank and accompanied a Temporary Order to Cease and De sist. The Temporary Order addressed violations of the lending limit, loans to criticized borrowers and insider abuses through excessive fees and salaries. Notices of Charges were also issued to six individual directors seeking reimbursement for losses on lending limit vio lations and certain other losses suffered by the bank. Subsequently, a Notice of Intention to Remove the president from his positions as president and chair man of the board was issued. The parties described above have filed answers to the charges against them and administrative law judges have been appointed to preside over hearings on these matters. A civil money penalty referral was made and is under review. 24. Bank with assets of less than $25 million The condition of the bank continued to deteriorate after the execution of a written Formal Agreement with the OCC. Criticized assets equalled approximately 200 percent of the bank's gross capital funds. Capital was considered inadequate and violations of law, including 12 USC 84, were discovered. The loan policy was not considered adequate. Internal control and audit defi ciencies subjected the bank to potential loss. A Notice of Charges was served on the bank alleg ing the above unsafe and unsound banking practices * This bank was the subject of two administrative actions in 1980. 108 and violations of law. Subsequently, the bank stipu lated to and was served with an Order to Cease and Desist. The order required the bank to increase its eq uity capital accounts by not less than $1 million; cor rect all violations of law, including 12 USC 84; strengthen the loan portfolio and eliminate criticisms; reevaluate the lending policy; strictly adhere to the re quirements of a prior written Agreement; and eliminate internal control and audit deficiencies. The bank was also required to submit monthly writ ten reports to the regional administrator outlining the bank's progress in complying with the order. 25. Bank with assets of $25 to $50 million A general examination disclosed possible violations of the federal securities laws and unsafe and unsound banking practices by the bank and its former presi dent. The Comptroller therefore issued an Order of In vestigation in order to determine the nature and extent of any such violations and unsafe and unsound bank ing practices. This investigation disclosed that the former president had engaged in a course of conduct in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5, thereunder. It was determined that the former president had fraudulently caused sev eral of the bank's shareholders to sell their stock to him for substantially less than market value. The OCC in vestigation also determined that the bank had aided and abetted the former president in committing the aforementioned violations. An examination of the bank's trust department dis closed serious deficiencies in all operational areas of the department. Violations of law and regulation in cluded 12 USC 92a and 12 CFR 9.7, 9.9 and 9.12. The 12 CFR 9.12 violations concerned mortgage participa tions sold between fiduciary accounts at unpaid princi pal value and the practice of bank officers and em ployees of purchasing assets from estates being administered by the bank. The examination also deter mined that trust accounts and investments were not adequately reviewed or documented. The bank stipulated and consented to the issuance of an Order to Cease and Desist prohibiting it from vio lating the antifraud provisions of the federal securities laws in connection with the offer, purchase or sale of securities issued by the bank. Additionally, the board of directors was required to engage independent legal counsel to investigate and issue a written report detail ing the former president's participation in all transfers of the bank's stock occurring since 1975 and any other related matters pertaining to any possible impropriety or abuse by the former president or any other officer or director of the bank. The independent counsel was also required to review and investigate all estates ad ministered by the bank since 1975 for possible con flicts of interest. The order directed the board to act upon all findings and recommendations contained in the independent counsel's report within 30 days of the report's completion. All market-making activities in the bank's stock by bank officers, directors, and em ployees were prohibited, and the board was directed to submit to the regional administrator, for his ap proval, a written policy setting forth an appropriate method for handling inquiries from persons interested in buying or selling the bank's stock. The order also contained provisions directing the bank to correct the numerous and varied deficiencies in the trust depart ment. Finally, the bank was required to discount all mortgage participations that were sold between fiduci ary accounts at unpaid principal value so as to reflect interest rates in effect on the date of the transactions. The bank was then directed to reimburse the purchas ing fiduciary accounts for the excess purchase price paid. The former president stipulated and consented to the issuance of a separate Order to Cease and Desist. The order prohibited him from violating the antifraud provisions of the federal securities laws in connection with the offer, purchase or sale of securities issued by any national bank. The former president was required to disgorge and make restitution of all profits plus in terest that he had made as a result of his violations of the federal securities laws. He was also required to re imburse the bank for all expenses that it incurred as the result of engaging independent legal counsel to in vestigate his transactions in the bank's stock. A sepa rate Formal Agreement between the former president and the OCC was also executed. That Agreement pro hibited the former president from serving as a director, officer or employee or participating in any manner in the conduct of the affairs of (1)any national bank, with out the prior written consent of the Comptroller of the Currency; (2)any state-chartered bank which is a member of the Federal Reserve System, without the prior written consent of the Federal Reserve Board; or (3)any "non-member" bank which is insured by the Federal Deposit Insurance Corporation, without the prior written consent of the Chairman of the Federal Deposit Insurance Corporation. 26. Bank with assets of less than $25 million A small trust department examination revealed nu merous violations of law, regulation and sound fiduci ary principles. A majority of the criticisms were recur ring from a prior examination. The management's lack of expertise in trust matters was compounded by the absence of written policies and procedures to guide the trust department personnel in performing their re spective functions. Numerous violations of 12 CFR 9.12, involving improper investments in own bank time deposits, were revealed. Other violations included 12 CFR 9.9, failure to audit trust activities at bank's branch; 12 CFR 9.13, assets kept in account files not under joint control; 12 CFR 9.8, incomplete books and records; and 12 CFR 9.10, funds awaiting investment or distribution not made productive within a reason able amount of time. Additional deficiencies included: (1) estates held open for undue periods of time, (2) ap pointments and inventories not on file, (3) synoptic rec ords not prepared for new accounts, (4) court ac counts lacked biennial accountings required by state law, (5) incomplete documentation of corporate trusts and agencies, and (6) inadequate management of real estate held in trust. A Formal Agreement required correction ot all viola tions of law, regulation and deficiencies cited in the ex amination report. The bank was required to correct each violation of 12 CFR 9.12 at no loss to the ac count. In addition, the bank was required to reimburse the account for all penalties incurred for early with drawal of certificates of deposit where that was a nec essary corrective measure. The bank was further re quired to reimburse the trust accounts for profits earned by the bank on those accounts. Profits were computed for the years 1974 through 1978 by sub tracting the interest paid by the bank on the involved trust accounts from the bank's average yield on loans for each of the years involved. For the period of Janu ary 1979 until the correction of each violation, the bank was required to calculate the amount of reimburse ment by subtracting the interest paid by the bank to the accounts involved from the average prevailing rate of interest charged by the bank on commercial loans as of the end of each month during the involved pe riod. The bank was required to provide the beneficiary of each trust account which was reimbursed with a written explanation detailing the reasons for restitution. The board of directors was required to perform a study of the advisability of the continued operation of the trust department and the bank's present and future requirements with respect to management of the trust department. The board of directors was required to develop a number of specific policies and procedures designed to ensure compliance with 12 CFR 9. The board of di rectors was also required to develop measures to properly monitor and document investments made for all trust accounts, measures to ensure proper account administration and measures to ensure proper man agement of real estate held in a fiduciary capacity. An internal control and auditing program was required to be implemented. Finally, the bank was required to col lect all fees due from accounts. 27. Bank with assets of $50 to $75 million The bank had been operating under a written Agree ment. Continued weak management supervision re sulted in asset problems. A subsequent examination revealed that the bank's overall condition had deterio rated and several provisions of the Agreement were not being complied with. Insiders were extended pref erential treatment. Criticized assets had tripled from the previous examination. The bank also suffered from a high volume of credit and collateral exceptions, past due loans and a failure to adopt procedures to insure the adequacy of the bank's allowance for possible loan losses. Violations of 12 USC 375a, 375b and 375c were cited. Liquidity, capital and internal controls were inadequate. Bank expenses were excessive and poorly documented. The bank stipulated to the issuance of an Order to Cease and Desist. The order required the bank to cor rect violations of law and to adopt procedures to pre vent their recurrence. The bank was also required to adopt and adhere to a comprehensive loan policy and a written plan to eliminate each criticized asset. Credit to criticized borrowers would be restrained. Credit in formation and collateral were to be perfected. Problem loans were to be monitored, and the bank's allowance 109 for possible loan losses was to be maintained at an adequate level. The bank was required to formulate overdraft guidelines. A liquidity plan was to be formu lated. The bank was also required to adopt a written li quidity/funds management policy. The bank was re quired to review its management team, a special counsel was retained to review the bank's expenses, and an expense policy was to be adopted and imple mented. A capital program was required. The bank was also compelled to adopt a business code of ethics. Periodic reports to the regional administrator were also required. 28. Bank with assets of $75 to $100 million Two prior administrative actions in the form of For mal Agreements had proven unsuccessful in improv ing the condition of the bank. Prior problems included fraud, inordinate asset risk, inadequate capital and loan loss reserves, poor earnings and ineffective man agement systems. A general examination revealed no improvement in the overall condition of the bank. The major problem was inadequate capital. Capital plans submitted by majority ownership and management were not viable solutions to the problem. Total classi fied assets equalled 63 percent of gross capital funds. Loans lacking satisfactory credit information repre sented 6 percent of gross loans. Liquidity problems were significant. Overdue loans represented 9 percent of gross loans. Internal control and audit deficiencies, inadequate loan review program, inadequate allow ance for loan losses, and ineffective supervision by management were also causes of concern. Three vio lations of 12 USC 84 and one violation of 12 USC 371c were cited. An examination of the bank's trust depart ment revealed that the bank's pension trust fund was not being administered in compliance with the Em ployee Retirement Income Security Act. An Order to Cease and Desist required that all viola tions cited be corrected immediately. The board of di rectors was to provide the bank with a new chief exec utive officer and also to inject $2.5 million in equity capital into the bank's capital accounts. The board of directors was also directed to employ independent outside counsel to review the violations of 12 USC 84 and to determine the board's liability for those viola tions. Written programs were required to (1) improve and sustain the bank's earnings, (2) provide adequate capitalization, (3) remove all assets from criticized status, (4) obtain current and satisfactory credit infor mation on all loans so lacking, (5) maintain an ade quate allowance for possible loan losses, (6) reduce delinquent loans, (7) implement an internal loan review system, and (8) improve its internal audit program. The bank was required to amend its written loan policy to cure the cited deficiencies. Dividends were prohibited without the prior approval of the regional administrator. Increases in salaries, fees, bonuses and other remu neration paid by the bank to its directors were prohib ited until the bank's condition and capital were re stored to a satisfactory level. Finally, the bank was directed to submit a written plan designed to ensure that the bank's pension trust fund was administered in 110 compliance with the Employee Retirement Income Se curity Act. 29. Bank with assets of $50 tp $75 million A specialized examination disclosed that weak man agement and ineffective board supervision had re sulted in substantial deterioration in the bank's overall condition. Criticized assets were excessive with classi fied assets at 47.5 percent of gross capital funds and other assets especially mentioned at 19.5 percent of gross capital funds. Credit information exceptions were also excessive, 18.5 percent of gross loans, and past due loans were high at 6.5 percent. The bank failed to maintain the allowance for possible loan losses at an adequate level. Liquidity was marginal at 16.5 percent. The bank's overreliance on rate-sensitive deposits, which accounted for 35.4 percent of total de posits, further evidenced the bank's poor liquidity posi tion. Capital was inadequate in view of the size and quality of the loan portfolio. Particularly disturbing was the fact that loans to certain directors and their inter ests violated banking laws and regulations. Extensions of credit to insiders and their interests represented 4.7 percent of all criticized credit extensions. In addition, the examination indicated that certain loans to insiders and their interests may have been made on preferen tial terms. A Formal Agreement required the correction of all vi olations of law and the adoption of procedures to pre vent the recurrence of similar violations. The board was required to submit a 5-year capital plan to the re gional administrator for approval. The bank was pro hibited from declaring or paying any dividends without the prior written approval of the regional administrator until the capital plan had been approved and the bank had completed its current program to raise $1 million in equity capital. The bank agreed to adopt and imple ment written programs designed to eliminate all criti cized assets and improve collection efforts and effect a reduction in the level of delinquent loans. The board was required to formulate and implement a new written loan policy of a safe and sound nature, and the bank was to take all necessary steps to obtain and maintain current and satisfactory credit information on all present and future loans. The Agreement directed the bank to extend credit only in conformity with all appli cable laws and regulations, and the board was re quired to engage an independent certified public ac countant to investigate whether the bank had made credit extensions to the bank's insiders on a preferen tial basis. Written funds management and investment policies were required to be formulated and imple mented and the board was to regularly review the ade quacy of the allowance for possible loan losses. Fi nally, the Agreement required the appointment of a compliance committee to ensure adherence with the Agreement and to perform a management study and to thereafter formulate and implement a written man agement plan. 30. Bank with assets of $25 to $50 million A special supervisory examination revealed signifi cant deterioration in several major areas of the bank's operations. Insider abuse resulting in violations of 12 USC 84, 371c, 375a and 375b and 12 CFR 215 were a major concern. The asset condition of the bank had seriously deteriorated. Total classified assets had reached 78 percent of gross capital funds. Over 80 percent of the criticized loans were out-of-territory credits. The bank's capital position was severely strained. Depreciation in the bank's investment ac counts had reached 97 percent of gross capital funds. Liquidity was also a significant problem. Three viola tions of 12 USC 84, five violations of 12 USC 371c and numerous violations of 12 USC 375a and 375b and 12 CFR 215 were found. A Temporary Order to Cease and Desist directed the board of directors to prohibit the chairman of the board and the president of the bank from performing certain functions in the bank including the making of loans, the expenditure of bank funds, the investment of bank funds, the sale of bank assets, any borrowing on behalf of the bank, the obligation of the bank in any contract, initiation of personnel actions within the bank, participation in bookkeeping functions and removal of bank records. The bank was directed to establish a loan committee consisting of three outside directors to review and approve every extension of credit exceed ing $25,000. Further violations of the statutes and reg ulations cited were prohibited. The bank was directed to take immediate action to complete an injection of equity capital of not less than $1 million. The bank was prohibited from extending credit to a number of named insiders of the bank and their related interests. Exten sions of credit to named criticized borrowers were also prohibited except if deemed to be in the best interest of the bank. Out-of-territory loans were also prohibited in the same manner. The bank was also directed to raise its liquidity ratio to an acceptable level by devel oping methods to match liquid asset maturities with those of rate-sensitive deposits and other short-term, non-deposit liabilities. Further dividends by the bank were prohibited without the prior approval of the re gional administrator. Finally, the bank was prohibited from making any payments as expenses or fees to the chairman of the board, except directors' fees, at their current rate. 31. Bank with assets of $75 to $100 million The bank was operating under a Formal Agreement, however, it was incurring persistent operating losses and operating with inadequate capital and had an ex cessive volume of classified assets and substantial amounts of other real estate owned and other nonperforming assets. Supervision of the bank's loan portfolio was deficient and classified assets amounted to 187 percent of gross capital funds. The bank failed to com ply with the provision in the Formal Agreement which called for an injection of $3 million in capital. The bank's capital needs warranted an injection of $6 mil lion. An Order to Cease and Desist required either an in jection of $6 million in equity capital or the sale or merger of the bank. The order further called for the submission of a written capital program and prevented the bank from declaring any dividends. The order re quired the bank to employ a senior lending officer, an operations officer and an auditor. The bank was re quired to improve the quality and sufficiency of its staff in the lending and collections areas. The board was di rected to take action to improve the bank's earnings, including developing strategies to reduce the volume of nonperforming assets and noninterest expenses, and strategies to eliminate losses in certain of the bank's divisions. The submission of budgets and ac companying materials were required and the bank was required to adopt and implement policies regard ing the charges for legal services and the reimburse ment of directors for travel and related expenses as well as lodging and incidental expenses. Furthermore, the bank was precluded from entering into any new contracts with any of its directors, or directors' firms without the approval of the regional administrator, and was required to discontinue its practice of providing directors with bank-owned or -leased automobiles. Ad ditionally, payments to directors were limited for at tendance at board and committee meetings. The bank was required to review its payments to former directors and to adjust them to reasonable levels and to monitor any expenditures to firms in which directors or combi nations of directors have a significant interest and to refrain from any such expenditures unless specified criteria were met. The bank was required to strengthen its loan account and credit administration process and continue to take action necessary to protect its interest with regard to criticized assets. The bank was required to obtain and maintain current and satisfactory credit information on all loans lacking such information and to review its allowance for possible loan losses quarterly and maintain that allowance at an adequate level. Management was required to correct the violations of law, rule and regulations and institute measures to pre vent their recurrence. The board was required to pro vide the regional administrator with copies of its exec utive committee minutes and board minutes and submit monthly reports. The bank is being sold to in vestors willing to increase the bank's capital. 32. Bank with assets of less than $25 million The bank had been operating under a Formal Agreement since May 1978, and had substantially complied with its provisions. The bank also had made substantial progress in reducing its volume of criti cized assets and past due loans and in generating positive earnings. There continued to exist, however, serious deficiencies in these areas. In addition, the bank had numerous credit and collateral exceptions; was relying excessively on rate-sensitive funds; and was in need of a qualified chief executive officer and cashier. Lastly, the bank had made various preferential extensions of credit to its insiders; had entered into an unwarranted and excessive lease with its chairman; and had paid its chairman for legal services which were not properly documented or justified. Finally, the bank was delinquent in filing its annual report to share holders and holding its shareholders meeting. The outstanding administrative action against the bank was upgraded to an Order to Cease and Desist to which the bank consented. The order requires the 111 bank to (1) obtain a formal, independent appraisal and review of the insider leasing transaction; (2) to cease using the chairman's law firm for legal services; (3) to receive proper documentation and justification before paying for legal services; (4) to obtain a new chief ex ecutive officer and cashier; (5) to file its annual report to shareholders (Form F-2); and (6) to implement pro grams addressing capital, criticized assets, earnings, liquidity and rate-sensitive funds. 33. Bank with assets of less than $25 million The specialized examination reflected significant credit administration deficiencies resulting in a sharp increase in classified assets, large loan losses and poor earnings. Criticized assets equalled 100 percent of gross capital funds and included a large volume of loans classified doubtful. More than half of the classi fied assets was indirect lease obligations of an auto mobile leasing company. Losses of approximately $140,000 were taken by the bank and additional losses were anticipated. The allowance for possible loan losses was not adequate. The volume of collateral exceptions and extensions of credit lacking adequate supporting financial information was also excessive. Four violations of 12 USC 84 were discovered, as were other violations of law. Other problems included poor earnings, continued insider abuses and internal con trol and audit deficiencies. A Formal Agreement required correction of the stat utory violations and adoption of procedures to prevent recurrence. The board was required to formulate and implement written programs to (1) eliminate the grounds upon which each asset was criticized; (2) en sure collection of all loans past due, either as to princi pal or interest; (3) formulate a safe and sound loan pol icy; (4) establish and maintain an adequate allowance for possible loan losses; (5) prepare an analysis of the bank's present and future equity capital needs; (6) de fine the duties and responsibilities of each member of the management team; (7) formulate a safe and sound investment policy; and (8) develop and implement an effective internal control and audit program. The board was also required to develop a compen sation plan for the senior management staff commen surate with their assigned duties and responsibilities. The Agreement required the board to provide indemni fication of the bank for any loss suffered on extensions of credit granted in violation of 12 USC 84. The bank was required to correct each violation of law, rule or regulation and adopt procedures to prevent recur rence of similar violations. 34. Bank with assets of $25 to $50 million Examinations conducted of the bank's commercial and trust departments revealed significant deteriora tion in the bank's overall condition attributable in large part to weak management and an inattentive board of directors. Classified assets were high at 84.7 percent of gross capital funds. Heavy provisions for loan losses substantially impacted earnings and rendered capital inadequate. The allowance for possible loan losses was also considered to be insufficient in light of the bank's excessive loan losses. Loans not supported 112 by current credit information amounted to 24.6 percent of gross loans. Noninterest expenses were allowed to remain at an extremely high level. The bank's internal audit was not acceptable, and accounting procedures throughout the bank have traditionally been poor. Vio lations of law in the commercial department included two violations of 12 USC 84, two violations of 12 USC 375a, and one violation of 12 USC 371 d. The bank's trust department, which only administered five fiduci ary accounts with a total market value of less than $500,000, was operated and administered in an un safe and unsound manner. The examination disclosed numerous violations of 12 CFR 9 and sound fiduciary principles. In particular, the department was not prop erly administered and supervised by the board of di rectors as required by 12 CFR 9.7. The administration of fiduciary powers was assigned to an inexperienced trust officer with little or no board supervision. Neither a trust committee nor a trust audit committee were ap pointed as required by the bank's bylaws. Other defi ciencies in the department primarily concerned the lack of internal procedures, controls and audits. A Formal Agreement required correction of all viola tions of law and required procedures to be adopted to prevent future violations. The board was required to provide the bank with a new active and capable chief executive officer and to evaluate management's per formance on a regular basis. The board agreed to de velop and submit to the regional administrator for ap proval a written capital program designed to provide the bank with an equity capital injection of not less than $500,000. The board also agreed to immediately replenish the allowance for possible loan losses to a minimum balance of $409,000. Written programs were required to be established and implemented in order to (1) remove all assets from criticized status, (2) main tain an adequate allowance for possible loan losses, (3) obtain current and satisfactory credit and collateral information on all current and future credit extensions, (4) adopt loan policies of a safe and sound nature, (5) improve and sustain the earnings of the bank, and (6) correct all internal audit and internal control deficien cies. The bank also agreed to surrender its fiduciary powers and to divest itself of all previously accepted trust accounts in an expeditious manner. 35. Bank with assets of less than $25 million A general examination of the bank disclosed a se rious and substantial violation of 12 USC 84. The bank extended credit for the benefit of a single corporation in an amount that approximately doubled the bank's legal lending limit. A significant portion of this credit extension was classified as doubtful. Shortly after the close of the examination the OCC became aware of facts which indicated that the bank was planning to extend additional funds to this corporation in further vi olation of Section 84. A Temporary Order to Cease and Desist prohibited the bank from extending credit to any borrower in vio lation of 12 USC 84. The order also required the bank to reduce all extensions of credit in excess of the Sec tion 84 lending limitation to conform, without loss to the bank. 36. Bank with assets of $25 to $50 million Liberal lending practices, a lax board, marginally active management and a poor local economy caused the bank's problems. Classified assets equalled 78 percent of gross capital, the allowance for possible loan losses was inadequate, liquidity was strained and earnings were only fair. Capital was inadequate and several violations of law and regulation were dis closed. A Formal Agreement required correction of the viola tions of law and regulation and reimbursement to the bank for all lost income which resulted from preferen tial rates to insiders. Strengthening of the lending func tion by employment of a senior lending officer was re quired. The Agreement also required action to reduce criticized assets, improve collections, revise loan poli cies, maintain an adequate allowance for possible loan losses, formulate and implement written funds man agement policies, injection of equity capital and com pilation of a 5-year capital plan. A compliance committee was formed on the date of the Agreement. Sixty-day compliance reports were re quired. 37. Bank with assets of less than $25 million Weak executive management and the self-serving practices of the controlling owner and chairman of the board contributed to the bank's unfavorable condi tions. Problems included insider transactions involving continuous sizeable drawings against uncollected funds and violations of laws and regulations. In addition to the above, there were six major areas of concern (1) significant increase in classified assets, to 84 percent of gross capital funds; (2) equity capital shortfall; (3) need for an asset/liability, liquidity man agement policy due to the rate-sensitive nature of the bond portfolio and deposit structure; (4) excessive credit and collateral exceptions; (5) heavy volume of delinquencies; and (6) an inadequate lending policy. A Formal Agreement required correction of the stat utory violations and required the adoption of proce dures to prevent future violations. The board of direc tors was required to (1) perform a management study, including an assessment for retention purposes of the capabilities of the chairman of the board and presi dent, (2) develop a management plan based upon the management study, (3) formulate and implement a written program to eliminate all assets from criticized status, (4) revise lending policies and establish proce dures to assure compliance and improvement of over all loan administration, and (5) ensure that the bank obtained current and satisfactory information on all loans lacking such information and refrained from granting or renewing loans until said information was obtained. The board was also required to develop and submit to the regional administrator (1) a written capital plan, including a provision for an equity capital injection; (2) written guidelines governing liquidity and asset/liability management; and (3) a written policy addressing drawings against uncollected funds, insufficient funds checks and overdrawn accounts. A number of the repetitive and flagrant insider related law violations similar in nature were referred by the regional office for consideration for civil money penalties. 38. Bank with assets of $25 to $50 million Classified assets were high, 67 percent of gross cap ital funds. The heavy losses identified at the examina tion exceeded the allowance for possible loan losses. Loans not supported by current and satisfactory credit information and delinquent loans exceeded prudent banking standards. The development of a more com prehensive lending policy was needed. Many of the loans deviated from the bank's existing lending policy and were recommended by members of the board. No profits for 1980 were expected because of high loan losses and poor loan pricing. The bank had inade quate capital. A formal funds management policy was needed. Fees paid to the chairman of the board were excessive and not in compliance with Banking Circular 115. Three violations of 12 USC 84 and violations of 12 USC 29, 375b and 463 were cited. One violation of 12 USC 84 included several illegal advances which were identified as loss at the examination. A Formal Agreement required correction of the stat utory violations and required adoption of procedures to prevent future violations. The board was required to (1) indemnify the bank for losses suffered on any ex tensions of credit granted in violation of 12 USC 84, (2) assess management quality and depth, (3) revise and enforce the bank's lending policy, (4) formulate and implement a written program to eliminate all assets from criticized status, (5) maintain an adequate allow ance for possible loan losses, and (6) ensure that the bank obtains current and satisfactory information on all loans lacking such information and refrain from grant ing or renewing loans until said information has been ascertained. The board was also required to develop and submit to the regional administrator a written capi tal plan which included a 1980 equity capital injection, a comprehensive budget and written guidelines gov erning liquidity and asset/liability management. 39. Bank with assets of less than $25 million The bank had asset quality problems, loan losses and weak earnings which led to a capital deficiency. A Memorandum of Understanding, signed by the board of directors in 1979 was not effective in reversing neg ative trends. Management supervision was poor, with classified assets totaling 92 percent of gross capital funds, and a year-to-date operating loss was shown for the first 5 months of the year because of heavy loan losses and poor interest margins. Control of the bank was sold subsequent to the examination. Two viola tions of 12 USC 84 and one violation of 12 USC 61 were disclosed. A Formal Agreement required the bank to (1) pro vide the bank with a capable senior lending officer; (2) establish and implement a loan review committee de signed to remove each asset from a classified status; (3) ensure that all possible steps are taken to obtain current and satisfactory credit information on all exist ing and future loans; (4) take appropriate action to re duce and maintain the volume of past due loans more 113 in accordance with the industry average; (5) conduct quarterly reviews of the allowance for possible loan losses and make appropriate adjustments; (6) develop and implement written guidelines for the coordination and management of the bank's assets and liabilities; (7) adopt a written program designed to maintain a level of earnings adequate to provide capital to sup port future growth, absorb loan losses and provide an acceptable return to shareholders; (8) inject $100,000 in equity capital; (9) prohibit extensions of credit which exceeded the lending limitations of the bank; and (10) if improvement was not noted in the bank's condition, provide the bank with a new, capable chief executive officer. 40. Bank with assets of $25 to $50 million The bank had a large volume of criticized assets which resulted from poor credit administration, inade quate policies and nonadherence to existing policies. Classified assets equalled 54 percent of gross capital funds and had doubled since the previous examina tion. Included in the criticized assets and the violations of law were extensions of credit to various insiders and related interests. Other problems included a large vol ume of speculative and defaulted securities, a low level of liquidity supported by steady use of purchased funds, low earnings, an inadequate allowance for pos sible loan losses and poor internal controls. A Formal Agreement required correction of the stat utory violations and required the adoption of proce dures to prevent future violations. The board was re quired to formulate and implement written programs to (1) eliminate grounds upon which assets were criti cized, (2) remove from criticized status all loans to in siders and related interests, (3) establish and maintain an adequate allowance for possible loan losses, (4) maintain an adequate level of capital, and (5) formu late an investment policy. The board was also required to develop a written program governing liquidity and funds management. The Agreement also required the board to assess the sufficiency and quality of active management. The bank was also required to obtain current and satisfac tory credit information on deficient loans. 41. Bank with assets of less than $25 million An aggressive and liberal lending philosophy and poor loan supervision resulted in an overloaned posi tion, a significant volume of classified assets (equal to 74 percent of gross capital funds), and an illiquid as set structure with a disproportionate reliance on bor rowings. The bank's liability structure was one of the most costly in its peer group. Weak earnings and a rel atively high dividend payout left the bank in an under capitalized position. The bank had recently undergone an ownership change and new management was try ing to cope with inherited problems and had failed to properly supervise installment lending activity. The ex amination disclosed a delinquency rate of 26 percent which led to the dismissal of the responsible officer. Included among several violations of law were viola tions of 12 USC 84 and 371c and three violations of 12 USC 375a and 375b. The consumer examination, con 114 ducted concurrently with the commercial examination, disclosed consumer law violations. A Formal Agreement required correction of all viola tions of law and regulations and required procedures to be adopted to prevent future violations. Dividend re strictions were imposed and the bank was required to forward a program to strengthen capital. Additionally, the bank was required to formulate and implement pol icies governing (1) elimination of all assets from criti cized status, (2) collection procedures and internal problem loan identification, (3) capital standards and dividends, (4) transactions with affiliates, and (5) .li quidity and asset/liability management. Actions to rem edy deficiencies with respect to internal controls and the internal audit function were also addressed. 42. Bank with assets of less than $25 million The location of the bank in an economically de pressed area and a less than effective management team contributed to the increase in classified paper. Such classified assets equalled 55 percent of gross capital funds at the last examination. High levels of loan delinquencies and credit file exceptions were also reported. Earnings for the year will be nominal due to the volume of loan write-offs and the low and declining net interest margin. Capital adequacy would become a problem unless deterioration in condition of the bank was arrested. One violation of the bank's lending limit and several consumer violations of law were cited in the report. A Formal Agreement addressed the lending prac tices and procedures of the bank and the capacities of the lending staff. The bank was required to formulate and implement written programs to eliminate the grounds of criticism of all criticized assets and im prove the lending function. The board was also to es tablish and maintain an adequate allowance for possi ble loan losses and to take all necessary steps to obtain sufficient credit information. The board was to perform a study to identify the reasons for declining earnings and to formulate asset/liability guidelines de signed to improve the bank's profitability. All violations of law were to be corrected. 43. Bank with assets of less than $25 million Loan portfolio administration deficiencies caused an increase in classified paper, with such paper equalling 61 percent of gross capital funds at the last examina tion. An inordinate volume of credit file exceptions and higher than average loan delinquencies were also re ported. An overall reevaluation of loan policies and procedures was recommended by the examiner. Technical violations of law were also reported in the commercial and consumer sections of the report. Cap ital, liquidity and earnings were satisfactory. A Memorandum of Understanding addressed the need to review the bank's lending policies and related procedures. The board was required to perform this review and to amend the bank's loan policies as nec essary to ensure that the lending function was oper ated in a safe and sound manner. The board also was to develop a written program to eliminate the grounds of criticism for each classified asset. In addition, the board was to develop and implement written programs to ensure that no loans are granted without the bank first having obtained sufficient credit and collateral documentation. The board was also to correct each vi olation of law and adopt procedures to prevent them in the future. 44. Bank with assets of less than $25 million Problems were centered around poor earnings, in adequate capital, decreasing liquidity and a high level of classified assets. Accounting methods did not con form to generally accepted methods and earnings were negatively impacted by rising interest rates and cost of funds coupled with high occupancy expense. Deficit earnings resulted. Loan growth along with oper ating losses and a liberal dividend policy rendered capital inadequate. Nine violations of 12 USC 84, as well as five other violations of law were disclosed. Sev eral of the excess loans were apparently the result of a miscalculation of the lending limit due to inaccurate accrual of income and expenses. A Memorandum of Understanding required correc tion of the violations of law and regulation, restrictions on payment of dividends, and a review of the earning capacity of the bank as well as actions to provide for capital adequacy. In addition, actions were to be taken to improve and strengthen liquidity, funds manage ment, the system for identifying problem loans, and providing for the adequacy of the allowance for possi ble loan losses. The bank was also required to under take an analysis of management needs and strengthen internal and external audit functions and internal con trols. Monthly compliance reports were required. 45. Bank with assets of $50 to $75 million A trust examination revealed that the bank's trust de partment had not maintained adequate documentation of its trust accounts. General carelessness was noted. The master Keogh plan incorporated the law of the wrong state. Recordkeeping requirements of 12 CFR 9.9 were violated. Poor administration was resulting in an unacceptable exposure to losses. Employee benefit accounts were participating in collective investment funds without proper authorization in violation of the Employee Retirement Income Security Act. A Memorandum of Understanding required the bank to correct all violations of law, rule or regulation cited in the trust report of examination. The bank was required to institute a revised audit program to ensure adequate review of documentation and ledger control and to submit a new trust department policy and procedures manual. The bank was also required to organize a document retention and retrieval system and to estab lish procedures to ensure compliance with the docu mentation requirements of the Employee Retirement Income Security Act. 46. Bank with assets of $25 to $50 million A general examination disclosed incompetent man agement, high concentration of credits in one individual's related interests (74 percent of total capital funds), violations of 12 USC 84 that apparently stemmed from nominee borrowing, inadequate or sus pect credit information and collateral documentation, and payment of checks against uncollected funds without a bank policy to govern that activity. Classified assets equalled 90 percent of gross capital funds, with 90 percent of the classified assets to one individual's related interests; past due loans amounted to approximately 6 percent of total loans; the allow ance for possible loan losses of $100,000 was inade quate in view of charge-offs during the examination that amounted to $990,000; and capital was inade quate. During the examination the board replaced the bank's chief executive officer with a new, qualified chief executive officer who immediately began to work with the board in the problem areas. A Notice of Charges and Temporary Order to Cease and Desist were issued against the bank addressing the conditions that could threaten the solvency of the bank. The board was prohibited from any further ex tensions of credit, including renewals for the benefit of a named individual, his family and any company in which he occupied a position as director, officer, em ployee, agent or trustee or owned more than 5 percent interest. The bank was directed to take steps to cor rect collateral and credit exceptions and to take imme diate action to establish and maintain the allowance for possible loan losses at an adequate level. The bank was prohibited from declaring or paying any dividend, except in compliance with 12 USC 56 and 60, and with prior approval of the regional administrator. The board was to take immediate action to correct the violations of law, rule and regulation and to adopt procedures to prevent them from recurring. An administrative hearing is pending. 47. Bank with assets of less than $25 million Results of the examination revealed that the bank faced possible insolvency due to extremely inept man agement of the loan portfolio. Classified assets amounted to 185 percent of gross capital funds. Past due loans equalled 13.7 percent of gross loans and loans lacking proper collateral documentation amounted to 39 percent of gross loans. Collection ef forts were ineffective or nonexistent. One violation of 12 USC 84 and one violation of 12 CFR 2 (credit life in surance) were cited in the examination. A Notice of Charges, and a Temporary Order to Cease and Desist were issued against the bank. The board of directors was directed to provide the bank with a new active and capable chief executive officer. The bank was prohibited from payment of dividends, except in accordance with 12 USC 56 and 60 and the approval of the regional administrator. The board of di rectors was required to inject $1 million in equity capi tal or take action to cause a ratified agreement provid ing for the sale or merger of the bank with specified time limits. The board was required to establish and maintain an allowance for possible loan losses and correct violations of law. An administrative hearing is pending. 48. Bank with assets of less than $25 million The general examination reflected significant credit administration deficiencies resulting in a large in crease in classified assets, an illiquid position and poor earnings. Classified assets amounted to 116 per115 cent of gross capital funds. Based on the current con dition of the loan portfolio, the allowance for possible loan losses was inadequate and required a substantial loan loss provision. This provision impacted an already low level of earnings. Many of the bank's problems were traced to a former, inadequate officer. Since the dismissal of the former officer, many of the bank's problems became evident because of increased board involvement. A Formal Agreement required the board to take actions and implement written programs to (1) correct each violation of law and adopt procedures to prevent recurrence; (2) provide the bank with a new active and capable chief executive officer; (3) eliminate the grounds upon which assets were criticized; (4) obtain and maintain current and satisfactory credit informa tion; (5) ensure collection of all loans past due, either as to principal or interest; (6) establish and maintain an adequate allowance for possible loan losses; (7) pre pare an analysis of the bank's present and future capi tal needs; and (8) achieve and maintain an acceptable level of liquidity which does not place undue reliance on purchased funds. 49. Bank with assets of less than $25 million Poor lending practices coupled with a depressed business environment had a detrimental effect on the bank. Management and supervision were lax with many deviations from set policies noted. Classified assets in creased to 146 percent of gross capital funds. Past due loans and credit and collateral documentation ex ceptions-were at excessive levels. A provision to the allowance for possible loan losses was necessary to cover losses identified. The bank's capital was mar ginal. Violations were cited involving insider transac tions as well as violations of 12 USC 371c and 371 d, 12 CFR 1.8 and 7.4305(b), and several consumer vio lations. A Formal Agreement required the board to thor oughly review (1) the effectiveness of management, particularly in the lending area; (2) loan administration; (3) the adequacy of the reserve for possible loan losses; and (4) capital adequacy. Conclusions and corrective actions were to be submitted to the regional administrator, who had a power of veto over the pro posed capital program. The Agreement required cor rection of the statutory violations and required proce dures to be adopted to prevent future violations. The board was required to establish a program to eliminate all criticized assets. Proper credit and collat eral documentation was also required. A comprehen sive budget for 1981 was also required, as were writ ten asset/liability guidelines. The Agreement also required a written program to eliminate internal control deficiencies identified by the OCC and the internal au ditor. The bank was also required to establish a com mittee of outside directors to ensure compliance with the articles of the Agreement. 50. Bank with assets of less than $25 million The bank's strong growth outpaced management's capabilities to control. Lack of quality control over the loan portfolio resulted in classified assets totaling 67 116 percent of gross capital funds, with losses depleting the allowance for possible loan losses and earnings. Earnings have also been adversely affected by the opening of a large and expensive branch. Capital had not kept pace with the strong growth and was further strained by the loss in earnings. The loan portfolio re flected high delinquency, excessive documentation exceptions, noncompliance to loan policy and inade quate training and supervision. A significant number of internal control exceptions were uncorrected; viola tions were cited under 12 USC 371 d, 31 CFR 103 and 12 CFR 217.4(f); and numerous consumer violations were identified. A Formal Agreement required correction of the stat utory violations and required procedures to be adopted to prevent future violations. The board was re quired to review the effectiveness of management and the bank's lending functions. Conclusions and correc tive actions were to be submitted to the regional ad ministrator. The board was to develop a program for the elimination of each criticized asset and to correct the loan documentation exceptions. A thorough review of the allowance for possible loan losses was required. A comprehensive budget was required to be devel oped together with a capital program that met the ap proval of the regional administrator. The budget was to be prepared in conjunction with the development of an asset/liability management policy, while maintaining 20 percent liquidity. The board was to conduct a compre hensive review of the investment account, particularly the recent trading activity. The board was to develop and implement an internal audit program and correct all internal control deficiencies. 51. Bank with assets of less than $25 million Heavy officer, employee and director turnover, an overbanked market area, and domination by the chair man of the board contributed to the unsatisfactory condition of the bank. Classified assets to gross capi tal exceeded 52 percent, overdue loans were approxi mately 12 percent of total loans, the allowance for pos sible loan losses was inadequate, several violations of law and regulation were disclosed, and earnings were poor due to inadequate funds management and poor interest spreads. A Formal Agreement required correction of the viola tions of law and regulation, establishment of detailed position descriptions for the chairman of the board and chief executive officer, creation of plans to reduce turnover in the bank's staff and action to reduce criti cized assets and improve collection of delinquent loans. In addition, the Agreement required the board to review the bank's allowance for possible loan losses at least quarterly, obtain and maintain satisfactory credit information, revise the existing loan policy, for mulate and implement a written funds management policy, submit a 3-year capital plan, correct internal control deficiencies, and designate duties and author ity of the consumer compliance officer. Sixty-day com pliance reports were required. 52. Bank with assets of less than $25 million Classified assets increased to 63 percent of g?oss capital funds. Loan losses exceeded the losses of comparable banks. Loans not supported by current and satisfactory credit information and delinquent loans exceeded prudent banking standards. The bank's lending staff granted loans without a thorough credit analysis. The bank's capital was strained and grew beyond projections contained in the submitted capital program. Recent official reports required amendment because of accounting errors which over stated capital. A formal liquidity and funds manage ment program is needed. Violations of laws, rules and regulations were cited in the commercial consumer af fairs examination. A Memorandum of Understanding required correc tion of the law violations and the adoption of proce dures to prevent future violations. The board of direc tors was to (1) formulate and implement a written program to eliminate all assets from criticized status, (2) establish procedures to ensure compliance with the bank's lending policy, (3) ensure that the bank ob tains current and satisfactory information on all loans lacking such information and refrain from granting or renewing loans until said information has been ascer tained, (4) develop a system for identifying and moni toring problem loans, (5) develop a program to im prove loan collections, and (6) maintain an adequate allowance for possible loan losses. The board was required to submit to the regional ad ministrator (1) an acceptable written capital program, (2) written guidelines governing liquidity and asset/ liability management, and (3) amendments to inaccu rate regulatory reports. 53. Bank with assets of less than $25 million Classified assets were 58 percent of gross capital funds. Loan losses almost depleted earnings. Loans not supported by current and satisfactory credit infor mation and delinquent loans exceeded prudent bank ing standards. A majority of the bank's loans were in noncompliance with the lending policy. The bank's president granted and supervised most of the bank's loans. Additional lending staff was needed. The bank also had a capital shortfall. A formal liquidity and funds management program was needed. Violations of 12 USC 84 and 74, and 12 CFR 1.8 were cited in the commercial examination. Bank officials did not re spond regarding correction of violations cited in a con sumer affairs examination. A Memorandum of Understanding required correc tion of violations of law and the adoption of procedures to prevent future violations. The board was required to (1) assess the adequacy of and make any desired ad ditions to the bank's lending staff, (2) formulate and implement a written program to eliminate all assets from criticized status, (3) establish procedures to en sure compliance with the bank's lending policy, (4) en sure that the bank obtains current and satisfactory in formation on all loans lacking such information and refrain from granting or renewing loans until said infor mation has been ascertained, and (5) develop a sys tem for identifying and monitoring problem loans. The board was also to submit to the regional administrator a written capital plan with injection, a comprehensive budget, and written guidelines governing liquidity and asset/liability management. 54. Bank with assets of $100 to $250 million The bank's asset and loan growth rates had been large, almost tripling in 3 years. Capital accounts had not kept pace with the asset growth and were inade quate. The investment portfolio was of adequate qual ity but represented a small percentage of assets and was of a long-term nature. A majority of the asset growth had been funded by purchased liabilities. As a result of these practices, liquidity was unsatisfactory. In addition, the loan portfolio reflected signs of deterio rating quality with increases in classified assets and overdue loans. The report of examination showed sev eral violations of law and regulations. An Agreement required that the board formulate and submit a 5-year capital plan, including an immediate capital injection. The Agreement further required the board to adopt and implement (1) a written liquidity/ funds management policy, (2) a lending policy, and (3) an investment policy. The bank was to take the neces sary steps to obtain and maintain satisfactory credit in formation on all loans and to correct the imperfections pertaining to the securing of collateral. The board was to correct violations of law and regulation and to adopt procedures to prevent recurrence of similar violations. In addition, the Agreement required the board to con duct a study of the effectiveness and depth of current management and make adjustments where necessary. 55. Bank with assets of $500 million to $1 billion The bank was the lead bank of a holding company. The financial condition of the holding company closely paralleled that of the lead bank. The problems at the bank were identified as poor asset quality centered in the loan account, poor earnings, capital inadequacy, and weak management. Problems in the lending area were caused by a disregard for sound principles and, in many instances, good credit analysis and effective collection procedures were lacking. The volume of past due loans was high and illustrated the weak nesses of the loan portfolio and the collection effec tiveness of management. Net loan losses continued to deplete the allowance for possible loan losses. Past earning records were poor with a steady downward trend. An equity capital shortfall existed, primarily due to unsatisfactory retention of earnings caused by heavy loan losses. The board of directors and active management were cooperative, but the problems of the bank appeared overwhelming for management and they lacked the capacity to effectively solve them. A Notice of Charges was served upon the bank, and the board stipulated to a final Order to Cease and De sist. The board was ordered to appoint a compliance committee, which would monitor the order and report on the bank's progress. The board was to initiate steps to employ an executive management officer whose pri mary responsibility would be in the lending area and who would be accountable only to the board. If the re gional administrator was not satisfied with the bank's overall progress by year-end, the board would provide the bank with a new chief executive officer. The bank was to take action necessary to protect the bank's in117 terest concerning criticized assets, and to adopt a pro gram to eliminate each asset from criticized status. No new credit or renewals were to be made to criticized borrowers unless in the best interest of the bank. The reasons were to be documented. The bank was to ob tain and maintain current and satisfactory credit infor mation and grant no new credit without this informa tion. The bank was to maintain the allowance for possible loan losses at an adequate level and to re view that adequacy on a quarterly basis. The board was to submit a written 5-year capital plan to the re gional administrator which would provide for a large equity injection by year-end and, if necessary, an equal equity injection at the end of the next year. The bank was to pay no dividends without the prior written approval of the regional administrator until the full eq uity injections had been accomplished. The board was also required to select a capital committee which would report the bank's efforts to raise the additional capital. The bank was to prepare a written profit plan describing the bank's objectives and the action taken to achieve those objectives. Projections, adjustments and comparisons of the profit plan were to be moni tored and reported on a periodic basis. The board was to formulate and implement a written funds manage ment policy. The bank was to correct all violations of law, rule or regulation and establish procedures to pre vent further violations. 56. Bank with assets of less than $25 million Loan administration problems were identified; classi fied loans increased from 21 to 73 percent of gross capital funds, with the deterioration attributed to inade quate supervision and failure to adhere to the lending policy. Also of concern is an increasing volume of ratesensitive funds along with the lack of a written asset/ liability management plan. The consumer report re flected four violations, including one repeat violation of Regulation Z. There were two violations of 12 USC 84 on the date of examination, and a number of loans were made in excess of the lending limit between ex aminations. A Formal Agreement required the bank to (1) cause all extensions of credit which were in excess of the lim itations provided in 12 USC 84 to be reduced to con forming amounts, (2) amend existing policies and pro cedures to prevent future violations of 12 USC 84, (3) implement an effective internal control program de signed to prevent future violations of consumer laws and regulations, and (4) develop and implement a writ ten program designed to remove each asset from a criticized.status. The bank was also required to strictly adhere to the written loan policies adopted by the board, conduct at least quarterly reviews of the allow ance for possible loan losses and adjust it appropri ately, develop and implement written guidelines for co ordination and management of the bank's assets and liabilities, and formulate and adopt a written program to restore and maintain earnings. A civil money penalty referral was made concerning repeated violations of 12 USC 84. 57. Bank with assets of $25 to $50 million Initial results of a general examination of the bank 118 revealed deterioration of condition raising a possibility of insolvency. Assets classified as doubtful and loss amounted to 118 percent of gross capital funds and total criticized assets represented approximately 213 percent of gross capital funds. The loan portfolio con tained a heavy concentration of insider and out-ofterritory loans. There were unexplained wide fluctua tions between financial statement dates, numerous collateral imperfections and lack of information about the ownership of many of the classified corporate bor rowers and/or their affiliates. Missing, outdated or sus pect financial information, including highly inflated as set values, increased the difficulty of evaluating certain loans. Numerous, unwarranted, unsecured advances, often without an identified source of repayment, were uncovered. A Notice of Charges and Temporary Order to Cease and Desist were served upon the bank. The Tempo rary Order stopped payment of dividends except in accordance with 12 USC 56 and 60 and with prior ap proval of the regional administrator. The bank was pro hibited from extending further credit to certain bor rowers and was required to take all steps necessary to obtain and maintain credit information and collateral documentation for loans listed in an appendix to the Temporary Order. Finally, the bank was prohibited from payment of checks drawn against uncollected deposit balances with respect to certain accounts. An administrative hearing is pending. 58. Bank with assets of $25 to $50 million Classified assets amounted to 85 percent of gross capital funds, an increase from 46 percent in the pre vious examination. Past due loans were high in all cat egories and represented 9 percent of gross loans. Overall administration of the loan portfolio was poor. Earnings were below the peer group average due to high personnel expenses and other operating ex penses. Equity capital growth did not keep pace with asset growth; the equity capital to total asset ratio was 7:1, low compared with other banks in its peer group. A Memorandum of Understanding required the bank to immediately correct all violations of law. The bank was to perform a review of management and to ap point a new chief executive officer within 90 days. Management and director fees were to be evaluated under listed criteria and a plan to prevent excessive payment of such fees was required to be submitted to the regional administrator who had veto power over the plan. The bank was to develop and implement a plan to improve loan administration which addressed specified areas. The bank also was to develop and im plement a revised 5-year capital plan, to be reviewed by the regional administrator. A plan to identify, moni tor and limit concentrations of credit, particularly in the construction loan area, was required. 59. Bank with assets of $50 to $75 million Serious problems were revealed in the examination of the bank due to mismanagement in administration of the lending function by the senior executive officers. Violations of 12 USC 84 were uncovered indicating im proper management and inadequate director supervi sion. One of the loans in violation of 12 USC 84 exhib- ited tremendous loss potential. Inadequacy of capital was exacerbated by high dividend payments. The bank lacked control over overdrafts, particularly to cer tain borrowers whose loans were classified. Classified assets amounted to 148 percent of gross capital funds and credit data and collateral exceptions were at the inordinately high levels of 18 and 13 percent, respec tively. Due to the loss potential, the allowance for pos sible loan losses was inadequate. A Temporary Order to Cease and Desist prevented the bank from further extensions of credit to any bor rower cited in violation of 12 USC 84 and required the bank to take steps to correct these violations. The bank was ordered not to pay or declare dividends ex cept in conformity with 12 USC 56 and 60, and with prior written approval of the regional administrator. Es tablishment of an overdraft policy was required as was an analysis of the bank's allowance for possible loan losses. The bank was prevented from extending addi tional credit without necessary credit information and collateral documentation. A civil money penalty referral has been made and a hearing on the Order to Cease and Desist has been scheduled. 60. Bank with assets of $50 to $75 million The bank's identified problems included inadequate supervision, poor operating procedures and poor lending practices. These problems had led to an inor dinate level of classified assets and delinquent loans, deficient earnings and a marginal capital position. The examination revealed continuation of previous prob lems which included extensive employee turnover at all levels and inadequate management. A change in ownership of the bank occurred, initiating slow but positive change in operation of the bank. New owner ship focused attention on reducing expenses, analyz ing the investment portfolio, correcting violations of law and revising the budget. Although a new commercial loan officer was hired, the bank was ill without a full time chief executive officer. A Formal Agreement required the board of directors to conduct a management review and hire a new chief executive officer within 60 days. The board was re quired to develop and implement a profit plan to im prove earnings and a program to strengthen equity capital. Declaration of dividends was prohibited ex cept in accordance with 12 USC 56 and 60 and with approval of the regional administrator. The bank was prohibited from rebooking loans and was directed to correct internal control deficiencies. The board was di rected to develop and implement an overdraft policy, adopt a written plan for each criticized loan and review the adequacy of the present loan policy in correcting the deficiencies listed in the report of examination with respect to that loan policy. 61. Bank with assets of less than $25 million The bank's condition under current ownership re flected asset problems, a capital shortfall and selfserving practices. Ownership promised to correct these deficiencies. The examination reflected classi fied assets equal to 43 percent of gross capital funds and other assets especially mentioned equalling an additional 25 percent. The classifications excluded $285,000, equal to 23 percent of gross capital funds, in insider loans that were refinanced at another institution during the examination. A capital injection had not been accomplished. Several violations of law were re ported, including insider violations. Additional deficiencies were (1) unstable earnings, (2) an incomplete lending policy, (3) loan documenta tion exceptions, (4) need for an investment policy, and (5) need for a liquidity and asset/liability management policy. A Formal Agreement required adoption of proce dures to prevent violations of law. The Agreement also required (1) strict requirements regarding extensions of credit to executive officers, directors and principal shareholders of the bank, (2) completion of an equity capital injection during 1980 and compliance with the bank's capital plan, (3) submission of a comprehen sive budget, (4) revision of the lending policy, (5) for mulation and implementation of a written program to eliminate all assets from criticized status, (6) mainte nance of an adequate allowance for possible loan losses, (7) acquisition of current and satisfactory infor mation on all loans lacking such information and no granting or renewing of loans until such information has been ascertained, (8) establishment of written guidelines governing liquidity and asset/liability man agement, and (9) adoption of a written investment pol icy. A referral has been made by the region for consider ation of civil money penalties for insider violations. 62. Bank with assets of $100 to $250 million The bank was in deteriorating condition as a result of a poor local economy and lax management. There were significant increases in classified assets, which grew from 43 to 72 percent of gross capital, substan tial loan losses, liberal rewrite and loan extension poli cies, high credit card charge-offs, and overline and out-of-trust situations. Violations of law included 12 USC 29 and 84, and two violations of Regulation Z, 12 CFR 226. A Memorandum of Understanding required the board to perform a study of its management and cor rect any deficiencies. The board was required to cor rect all violations of law. The board was to submit a written program to eliminate each asset from criticized status, formulate an internal loan review system, main tain an adequate allowance for possible loan losses, reduce the level of delinquent loans, adopt a nonaccrual policy, adopt floor plan lending and credit card lending policies, and adopt a funds management pol icy. Loans to any borrower whose loans or other exten sions of credit had been criticized were restricted. 63. Bank with assets of $25 to $50 million This $1 million trust department with nine fiduciary accounts was operating at a loss as a service to bank customers. The examination revealed that the board failed to supervise the administration of the trust de partment, having delegated that function to a trust in vestment committee which had only met once in the last year. The bank's fiduciary activities were not being suitably audited; there were no general ledger controls or annual written account reviews. Real estate held in 119 trust was not being appraised. There were no written policies or procedures. A Formal Agreement required the board to evaluate whether the bank should continue to operate a trust department and to consider its profitability and the quality and depth of its management. Policies and pro cedures were established to bring the trust depart ment into compliance with 12 CFR 9, particularly with regard to the investment of fiduciary funds in accord ance with 12 CFR 9.11. Adequate books and records were also required in conformance with 12 CFR 9.8(a), and periodic account reviews were required in con formance with 12 CFR 9.7(a)(2). Proper documentation of discretionary actions was required, as were policies prohibiting the use of material insider information and self-dealing transactions in conformance with 12 CFR 9.12. Real estate held in trust was required to be prop erly administered. -Recordkeeping and confirmation of securities transactions were also required to conform with 12 CFR 12. 64. Bank with assets of $75 to $100 million The bank's condition markedly deteriorated since the last examination. Classified assets increased from 29 to 73 percent of gross capital funds and liquidity was down to 11 percent. Earnings had declined which contributed to a strain on capital. Management was in effective, with employee turnover amounting to 45 per cent in 1979. A Memorandum of Understanding required the board to review bank management, augmenting it where appropriate, and to review the causes of exces sive employee turnover. The board was required to correct all violations of law. The board was also re quired to review its loan supervision system, eliminate each criticized asset, not lend additional money to a borrower whose loan was criticized, maintain current credit information and review the allowance for possi ble loan losses. The board was required to raise the level of liquidity, implement a written funds manage ment policy, analyze the bank's capital needs and submit a capital plan to the regional administrator. 65. Bank with assets of $250 to $500 million The bank had engaged in heavy speculative real es tate lending and maintained a large portfolio of low yielding real estate loans. Heavy loan loss provisions resulted in depressed earnings. Although the bank's li quidity was stable and at a comfortable level, the bank's holding company continued to draw virtually 100 percent of the bank's net income in the form of dividends. Management's progress in working out of the real estate situation was exceptionally slow and it was felt that some regulatory input was needed to move the bank toward correction. A Memorandum of Understanding required the board to (1) create and implement new written pro grams and policies to eliminate criticized assets, (2) establish an amended written loan policy, (3) handle and dispose of other real estate owned, (4) establish guidelines governing the loan review system, (5) iden tify problem loans in a timely manner, and (6) create a revised asset/liability management policy. 120 66. Bank with assets of less than $25 million The bank's problems included an inadequate capital structure, continued operating losses, a rate-sensitive liability structure, and increased criticized assets. Lax management of the loan portfolio, inadequate docu mentation and liberal rewrites and renewals contrib uted to the problems. Lack of earnings and recent loan losses also had an adverse impact on the bank's capi tal. A Formal Agreement required the adoption of a plan to reduce criticized assets and the implementation of a program to improve collection efforts and increase su pervision over the loan portfolio. Current and satisfac tory credit information was to be obtained and main tained for all loans. The allowance for possible loan losses was to be monitored to ensure it is maintained at an adequate level. A capital plan and a profitability plan were required to be developed and implemented in a timely fashion. All violations of commercial bank ing laws and consumer laws were to be corrected and procedures were to be adopted to prevent recurrence. 67. Bank with assets of less than $25 million The bank, with a history of asset problems, was in deteriorating condition. Classified assets increased to 127 percent of gross capital funds. Self-serving owner ship and frequent management changes were cited as the cause of the bank's problems. The bank had four presidents in 3 years. The directors had violated 12 USC 375b and had received unreasonable or unjustifi able expenses and fees. The directors interfered with management's handling of the lending function by committing the bank to make loans. One director's loan had been classified as a loss. High loan losses resulted in poor earnings and impaired capital. A Formal Agreement required that the bank correct violations of 12 USC 375a and 375b. An equity capital injection was required, along with a 3-year capital plan. The board was required to engage an indepen dent special counsel to evaluate compensation paid to certain directors for salaries, fees and expenses and to determine whether restitution was warranted. The board was required to submit a plan to ensure that fu ture compensation paid to officers, directors or em ployees was reasonable for services rendered and ad equately documented. The board was required to perform a management study and to develop a plan to strengthen loan administration. The plan was to in clude procedures ensuring that no director could uni laterally commit the bank to make a loan. Loans to crit icized borrowers were prohibited. The bank was required to take immediate action, including legal action, to collect the classified loan of its director. The allowance for possible loan losses was required to be increased immediately by $150,000. A written funds management policy and investment policy were re quired. 68. Bank with assets of less than $25 million The bank was in deteriorating condition. The level of classified assets and delinquent loans had increased. Credit and collateral exceptions had also increased. Loan losses were negatively impacting earnings. The problems were, in part, caused by ineffective manage ment and liberal lending philosophies. Some audit de ficiencies were also disclosed. A Memorandum of Understanding required that ex tensions of credit in excess of the bank's lending limits be reduced to conforming amounts. All other violations of law were to be corrected. The board was required to make a management study. The bank was not al lowed to lend additional money to a borrower whose loan had been criticized and the board was required to formulate a plan to eliminate each asset from criti cized status. The board was required to establish its own monitoring program for problem loans and to take action to protect the bank's position with respect to de linquent loans. The board was required to obtain cur rent and satisfactory credit information and obtain and perfect collateral. The allowance for possible loan losses was to be maintained at an adequate level. In ternal control deficiencies were to be corrected. 69. Bank with assets of less than $25 million The bank experienced a massive embezzlement by the former chief executive officer. The total amount of the defalcation amounted to nearly half of the bank's capital. A pension fund was the principal account which suffered losses. Although the bank had no trust charter, the chief executive officer may have misrepre sented that he was acting as fiduciary in his capacity as a bank officer. The board allegedly was apprised of the embezzlement as early as 1978, but did not report it to the OCC or other authorities in violation of 12 CFR 7.5225. The board also failed to record any discussion of the matter in the board minutes. It was possible that the bank's bonding company would refuse to honor part of the claim or would cancel coverage. Addition ally, the board received excessive compensation for expenses. Internal control deficiencies also existed. An Order to Cease and Desist required the board to appoint two independent directors and a third director acceptable to the regional administrator, to comprise a compliance committee to (1) determine the extent of the losses resulting from the defalcation; (2) ensure that all possible claims were filed with the bonding company; (3) advise the bank whether any cause of action exists against any director, officer or employee as a result of the defalcation; (4) request any neces sary restitution from any director, officer or employee for any claims dishonored by the bonding company; and (5) determine what disclosure should be made to shareholders. The board was required to inject equity capital in an amount requested by the regional admin istrator to cover any losses resulting from defalcation. The board was to adopt policies to ensure that any known or suspected criminal activity was immediately reported to the bonding company and the proper au thorities. The board was required to pursue all claims against the bonding company and to maintain fidelity insurance coverage in an adequate amount. Minutes of all matters reviewed, discussed and acted upon were required to be maintained by the board. A new chief executive officer was to be hired. Policies and procedures for fees and expenses were required to be instituted. The special counsel was required to review expenses and recommend whether reimbursement should be requested by the bank from the recipient. Internal control deficiencies were required to be cor rected, as were all violations of law. The bank was also required to adopt a program for improving collection efforts and reducing the level of delinquent loans and to submit a written funds management policy. No fur ther dividends were allowed without the prior approval of the regional administrator. A budget and profit plan were required. The board was required to either obtain a trust charter or ensure that none of its officers act in a fiduciary capacity with a depositor unless the board was satisfied that the relationship was sufficiently inde pendent of the bank. 70. Bank with assets of $50 to $75 million The bank's problems stemmed primarily from the rapid growth and poor loan administration and super vision. There were violations of 12 USC 84, with the ex cessive lines subject to criticism. Liquidity was consid ered inadequate and there was a need for improved asset/liability management. Earning figures Were over stated due to inadequate provisions to the allowance for possible loan losses and questionable loan accrual methods. Capital growth had not kept pace with asset growth and capital ratios were well below peer group averages. Some directors' loans were criticized and directors generally were uncooperative. A Formal Agreement required the bank to reduce loans in violation of 12 USC 84 to conforming amounts, and the board was to insure that the bank suffered no loss on any loan in violation of 12 USC 84. Additionally, the bank was to correct each violation of law and adopt procedures to prevent future violations. The board was to submit a written capital plan to the re gional administrator which included the completion of an equity capital injection. The bank was to submit a budget which included a detailed balance sheet and income and expense items and assumptions used in developing the forecast. The board was to perform a study of current management and implement a written management plan. The board was to establish and im plement procedures to monitor and enforce adherence to the lending policy. The board was to adopt a pro gram to eliminate the grounds of criticism of each as set criticized and not to extend credit to borrowers whose loans had been criticized, unless in the best in terest of the bank. The board was to conduct quarterly reviews of the adequacy of the bank's allowance for possible loan losses and make adjustments to the al lowance which would be reflected in regulatory reports and obtain and maintain current and satisfactory credit information and collateral documentation on loans. The board was to adopt a written liquidity, asset and liabil ity management policy. The bank's liquidity was to be maintained at a level commensurate with the bank's needs. The board was to formulate a written policy to define the circumstances under which depositors would be permitted to draw against uncollected funds. The board was to review and revise the bank's invest ment policy and to establish procedures to monitor and enforce adherence to that policy. The board was to assess the appropriate amount of directorate and 121 committee fees paid by the bank. Their conclusions and recommendations were to be reported to the full board and the regional administrator. 71. Bank with assets of $25 to $50 million The bank suffered from liberal lending practices and poor collection efforts as evidenced by high classified assets. Loan documentation was deficient and loan portfolio delinquency was high. It was apparent that improved loan administration was needed. Earnings had been satisfactory but losses and charges to re plenish the allowance for possible loan losses im pacted current earnings. There was a capital shortfall and a need for a capital plan. Several violations of 12 USC 84 and four other violations of laws, rules or regu lations were cited in the report of examination. A Memorandum of Understanding required a written capital plan acceptable to the OCC. The bank was re quired to correct loan documentation deficiencies. The board was to review the allowance for possible loan losses at least quarterly and maintain the account at a balance which would reflect the risk inherent in the loan portfolio. The board was to adopt a written pro gram to improve management's collection efforts. The board was to review and revise the existing lending policy to include a method of monitoring and enforcing compliance with the policy, a system to identify and monitor problem loans and provisions for extension of credit to insiders. The Memorandum required a written program to eliminate grounds for criticism of each as set criticized and to correct all violations of laws, rules and regulations. All losses resulting from a loan ex tended in violation of 12 USC 84 were to be docu mented and a method of reimbursement for any losses was to be developed. The board was to adopt a writ ten liquidity, asset and liability management policy. Additionally, a written internal audit program was to be adopted and the board was to appoint a capable and independent individual to perform such procedures. 72. Bank with assets of $100 to $250 million The specialized examination revealed a significant deterioration in the condition of the bank. Liquidity had dropped to less than 6 percent because of sustained growth in real estate credits. This concentration in real estate amounted to nearly 300 percent of gross capital funds. Classified assets represented 141 percent of gross capital funds (80 percent of which were real es tate related); delinquencies were 8 percent of gross loans, and 11 percent of the loan portfolio was not supported by current credit information. The allowance for possible loan losses was inadequate. Insider abuses had occurred, consisting of violations of 12 USC 375a and 375b, and unjustified payment of ex penses and salary advances. Illegal political contribu tions had been made. Extensions of credit had ex ceeded the bank lending limit, in violation of 12 USC 84. There had also been excessive extensions of credit to the bank's affiliate, in violation of 12 USC 371c, and violations of 12 CFR 226 (Regulation Z), and 12 CFR 7.3025. Additionally, a contract had been awarded to a director to construct the bank's new building without first requiring competitive bidding. A Formal Agreement required the board to reduce 122 the Section 84 violations to conforming amounts, cease extending credit to its officers, directors, princi pal shareholders or their related interests in violation of 12 USC 375a and 375b, cease extending credit to af filiates in violation of 12 USC 371c, and cease violating Regulation Z. The board was required to obtain the re gional administrator's approval before issuing any divi dends, maintain adequate liquidity and adopt a funds management policy. A management study was re quired, as well as the employment of a new senior lending officer. The bank was required to eliminate each asset from criticized status and refrain from lend ing additional money to a borrower whose loan had been criticized. Current and satisfactory credit infor mation was required. The board was also required to review its policy for the purpose of reducing concen trations of credit in real estate, formulate a new policy, and take action to bring each concentration into com pliance with that new policy. The board was also re quired to engage an independent appraiser to ap praise other real estate owned, in conformity with 12 CFR 7.3025. The board was to identify and review problem loans and maintain the allowance for possible loan losses at an adequate level. Delinquent loans were to be reduced and a loan policy implemented. Reimbursement of officer overdrafts was required, along with the institution of a policy covering over drafts. A capital plan and an expense policy were re quired. The board was required to hire a special coun sel to review expenses paid and the circumstances under which the construction contract had been awarded. The special counsel was to recommend res titution where necessary. Reimbursement was required for illegal political contributions if the recipients failed to voluntarily repay the bank. Audit deficiencies were to be corrected. 73. Bank with assets of $50 to $75 million The examination revealed a deteriorating asset con dition, with classified assets amounting to 57 percent of gross capital funds and total criticized to 76 percent of gross capital funds. Past due loans represented 7.5 percent of the portfolio; credit and collateral excep tions were excessive. Liquidity was unacceptable at 11 percent. Violations of commercial and consumer laws were noted. The administration of the trust de partment was deficient. The bank was not administer ing its common trust funds in compliance with 12 CFR 9.18; common trust fund units had been pledged to the commercial department. One common trust fund, a tax exempt bond fund, had invested more than 10 per cent of its assets in a single private placement. That fund had not been valued properly, and the bank had not instituted a procedure for approval of entries or withdrawals of units. The trust department violated 12 CFR 9.12 by purchasing bonds that the bank had con tracted to purchase. Active officers of the bank were acting as members of the trust audit committee in vio lation of 12 CFR 9.9. Internal controls were weak. No checklists or synoptic records to ensure proper admin istration of trust accounts were maintained. Real estate held in trust was not being appraised frequently enough and was not adequately insured. A Memorandum of Understanding required the bank to cease violating the law, to correct all violations and to implement policies and procedures to prevent future violations, including consumer violations. The board was required to formulate a capital plan, to implement a written funds management policy and to maintain an adequate liquidity position. A written plan to eliminate each criticized asset was required. The board was re quired to implement a problem loan identification and monitoring procedure and to review the allowance for possible loan losses to ensure that it is maintained at an adequate level. A review of the bank's delinquent loan procedures was required, as was the collection of satisfactory credit information and collateral documen tation. The tax exempt bond fund was to be revalued with readjustments to each affected account. The board was required to sell the trust department's inter est in the issuance that the bank had contracted to purchase at no loss to the trust accounts and was spe cifically required to implement procedures to prevent further self-dealing. The bank was required to release all common trust fund units pledged as collateral for loans. Various procedures to correct the deficiencies in operation, administration and investment of collec tive investment funds in conformance with Section 9.18 were required. The bank was also required to correct deficiencies in the administration of real estate held in a fiduciary capacity. A written trust audit program was required, as was the elimination of active officers from membership on the trust audit committee. A trust de partment policy manual was required to be drafted. 74. Bank with assets of less than $25 million An Order to Cease and Desist prohibited extensions of credit in excess of the lending limitations of 12 USC 84. It also required the board of directors to indemnify the bank against losses resulting from loans or other extensions of credit made in violation of 12 USC 84. Prior to the Order to Cease and Desist, the bank had extended credit to a corporation in an amount that would have exceeded the lending limitation of 12 USC 84, except that a portion of the extension was partici pated to a correspondent bank. After the order be came effective, the corporation and its owner filed for bankruptcy. The correspondent bank charged the par ticipation back to the bank. Subsequently, the board of directors of the bank approved the charge off of the amount of the participation as a loss. The reacquisition by the bank of the participation was a new extension of credit which exceeded the lending limitation of 12 USC 84 and violated the Order to Cease and Desist. An Agreement with the board of directors of the bank required the board to make restitution to the bank for the amount of the participation reacquired by the bank and charged off by the board. The Agree ment also required the board to reimburse the bank for all legal fees paid to the board's counsel by the bank in connection with the matter. 75. Bank with assets of $75 to $100 million Speculative investment practices of the bank contin ued to hinder the bank's earnings, liquidity and bal ance sheet flexibility. Bond depreciation was 111 per cent of adjusted capital funds with 51 percent of the investment portfolio maturing beyond 10 years. Criti cized investments amounted to 38 percent of gross capital funds. Progress by the bank in correcting this situation was extremely slow. Criticized loans equalled 74 percent of gross capital funds. Of primary concern was a large extension of credit to or for the benefit of a corporation; that extension equalled 35 percent of gross capital funds and constituted a violation of 12 USC 84. The extension of credit had been on nonaccrual and without reduction for an extended period. The allowance for possible loan losses was also inade quate. Due to a deterioration of the net interest mar gins the bank's earnings had declined considerably. Bank capital was unduly leveraged in terms of asset growth, risk assets and inadequate levels of retention. A Notice of Charges was filed against the bank charging that it had violated the lending limitations of 12 USC 84. It also alleged that the bank was operating with inadequate capital, had accumulated criticized assets which totaled 114 percent of the bank's gross capital funds and had failed to properly review and su pervise the bank's loan portfolio, develop a current in vestment policy and develop an asset/liability manage ment policy designed to reduce the bank's reliance on rate-sensitive liabilities to support fixed rate assets. An administrative hearing is pending. 76. Bank with assets of $25 to $50 million The bank's problems were centered in the loan port folio. Total criticized assets equalled 90 percent of gross capital funds. Net loan losses for the prior year totaled 4 percent of average total loans. Past due loans totaled 8 percent of total loans. Credit and collat eral exceptions represented 23 percent of gross loans. Other real estate owned and repossessed automobiles represented 11 percent of gross capital funds. The condition of the loan portfolio was a result of problems in the executive management and lending personnel. Although the bank had implemented detailed loan poli cies and procedures, the executive officer of the bank had not adequately supervised the loan portfolio to en sure adherence to the loan policies. Supervision of the loan portfolio and lending authority were delegated to three officers who did not display the capability to ade quately manage the loan portfolio. Violations of law in cluded 12 USC 74 and 375a; 12 CFR 7.3025, 23 and 221; and 31 CFR 103.33. A Memorandum of Understanding required meas ures to improve the quality of management including a study of current management and the implementation of a written management plan. The progress of the bank in complying with the articles of the Memoran dum and in improving the condition of the bank were to be reviewed by the regional administrator 4 months after the effective date of the Memorandum and, if suf ficient progress had not been made, the board was re quired to obtain a new chief executive officer for the bank. In addition, the bank was required to submit (1) a written capital program, (2) a written program to im prove the earnings of the bank, (3) procedures to en sure compliance with lending policies, (4) a written program to eliminate all assets from criticized status, (5) a written program to improve collection efforts, (6) 123 a quarterly review of the allowance for possible loan losses, (7) procedures to obtain satisfactory credit and collateral documentation and (8) a plan for correction of internal control deficiencies. A compliance commit tee was also to be formed. 77. Bank with assets of $250 to $500 million An examination revealed deterioration in the condi tion of the bank. Total criticized assets amounted to 67 percent of gross capital funds. Loans not supported by current credit information represented 13 percent of gross loans. The loan review procedures used by the bank were in need of revision to ensure the review function was independent and accountable to the board. The bank was undercapitalized and earnings were inadequate. In view of the substandard earnings, the depreciated investment portfolio, the high net bor rowed position of the bank, a negative growth in de mand deposits, and the overall volatility of the deposit structure, liquidity was considered marginal. Violations of law included 12 CFR 7.5225, 23.1 and 7.7000. Defi ciencies were also noted in the trust department; the most serious of those was the out of proof condition of a corporate stock transfer account. A Memorandum of Understanding directed the board to strengthen the quality of supervision by man agement including adjustments to staffing if neces sary. The board was required to review the bank's writ ten capital program and ensure that the projections detailed in the program were being met. If the review indicated that the projections were not being met, then revision of the program to provide a level of equity capital acceptable to the regional administrator was required. Additionally, the bank was required to (1) im plement a written program to eliminate all assets from criticized status, (2) implement procedures to obtain satisfactory credit and collateral documentation, (3) re vise its funds management policy, (4) submit a budget, and (5) correct and eliminate all violations of law. The bank was also required to take all necessary steps to correct the deficiencies cited in the trust re port of examination. Finally, the bank was required to establish a committee to ensure the bank's compli ance with the Memorandum of Understanding. 78. Bank with assets of $25 to $50 million The bank had previously suffered substantial loan and operational losses which threatened its continued existence. These problems were related to the lack of management experience and controls. Criticized as sets approximated 50 percent of gross capital funds, past dues exceeded 6 percent of gross loans, and credit information was insufficient. Management had embarked on a growth program, with assets doubling in approximately 1.5 years. That growth was funded largely by rate-sensitive and volatile deposits, with ap proximately one-third of the bank's footings supported by a single, overnight demand deposit account. At the same time, the bank was using those funds to provide medium term real estate loans at fixed rates. Between examinations, loans to deposits had grown to approxi mately 99 percent. Increased levels of earnings came with that growth, and the board approved a compen sation program for the chief executive officer solely 124 tied to a specific percentage of pretaxed net income. Additionally, the bank was cited for violations of 12 USC 84, 83 and 375b; 12 CFR 217 (Regulation Q); and 15 USC 1681. A Formal Agreement required the board to develop a written management plan, including a summary of their own duties and responsibilities and written posi tion descriptions for chief officers, which addressed the current compensation program. The board was not to base compensation solely upon the bank's operat ing performance. Additionally, the Agreement required that the board develop a comprehensive financial plan, including a liquidity and asset/liability manage ment program, a program to sustain the bank's earn ings and a capital maintenance program. The board was also required to reduce the bank's exposure in criticized assets and not to extend any further credit to a borrower whose loan was criticized. Each of the items was required to be submitted to the regional ad ministrator for his review and approval. A loan policy was required to be developed with respect to insider transactions, delinquent loans and credit information. 79. Bank with assets of less than $25 million Poor asset quality, loss operations, a capital shortfall and an inadequate funds management policy were at tributed to poor management and inadequate director ate supervision. The examination revealed that the bank's overall condition had deteriorated because of continued poor management and insufficient director ate supervision. Classified assets increased from 62 to 126 percent and delinquent loans rose from 11 to 14 percent. Recently hired management proved to be in adequate as shown by continued poor internal opera tions and limited loan loss recoveries. An Order to Cease and Desist required the bank to (1) obtain a new chief executive officer acceptable to the regional administrator, (2) have the board regularly review the adequacy of bank management, (3) pro duce and implement a written outline of senior management's duties and responsibilities, (4) elimi nate criticized assets, (5) take action to remove loans to directors from criticized status, (6) strengthen its lending policy by review and revision, (7) take action to obtain current and satisfactory credit information on all existing and future loans, (8) take necessary steps to correct collateral exceptions and establish proce dures to ensure sufficient collateralization in the future, (9) conduct quarterly board review and adjustment of the adequacy of the allowance for possible loan losses, (10) provide delinquent loan percentage re ports to the regional administrator, (11) review and re vise the written liquidity, asset and liability manage ment policy, (12) develop and implement a written audit program, and (13) record all board and boardappointed committee meetings. 80. Bank with assets of less than $25 million Ineffective board supervision and frequent senior management turnover contributed to loan portfolio de terioration, poor operations and violations of law. Inter nal controls and audit procedures were weak. The lending staff was considered inadequate. Classified assets equalled approximately 85 percent of the bank's gross capital funds. Loans not supported by current and satisfactory credit information represented approximately 25 percent of total loans and past due loans were almost 30 percent of gross loans. Four vio lations of 12 USC 84 were noted. The bank had failed to conform to the requirements of a Memorandum of Understanding previously executed. An Order to Cease and Desist ordered the board to correct violations of 12 USC 84 and other violations cited. The board was further required to evaluate present management. The bank was ordered to pro tect the interests with regard to criticized assets, not to lend to certain criticized borrowers and to improve and strengthen its collection efforts. The bank's allowance for possible loan losses was also to be increased and maintained on a periodic basis. The bank was also re quired to obtain current and satisfactory credit infor mation on all loans. The board was required to elimi nate certain internal control and audit deficiencies and to establish a comprehensive formal written audit pro gram and to develop a capital plan subject to the re view and approval of the regional administrator. 81. Bank with assets of $25 to $50 million Inadequate management, violations of law and regu lation, increased classified assets, loans not supported by current and satisfactory credit information, and past due loans were the primary problems affecting this bank. One violation of 12 USC 29, two violations of 31 CFR 103, and one violation of 12 CFR 217 were dis closed. A Formal Agreement required immediate correction of all violations of law." A committee was established to study and evaluate the bank's current management. The bank was required to retain the services of an in dependent appraiser. The bank was further required to adopt and implement a written program for strengthen ing criticized assets and to adopt written procedures for recovery of charged off loans and delinquent loans, as well as to develop a program to maintain current and satisfactory credit information. The bank was also directed to evaluate its lending policy and not to ex tend credit without having adequate collateral. The bank was required to increase its allowance for possi ble loan losses and further required to develop invest ment policies. The bank was required to review its capital and to develop a program to maintain and strengthen the capital structure of the bank. The bank was prohibited from declaring dividends without the prior written approval of the regional administrator. 82. Bank with assets of $25 to $50 million Violations of 12 USC 84, coupled with insider abuse, led to a severe deterioration in the condition of this bank. Classified assets had increased, the reserve for possible loan losses was inadequate and loans not supported by current credit information represented approximately one-third of the bank's loan portfolio. Past due loans were approximately one-fourth of all loans. An Order to Cease and Desist ordered the bank to immediately correct all violations of 12 USC 84 and any other violations cited. The bank was required to obtain independent special counsel to review the vio lations of 12 USC 84 and 12 CFR 215 to determine what liability the board may have had in granting such loans and causing such violations. The bank was fur ther required to develop a compliance committee to develop procedures to ensure compliance with the or der. The bank was prohibited from extending credit to certain former bank officials and loans were not per mitted to certain persons cited in the report of exami nation as having indulged in insider transactions, selfdealing, and abuse. The bank was also required to evaluate its management needs and to adhere to cer tain lending policies. The bank was required to de velop a plan to recover certain assets that had been charged off. The bank was further required to develop an investment policy in liquidity and to improve its li quidity. The bank was required to evaluate its capital needs. The bank was ordered to develop a plan to ob tain and maintain satisfactory credit information and was prohibited from extending credit to criticized bor rowers. The bank was further required to increase and maintain its allowance for possible loan losses. The board of directors was required to adopt a written code of ethics. Dividends and compensation paid to officers were restricted. 83. Bank with assets of less than $25 million The bank was initially required to enter into an Order to Cease and Desist with this Office. However, in view of improved conditions, the order was terminated and the board entered into the Memorandum of Under standing. The bank still needed a capital injection and had to undertake action to improve and sustain its earnings. The allowance for possible loan losses was not adequate and internal controls needed to be im proved. A Memorandum gf Understanding required the board to seek capital injection through the sale of common stock and to develop plans to improve and sustain its earnings. The bank was prohibited from paying dividends without the prior written approval of the regional administrator, and the board was required to improve its funds management policies. The board of directors was further required to review its allow ance for possible loan losses and to obtain and main tain current and satisfactory credit information on loans listed in the report of examination as lacking such in formation. 84. Bank with assets of $500 million to $1 billion Criticized assets amounted to approximately 110 percent of the bank's gross capital funds. Past due loans represented 12 percent of total loans. A violation of 12 USC 371c was noted. The bank was issuing due bills to retail customers without fully complying with 12 CFR 204.110. Payments of monies to the bank's hold ing company were considered excessive and certain of the bank's correspondent accounts were consid ered inappropriate. Management was not considered adequate. The bank was also using short term and rate-sensitive funds to support long term and fixed rate assets which had a subsequent adverse impact on the bank's profitability. Capital, liquidity and funds man agement policies were inadequate. A Formal Agreement restricted credit to certain criti125 cized borrowers and required the board to develop a plan to improve criticized assets. The bank was re quired not to extend credit in violation of 12 USC 371c and 375b and 12 CFR 215. The bank was required to eliminate and correct all violations of laws, rules and regulations. Dividends were restricted. The bank was prohibited from maintaining any correspondent ac counts for the benefit of any affiliate unless in compli ance with law, rules and regulations. The bank was re quired to review its management structure and to make any necessary changes. The board was di rected to review its asset and liability management policies and to develop and adopt a written policy ad dressing capital as well as covering the payment of dividends and liquidity. 85. Bank with assets of less than $25 million The bank was suffering from severe problems. Clas sified assets equalled approximately 150 percent of the bank's gross capital funds. Insider abuse had been noted by previous management. Loans not sup ported by current and satisfactory credit information represented approximately 20 percent of gross loans as did the past due loans. Management was not con sidered adequate. Seven violations of 12 USC 84 and two violations of 12 USC 375a were noted. An Order to Cease and Desist required the bank to inject equity capital into the bank and to maintain eq uity capital equal to not less than 10.5 percent of the bank's total assets. The bank was also ordered to re tain the services of a new chief executive officer. The bank was further required to correct the violations of 12 USC 84, providing indemnification for any loss suf fered, and to correct the other violations noted in the report of examination. The bank was required to take immediate action to protect its interests concerning criticized assets. The bank was restricted from lending to certain criticized borrowers. The bank was further required to maintain its allowance for possible loan losses at an adequate level and was required to adopt a written program to improve its collection efforts. The bank was also required to improve and maintain its level of liquidity and to improve its earnings. As re quired by the order, the bank adopted comprehensive written lending and investment policies. Internal con trol deficiencies and audit deficiencies were corrected. 86. Bank with assets of less than $25 million An examination of the bank disclosed violations of 12 USC 84, 375b and 371c; 12 CFR 1.8; and 31 CFR 103 as well as inadequate capital, classified assets, in adequate liquidity and excessive management fees to the bank's holding company. A Notice of Charges was served upon the bank al leging the above violations of law and regulation and unsafe and unsound banking practices. An administra tive hearing is pending. 87. Bank with assets of less than $25 million An examination of the bank revealed that the bank had accepted excessive deposits of volatile, ratesensitive funds through the use of retail repurchase agreements and had failed to match the repurchase agreements with the obligations backing the agree 126 ment. The condition of the bank was such that any fur ther mismatching by bank management would cause the bank to fail in a short period of time. A Notice of Charges was served on the bank alleg ing that unsafe and unsound banking practice and a Temporary Order to Cease and Desist was issued which prevented the bank from further indulging in the repurchase agreements on a mismatched basis. An administrative hearing is pending. 88. Bank with assets of less than $25 million The bank's criticized assets had increased to ap proximately 93 percent of the bank's total loans. The bank's allowance for possible loan losses was consid ered inadequate and the bank was in need of new ex ecutive management. A Memorandum of Understanding required the bank to take prompt and continuing action to protect its as sets which had been criticized in the report of exami nation. Limits were made on extensions of credit to borrowers and the bank was required to develop a comprehensive written lending policy. The allowance for possible loan losses was required to be adjusted periodically by the bank, and the bank was required to develop and implement written guidelines for coordi nation and management of the bank's assets and lia bilities. The bank also was required to retain a new chief executive officer. 89. Bank with assets of less than $25 million The bank had criticized assets amounting to approx imately 100 percent of its gross capital funds. Its allow ance for possible loan losses was inadequate. Loans not supported by current and satisfactory credit infor mation represented approximately 20 percent of total loans. Violations of 12 USC 29 and 375a were noted. A Memorandum of Understanding required the bank to adopt a written program to eliminate criticized as sets and to eliminate each violation of law, rule and regulation. The bank was also required to submit a capital program to the regional administrator. The bank was directed to maintain the allowance for possi ble loan losses at an adequate level and to take action necessary to obtain and maintain current and satisfac tory credit information. The bank also was required to revise its lending policies, as well as its liquidity asset; and liability management policies. 90. Bank with assets of less than $25 million The bank was being operated by inadequate man agement. Classified assets amounted to approximately 150 percent of the bank's gross capital funds. Over due loans were approximately 15 percent of total loans. The bank's loan loss reserve was inadequate and capital was deficient. Three violations of the bank's lending limit, 12 USC 84, were noted. A Notice of Charges and a Temporary Order to Cease and Desist were served on the bank. The No tice of Charges alleged the above conditions as un safe and unsound banking practices and the Tempo rary Order required the bank to develop a capital plan for the immediate injection of capital and/or to deposit certain monies in the bank. An administrative hearing is pending. 91. Bank with assets of more than $1 billion A trust examination revealed a substantial number of violations of law, rule and regulation which were recur ring. The bank, in an effort to relieve itself of liability for the management of trust account assets, as a matter of practice required that an investment advisor be ap pointed before it would accept an account. The trust instruments signed by the settlors delegated varying degrees of responsibility to the investment advisor and attempted to totally relieve the bank of liability for in vestment decisions and account management. The bank's failure to provide any type of supervision for trust accounts managed by an investment advisor led to a number of deficiencies in trust account adminis tration and conflicts of interest. Some of the areas of concern included the lack of organizational structure in the trust department, the lack of supervision by the board and the trust committees, inadequate audits, lack of internal controls, lack of documentation in the accounts, lack of investment policies and procedures, and lack of policies and procedures governing ac count administration. Those deficiencies led to prob lems such as failure to abide by the terms of the gov erning instrument, imprudent investments, lack of diversification, purchase of the bank's holding com pany stock for trust accounts in violation of law, and numerous other violations of law and regulation. A Formal Agreement required formation of a trust in vestment committee, a majority of whose members were outside directors. The committee was responsi ble for making investment decisions, reviewing the bank's compliance with the Agreement, reviewing an nually each trust instrument to determine whether the account had been administered in accordance with its terms during the previous year and, most importantly, reviewing each account to determine whether there had been any past violation of the terms of the govern ing instrument or violation of law with respect to that account. The trust investment committee was required to determine whether corrective action was necessary, including restitution to the beneficiaries. The board was required to adopt and implement written policies and procedures designed to ensure compliance with 12 CFR 9 and sound fiduciary principles and specifi cally designed to correct the deficiencies noted in the trust examination. The bank was required to enforce its procedures to ensure compliance with all rules of the Securities and Exchange Commission relating to trans fer agent activity. It was required to obtain court ap proval for all investments for court supervised ac counts. The bank was also required to obtain funding policies for its pension plans, take measures to correct deficiencies with respect to corporate trust activities, and to perform customer notification in conformance with 12 CFR 12.4. With respect to investment advisor accounts, the bank was required to review the lan guage of each instrument appointing an investment advisor and limiting the bank's liability to determine whether the instrument conformed with state law, whether the bank was in fact insulated from liability and, if not, to determine the actual liability and duties the bank had. The Agreement required specific lan guage to be included in all new trust account instru ments the bank accepted which had the intention of limiting the bank's liability to the extent permitted by law. Before acting on any instruction received from an investment advisor, the bank was required to deter mine that the instruction conformed to the governing instrument and that, to the bank's knowledge, that the instruction did not breach the investment advisor's fi duciary duty. The bank was also required to formulate a written program describing audit procedures for the trust department and a program for information pro cessing which conforms to standards established by the OCC. There was also a prohibition on the purchase of bank holding company stock unless specifically au thorized by the governing instrument. 92. Bank with assets of $100 to $250 million A trust examination revealed numerous deficiencies primarily with respect to the adoption and implementa tion of sound policies and procedures governing the operation of the trust department. Of primary concern were the lack of an orderly filing system, inadequate control of trust assets in violation of 12 CFR 9.13, insuf ficient supervision of closely held companies, inade quate real estate loan supervision, deficiencies in the supervision of real estate held as assets in trust ac counts, and the lack of adequate employee benefit trust account management. Also of concern were vio lations of 12 CFR 9.12, involving improper use of own bank time deposits, and 12 CFR 12, involving lack of the required recordkeeping and confirmation proce dures. Other deficiencies were also noted including large uninvested cash balances, inadequate invest ment review material and lack of proper approval for deposits and withdrawals in the collective investment fund. A Memorandum of Understanding required correc tion of each violation of law, rule or regulation at no loss to the accounts. The Memorandum also required the adoption of policies and procedures designed to ensure that all trust account documentary files were maintained in an organized and current condition, to ensure the prompt recording of deposited trust as sets, to address the supervision of investments and closely held companies, to address the proper su pervision of real estate loans held as assets in trust ac counts, to ensure maintenance of a program of infor mation processing for the recording of trust account liabilities, to ensure the maintenance of detailed min utes of all meetings in accordance with 12 CFR 9.9 and to ensure that funds awaiting investment are su pervised and invested in a comprehensive and timely manner. The bank was also required to provide the trust department with a qualified employee benefit ac count administrator. The board was required to report at frequent intervals the bank's progress in achieving compliance with the terms of the Memorandum. 93. Bank with assets of less than $25 million The bank embarked on an extensive growth pro gram, doubling its assets in approximately 1 year. That growth was funded by a large amount of rate-sensitive deposits; however, the bank had maintained control of its costs and priced each loan on a variable rate basis. Net profits were good. The bank had lost control of the 127 level of its current outstandings and commitments granted to customers. Liquidity had been reduced to approximately 10 percent, with loans to deposits of ap proximately 84 percent. During the examination, net liquid assets were reduced to - 0 . 8 1 percent, and loans to deposits increased to 98 percent. The bank began an immediate program to curtail commitments and to funnel all cash flow into liquid assets. Some success was immediately apparent, and liquidity ratios improved rapidly. Initially, based on the immediate im provement in the bank's liquidity, administrative action was waived. Upon examination of the bank approxi mately 5 months later, it was determined that the bank had adopted an unsafe and unsound practice regard ing the method with which they had improved their li quidity. In order to rapidly acquire deposits, the bank had requested excessive compensating balances (equalling approximately four times current outstand ings) from three criticized borrowers. In order to ac quire those deposits, the borrowers had entered into agreements with funds brokers to provide the bank with deposits and to pay the required brokers' fees. That resulted in an effective cost of funds to each bor rower equivalent to an annual percentage rate of 50 percent. The bank had put at risk substantial loan pro ceeds to solve the liquidity problems rather than pru dently redistributing assets through normal cash flow. A Memorandum of Understanding required that the bank search its records to determine that all such rela tionships were fully disclosed and that the board adopt a policy to discontinue the practice. Amendments to the bank's asset/liability management policy regarding the use of broker deposits and purchased funds, ag gregate limitations, restrictions on use, individual transaction limits, specific liquidity guidelines, and re porting requirements to ensure the maintenance of all policies were also required. Also included were re quirements that the board adopt a program to improve the level of criticized assets which equalled approxi mately 77 percent of gross capital funds. Each of the programs was required to be submitted to the regional administrator for comment or approval. 94. Bank with assets of less than $25 million The bank showed a continuing significant asset de terioration with 52 percent classified and 52 percent other assets especially mentioned. Credit and collat eral exceptions and past dues were excessive. A funds management strategy was also lacking. There was a sizable influx of money market certificates of de posit and a rapid deterioration in interest margins. Two directors were replaced at the shareholders meeting by illegal voting procedures. Several other violations were noted. Despite continued deterioration in the bank's condition, a substantial cash dividend was paid. Lending officers were considered weak. Defi ciencies were found in the internal controls and audit procedures. An Order to Cease and Desist required the bank to cause all extensions of credit to conform with 12 USC 84, and required the adoption of policies and proce dures to ensure compliance with Section 84. A new chief executive officer was required and the regional 128 administrator was given the power of veto prior to that appointment. The order prohibited the issuance of offi cial checks without prior payment from the customer and required that any such checks issued be properly recorded and reconciled at least monthly by an indi vidual without authority to issue such checks. Interest earnings were not to be reflected in the books until ac tually received. A program designed to eliminate criti cized assets was to be promulgated and no credit in excess of $5,000 was to be extended to any borrower whose credit had previously been criticized unless fail ure to do so would be detrimental to the bank and the extension had received prior written approval of a ma jority of the board. The bank was to submit a written loan policy. All loans, present and future, were to be supported by current and satisfactory credit informa tion. The allowance for possible loan losses was to im mediately be no less than $200,000, with the mainte nance of an adequate level in the future monitored by quarterly reviews by the board. A program addressing asset and liability management was to be imple mented as was an operating plan for capital and earn ing needs. Dividends were not to be declared unless in conformity with 12 USC 60 and justified by safe and sound banking. All deficiencies in internal control and internal audit procedures cited were to be corrected and a CPA was to be employed to perform an audit, which was to form the basis of a plan to be drafted to improve internal controls and internal audit proce dures. Blanket bond insurance was to be maintained at an adequate level. 95. Bank with assets of $500 million to $1 billion An examination of the bank disclosed that an exces sive amount of criticized assets, primarily real estate construction loans, had negatively impacted on earn ings. An increasing imbalance between rate-sensitive assets and liabilities had caused the bank to become extremely vulnerable during periods of high interest rates. The increased reliance on rate-sensitive funds also caused a decline in liquidity. Problems at the holding company level also contributed to the deterio ration in the bank's condition. Bank earnings had, to a large extent, been upstreamed to service the holding company's debt. In addition, the bank had purchased $20 million in low yielding, long term real estate credits from another holding company subsidiary. As a result, capital growth from profit retention was virtually nonex istent. A Memorandum of Understanding prohibited the bank from declaring or paying dividends unless it first received written approval of the regional administrator. The bank was also required to establish a program to reduce criticized assets. The board was required to (1) draft and implement a policy prohibiting the bank from entering into any transactions with its affiliates which required the bank to make any payment to said affili ates unless the bank first received written notification of the regional administrator's intent not to disapprove the transaction; (2) implement a policy statement gov erning the maintenance of bank correspondent ac counts for the benefit of affiliates; (3) adopt a policy and procedures prohibiting the bank from engaging in any financial futures contracts, forward placement con tracts, or standby contracts in its commercial banking activities except in conformance with Banking Circular 79; (4) adopt a written profit plan; and (5) conduct an analysis of the bank's capital requirements and adopt a written plan designed to meet future capital require ments. Management was required to design a plan providing for the improvement of the bank's position with respect to the imbalance between the level of rate-sensitive assets and liabilities. 96. Bank with assets of $100 to $250 million The bank's overall condition deteriorated as a result of poor lending practices coupled with a rapidly grow ing area economy. The bank did not have a sufficient number of trained and experienced lending officers to administer the increasing volume and complexity of its loan portfolio. Classified assets had doubled since the prior examination, and equalled 115 percent of gross capital funds. The allowance for possible loan losses, at 0.7 percent of total loans, was inadequate. The bank had aggressively expanded loan volume at the ex pense of other balance sheet components. As a result, net liquid assets equalled only 7 percent of net de posits and the bank has been a consistent and sub stantial borrower of funds. Those factors resulted in an inadequate capital situation. Equity capital equalled only 6 percent of total assets. The examination dis closed several serious violations of 12 USC 84, one of which resulted in a loss to the bank in excess of $1 million. A Formal Agreement required the correction of all vi olations of law, rule or regulation cited in the commer cial and consumer affairs reports of examination, and the adoption of procedures to prevent the recurrence of similar violations. The individual board members who approved the excessive credit extensions in viola tion of 12 USC 84 were required to indemnify the bank for all losses and expenses that the bank incurred as the result of said credit extensions. The board was also required to (1) modify the bank's management in formation system; (2) evaluate the sufficiency and competency of the bank's existing officer staff and make any appropriate staffing changes; (3) submit to the regional administrator, for his approval, a written capital program deisgned to provide the bank with an equity capital injection of not less than $1.35 million; (4) conduct an analysis of the bank's future equity capital needs; and (5) conduct quarterly reviews of the allowance for possible loan losses and make any nec essary adjustments. The bank was required to take im mediate and continued action to protect its interests with respect to all assets criticized in the report of ex amination. The bank was also required to submit to the regional administrator a written program designed to achieve and maintain an acceptable level of liquidity. The Agreement directed the board to establish an oversight committee composed of outside directors to monitor the bank's progress in complying with the Agreement. 97. Bank with assets of $100 to $250 million Examination of the bank disclosed that classified and criticized assets had remained excessive at 58 percent of gross capital funds. Additionally, delinquent accounts increased to 11 percent of gross loans and collateral exceptions and loans not supported by cur rent credit information remained well above accept able levels. As a result, the bank incurred substantial loan losses. Management structure was unsatisfactory, with the president assuming responsibility for the ad ministration of the entire loan portfolio without properly delegating responsibility. There existed no specific lines of authority and areas of responsibility for senior management positions. The board did not exercise ad equate supervision oyer the conduct of the bank's af fairs. Violations of 12 USC 371c and 375a, 12 CFR 7.3025 and 215, and 31 CFR 103.33 were cited. A Memorandum of Understanding required the bank to correct all violations of law, rule or regulation, and adopt procedures designed to prevent the recurrence of similar violations. Compliance with the Memoran dum was to be monitored by a compliance committee composed of five outside directors. The Memorandum further required the board to (1) conduct an evaluation of current management and to formulate and imple ment a written management plan for the correction of identified management and staffing deficiencies, (2) review the bank's lending and collection policies and procedures and to amend said policies and proce dures as deemed necessary, (3) adopt and implement a plan designed to remove all assets from criticized status, (4) adopt and implement a plan to improve the bank's earnings and to maintain an adequate capital structure, and (5) develop an asset/liability manage ment plan. 98. Bank with assets of less than $25 million Examination of the bank disclosed that classified as sets had increased from 13 to 55 percent since the prior examination. Other assets especially mentioned amounted to an additional 16 percent of gross capital funds. Loans not supported by current credit informa tion were intolerably high, at 28 percent of gross loans. The poor quality of the loan portfolio resulted in a sig nificant increase in loan charge-offs and negatively im pacted on the bank's capital structure. Total assets equalled 18 times adjusted capital. The capital short fall had been estimated at approximately $250,000. Management complacency in the administration of the lending function was cited as a primary cause for the poor condition of the loan portfolio. In addition, the board was criticized for not requiring management to maintain an ongoing list of problem loans. The exami nation also disclosed violations of 12 USC 84 and 375a, 12 CFR 7.3025 and 215.4, and 31 CFR 103.33. A Memorandum of Understanding required the bank to correct all cited violations of law and to adopt ade quate procedures to prevent the recurrence of similar violations. The board was required to (1) indemnify the bank against any losses resulting from extensions of credit made in violation of 12 USC 84; (2) implement a written program designed to remove all assets from criticized status; and (3) submit to the regional admin istrator, for his approval, a written program designed to increase equity capital by at least $250,000 and to 129 immediately implement the program upon receipt of said approval. 99. Bank with assets of $50 to $75 million Examination of the bank disclosed continued deteri oration in the bank's overall condition. Ineffective su pervision had resulted in a loosely run lending opera tion with no organizational structure. Fundamental lending principles were not followed. In 2 years, classi fied loans had increased from 14 to 80 percent of gross capital funds. Over the same period, overdue loans and credit information exceptions had almost doubled. Excessive loan losses resulted in negative retained earnings for the first half of 1980. The bank's problems were compounded by a weakening of the bank's capital structure. Heavy asset, loan and deposit growth had strained capital ratios to the point where an additional equity injection was required. Capital equalled 16 percent of total assets. Factors contribut ing to those deficiencies included the absence of ef fective management supervision, a weak organiza tional structure, nonadherence to policy, absence of a realistic internal loan review function and nonaggressive collection efforts. Violations of 12 USC 84 and 375b and 31 CFR 103.33 were cited. An Order to Cease and Desist required the bank to correct all existing violations of law, rule or regulation and to adopt procedures adequate to prevent the re currence of similar violations. The order directed the board to (1) undertake an assessment of the suffi ciency, quality and capability of all officers participat ing in the bank's lending function and to make any necessary staffing changes; (2) make such amend ments to the bank's lending and collection policies and procedures as deemed necessary to improve the lending function; (3) formulate and implement an inter nal loan review system; (4) implement a written pro gram for eliminating all assets from criticized status; (5) conduct quarterly reviews of the allowance for pos sible loan losses and to make any necessary adjust ments; (6) develop and implement written asset/liability management guidelines; (7) submit to the regional ad ministrator, for his approval, a written program de signed to provide for an injection of at least $1 million in equity capital and to implement said program upon receipt of the regional administrator's approval; (8) de velop a comprehensive financial plan; and (9) take all necessary action to improve the effectiveness and ad equacy of the bank's internal controls. The order also directed the board to establish a compliance commit tee, the majority of which was outside directors, to monitor the bank's compliance with the order. 100. Bankwith assets of $100 to $250 million The bank's overall condition continued to deteriorate after the execution of a written Formal Agreement with the OCC. Criticized assets had increased to 98 per cent of gross capital funds. The allowance for possible loan losses, which equalled 1.2 percent of total loans, was considered inadequate in view of the unaccepta ble level of delinquent loans, the severity of the classi fied loans, the bank's lax collection procedures, and the depressed local economy. Past due loans were ex 130 cessive, at 17 percent of total loans, and credit infor mation exceptions were high, at 19 percent of gross loans. Management was considered poor and the un satisfactory condition of the loan portfolio was attrib uted, in large part, to the lending practices of the bank's president. The commercial report of examina tion cited violations of 12 USC 371 d and 375b, 12 CFR 215 and 7.3025, and 31 CFR 103.33. The consumer affairs report of examination also disclosed numerous violations of law and regulation, including violations of 12 CFR 226 (Regulation Z) and 12 CFR 202 (Regula tion B). The examination of the bank's trust department disclosed that it was in very poor condition, with nu merous violations of 12 CFR 9 cited. An Order to Cease and Desist prohibited the presi dent from participating in the supervision and adminis tration of the bank's lending function and required the bank to limit its loan portfolio to no more than 70 per cent of its deposits. The bank was required to correct all existing violations of law, rule or regulation, and to adopt procedures to prevent the recurrence of similar violations. The bank was also prohibited from extend ing credit to any of its insiders, except in conformity with the provisions of 12 CFR 215. In addition, the bank was prohibited from declaring or paying any divi dends in an amount exceeding 50 percent of net in come, after taxes, without the prior written approval of the regional administrator. The order directed the board to (1) provide the bank with new, experienced and capable senior lending, loan review and opera tions officers; (2) conduct a study of the quality and quantity of current management and implement a writ ten management plan for the timely correction of iden tified management and staffing deficiencies; (3) adopt and implement a written plan for removing all assets from criticized status; (4) adopt and implement a sys tem for monitoring problem loans; (5) review and for mulate a new comprehensive written loan policy; (6) formulate and implement a policy regulating the cir cumstances under which the bank may pay overdrafts; (7) conduct quarterly reviews of the adequacy of the bank's allowance for possible loan losses and to make appropriate adjustments thereto; (8) adopt and imple ment a funds management policy; and (9) submit a 5year capital program to the regional administrator, for his approval. In view of the poor condition of its trust department, the bank was prohibited from accepting any new trust accounts. Finally, the bank was ordered to identify all violations of Regulation Z, subject to the reimbursement provisions of 15 USC 1607, and to make reimbursement in accordance with those provi sions. The board was directed to establish a compli ance committee to monitor the bank's progress in complying with the order. 101. Bank with assets of $100 to $250 million Increases in both the volume and severity of classi fied assets were disclosed by the examination. Classi fied assets amounted to 92 percent of gross capital funds. Management structure was poorly organized, with no established lines of authority and responsibil ity. Excessive reliance had been placed on the credit judgment of the president. The bank had become too large for the president to serve as loan officer, problem loan collector and public relations officer. Overall de linquency was up to 7 percent of gross loans. Loans not supported by current credit information were unac ceptable, at 10 percent of gross loans. The allowance for possible loan losses, at 0.7 percent of total loans, was considered inadequate in view of the large vol ume of credits classified as doubtful. Although the bank's capital ratios were above average for its peer group and were considered adequate, the heavy po tential loan loss on the doubtful credits threatened the bank's earnings and capital ratings. The internal audit program was criticized as lacking both independence and effectiveness. Audit programs had not been up dated and, in many cases, audit procedures were not followed or documented. The commercial report of ex amination disclosed two violations of 12 USC84. In ad dition, the consumer affairs report of examination dis closed several violations, including violations of 12 CFR 226 (Regulation Z) and 12 CFR 202 (Regulation B). The trust report of examination cited violations of 12 CFR 12 and 9.18. A Memorandum of Understanding required the bank to correct all violations of 12 USC 84, and all consumer and trust violations cited in the reports of examination. The bank was also required to adopt procedures de signed to prevent the recurrence of similar violations. The Memorandum directed the board to (1) perform an indepth study of the bank's management structure with the aid of outside assistance, as necessary, and to correct all identified management and staffing defi ciencies; (2) adopt and implement a written program for removing all assets from criticized status; (3) review immediately the adequacy of the allowance for possi ble loan losses and continue to do so on a quarterly basis; (4) adopt a written program to provide for im proved collection efforts; (5) complete and adopt the bank's new written lending policy; (6) formulate and implement an internal loan review system consisting of personnel independent of the lending function; and (7) amend and expand the bank's internal audit program. 102. Bank with assets of more than $1 billion Examination of the trust department confirmed the overall satisfactory condition of the department but re vealed certain serious conditions, including violations of the transfer agent regulations. Prior to the examina tion, bank management discovered serious discrepan cies in the records maintained by the bank, in its trans fer agent function, for several issuers. Those out of proof conditions had existed for almost a decade but had been concealed from senior management. The bank's prompt action in reimbursing the issuers and in retaining an accounting firm and performing an inde pendent review of the bank's transfer agent activities resulted in substantial correction of all problems prior to the execution of a Memorandum of Understanding. Additional problems included the bank's failure to make turnaround calculations for approximately 4 months and deficient internal procedures, controls and audits. Physical security in the transfer agent area and controls over unissued certificates was similarly defi cient, as were the controls over the automated record keeping system. A Memorandum of Understanding required the bank to continue to take action to correct each violation and adopt procedures to ensure they did not recur. The bank was directed to ensure that no individual who it had reason to believe directed the concealment of dis crepancies in the transfer agent function remained in the bank, and to identify every individual it had reason to believe participated in the concealment of the dis crepancies. The board was required to assess the suf ficiency of the staffing of the bank's transfer agent function. The board was further required to cause actions to be taken to eliminate the deficiencies in the trust report of examination and to provide the regional administrator with a copy of the report of the outside auditors. The board was required to implement the recommendations of the outside auditors or explain why they did not. The bank was to comply with the turnaround require ments, improve its handling of written inquiries regard ing its performance as a transfer agent and improve physical security in its corporate agency areas. The bank further was to improve controls oyer unissued certificates and safeguards against overissuance. The bank was to reconcile the out of proof condition, main tain an allowance and regularly audit the transfer agent function. The bank was also required to refrain from acting as transfer agent for any new issuers until it fully complied with the Memorandum of Understand ing and obtained written authorization from the re gional administrator. 103. Bank with assets of less than $25 million Inadequate supervision of the lending function coupled with the bank's rapid growth resulted in esca lating asset problems and a declining capital base. Loans not supported by current, satisfactory credit in formation; delinquent loans; inadequate collateral files; and unsatisfactory compliance with the bank's lending policy contributed to this condition. Loan losses and past due loans increased significantly, thereby requir ing a charge to earnings to replenish the allowance for possible loan losses to an adequate level. This re sulted in a net loss for the year and an increased capi tal shortfall. Also, excessive noncompliance with the lending policies continued. The bank entered into a Formal Agreement which re quired the board to perform an evaluation of manage ment and implement a management plan regarding the positions, authority and responsibility of manage ment. The board was to obtain a new chief executive officer if the bank's condition did not improve suffi ciently to satisfy the regional administrator before the next examination of the bank. The board was required to submit a revised capital plan and to refrain from de claring any dividends without the written approval of the regional administrator. The board was required to implement a program to eliminate criticized assets and to refrain from extending additional credit to any bor rower whose credit was criticized. The board was di rected to obtain and maintain adequate credit informa tion and to refrain from extending credit without obtaining adequate credit information and collateral documentation. The board was further required to 131 adopt and implement a written program to improve collection efforts, reduce delinquent loans, and im prove recovery rates on charged off assets. The board was directed to improve lending policies and proce dures, and to review and augment the allowance for possible loan losses on a quarterly basis. The board was required to correct any violations of law and en sure they did not recur. The board was required to re vise its written policies regarding liquidity and asset and liability management. The board was directed to submit monthly reports to the regional administrator. 104. Bank with assets of more than $1 billion Prior to the action, the bank reflected instability in the ranks of senior management. Classified assets equalled 77 percent of gross capital funds. The bank's asset/liability management policies and operations were deficient as was its management information sys tem. The bank was experiencing an unsatisfactory earnings performance and its capital was becoming strained. Certain of the institution's overseas trust and data processing operations were experiencing a vari ety of problems. A Memorandum of Understanding required the bank to reconstitute its asset and liability management com mittee and establish improved asset/liability policies and funds management strategies. Further, the bank's board of directors was required to direct that a man agement study be performed and to implement a plan to satisfy the bank's managerial needs. In addition, the bank was required to develop a strategic plan ad dressing its future needs, including capital, and to submit the plan to the OCC for review. The Memoran dum also required the bank to improve its manage ment information system and specified a number of operational areas to be covered by the system. The Memorandum further required actions to improve as set quality as well as operations in the trust and data processing functions which had been subject to criti cism. 105. Bank with assets of less than $25 million The bank had inadequate capital, poor earnings, heavy losses, a violation of 12 USC 29 and 84, a total lack of improvement in the volume of classified assets, heavy depreciation in its investment portfolio, a domi nating chief executive officer, and a complete lack of supervision by the board of directors. An Order to Cease and Desist required the bank to obtain a new chief executive officer and $500,000 in new equity capital. The order also required a program to improve the earnings of the bank, to restrict the pay ment of dividends without the prior written approval of the regional administrator, and to ensure active in volvement and supervision by the board. 106. Bank with assets of $25 to $50 million An Order to Cease and Desist required the bank to correct each cited violation of law, rule or regulation and to adopt procedures to prevent the recurrence of similar violations. The bank was directed to comply with the restitution provisions of Section 608 of the Truth in Lending Simplification and Reform Act, 15 132 USC 1607, with respect to the reimbursable Regulation Z violations cited in the consumer report. The entire summary of this action may be found at #6 under the Civil Money Penalty heading. 107. Bank with assets of $75 to $100 million The quality of the bank's loan portfolio had deterio rated. Between examinations, criticized assets jumped from 41 to 99 percent of gross capital funds. Past due loans, at 18 percent of gross loans, and loans not sup ported by current credit information, at 23 percent of gross loans, were excessive. Although the deteriora tion in the loan portfolio was largely attributed to de pressed local economic conditions, unsound lending practices were also a factor. Management's philoso phy and practices with respect to overreliance on col lateral, inadequate emphasis on determining the borrower's repayment capacity, a rather liberal re newal policy, and laxness in collection procedures also contributed to the present situation. Loan chargeoffs, at $380,000, depleted the allowance for possible loan losses, which stood at only 0.32 percent of total loans outstanding. The bank's capital base was strained as a result of substantial asset growth, weak earnings and a large cash dividend. The violations of laws, rules and regulations resulted primarily from management's unfamiliarity with the applicable laws and a lack of internal controls. In addition, the con sumer affairs report of examination disclosed violations of law, rule and regulation, including reimbursable vio lations of 12 CFR 226 (Regulation Z). A Memorandum of Understanding required that the bank take all action necessary to correct every viola tion of law, rule or regulation cited in the commercial and consumer affairs reports of examination, and to establish procedures designed to prevent the recur rence of similar violations. In particular, the bank was required to comply with the restitution provisions of Section 608 of the Truth in Lending Simplification and Reform Act, 15 USC 1607, with respect to the reimburs able Regulation Z violations. The board was required to (1) perform a comprehensive review of the bank's lending function and develop measures designed to ensure that the bank's lending function was performed in a safe and sound manner; (2) implement a written program to remove all assets from criticized status; (3) develop a comprehensive and detailed budget for 1981; (4) develop and implement written asset/liability management guidelines; (5) prepare an analysis of the bank's present and future capital needs and to, there after, adopt and implement a written plan designed to increase the equity capital of the bank to a specified capital to asset ratio; and (6) cause the bank's internal control deficiencies to be corrected. The Memoran dum required the bank to immediately increase its al lowance for possible loan losses to an amount not less than $400,000. The Memorandum also restricted divi dend declarations or payments if the bank failed to reach certain specified capital to asset ratios. 108. Bank with assets of more than $1 billion Although the solvency of the institution was not in jeopardy, the bank was suffering from a range of prob lems which made its overall condition generally unsat- isfactory. The bank's management structure did not provide for management succession and was inade quately staffed at the middle management level. The bank was cited for a deficient management information system and criticized for lacking a meaningful strate gic planning function. In addition, classified assets equalled approximately 70 percent of gross capital funds. The bank's lending policies were generally defi cient. Finally, the bank was criticized for having inade quate capital to support its level of operations. A Memorandum of Understanding required the bank to develop and implement a written management pro gram designed to alleviate the cited deficiencies in bank management. The bank was also required to im prove its management information system and to ex pand the system to include certain specified compo nents. The bank also was to improve its system for determining the sufficiency of its allowance for possi ble loan losses and to improve strategic planning. Lending policies governing all lending activities were required to be developed, approved by the bank's board, and implemented. The Memorandum also re quired the bank to take measures to strengthen its capital base, as well as its position with regard to criti cized assets. The bank was further required to formal ize an asset/liability management policy, a policy for disposing of other real estate owned, and procedures for identifying transactions with its affiliates. 109. Bank with assets of $25 to $50 million Criticized assets as a percent of gross capital funds increased from 27 to 40 percent on a stronger capital base, indicating deterioration in asset quality. Earnings had declined. Liquidity and the allowance for possible loan losses were also declining. The volume of loans, at 81 percent of total deposits, was beyond the ability of management to properly supervise. The loan portfo lio was comprised primarily of low yielding, fixed rate assets. Loan demand was being funded by ratesensitive liabilities. The bank had been in a net bor rowed position throughout most of 1979. The bank's heavy reliance on borrowed funds, as well as increas ing dependence on money market certificates, contrib uted significantly to the decline in the bank's earnings. The bank had been attempting to control loan growth for several years but had been unsuccessful. Management's inability to control loan demand, coup led with decreasing deposits, a heavy reliance on bor rowed funds, and an illiquid investment account, re sulted in a declining liquidity position. Capital was not adequate. The examination disclosed several viola tions of 12 USC 84 and 375b, and 12 CFR 215, which involved directors or their related interests. The bank's deficiencies were attributed, in large part, to inade quate board and management supervision. A Memorandum of Understanding required the bank to correct all existing violations of law, rule or regula tion and to adopt adequate procedures to prevent their recurrence. In particular, the bank was required to seek reimbursement for any loss of fee or interest in come sustained by the bank as a result of credit exten sions to insiders made in violation of the provisions of 12 CFR 215. The Memorandum also required the de velopment and implementation of a written program for improving the bank's liquidity position and amendment of the bank's written investment policy. The board was required to (1) develop and adopt a written program to improve and sustain the earnings of the bank; (2) re view the bank's capital structure on a semiannual basis to ensure that capital is maintained at an ade quate level; (3) conduct quarterly reviews of the allow ance for possible loan losses and make any necessary adjustments; (4) review the bank's lending policies and make all necessary amendments; and (5) provide the bank with a new, active and capable senior lend ing officer, unless a ratified agreement providing for the sale or merger of the bank could be submitted to the regional administrator within 120 days of the effec tive date of the Memorandum. The board was also re quired to take prompt and continuing action to protect the bank's interest with respect to all criticized assets. 110. Bank with assets of $25 to $50 million A Notice of Intention to Remove the president from his positions as president and chairman of the board was issued. The entire summary of this action may be found at #23 under the Administrative Actions heading. 111. Bank with assets of $50 to $75 million Although the asset quality of the bank and its earn ings were adequate, the bank refused to engage in constructive capital planning with the result that the bank was inadequately capitalized. That problem was exacerbated by the high growth rate experienced by the bank and projected for the future. The bank wanted to change the location of its main office and approval of the bank's application was conditional on the bank's injection of an adequate amount of equity capital. The bank ignored that written condition and re located. The bank incurred two violations of the legal lending limit and further violated 12 USC 29, 371 d, 375a and 30. A Notice of Charges was issued based on the viola tions of law, the condition imposed in writing by the OCC in connection with the granting of the bank's ap plication to relocate, and the bank's inadequate capi tal. Subsequent to the administrative hearing, the ad ministrative law judge accepted the proposed findings and conclusions of representatives of the OCC and made a recommended Order to Cease and Desist which would require the bank to submit a written capi tal program to provide for the bank's immediate and future needs. The proposed order would require the board of directors to obtain the regional administrator's approval of the bank's capital program. That program would also provide for the increase and maintenance of the bank's equity capital to a level at least equal to 7 percent of the bank's total assets. The order would re quire the bank to reach the 7 percent equity to asset position within 30 days from the effective date of the order. The order would require the board of directors to take action to correct the violations cited in the No tice of Charges. The Comptroller's final decision is pending. 133 112. Bank with assets of less than $25 million The bank lacked sound management. The chief ex ecutive officer and his family constituted three-fifths of the board of directors. Classified assets continued to be a problem and the bank failed to comply with cer tain provisions in an outstanding Agreement. New classified loans and a continued high volume of loan delinquencies along with inadequate credit information and collateral documentation remained major prob lems in the bank. Violations of law, particularly 12 USC 84, along with internal control deficiencies, deficient earnings and inadequate capital continued to plague the bank. A Formal Agreement required the bank to increase the membership of the board of directors by adding at least two outsiders not related by blood or marriage to directors or officers of the bank. Furthermore, the chief executive officer's authority to perform many functions within the bank was severely restricted as a result of his inability to perform his duties responsibly. The Agreement required the bank to hire a new senior lending officer, to correct the lending limit violations, and to take actions to ensure they did not recur. Addi tionally, the board of directors was to indemnify the bank for any losses resulting from the illegal exten sions of credit. The bank was prohibited from extend ing credit in violation of any statute and to take action to correct all violations of law, rule or regulation and to ensure that they did not recur. The bank was to take continuing action to reduce its volume of criticized as sets and to obtain and maintain current and satisfac tory credit information. The Agreement required a writ ten program to be implemented by the bank to improve collections. The bank was further required to adopt a program to augment its capital. The Agree ment precluded the bank from paying dividends and required the board to increase the bank's allowance for possible loan losses and maintain the allowance at an adequate level. The Agreement required improved lending policies and an improved investment policy. The bank was to correct its internal control and audit deficiencies and adopt adequate auditing procedures and internal controls. The board was also required to take action to improve the bank's earnings, including the preparation of a comprehensive budget and an analysis of the pricing of all bank services along with plans to control the bank's operating expenses. The bank was to submit monthly reports monitoring its im provement and compliance with the provisions of the Agreement. 113. Bank with assets of $50 to $75 million The existence of a significant number of violations of the Currency and Foreign Transactions Reporting Act and the regulations promulgated thereunder were dis closed during an examination of the bank. Although those violations had been detected by the directors' examining committee and corrective action had been initiated, administrative action was deemed appropri ate. A Memorandum of Understanding required the bank to correct past violations of the Currency and Foreign Transactions Reporting Act. The board was required to 134 establish a compliance committee composed of at least three outside directors to ensure compliance with the provisions of the Memorandum, with periodic pro gress reports to be submitted to the regional adminis trator. The board was further required to adopt a code of ethics for the bank. That code was to include a pol icy statement regarding bank involvement in large cur rency transactions. Written programs were required to (1) adopt a system of internal controls, (2) establish training programs, (3) establish a records retention program, and (4) establish internal audit programs de signed to ensure compliance with the Currency and Foreign Transactions Reporting Act. 114. Bank with assets of $25 to $50 million An examination of the bank disclosed that classified assets had increased to 58 percent (from 22 percent in 1979) and loan losses were $300,000. Those loan problems required a heavy loan loss provision which, in turn, impaired earnings. The lack of a strong senior lending officer and ineffective loan policies and proce dures were causal factors. A Memorandum of Understanding required a new, qualified senior loan officer, a review of lending per sonnel, a review of loan policies and procedures, the maintenance of proper credit information, an internal loan review, and a quarterly review of the allowance for possible loan losses. Other areas covered by the Memorandum were a profitability program, a capital program, internal control policies, correction of viola tions of law, and creation of an oversight committee to monitor compliance. 115. Bank with assets of $25 to $50 million The bank's primary problems were a direct result of personnel turnover, ineffective chief executive officers, and a weak board. As a result of those deficiencies, the chief executive officer resigned during the exami nation. As his replacement, the board appointed the bank's number two officer as chief executive officer, which caused further deterioration and created morale problems among the employees of the bank. The com placency on the part of the board was further evi denced by heavy loan losses over the past 3 years, high levels of criticized and classified assets, continu ing delinquency problems, ineffective collection/ recovery procedures, poor lending practices, opera tional inefficiencies, and poor internal organization. As a result of those inefficiencies, the bank's net income had been reduced dramatically over the past several years. A Memorandum of Understanding required the bank to report monthly progress to the regional administra tor. Additionally, constant monitoring on the Action Control System was initiated. The Memorandum ad dressed the following areas requiring specific action on the part of the board (1) a study of management structure and the assigned duties of the chief execu tive officer, (2) an assessment of all managerial em ployees, (3) adoption of written policies in all areas necessary to improve the bank's operations, (4) reduc tion or elimination of all criticized assets in the report of examination, (5) improved credit collateral documenta- tion, (6) adoption of adequate internal controls or pro cedures to prevent future violations of law, and (7) adoption of a program to achieve profitability. 116. Bank with assets of $25 to $50 million In part due to a poor local economy, the bank had experienced a significant increase in criticized and de linquent obligations. Liquidity had been severely im paired. Both of those factors exacerbated a marginal capital base. Of major concern was a violation of 12 USC 84 which resulted from a sale of installment paper subject to repurchase. A Memorandum of Understanding required that the 12 USC 84 violation be eliminated, liquidity be restruc tured to reduce reliance on short term borrowings, no dividends be paid without prior approval of the re gional administrator, and a committee of outside direc tors be established to formulate a capital plan. Estab lishment of a more reasonable loan to deposit ratio, maintenance of an adequate allowance for possible loan losses, and reduction of criticized assets and credit data exceptions were also addressed. 117. Bank with assets of less than $25 million For a prolonged period of time the bank experi enced major deficiencies in the areas of loan portfolio management and funds management. Classified as sets were excessive and an undue reliance was placed on outdated collateral values as opposed to the creditworthiness of the borrower. Large numbers of credit data and collateral exceptions were also noted. The chief executive officer approved an excessive overdraft to a problem credit line, resulting in a viola tion of 12 USC 84. A Memorandum of Understanding required that the directors pledge and maintain a U.S. Treasury bill to cover the potential loss on the excessive credit, that a new chief executive officer be hired and that a detailed and complete financial forecast be compiled. Reduc tion of criticized assets, collateral and credit data ex ceptions, collection procedures and internal controls were also addressed. 118. Bank with assets of less than $25 million An examination of the bank disclosed adverse trends in the condition of the loan portfolio. Classified assets had increased to 29 percent of gross capital funds. In addition, loans not supported by current credit information were excessive, at 9 percent of gross loans, and overdue loans were rapidly increas ing, at 8 percent of gross loans. Supervision and ad ministration by both management and the board were considered lax. The president was cited for being inat tentive to the conduct of the bank's affairs. The invest ment portfolio function was severely deficient. The ex amination cited several violations of law, including 12 USC 371; 12 CFR 1.8, 1.11 and 21.5; and 31 CFR 103.33. A Memorandum of Understanding required the bank to correct each violation of law, rule or regulation and to adopt adequate procedures to prevent the recur rence of similar violations. The bank was also required to take all steps necessary to obtain and maintain cur rent and satisfactory credit information on all outstand ing extensions of credit and to correct all collateral ex ceptions. The Memorandum directed the board to (1) conduct an indepth study of the bank's management with the aid of outside assistance, as necessary, and to implement a written management policy for the cor rection of all identified staffing deficiencies; (2) take immediate action to remove all assets from criticized status, in particular to develop and implement a written program to provide for improved collection efforts; (3) conduct quarterly reviews of the bank's allowance for possible loan losses and to ensure that allowance is maintained at an adequate level; (4) develop or amend, as necessary, a written investment policy which addresses all criticisms of the investment func tion cited in the report of examination; and (5) review the adequacy of the bank's fidelity insurance coverage and increase such coverage as necessary. 119. Bank with assets of $50 to $75 million The bank's condition deteriorated. Classified assets were excessive, at 49 percent of gross capital funds. Additionally, in spite of the bank's ultra-liberal renewal and extension practices, past due instalment loans ex ceeded 19 percent of outstanding loans. Loan losses of $500,000 were high, and it appeared that further heavy losses would be sustained when latent prob lems in the loan portfolio came to light. Because of large loan loss provisions, the earnings picture was also bleak. Poor earnings allowed loan growth to out pace growth in equity capital and rendered capital in adequate. Liquidity was marginal at 14 percent, super vision and administration by management and the board was poor, and violations of laws and regulations were disclosed. A Formal Agreement required correction of the stat utory violations and required procedures to be adopted to prevent future violations. The board was re quired to employ a new senior lending officer, appoint a committee to perform a management study, and im plement a management plan. The bank was required to eliminate all assets from criticized status, improve collection efforts overall, and take necessary steps to maintain current credit information on all borrowers. The bank was required to formulate a written loan pol icy, funds management policy, profit plan, and a standard procedures manual. The board was required to review the allowance for possible loan losses quar terly and develop a 5-year capital plan, and was pro hibited from declaring dividends without the prior ap proval of the regional administrator. The board was to ensure that deficiencies in the internal controls were eliminated and that an adequate internal audit was es tablished. 120. Bank with assets of less than $25 million Examination of the bank revealed apparently fraudu lent activity within the loan portfolio, along with 21 vio lations of the statutory lending limit and excessive classified loans (equal to 198 percent of gross capital funds). The bank lacked adequate credit files and any safe policy regarding overdrafts. Furthermore, inade quate controls existed throughout the lending function resulting in a high volume of past due loans and other instances where notes appeared to have been altered. 135 Examination revealed insufficient liquidity and addi tional violations of 12 USC 375a and 375b, with the condition of the bank evidencing incompetent, if not fraudulent, activity by the chief executive officer. Upon discovery and while the examination contin ued, a Notice of Charges and Temporary Order to Cease and Desist was served upon the bank. The Temporary Order restricted the activity of the bank's chief executive officer, effectively suspending him from participating in the affairs of the bank. The order pro hibited violations of 12 USC 84, 375a, and 375b, and prevented extension of credit to any borrower with crit icized credit. The order also prohibited extension of credit without adequate credit information and collat eral documentation, and required the bank to increase and maintain liquidity. The bank was required to re duce its ratio of loans to deposits to a safe level and to refuse to honor checks creating an overdraft of greater than $250 for any customer without the prior approval of the board. While the Temporary Order was in effect, the chief executive officer was not able to falsify bank records to hide his fraudulent activity. Management confessed in volvement in fraudulent activity to the board and the FBI began an investigation. Continued examination of the bank revealed that the fraud and mismanagement was so extensive that the bank was declared insolvent by the Comptroller, and the FDIC was appointed as re ceiver. The bank's chief executive officer was subsequently convicted on the basis of his fraudulent activity and is currently serving time in prison. The vice president of the bank was also convicted for his role in the fraud. 121. Bank with assets of more than $1 billion The bank was suffering from a variety of problems which made its overall condition unsatisfactory but not critical. The principal deficiencies centered on asset quality (classified assets equalled 50 percent of gross capital funds), ineffective management response to identified problems, and inadequacies in the bank's in ternal controls. A Memorandum of Understanding required the bank to take action to improve its asset quality and loan ad ministration. The Memorandum also directed a man agement study to identify deficiencies and propose solutions. Further, certain improvements in internal control and audit procedures were required by the Memorandum. 122. Bank with assets of $25 to $50 million The bank's ineffective management, as well as a disappointing earnings performance and an increase in classified assets, resulted in inadequate capital. Criticized assets amounted to 63 percent of gross capital funds and loan delinquencies and credit file ex ceptions were a concern. The bank's trust department was not adequate. A Memorandum of Understanding required elimina tion of management staffing deficiencies and a review of the capital needs of the bank as well as an im proved earnings performance plan and loan portfolio and internal audit control plans. The board was also 136 required to establish adequate internal control func tions, monitor liquidity, and operate its trust functions in a safe and responsible manner. 123. Bank with assets of $25 to $50 million Examinations of both the commercial and trust oper ations of this bank disclosed that an Agreement placed on the bank in 1979, designed to correct sev eral areas of weakness, was not being complied with satisfactorily. Major problems included weak and inef ficient management along with inadequately super vised lending activities and a lack of appropriate poli cies and procedures. Further, the chief executive officer and an executive vice president were sus pected of improprieties resulting in personal gain. Fi nally, the bank's trust operation had been operated in an improper manner, which included failure to keep proper records of trust assets, improper real estate management, and lack of proper trust department au diting. An Order to Cease and Desist required, among other things, the hiring of a new chief executive officer and new loan officer. The bank was required to elimi nate criticized assets, maintain adequate credit file in formation, and review and maintain the adequacy of the allowance for possible loan losses. The order then required the bank not only to correct the deficiencies in the trust department operations and have it audited, but also to study the operations of that department to consider the costs and the need for proper manage ment talent. Continued operation of the department was then to be justified in detail to the regional admin istrator. 124. Bank with assets of less than $25 million Supervision and administration of the bank's affairs has been adversely affected by internal conflict among board members. That conflict carried over to bank management and was reflected by poor planning and policies, particularly in the areas of liability manage ment and lending. Those problems resulted in a large volume of classified assets, serious earnings problems and a volatile liability structure. A Memorandum of Understanding was executed which required the bank to (1) correct and eliminate the violations of law, (2) eliminate grounds upon which the assets were criticized, (3) obtain and maintain cur rent and satisfactory credit information, (4) improve collection efforts, (5) adopt written liquidity and funds management policies, (6) develop a budget and plan to improve earnings, (7) develop job descriptions for senior management, and (8) designate a consumer compliance officer. 125. Bank with assets of less than $25 million A large volume of criticized assets resulted from lib eral lending policies, poor credit administration and overlending to marginal borrowers. The substantial and increasing volume of assets classified doubtful and loss had a serious effect on earnings because large loan loss provisions were necessary. Classified assets represented 56 percent of gross capital funds. Management had not shown an ability to effectively su pervise the lending area. A Memorandum of Understanding was executed which required the bank to (1) eliminate grounds upon which the assets were criticized, (2) obtain and main tain current and satisfactory credit information, (3) im prove collection efforts, (4) establish and maintain an adequate allowance for possible loan losses, (5) amend written lending policies, (6) adopt written li quidity and funds management policies, and (7) pre pare an analysis of present and future capital needs. 126. Bank with assets of less than $25 million The bank's primary problem was a large volume of criticized assets resulting from weak credit administra tion and compounded by a depressed agricultural economy. Other problems included violations of law, inadequate liquidity and internal control and audit defi ciencies. Criticized assets represented 66 percent of gross capital funds. Violations of law included a viola tion of 12 USC 84; a violation of 12 USC 375b, involv ing two executive officers and a director; and a viola tion of the Employee Retirement Income Security Act where funds of the profit sharing plan were invested in loans acquired from the bank. Earnings were good and capital adequacy had not been an issue. Major problems of the bank have been caused by the lack of administrative support to the president. A Memorandum of Understanding required correc tion of violations of law and required procedures to prevent recurrence. The bank also was required to (1) formulate a written program to eliminate all assets from a criticized status, (2) ensure reasonable steps have been taken to obtain current credit information and collateral documentation on all loans, (3) implement a written collection and loan administration program, (4) review and amend the written lending policy, (5) adopt a written investment policy and a written liquidity and funds management report, (6) assess the sufficiency and quality of active management, (7) correct internal control and audit deficiencies and implement a written program in those areas, and (8) provide sufficient in formation to the board of directors to enable effective supervision of the bank's affairs. 127. Bank with assets of less than $25 million Mismanagement of the bank by the former president and principal shareholder was disclosed during an ex amination. Liberal lending practices resulted in heavy loan losses and a high volume of classified loans. In ept funds management caused dependence on out-ofarea, rate-sensitive deposits and borrowings, and re sulted in low liquidity. All of those factors impacted adversely on earnings and capital. A management change and a change in ownership produced positive results. Classified assets had been reduced to 53 per cent of gross capital funds. Earnings were considered good in spite of heavy loan losses. Capital and liquid ity are also considered adequate. Present manage ment put sound and effective policies in place. An Order to Cease and Desist was placed on the bank because of the problems noted at a prior exami nation. The subsequent improvement in the bank's condition led to termination of the order and its re placement by a Memorandum of Understanding. The Memorandum required the bank to (1) take immediate action to protect its interests with regard to criticized assets and, also, to adopt a written program to elimi nate all criticized assets and not extend additional credit to criticized borrowers; (2) take steps to obtain current credit information on all loans lacking such in formation and institute procedures to ensure current credit information is maintained on an ongoing basis; (3) implement a written collection and loan administra tion program; (4) ensure fees paid to controlling owner and his related interests conform to Banking Circular 115; (5) correct internal control deficiencies; and (6) extend credit in conformance with the Truth in Lending Act and Regulation Z. 128. Bank with assets of less than $25 million Substantial deterioration in asset quality, primarily resulting from imprudent investment policies, was dis closed during an examination. Classified assets equalled 42 percent of gross capital funds, with invest ment securities representing close to half of that amount. Violations of law, many of which were in the investment area, were listed. A substantial and unwar ranted volume of bond trading since the previous ex amination was also disclosed. The brokerage firms used by the bank for most of those transactions were out-of-area firms with questionable reputations. Sepa rate, independent pricings were obtained on all acqui sitions and trades since initiation of those business re lationships. The serious problems noted in the investment area were the result of the president's com plete control over the area and total lack of board awareness and supervision. Problems in the loan area were the result of a lack of support to the executive vice president. Other problems of the bank included declining liquidity, steady use of borrowings, declining earnings, inadequate internal controls and audit cover age, general lack of any effective policies, and overall weak management and inadequate board supervision. A Memorandum of Understanding required the bank to (1) correct all violations of law and establish proce dures to prevent recurrence; (2) take steps to protect interests regarding criticized assets and implement a written program for the elimination of all criticized as sets; (3) not extend additional credit to borrowers whose loans were not supported by adequate credit information; (4) implement a written collection and loan administration program to determine the allowance for possible loan losses at least quarterly; (5) review and amend the written lending policy; (6) develop and adopt a written investment policy; (7) determine whether securities trading will be engaged in; (8) de velop a written program to achieve and maintain an adequate liquidity position, without undue reliance on rate-sensitive funds; (9) assess the sufficiency and quality of active management; (10) correct internal control and audit deficiencies and establish written op erating procedures; and (11) provide sufficient infor mation to the board to allow them to effectively super vise the bank's affairs. 129. Bank with assets of $500 million to $1 billion 130. The overall condition of the bank was unsatisfactory. Classified assets, loan losses, delinquencies and non137 accruals had reached unacceptable levels. The poor condition and performance of the loan portfolio re sulted in an inadequate return on assets. Insufficient earnings retention, coupled with liberal dividend pay outs, resulted in a strained equity capital base. Those deficiencies were exacerbated by the excessive and improper involvement by certain members of the board of directors in the day-to-day operations of the bank and administration of the lending function. Ad verse publicity regarding the bank's unsatisfactory condition severely threatened the bank's access to the professional funding sources, thereby further straining an already marginal liquidity posture. A Formal Agreement, which was enforceable to the same extent and in the same manner as an effective and outstanding Order to Cease and Desist, prohib ited the bank from declaring or paying any dividends without the prior written approval of the regional ad ministrator. The bank was also prohibited from violat ing the antifraud provisions of the federal securities laws with respect to the purchase or sale of the bank's securities and the filing of any proxy materials, annual, periodic, or other reports filed with the OCC pursuant to Sections 12, 13 or 14 of the Securities Exchange Act. The bank was further required to amend any doc ument previously filed with the OCC, pursuant to Sec tion 12, 13 or 14, which contained untrue or misleading information. The Agreement required the board to: (1) fill all board vacancies by appointment until at least two-thirds of the board was independent from any affil iate of the bank; (2) appoint a nominating committee, composed of at least five independent directors which was required to nominate, as management candidates for election to the board, a slate of directors, com posed of at least two-thirds independent directors who were acceptable to the regional administrator; (3) ap point a compliance committee of the board responsi ble for monitoring the bank's adherence to the Agree ment; (4) provide the bank with a new, active and capable chief executive officer experienced in banking operations, lending and investment who is acceptable to the regional administrator; (5) provide the bank with a new, experienced and capable senior lending officer acceptable to the regional administrator; (6) perform a study of the bank's current senior management; (7) develop a strategic plan identifying projections and goals for the bank's future operations; (8) review the bank's current lending policies and procedures and make such amendments as necessary to ensure safe and sound lending practices; (9) implement a written program for elimination of all assets from criticized status; (10) strengthen the bank's credit examination function; (11) develop and implement written guide lines for the coordination of the bank's assets and lia bilities, in order to promote profitability and adequate liquidity; (12) adopt a written comprehensive code of ethics to be applicable to all directors, principal share holders, officers and employees of the bank; and (13) review the allowance for possible loan losses quarterly and ensure that it is maintained at an adequate level. The Agreement directed the compliance committee to determine whether the bank should seek reimburse ment from any person or entity, including present or 138 former officers, directors or the bank's principal share holder, for losses sustained by the bank as the result of certain credit extensions. The OCC and the Federal Reserve Board entered into a separate Formal Agreement with the bank and its majority shareholder, a registered bank holding company, which required the holding company to abide by the terms of the bank's Agreement with the OCC. The holding company was directed not to partici pate in the bank's management, operations and poli cies other than through its representation on the bank's board. Finally, the holding company was re quired to vote its shares in support of the nominating committee's proposed slate of directors. 131. Bank with assets of less than $25 million The lack of a solid core deposit base penalized this bank's earnings heavily. Weak deposit generation for several years had caused bank to fund growth with rate-sensitive liabilities. Escalating interest rates con tributed to significant operating losses. The balance sheet mix would not sustain earnings in an environ ment of volatile interest rates. In addition, the board of directors needed strength and diversification, loan quality was questionable, and several lawsuits had caused much unfavorable publicity. A Memorandum of Understanding required formula tion of an asset/liability policy. The board was also re quired to evaluate management. A profit plan and budget were required because the planning process was inadequate. Also, monthly comparisons to the budget were required. The bank was to develop inter nal control and audit programs. Finally, a bankwide code of ethics, new directors and committee to over see compliance with the Memorandum of Understand ing were required. 132. Bank with assets of $25 to $50 million The bank's board of directors had failed to ade quately monitor the condition of the bank. Credit ex ceptions were heavy, financial information was not ad equately analyzed, loans were granted based on personal relationships rather than repayment capacity, and the impact of interest rates on earnings was not recognized. Those problems resulted in high classified assets and loan losses, a thin capital base and a his tory of mediocre earnings. A Memorandum of Understanding required the board to implement responsible policies and at the same time recognize that continued interference with management only heightened the problems. The bank was required to correct violations of law. Various loan policies and procedures were requested and the bank was instructed to develop a plan to reduce criticized assets. An internal audit program and an external audit were required. A capital plan was also required. Fi nally, a profitability plan, including a budget, was re quired. 133. Bank with assets of less than $25 million An examination revealed serious deterioration in vir tually every aspect of the bank's condition and was at tributed to management and the board's emphasis on growth and their failure to properly supervise the af- fairs of the bank during a period of very rapid asset ex pansion. Criticized assets equalled approximately 80 percent of gross capital funds. Past due loans were 22 percent of gross capital funds, with 30 percent of the portfolio having credit and collateral exceptions. Viola tions of law were also of primary concern, including 12 violations of 12 USC 84, and violations of 12 USC 375a and 371 d, 31 CFR 103.33, and seven different viola tions of consumer laws, rules and regulations. Weak earnings and rapid asset growth resulted in a severely undercapitalized position. The allowance for possible loan losses was inadequate. A severe liquidity crisis, with liquidity dropping as low as 4 percent, resulted in the bank becoming heavily dependent upon federal funds borrowings to support its liquidity requirements. Other problems included the lack of documentation for expenses incurred by officers and directors of the bank, internal control and audit deficiencies and failure to adhere to the recommendations of outside auditors, and the lack of supervision of operations as reflected by unlocated differences in several general ledger ac counts. An Order to Cease and Desist prohibited extensions of credit in violation of 12 USC 84 and called for the appointment of an independent special counsel to in vestigate the previous violations. Special counsel was directed to determine whether the bank had a cause of action against any current or former officers and direc tors with respect to the violations and to make recom mendations including what action should be taken by the bank for the protection of its shareholders. The board of directors was directed to act upon the special counsel's recommendation and to notify all the share holders that a copy of the report was available for their inspection. The bank was also prohibited from any ex tension of credit in violation of 12 USC 375a, as well as any other violations of law cited in the report of exami nation. The order required the appointment of a com pliance committee and required it to review all loans, overdrafts or other extensions of credit to any bank in siders for preferential treatment. The compliance com mittee was also directed to review all time deposits, entered into by the bank, which were subject to the in terest penalty requirements imposed by 12 CFR 217.4(d) to determine if the interest penalty charged by the bank on early deposit withdrawals exceeded the amount required by 12 CFR 217.4(d). The board of directors was required to review the committee's re ports and to secure reimbursement to the bank of all interests and fees which would have been paid to the bank had all extensions of credit to the insiders been made on non-preferential terms. The board was also directed to secure reimbursement for each depositor whose deposit was assessed a penalty charge in ex cess of the amount disclosed when the deposit was made. The board of directors was required to analyze the bank's management needs. It was also directed to perform an analysis of the bank's continuing capital needs and to submit a capital plan. The board of di rectors was required to develop a written plan for achieving and maintaining an average daily liquidity of not less than 20 percent, which also addresses the matching of assets and liabilities. The board was fur ther required to adopt and implement a program to eliminate all assets from criticized status and to review its written lending policy with the objective of inserting guidelines regarding the handling of overdrafts. The board was required to take all steps necessary to ob tain current credit information and to perfect collateral on all secured loans. The board was also required to seek to reduce the level of delinquencies in its loan portfolio and to establish formal procedures for ensur ing the ongoing adequacy of its allowance for possible loan losses. The bank was prohibited from reimbursing any employee or former employee for expenses in curred which were not reasonable and properly docu mented. Finally, the bank was directed to eliminate all internal control and operational deficiencies listed in the report of examination. 134. Bank with assets of $25 to $50 million An examination of the bank revealed assets to be in a deteriorating condition with classified assets equal to approximately 130 percent of gross capital funds. One-fourth of total loans were not supported by current credit information and 5 percent were past due. The investment portfolio suffered 50 percent depreciation and the bank's earnings were not satisfactory. The ex amination also revealed 11 violations of 12 USC 84, as well as violations of 12 USC 60 and 375a and 31 CFR 103, as well as other violations of law. An Order to Cease and Desist required the immedi ate correction of all violations of law cited in the report of examination, an immediate increase in the equity capital accounts of the bank, a new chief executive of ficer, a program to eliminate classified assets, and a prohibition of further loans to classified borrowers. The bank was also required to take immediate steps to maintain current and satisfactory credit information on all loans lacking such information, as well as on future loans. The bank was also required to develop a plan eliminating past due loans. Dividends were prohibited. The board was required to employ the services of an independent professional auditing firm acceptable to the regional administrator. Criticized expense reim bursement to certain insiders was prohibited. The or der also required the review of the allowance for possi ble loan losses on a periodic basis as well as the development of comprehensive written loan policies and investment policies. The bank was required to im mediately correct its internal control and audit defi ciencies cited in the report of examination and to de velop a coordinated asset and liability management plan. The board was required to develop a compre hensive budget. The bank was also required to correct deficiencies in its electronic data processing depart ment and make periodic reports to the regional admin istrator concerning compliance with the order. 135. Bank with assets of less than $25 million The bank suffered from inadequate capital as a result of mismanagement by the bank's chief executive officer. The condition of the bank had deteriorated to a point that the bank needed a substantial injection of capital. The bank had an unsafe level of criticized as sets and a high level of loans which were not sup ported by adequate credit information. Additionally, 139 the bank's allowance for possible loan losses was de pleted. Further problems within the bank's loan func tion included a high level of past due loans. The bank's earnings were very poor and the bank needed a funds management policy. The bank had two viola tions of 12 USC 375a and a history of insider lending violations. The bank had high levels of concentrations of credit to insiders. An additional problem within the bank was the chief executive officer's violation of Rule 10(b)(5). That indi vidual had knowledge that the bank had agreed to merge with another institution and that, under the terms of that agreement, the bank's stock would ap preciate in value. He began purchasing stock from other shareholders of the bank without disclosing his material, inside information to the sellers. Although that agreement to merge never materialized, the chief ex ecutive officer had deprived the bank's shareholders of an opportunity to sell their stock at higher prices by his trading in the bank's stock without disclosing his material, inside information. The bank consented to an Order to Cease and De sist which required the submission of a plan to sell or merge the bank or to provide the bank with a new chief executive officer and a capital injection, along with a capital plan addressing the bank's future papital needs. The order also required the bank to refrain from declaring any dividend and to refrain from extending credit to any borrower whose loans were criticized or did not have adequate credit information. The board was also required to reduce the level of criticized as sets and obtain and maintain adequate credit informa tion. Furthermore, the board was required to augment the allowance for possible loan losses and review and maintain that allowance at an adequate level. The board was required to reduce the bank's level of past due loans and to take action necessary to increase the bank's earnings. Additionally, the order required the board to implement a funds management policy and to correct the violations of law and ensure that they did not recur. The order further required the board to re duce the concentration of credit to the insiders and to submit reports to the regional administrator detailing the bank's compliance with the order and improve ment. The chief executive officer of the bank stipulated to a separate Order to Cease and Desist and also signed a Formal Agreement with the Office of the Comptroller of the Currency. That order required him to refrain from violating the provisions of Rule 10(b)(5) and to make restitution of the paper profits he would have recog nized had the merger of the bank gone through as planned. Through the Formal Agreement with the OCC, the chief executive officer agreed not to partici pate in the affairs of any national bank, FDIC-insured bank, or bank which was a member of the Federal Re serve System, without obtaining the prior written con sent of the appropriate federal bank regulatory agency. 136. Bank with assets of $25 to $50 million Inadequate supervision by both the board and man agement led to an escalation of classified assets, an 140 inadequate loan loss reserve, operations and recon cilement problems, and an excessive volume of inter nal control exceptions. The loan account was adminis tered almost exclusively by the bank's president who demonstrated an unwillingness to delegate responsi bility. An inordinate volume of credits lacked adequate supporting credit information or were subject to collat eral or documentation exceptions and numerous ac counting deficiencies and regulatory report errors. The bank's budget was not effectively monitored. The bank lacked written policies in several key areas, some of which represented relatively new activities for the bank, such as credit card loans, direct lease financing, and gold transactions. The bank's auditor was bur dened with operational duties and was inadequately trained. The audit program was deemed inadequate. Several violations of law existed. A Memorandum of Understanding addressed all sig nificant areas of concern. Included in the Memoran dum were the requirement for a management plan; de velopment of written policies or policy supplements, where needed; and internal control and audit improve ments. Management provided lengthy and compre hensive response material to the Memorandum. 137. Bank with assets of $25 to $50 million The bank's liberal lending philosophy and lax credit administration practices resulted in unacceptable levels of classified assets and past due, non-accrual, and loans lacking current credit information. Provisions for loan losses were determined by the bank's external accountant on the basis of tax considerations. The al lowance for possible loan losses was deemed inade quate, requiring an immediate provision. Internal audit was inadequate, and the internal auditor's indepen dence was compromised by performance of opera tional duties. Approximately half of the numerous viola tions of law and regulation that had previously been cited remained uncorrected. The board discontinued the payment of fees to salaried officers, but granted substantial raises to the officers. Salaries and direc tors' fees appeared excessive, although earnings were satisfactory. The board had taken virtually no action to correct those weaknesses. A Memorandum of Understanding was prepared in cluding the following provisions (1) a written lending policy was required, (2) actions to reduce the volume of criticized assets were mandated, (3) quarterly anal ysis of the loan loss reserve was to be accomplished and recorded in writing, (4) written investment and funds management policies were to be prepared, (5) justification for individual officers' and directors' fees was to be performed, (6) a written audit program was to be developed, (7) all violations of law were to be corrected, and (8) trust department deficiencies were also to be corrected. 138. Bank with assets of $25 to $50 million Ineffective leadership on the part of the bank's former president and controlling owner resulted in a deteriorated loan portfolio, inadequate reserve for loan losses, poor earnings, inadequate capital, poor asset/ liability management, and poor internal controls. Ap- parent business and travel expense abuses were un covered by an audit. Capital was inadequate. A Memorandum of Understanding required the bank's management plan to be amended to include position descriptions of key senior officers, compensa tion ranges, and justification for the level of payments to those officers. A new president was to be employed. A program to improve the bank's earnings was to be prepared and accompanied by an acceptable budget. A capital analysis addressing related key issues was to be developed, to include the sources and timing of additional capital. Earlier business expenses were to be formally reviewed, and written procedures were to be developed to ensure proper documentation of all future business, travel and other expenses. Monthly progress reports concerning the bank's ongoing new computer installation were to be provided. 139. Bank with assets of $25 to $50 million The primary areas of concern in the bank were un satisfactory earnings, ineffective operating and audit policies, an unproven management team, weak asset/ liability management procedures, and high loan losses that resulted from deficiencies in the lending area. A Memorandum of Understanding required the drafting of an asset/liability management policy, the maintenance of an adequate allowance for possible loan losses, financial budgets for 1981, the implemen tation of audit policies, and the adoption of programs to reduce delinquencies and improve collections. The correction of internal control deficiencies and viola tions of law was also required, along with the adoption of procedures to prevent their recurrence. 140. Bank with assets of $25 to $50 million Ineffective loan portfolio management led to an inor dinate volume of criticized assets, an excessive delin quency rate, and an excessive level of loans not sup ported by adequate credit information. The bank's growth rate placed increasing pressure on the bank's capital base. A Memorandum of Understanding required the for mulation of a written program for eliminating the under lying basis upon which each asset was criticized. All actions necessary to strengthen the bank's loan ac count were required to be taken. The allowance for possible loan losses was to be maintained at an ade quate level. A capital plan was to be developed and each violation of law was to be corrected and its recur rence prevented. 141. Bank with assets of less than $25 million An examination of the bank revealed deterioration in all important areas. Classified assets increased to ap proximately 140 percent of gross capital funds, the earnings for the bank had been eliminated by a much needed increase in the allowance for possible loan losses. The bank's capital had been strained by a rapid loan volume growth; liquidity was not adequate; and violations of law and regulation, including 12 USC 84 existed. Many of the problems were attributed to the inexperience of a new management team. A Formal Agreement required the correction of stat utory violations and required the bank to develop pro cedures to prevent future violations. The bank was re quired to establish detailed procedures for the recovery of charged off assets, and was also to imple ment a new written loan policy. The bank was further required to take necessary steps to obtain and main tain- current and satisfactory credit information on all loans and to correct all collateral exceptions. The bank was required to develop a plan to correct criticized as sets and was prohibited from lending additional funds to the bank. The bank was to maintain an acceptable level of liquidity and its allowance for possible loan losses was to be maintained at an adequate level. The board was required to create an audit committee to monitor the bank's internal and external audit proce dures. The board was required to submit a capital plan to the regional administrator for his approval. The bank was required also to review correspondent accounts of certain other banks. A compliance committee was re quired to coordinate compliance with the provisions of the Agreement. 142. Bank with assets of $25 to $50 million A general examination of this bank revealed a seri ously deteriorated condition. Affected areas were spread throughout the bank and included asset qual ity, credit administration, an inadequate allowance for possible loan losses, inadequate capital, illiquidity, poor earnings, and continuing violations of law. The problems of the bank were compounded by weak and ineffective management and lack of supervision by the board of directors. A sale or merger of the bank was needed; the alternative was an injection of capital to give the bank time to remedy its problems. An Order to Cease and Desist required remedial action in the various problem areas and included a provision for obtaining a new chief executive officer. Further, the order required the injection of $375,000 in equity capital within a short time or, alternatively, the sale or merger of the bank. The order also required corrections of violations of 12 USC 84, 375a and 375b and 12 CFR 215; a compliance policy for criticized as sets; a lending policy; a policy for credit information and the collection of past due loans; compliance with a capital program and a plan for sale or merger of the bank; a review of the allowance for possible loan losses; development of internal controls; an investment policy; and an analysis of liquidity. 141 Selected Addresses and Congressional Testimony Date and topic Jan. 25, 1980. Statement of John G. Heimann, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C Feb. 19, 1980. Statement of Jo Ann S. Barefoot, Deputy Comptroller for Customer and Community Programs, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C Feb. 20, 1980. Statement of John G. Heimann, Comptroller of the Currency, before the Subcommittee on Fi nancial Institutions Supervision, Regulation and Insurance of the House Committee on Banking, Finance and Urban Affairs, Washington, D.C Feb. 22, 1980. Remarks of H. Joe Selby, Senior Deputy Comptroller for Operations, before the 40th Assembly for Bank Directors, Palm Springs, Calif Mar. 10, 1980. Remarks of John G. Heimann, Comptroller of the Currency (presented by Charles E. Lord, Sen ior Advisor to the Comptroller), before The Government Research Corporation's Second Policy Forum on American Banking, London, England Mar. 17, 1980. Remarks of John G. Heimann, Comptroller of the Currency, before the 49th Annual Meeting of the National Housing Conference, Washington, D.C Mar. 26, 1980. Remarks of John G. Heimann, Comptroller of the Currency, before the Consular Law Society, New York, N.Y Mar. 27, 1980. Statement of Cantwell F. Muckenfuss, III, Senior Deputy Comptroller for Policy, before the Sub committee on Commerce, Consumer and Monetary Affairs of the House Committee on Government Oper ations, Washington, D.C April 28, 1980. Remarks of Charles E. Lord, Senior Advisor to the Comptroller, before the National Bank Divi sion Meeting of the 96th Annual Convention of the Texas Bankers Association, Houston, Tex May 9, 1980. Remarks of Lewis G. Odom, Jr., Senior Deputy Comptroller, before the National Management Conference, Society for Advancement of Management, Chicago, III May 15, 1980. Remarks of John G. Heimann, Comptroller of the Currency, before the Association of Interna tional Bond Dealers, New York, N.Y May 21, 1980. Statement of John G. Heimann, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C May 29, 1980. Statement of John G. Heimann, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C June 6, 1980. Statement of Paul M. Homan, Senior Deputy Comptroller for Bank Supervision, and Robert B. Serino, Director of the Enforcement and Compliance Division, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C June 25, 1980. Statement of John G. Heimann, Comptroller of the Currency, before the Subcommittee on Commerce, Consumer and Monetary Affairs of the House Committee on Government Operations, Wash ington, D.C Sept. 23, 1980. Statement of Lewis G. Odom, Jr., Senior Deputy Comptroller, before the Subcommittee on General Oversight of the House Committee on Small Business, Washington, D.C Sept. 25, 1980. Statement of John G. Heimann, Comptroller of the Currency, before the Subcommittee on Fi nancial Institutions Supervision, Regulation and Insurance of the House Committee on Banking, Finance and Urban Affairs, Washington, D.C Oct. 14, 1980. Remarks of John G. Heimann, Comptroller of the Currency, before the American Bankers Assocation, Chicago, III Nov. 21, 1980. Statement of John G. Heimann, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C Page 145 149 153 159 162 166 169 175 130 184 188 191 201 203 206 213 215 226 229 143 Statement of John G. Heimann, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C., January 25, 1980 It is a pleasure to appear before this committee to discuss the 1980 budget of the Office of the Comptrol ler of the Currency. The OCC has previously transmit ted to the committee the 1980 budget as well as infor mation specifically requested. Budget Overview Budget and OCC—The 1980 OCC budget of $107,759,000 represents a nominal annual increase of 7.1 percent over 1979's spending. Based on the con sensus forecast of a 9 percent increase in the GNP price deflator in 1980, this projected nominal increase would become a decrease in real dollars of 1.7 per cent. Actual expenditures in 1979 were $100,585,000, or approximately 1.4 percent less than the $102,013,000 1979 budget presented to this committee last year. When adjusted for inflation, the 1979 actual expendi tures in real dollars decreased 0.4 percent from the 1978 level. This result coupled with the anticipated ab sence of a real spending increase in the 1980 budget reflects careful fiscal and operational management. OCC's policy and operating objectives of the past several years have resulted in improved operations, streamlined organizational structure, improved super visory effectiveness, institution of procedures to meet new statutory responsibilities and successful recruit ment efforts, all of which have prepared the OCC to meet the challenges of the 1980's. 1980 Environment—The commercial banking sys tem during the 1970's underwent substantial change and is entering a new decade which promises even greater change and complexity, as well as intensified competition. Assets in the commercial banking system were $1.64 trillion as of September 30, 1979. Of the 14,399 commercial banks in the U.S., 169 banks with $1 billion or more in assets (slightly more than 1 per cent of all banks) held 60 percent of total bank assets. Commercial banks with assets between $100 million and $1 billion numbered 1,316, or 9.1 percent of all banks, and held 19.7 percent of total bank assets. The 12,914 banks with less than $100 million in assets, 89.7 percent of all banks, held 20.5 percent of total as sets. National bank assets were $967 billion, or 59 per cent of commercial bank assets. Foreign assets of na tional banks continued growing more rapidly than do mestic assets and now account for more than 20 percent of national bank assets. The 113 largest national banks, with assets of $1 bil lion or more, accounted for 2.5 percent of all national banks but held over $671 billion, or 69.5 percent of to tal national bank assets and 41 percent of all commer cial bank assets. There were 691 national banks with assets between $100 million and $1 billion, 15.4 per cent of national banks, which held 18.1 percent of na tional bank assets. The 3,676 national banks with less than $100 million in assets, representing 82 percent of all national banks, held 12.4 percent of national bank total assets. As would be expected, the differences in the opera tional complexity and the kinds of financial services of fered by the small local community banks and the large multinationals are enormous and have been growing larger oyer time. The disparity in size and complexity between the biggest and smallest banks indicates the need for flexibility in achieving OCC's goals, and several changes have been instituted that recognize the differing supervisory and regulatory needs of national banks. For both small and large banks, the business of com mercial banking, or more accurately the business of providing financial services, has changed radically during the 1970's. What, for instance, do the following phrases have in common: NOW accounts; money mar ket certificates; automated teller machines; MerrillLynch cash management accounts; automatic transfer accounts; telephone bill payer accounts; bank issued mortgage-backed bonds; credit union mortgage powers; and money market mutual funds? None of these existed in 1970, the beginning of the last dec ade. Spurred by inflation, significant advances in com munication and data processing technology and the fi nancial requirements of our increasingly complex and interconnected national and international economy, fi nancial institutions, vying for advantage in the market place, have been breaking down the traditional bar riers of financial services specialization. However, the legal environment for financial services has not kept pace with many of the changes. Indeed, the limitations on some classes of institutions, such as deposit interest rate ceilings, have contributed to the growing complex ity of financial markets. Financial institutions with the legal capacity to perform new services have taken ad vantage of the legal restrictions on other participants. Banks, thrift institutions and credit unions will con tinue seeking larger shares of traditional financial serv ices markets, and nondepository institutions will in creasingly be competitors for deposit markets. For example, as of December 30, 1979, money market mutual funds stood at $45.1 billion, a growth of 314 percent over the previous year. The Merrill Lynch cash management plan and the Sears plan to sell its medium-term notes to its credit card holders are but two of the 1970's innovations which presage more of the same inventiveness in the coming decade. OCC Management—The uncertainty created by rapid changes within the financial services world is compounded by the uncertainty of the general eco nomic picture for 1980. The 1980 environment will re quire that the OCC be prepared to anticipate problems and to respond quickly when they occur. Considerable improvement has been made in the agency's abilities 145 to look ahead and to handle unexpected contingen cies. Beginning in 1974, a major review of our operations and effectiveness was undertaken. This review led to considerable changes in examination procedures, per sonnel requirements and organizational structure. These changes, necessary to equip the OCC to carry out its mission effectively in light of the increasing complexity and rapid change in the financial system, required substantial increases in expenditures. In ad dition, 1975 and 1976 were difficult years for banks. As the table shows, actual dollar expenses increased 23.6 percent in 1975 and 17.2 percent in 1976. Since 1976, nominal increases have been smaller, and spending over the last 3 years has increased by a total of only 1.1 percent, in real dollars, and actually was negative in 1977 and 1979. Year 1974 1975 Expenses (000) $ 55,505 68,582 1976 1977 80,359 83,882 Nominal increase Real increase 23.6% 12.8% 17.2 4.4 11.4 -1.5 1978 92,724 10.5 1979 100,585 8.5 1980 107,759* 7.1* Average annual increase 1974-79 12.6 Average annual increase 1974-80 11.7* 3.1 -0.4 -1.7* 4.9 3.8 *Estimated. The process of strengthening the OCC begun in 1974 has taken several years. Substantial realization of many of the Office's goals set forth over the last 5 years has been achieved. In addition to comprehen sive revision of examination policy and procedures, other improvements include an intensive personnel de velopment program, hiring consumer and supervisory specialists, developing new capabilities in bank super vision (the national bank surveillance system and the Multinational Banking Division are two examples), es tablishing new programs to implement laws such as the Community Reinvestment Act, streamlining old programs such as the processing of national bank cor porate applications and adopting an organizational and managerial structure that allows flexible but effec tive use of the OCC's resources. Thus, while the problems ahead in any given budget year are not precisely predictable, the quality of re sources and flexibility of operation now in place at OCC will enable us to anticipate and handle better the actual problems encountered. Evaluation of the performance of any organization is a meritorious objective. One measure of performance is how well the office anticipates and acts to prevent or minimize problem situations. While bank failures do and should occur in an efficient and competitive finan cial system, it is difficult to determine to what extent OCC examiners and examination and supervisory techniques prevent or remedy problem situations that might otherwise have led to failures. And, how can the effect of devoting resources to facilitating community 146 development programs and enforcing compliance with civil rights and consumer protection laws be mea sured? Because precise measurements are not possible, it is important that there be assurance that the person nel, programs and management are of the highest cal iber and that there be a continual program of review to update and upgrade to meet the challenges of the changing world. Minimization of expenses is a worthy goal and one we pursue diligently. However, when the effective conduct of the OCC's mission requires, we must have the flexibility and the willingness to devote or reallocate the resources necessary and to incur the attendant costs. Before leaving the 1980 budget overview, it is impor tant to note that the continuing withdrawal of national banks from Federal Reserve membership makes it dif ficult to anticipate precisely assessment revenues and operating expenses. The Office is aware of a substan tial number of national banks with a large volume of assets that are seriously contemplating conversion to state charters. Withdrawal of large national banks could adversely affect resource allocation and plan ning because their contribution to OCC revenues is far greater than the cost of examining them. Budget Specifics Expenditures—1979 to 1980—Of the total antici pated 1980 expenses of $107,759,000, a total of $76,840,000, or 71.3 percent, will be spent for salaries and benefits, $12,679,000, or 11.8 percent, will be for travel and $2,572,000, or 2.4 percent, for the tuition and travel costs of education and training, although the total cost of OCC education is closer to 12 percent of total budget as noted later. Rent and maintenance expense is $5,939,000, or 5.5 percent, office expense is $2,265,000, or 2.1 percent, and all other expenses total $7,464,000, or 6.9 percent. The principal resource of the OCC is its people. It is not surprising, therefore, that costs pertaining directly to human resources traditionally account for such a large proportion of the OCC budget. Eighty-six per cent, or a total of $92.1 million, will be spent for sala ries, benefits, education and travel in 1980. The exam iner corps, distributed geographically throughout the United States, requires highly trained professionals to supervise properly the condition of national banks; correspondingly, the Washington office needs suffic ient experience and management depth to oversee and support the entire OCC operations. Our recruit ment efforts must be directed toward selecting and re taining the highest quality personnel. The everincreasing complexity and sophistication of the commercial banking system require that OCC's train ing programs be continually updated and expanded to keep pace with the industry. The OCC expects to maintain employment in 1980 commensurate with the number of positions allocated by the Office of Management and Budget. Full employ ment is necessary to maintain ongoing programs and to institute required new programs. The 7.1 percent in crease in salary expense provides for the attendant costs of new employees, merit promotions, awards and cost of living increases, including newly budgeted Senior Executive Service (SES) awards in 1980 as part of the government-wide SES Program expansion. The total amount spent for education and training in the OCC is not reflected in that line item in the budget, since it only shows tuition and travel costs related to education. Salaries, benefits and travel costs incurred for the days our employees spend in education and training is projected at approximately $12.3 million, of which $4.4 million represents on-the-job training pro vided to entry-level employees. And adding the cost of course development, preparing texts and materials and instructor charges brings the total OCC expendi ture for educational purposes to $13 million, or 12 per cent of the total budget. As mentioned previously, existing training must be expanded as the complexity of the industry changes, and new training programs must be developed and put on line to meet new responsibilities. Both existing training and new programs are being addressed through the Federal Financial Institutions Examination Council for uniform application to all member agencies of the council. The 1980 OCC budget includes costs of sending our people to council-approved courses and costs associated with using our personnel to develop programs for the council. Any consideration of the Office's education and training costs must take into account the high turnover rate among the bank examiners who compose oyer 75 percent of the total OCC employment. The effective conduct of our supervisory mission depends on an ex perienced, knowledgeable and well-trained examiner force. The high examiner turnover, which was 15 per cent in 1979, is expensive, disrupts productivity and impedes the development of proper levels of experi ence. There are three experience level categories of examiners that are relevant to a discussion of turnover: (1) entry-level examiners, (2) mid-career examiners and (3) career examiners. In 1976, the OCC formalized a successful national recruitment program to recruit entry-level examiners from colleges and universities. At this level, salaries and benefits are competitive with the private sector. Normal attrition in this category occurs as employees make decisions on career and occupational opportuni ties. The majority who leave the OCC do so in realiza tion that they are in the wrong job. Examiners enter a mid-career period after 4 to 5 years when required skills, knowledge and training en able them to be fully productive and responsible em ployees. Mid-career turnover is of significant concern to the OCC simply because at this point the OCC is not competitive with compensation available outside. Minority and female examiners at mid-career are par ticularly recruited by and employed within the banking industry. Examiners with 10 or more years of experience have typically become career professionals and assumed administrative responsibilities. At this level, examiners are generally subject to the same ceiling as other gov ernment professionals, and both horizontal and vertical movement becomes less available. The OCC bridges the federal employment sector and the professional financial sector, and yet it exists within both environ ments as it relates to people. The plethora of opportu nities in the banking industry and the ability of examiners at the federal pay ceiling to earn salaries between 50 and 100 percent more in that industry has resulted in an increasing attrition rate at the career level. Historically, professionalism and loyalty to the Office have kept many of our top career managers on board. However, unless we can decrease the disparity between federal government compensation and pri vate sector executive pay, these professionals will be lost and, once lost, difficult to replace. The modest 1980 increase of 2 percent for em ployee travel unrelated to education, although directly affected by high energy costs, has been achieved through our experiments with compressed work schedules in the OCC field offices, conscious energy conservation efforts, utilization of a consolidated exam ination concept and managed travel policies. In the last quarter of 1979, the OCC field offices be gan experimenting with the 4/5 workweek arrangement permitted under government-approved compressed work schedules. Preliminary figures show reduced tra vel and attendant costs, without sacrificing productivity in examinations of national banks. The new initiative in consolidated examinations pro vides for the consumer, electronic data processing, commercial, trust and international examiners to con duct concurrent examinations, permitting both joint tra vel and conservation of energy. These initiatives, along with a more closely managed travel policy which en courages and monitors maximum use of vehicles in of ficial travel, produces tangible savings in travel costs. The amount budgeted in 1980 for rent and mainte nance represents a 19 percent increase and results largely from the expiration of leases of the Washington Office in 1979. Current renegotiation of the contracts has not been completed, and the budget figure repre sents the lessor's request, which is the highest cost OCC could incur. A 14.3 percent increase in other expenses will occur as a result of the purchase and implementation of a new word processing system. The total integrated sys tem which pulls together word processing, data pro cessing and management information systems is de signed to improve our ability to allocate resources, provide current and valid information throughout the organization, enhance distribution of information from OCC supervisory activities and improve processing of a variety of workloads. Comptroller's Equity—At year-end 1979, the OCC equity account totaled $37 million. This gives the OCC a 4-month reserve from which operating expenses can be drawn. The equity account avoids disruption of OCC operations and assures continued stability in the supervisory and examination processes when prob lems in the economy or in the banking system ad versely affect OCC revenues or expenses unexpect edly increase. A small portion of the equity fund is administratively restricted to provide for possible legal liabilities in conjunction with receivership funds ante dating 1936. The planned surplus for 1980 is $2.6 million. That 147 excess is dependent on actual expenditures as budgeted, particularly whether full staffing can take place, on sudden unanticipated expenditures and on the revenues received. A reduction in total national bank assets upon which assessments are based or in number of national banks would have a direct and im mediate effect on revenues. Programs The 1980 budget centers on expenditures neces sary to carry on the existing programs and activities of the Comptroller's Office. New programs have minimal impact on expenditures but continue the pattern of im provement in our operations and management estab lished the past several years. The continuing develop ment and refinement of our supervisory activities provides much of the flexibility which will be needed to meet the challenges of the 1980's. Developments in Supervision—Multinational Bank ing, which was created in late 1978 to centralize the supervision of the 10 largest national banking organi zations and the international operations of all national banks, will reach full operation in 1980. Examinations of 105 overseas offices of 29 banks are planned for 1980. For those 10 banks in the multinational region, the traditional examination will be supplemented by a new quarterly visitation program to provide more fre quent and timely information than previously available. In 1980, the division's capacity to monitor and project bank performance will be enhanced by a data-based program. Special Surveillance will initiate a review program in 1980 to increase the level of information and analysis for 99 regional banks, each with assets ranging from $1 to 10 billion. The program is intended to contribute to OCC's awareness of the activities and trends in re gional banking by expanding our analysis of key finan cial information and by onsite visits. During 1979, the national bank surveillance system was structured to include data on international opera tions and introduced a new analytical tool, the bank holding company performance report, which will assist in evaluating bank holding companies and affiliated bank operations. A major addition to the national bank surveillance system will be video display units that will be in operation by the end of the first quarter of 1980, both in Washington and in our regions. The video dis play capability will enhance the analysis of individual banks and will produce tailored screens for earlier de tection of emerging problems. Another innovation in examination techniques will be tested in 1980 involving examination of multibank hold ing companies and their national bank subsidiaries. When a multibank holding company is highly central ized in management control and operating policies, we believe it is possible to supervise subsidiary national banks by examining and analyzing the information available at the holding company level. This approach may eliminate the need for some onsite examinations entirely and is expected to produce other cost and effi ciency benefits as well. Customer and Community Programs—Significant re 148 sources have been directed toward administering the OCC's mandates in customer protection, community affairs and civil rights, and these efforts are producing tangible results. The Community Development Division was created to encourage and facilitate commercial bank participa tion in the development activities of a bank's local community or neighborhood. The division serves as a clearinghouse for information pertaining to community reinvestment programs of various financial institutions; it informs national banks of governmental programs in the community development area; and it will develop model community development programs and facili tate communication between community groups and banks. The facilitative approach of the division is an appropriate adjunct to the regulatory approach taken by the federal bank agencies to achieve the goals of the Community Reinvestment Act. In 1979, the division published the Program Guidebook to Help Meet Community Credit Needs which de scribes federal, state and local government programs in which a bank may participate directly and several marketing programs for bank use in communicating with customers and community groups. In 1980, the division will be expanding its "clearing house" activities to information on existing community development projects which may serve as models for other communities. The Customer Programs Division is responsible for policy initiation and formulation with respect to con sumer protection and civil rights, oversight and moni toring in these areas, regulatory reform, outreach to public interest and banking groups, internal advocacy of the interests which consumer and civil rights laws seek to protect, and special education programs. The Customer, Community and Fair Lending Exami nations Division continued to build on the examination approach developed in previous years. Examiner train ing continues as a high priority with 450 examiners trained and 165 senior level supervisory examiners given special training on management of the con sumer examination during 1979. The development of specialized examination procedures has enabled us to reduce examination time and cost. The Office of Customer and Community Programs plans to conduct a comprehensive review of its civil rights and consumer examination and its enforcement efforts during 1980. Other Programs—The need to improve the OCC's ability to act in a more efficient manner on applications for bank charters, mergers and related concerns led to reorganization and expansion of the Bank Organiza tion and Structure Division in 1979. That division is now better equipped not only for its traditional corporate applications functions but also its enlarged responsi bilities stemming from new or amended laws which govern management interlocks, bank control changes, international banking and community reinvestment. By year-end 1979, the Comptroller had implemented expedited application procedures to reduce the time involved in processing routine branch, customer-bank communications terminal, relocation and title change applications. The Comptroller's Office has eliminated unnecessary delays by delegating authority to act on certain applications to the 14 regional administrators. In 1980, the division will undertake a thorough review of its policies, procedures and forms for corporate ap plications. The Regulations Analysis Division has contributed significantly to an improved regulatory process at the agency. There has been a 40 percent reduction in the number of disclosure items required in statutory finan cial reports for the 90 percent of national banks which have assets under $100 million. Exemptions appropri ate for smaller banks were made for recordkeeping and reporting on bank securities transactions and for dissemination of annual shareholder reports. One of the OCC's most dramatic efforts at better, but less burdensome, compliance regulation in 1979 involved the Office of Customer and Community Pro grams. The new fair housing home loan data system was developed on a computer-based analysis system which detects possible patterns of illegal discrimina tion. This system will be used as a tool by examiners to focus their in-bank efforts on critical areas where prob lems are most likely to occur in bank compliance with the Fair Housing and Equal Credit Opportunity acts. OCC has attempted to make this system workable with a minimum of information from the bank, keeping new recordkeeping requirements to a low level. A significant achievement in interagency coopera tion occurred during 1979 when OCC and the Federal Deposit Insurance Corporation (FDIC) successfully merged their processing of quarterly financial reports from banks. Those reports, which are nearly identical, had previously been processed using the personnel and processing programs maintained by each agency. Joint processing was achieved by transferring some personnel to the FDIC and adapting their com puterized processing programs to meet additional re quirements of this Office. To date, processing of three quarterly reports from the 13,400 national and state nonmember banks have been handled jointly, and this arrangement has reduced the total number of person nel required to do that task. Development of the "National Treatment Study" which reported to Congress on foreign government treatment of U.S. banks pursuant to the International Banking Act of 1978 was an extensive undertaking of OCC's Research and Economic Programs Division in 1979. The OCC received substantial assistance from the Federal Reserve Board and the Treasury and State departments in developing the comprehensive report. The final report discusses the types of restraints and restrictions facing U.S. banks operating in other coun tries and provides individual studies of the official treatment of U.S. and other foreign banks in 21 nations and six groups of countries. In conclusion, I would like to summarize some of the activities of the Comptroller's Office discussed here which illustrate our attempts to build a government agency that can perform effectively in the face of many different contingencies and one that can function well over time: • Continuing improvements in Multinational Bank ing to meet the challenge of supervising the most sophisticated multibillion dollar banks; • A new and efficient use of the Office's special surveillance capabilities to improve the supervi sory oversight of banks in the $1 to 10 billion asset range; • Refinement of the national bank surveillance system by adding data and video display capa bilities for earlier detection of emerging prob lems; • Increasing attention to the supervision of bank holding companies with plans to test a different approach to examination of multibank holding companies and their national bank subsidiaries which promises considerable savings in exam iner time and travel costs; • A nonregulatory approach in the Community Development Division to encourage private en tities to help meet community credit needs; • More effective monitoring at a minimum of addi tional regulatory cost in the compliance require ments of the fair housing home loan data sys tem; and • Considerable reduction in time delays involving our corporate applications function. Those and other creative uses of the agency's per sonnel, operational and managerial capacities will per mit the Comptroller's Office to carry out and actually improve the accomplishment of our mandates without an increase tn real spending in 1980. Statement of Jo Ann S. Barefoot, Deputy Comptroller for Customer and Community Programs, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C., February 19, 1980 Mr. Chairman, I am pleased to appear before the committee this morning to offer the views of the Office of the Comptroller of the Currency on the Home Mort gage Disclosure Act (HMDA) of 1975. We have exam ined the benefits and available cost information con cerning the act in the context of its goals and the related regulatory systems for enforcing civil rights laws and encouraging investment by banks under the Community Reinvestment Act. The enactment of HMDA in 1975 was a first step in a new federal approach to urban policy. Prior to that time, federal urban development efforts relied primarily on direct federal grants and other forms of subsidy. HMDA departed from that tradition by focusing on the 149 role which private financial institutions can play in re sponding to the needs of their local communities. In the years since its adoption, this theme has become the cornerstone of other federal urban policy initiatives. Increasingly, our objective has been to create a part nership between the private sector, local government and the residents of the community to respond to local problems. HMDA, like the Community Reinvestment Act (CRA) which followed it in 1977, is clearly intended to promote this objective. We believe that HMDA is an effective and necessary tool in efforts to promote urban reinvestment and that the law should be permanently extended. At the same time, however, we recognize that HMDA, in its current form, is far from perfect. It does not achieve its full po tential as an information source and does not appear to minimize the costs that it imposes on financial insti tutions and, indirectly, on their customers. We recom mend, therefore, a number of specific amendments at this time and further study of ways to strengthen HMDA and reduce its costs in the future. In my testimony this morning, I will discuss the uses and benefits of HMDA, explore its costs and discuss some of the problems raised by the existing statutes, regulations and procedures. Finally, I will make recom mendations which we believe the committee should consider in deciding the future of the act. Uses and Benefits of HMDA Data When HMDA was enacted by Congress in 1975, its purposes were two-fold. First, the law was intended to provide citizens and public officials with sufficient in formation to evaluate the performance of depository in stitutions in meeting housing credit needs. Second, HMDA was designed to provide a foundation for the design of public programs to improve the private in vestment environment. HMDA reports have been used for both purposes. While the regulatory agencies do not collect data on the number of people or organizations using HMDA re ports, informal surveys conducted by national reinvest ment groups have identified some 300 users. Since the enactment of CRA, local citizens have used HMDA data in about 50 instances to challenge applications for structural changes, including branches or mergers, by banks and savings institutions. HMDA data analysis was an important component of most of those chal lenges, a number of which resulted in specific rein vestment commitments by the affected institutions. We also know of situations where local community resi dents or officials compiled HMDA data to help identify basic trends and conditions in housing markets and to develop revitalization programs involving public and private financing. It is worth citing a few examples. In Cleveland, a regional planning agency compiled the data for the metropolitan area. Community groups used the compilation in reviewing the records of indi vidual institutions and developing revitalization pro grams. The groups presented HMDA data at agency hearings during the application review process, as did the lenders in defense of their lending records. Fur ther, the housing market problems revealed by the 150 study are now being addressed through programs co operatively developed by the community and local lenders. In New Haven, Conn., the city government used HMDA data in 1978 to develop city housing programs and choose target areas for local programs. The data enabled city officials to approach local lenders with specific proposals. The city and local financial institu tions worked together to develop home rehabilitation and purchase loan programs. In a Boston savings bank case, neighborhood advo cates used HMDA data to challenge a proposed branch. Rather than arguing for special public pro grams, the group helped design an affirmative market ing program through which the lender substantially in creased its market share in the target neighborhood. These examples illustrate the importance of the local partnership process which I described at the outset. HMDA data are only the starting point, however, for such successful reinvestment activities. They give the public and lending institutions insight into geographic lending patterns and indicate problem areas which need additional research and dialogue. The quality of that dialogue and whether the problems are actually solved depend heavily on the techniques used to sup plement HMDA information. Organizations such as the U.S. Conference of Mayors, the National Community Development Association and the Center for Commu nity Change are actively promoting the use of such supplementary information through community rein vestment seminars and manuals. Their publications emphasize that to understand the local real estate market, individual HMDA reports must be used along with demographic and sales data, compared to other local institutions' reports and assessed in light of indi vidual applicant experiences and local real estate practices. When HMDA was enacted, use by the public and lo cal government was the primary focus of congressio nal interest. Since that time, however, HMDA informa tion has become essential to the ability of the federal financial regulatory agencies to carry out responsibili ties under the Fair Housing and Community Reinvest ment acts. Use of HMDA data for fair housing and CRA assessments is now required by the Comptrol ler's Office in every consumer examination in metropol itan area banks. In addition, our written procedures for handling fair housing complaints and for reviewing the CRA applications of banks which have not had a re cent consumer examination include HMDA data anal ysis. All consumer examiners are trained in using HMDA and demographic data. Fair housing examination pro cedures require that HMDA data be arrayed in tables, plotted on census tract maps and analyzed in light of census information on minority population. If the pat terns reveal differential treatment, the examiner pur sues the reasons for the disparity with bank manage ment and, when necessary, with local people knowledgeable about the housing market. Similarly, agency CRA evaluations focus on ascer taining an institution's commitment to serving its entire community, including low and moderate income areas. HMDA information is the only tool available to exam iners, short of time-consuming and costly analyses of individual loan files, to make CRA assessments on pat terns of housing investment in particular neighbor hoods. We also use HMDA reports when evaluating bank applications for structural changes from a CRA standpoint. The first denial of an application by the Comptroller's Office on CRA grounds relied heavily on agency analysis of home mortgage disclosure and de mographic data. In summary, the benefits of HMDA have been to stimulate local dialogue, to create a base for local rein vestment strategies and to provide a realtively simple regulatory tool for monitoring CRA and Fair Housing Act compliance. Costs The Comptroller's Office has no independent infor mation on the cost of Home Mortgage Disclosure Act data. The study recently released by the Federal De posit Insurance Corporation (FDIC) and the Federal Home Loan Bank Board estimates the overall average cost to be about $1.50 per loan, with costs two or three times higher for small volume lenders. This suggests that the total cost for creating HMDA data is more than $5 million per year. Problems with HMDA Data We have outlined our reasons for believing that HMDA fulfills important purposes for both the general public and the regulators. However, a number of prob lems significantly reduce the effectiveness of HMDA as a tool for regulators and other users alike. Most of those problems are examined in detail in the report prepared by the FDIC and the Federal Home Loan Bank Board. Some of the difficulties can be readily solved. Others cannot without a restructuring of the re quirements of the law. uniformly responsive to requests for mailed or photo copied reports. In some SMSA's, people must travel considerable distances to bank offices to obtain state ments. That may be a significant barrier to using HMDA data in areas with hundreds of institutions. Completeness—HMDA information from one institu tion or from several is most useful when it can be eval uated in terms of local demographic data and the total number of local residential sales. However, total sales cannot be ascertained from one statement, or even from a compilation of all HMDA statements, since insti tutions covered by HMDA do not account for all mort gage originations. It is extremely difficult, and some times impossible, to obtain this missing information from local property transaction records. For example, according to the Mortgage Bankers Association, in 1978, the approximately 700 mortgage banks ac counted for 17.4 percent of total mortgage lending, and their market share has been increasing. Such in stitutions are not, however, subject to HMDA reporting requirements. The loans made by mortgage bankers are about equally divided among FHA insured, VA guaranteed and conventionally financed mortgages. Analysis Costs—Even if complete and accurate data were produced by lenders, mechanisms for ag gregating and analyzing the data are costly and time consuming. For example, the cost to develop and pro duce the previously mentioned Cleveland study was $75,000. The FDIC/Bank Board study describes a sys tem to computerize and aggregate data for all institu tions by census tract. It estimates, however, a year de lay and cost of $1 million to adequately analyze the HMDA data for 1 year. Moreover, even if the federal agencies compiled HMDA data, additional analysis would be required for detailed understanding of local problems. Local resources for analysis of this type are extremely limited. Recommendations Comparability—HMDA data are not now reported for comparable time periods or in comparable formats by different institutions. This prevents users from compar ing or compiling the data to place the record of one in stitution in a total context or to evaluate the complete picture of housing investment in an area. Accuracy—HMDA data are not always accurate enough to be usable. Significant errors were reported in both census tract address matching and data ag gregation for the institutions in the three standard met ropolitan statistical areas (SMSA's) included in the FDIC/Bank Board study. While our examination find ings indicate that errors have been reduced since those data were collected in 1978, it is clear that accu racy needs to be improved. Such improvements will entail additional costs to the regulators and may have to be undertaken at the expense of other examination priorities. Accessibility—HMDA data are not always readily ac cessible to the public. The availability of the data has not been widely known, and institutions have not been I have said that HMDA data are unique and provide important information for a number of vital missions, but are costly to collect and somewhat cumbersome and imprecise to use. The recommendations of the OCC are aimed at moving incrementally toward more useful and cost effective data products over the next several years. The first part of our proposal is to pro mote immediately the maximum usefulness of the data which financial institutions currently produce. The sec ond part is to continue evaluating the information tools for achieving fair housing and reinvestment objectives and to improve or replace them based on the results of that evaluation. We will be pleased to cooperate with the other regulatory agencies to this end through the established mechanism of the Federal Financial Insti tutions Examination Council. We recommend, therefore, that HMDA be adopted as a permanent law, subject to certain changes. First, we support legislative and regulatory changes to standardize report time frames and formats. Such uniformity will improve the comparability and useful ness of the data at minimal cost. We recommend that 151 a uniform annual reporting date be required. However, to avoid the end of the year reporting burden on many institutions, a date other than year-end may be appro priate. Specific federal preemption of unnecessarily duplicative state reporting requirements would be ap propriate. Second, we support several initiatives to improve data access by the public. Specifically, we propose the following: • The availability of HMDA data should be ex plained in the CRA statements now maintained in every branch of the covered financial institu tions. This change would require a minor revi sion in the agencies' CRA regulations. • A central collection point should be established in each SMSA where HMDA statements will be stored and copied. Local governments of cen tral cities in SMSA's should be provided with limited funding by the Department of Housing and Urban Development (HUD) to operate such centers. Perhaps HUD could commit some of its community development block grant funds for that purpose. Third, the financial regulatory agencies should take steps to improve HMDA accuracy, within the con straints of examination priorities. This would require clarifying some of the definitions in the act, providing improved guidance to covered institutions on proce dures and revising examination procedures to identify major problems. Fourth, we recommend that the regulatory agencies cooperate with HUD to aggregate HMDA data for 2 years, following a brief period during which regulations are revised and techniques for improving accuracy are communicated to the institutions. To be more com plete, such aggregated data should include census tract information on FHA mortgages, together with VA mortgage information to the extent such could be de veloped. While we recognize that this process entails addi tional cost to the federal government, we believe such data aggregation will have several major benefits. Even after the delay required to compile statements, the data would be in a readily usable form for hun dreds of jurisdictions. Thus, local institutions would have valuable information to develop reinvestment pro grams, and federal officials could systematically use the data in considering alternatives for urban policy. Data aggregation would also provide a more complete picture of the mortgage market, creating a framework for a definitive evaluation of HMDA requirements. It would allow us to analyze the effect of selectively elimi nating requirements or of allowing exemptions for cer tain institutions or entire metropolitan areas. Fifth, we oppose any extension of HMDA require ments to nonurban lenders. We have no evidence that HMDA, which was specifically designed for city neigh borhoods, would be very meaningful in rural areas. We 152 support the development of other tools which can be used by the public sector, lenders and regulators to assess rural community credit needs. Our office is cur rently sponsoring, together with the Farmers Home Ad ministration, a study to identify rural community data sources. We believe continued research into rural credit needs is warranted before additional reporting requirements are imposed on thousands of small banks. Finally, it is essential to develop alternative reporting methods to improve efficiency and reduce the burdens and costs to affected institutions. Recent improve ments in the agencies' fair housing collection systems may point the way toward improving and integrating fair lending data requirements. While our limited expe rience with these new systems does not yet allow us to recommend cost-cutting innovations, these efforts may be the key to making HMDA more useful and less bur densome in the future. For example, the fair housing home loan data sys tem which is being developed by the Comptroller's Of fice requires that, prior to an examination, institutions submit data from a sample of mortgage loan files se lected by us for computer analysis. The sample is evaluated for any patterns related to racial, ethnic or sex discrimination, and the examiner is instructed to follow up on any problems identified. The system, while it requires census tract reporting, is not now designed for geographic assessment. In most cases, the sample selected will not be of suffic ient size for determining geographic patterns. Further more, unlike HMDA, this system currently lacks data on home improvement lending. However, in the next few years, as we experiment with this system and use it in the examination process, we may discover signifi cant opportunities to develop a comprehensive system for fair lending and CRA data collection and analysis. We recommend, therefore, that the regulatory agen cies actively assess the potential of meshing the re porting requirements of CRA, HMDA and the fair hous ing regulations and creating uniform reports. Furthermore, we believe the use of sampling and com puter analysis techniques may be able to provide re ports for fair lending and CRA supervisory purposes and possibly for public purposes. The agencies should be able to report the results of their assessment to Congress within 3 years and to recommend needed changes. In conclusion, we believe that HMDA is a vital part of a larger system to stimulate local dialogue and secure compliance with fair housing and CRA mandates. It complements other information used by regulatory agencies and local planners. It contributes signifi cantly to the processes needed for local reinvestment activity. We recommend permanent extension of HMDA and believe our other recommendations will strengthen its effectiveness. At the same time, we in tend to continue developing improved ways to assure the revitalization of the nation's communities and neighborhoods. Statement of John G. Heimann, Comptroller of the Currency, before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the House Committee on Banking, Finance and Urban Affairs, Washington, D.C., February 20, 1980 I am pleased to have the opportunity to present the views of the Office of the Comptroller of the Currency on deposit rate controls, financial institutions reform and other issues under consideration by the commit tee at this time. Because of the broad range of issues which your invitation asked that we address, my testi mony is divided into several sections. First, I will com ment on the various proposals to eliminate deposit rate controls (Regulation Q) and to expand thrift institution powers, including the related sections of the Senatepassed version of H.R. 4986, as well as H.R. 6198, H.R. 6216, and the alternative proposals in Chairman St Germain's statement on financial reform. Second, I will comment, and largely reiterate positions taken in previous testimony, on the most significant sections of the other titles of the Senate bill, including our pro posed "housekeeping" provisions. Financial Institutions Reform We believe it is imperative to move forward immedi ately with financial institutions reform. We support the thrust of the legislative proposals under consideration as a step in the right direction. Beginning with the recommendations of the Com mission on Money and Credit nearly 20 years ago, the need for financial institutions reform has been clear. Since that time, numerous studies have concluded that Regulation Q should be phased out and that thrift insti tutions should be granted broader asset and liability powers. The OCC has on many occasions testified in support of financial institutions reform. Yet, despite calls for legislation to improve the competitiveness of our depository system, deposit rate controls, including the rate differential favoring thrifts, and restrictions on thrift institution asset and liability powers have re mained in place. In the meantime, the problems prompting calls for reform have continued to worsen. As a result, we are confronted today with a depository institution system, particularly the thrift institution segment, whose powers are constrained in ways that do not enable the system to compete effectively in financial markets, which themselves have been evolving in response to chang ing economic conditions. Thrift institution earnings, es pecially in the Northeast, once again are coming under pressure as a consequence of high interest rates and continued concentration of thrift investments in longterm, fixed rate mortgages. Furthermore, below-market rate ceilings have caused all depository institutions to lose deposits. Disintermediation has been particularly severe in smaller commercial banks and thrift institu tions which depend primarily on consumer deposits. For a time, deposit interest rate ceilings, imposed on all depository institutions in 1966, protected earnings and postponed the need to deal directly with the thrift institutions' earnings problem through removal of limi tations on asset powers. This solution, while buying time, has had a number of faults: • Deposit rate controls have been a regressive and inequitable tax on many of our citizens. They are not applied to all deposit instruments, but primarily to those traditionally held by unso phisticated and moderate- to low-income savers who lack sufficient familiarity with finan cial markets to take advantage of alternative in struments or do not have enough savings to meet the minimum denomination requirements of open market instruments. The 5.25 percent ceiling on passbook accounts at commercial banks is only 1.25 percentage points higher to day than the 4 percent ceiling rate that existed in 1962. Over this same period, rates on 3month Treasury bills have gone from 2.78 per cent to 13.34 percent. • Deposit rate controls disrupt credit flows, espe cially to the mortgage markets, during high in terest rate periods because they result in disin termediation as sophisticated depositors, seeking the best return, move funds out of de pository institutions and into Treasury securities, money market mutual funds and other instru ments yielding market rates of interest. • Deposit rate controls have resulted in inefficient competition for deposits. Rate controls have not eliminated competition among depository insti tutions. Rather, controls have resulted in institu tions competing on the basis of other factors such as premiums, free services and greater convenience in the form of more branches and longer hours. These adverse consequences of deposit interest rate ceilings make it clear that they were never a good solution. Market-rate instruments, such as money mar ket funds, assisted by advances in data processing technology and high interest rates, preclude a return to the old solution of protecting earnings by controlling deposit rates. Deposits, once viewed as the stable "core" of a bank's funds, are becoming increasingly sensitive to yield. The dynamics of the marketplace are such that a continuation of deposit rate controls will lead to a restructuring of the financial services indus tries, changing and diminishing the role of depository institutions. For example, in the last 24 months, money market mutual fund (MMF) assets have increased from $4 to over $53 billion. Money market mutual funds offer a highly liquid, low-cost investment instrument paying in vestors market rates of interest. Increasingly, bank and thrift institution executives are reporting a loss of de posits to those funds and to other open market instru ments such as Treasury bills and notes. While a signifi cant proportion of MMF assets is invested in 153 commercial bank certificates of deposit and other bank paper, these investments tend to be concen trated in only a few of the largest U.S. banks. Should MMF's and other instruments attract significant amounts of deposit funds, the liquidity and earnings of smaller commercial banks and thrift institutions, which do not have as much of a ready access to purchased sources of funds as larger institutions, would be ad versely affected. To limit disintermediation pressures, the financial in stitutions regulatory agencies already have been eas ing deposit rate ceilings. The $10,000 money market certificate of deposit (MMCD), with a floating rate ceil ing tied to the 6-month Treasury bill rate, was autho rized in June 1978. At the end of 1979, MMCD bal ances at federally insured savings and loan associations totaled $127 billion, or 27.6 percent of all deposits at those institutions. On July 1, 1979, a 4-year certificate with a floating rate ceiling tied to the yield on Treasury securities of comparable maturity was autho rized. That certificate was superseded on January 1, 1980, by a 21/2-year certificate with a floating rate ceil ing that is closer to the yield on Treasury securities of comparable maturity than was the ceiling on the 4-year certificate. To attempt to solve the problem of disintermediation by imposing rate controls on unregulated market in struments would interfere with the efficient functioning of financial markets and would reduce consumer in centives to save. Furthermore, the pressures are so great now that new means of offering market rates would be developed almost as quickly as old ones were restricted. Thus, such an approach would only ensure a decline in the role of depository institutions in the U.S. financial system, particularly those dependent on consumer deposits. While inflation and market developments have forced de facto deregulation of depository institution li abilities, the continuing impasse in the Congress with respect to reform and deregulation of restrictions on fi nancial institution asset powers imperils the ability of such institutions to function profitably. Thrifts are in creasingly faced with a choice of either defending their deposits by paying market rates of interest, thus ad versely affecting earnings, or attempting to protect their earnings by paying less than market rates and suffering deposit withdrawals. This dilemma occurs because thrift institutions are required to concentrate their investments in long-term, fixed rate mortgages. Shorter term assets and longer term assets with varia ble rates are elements of financial reform essential to eliminate this Hobson's choice. Our entire financial system, as well as the mortgage market, will be best served by strong and wellcapitalized depository intermediaries. Strengthening the thrift industry by permitting savings and loan asso ciations and mutual savings banks to offer a broad range of services, coupled with the elimination of de posit rate controls, will place these institutions in a far better position to attract deposits. Elimination of de posit rate ceilings, including the thrift institution differ ential, will also substantially improve the ability of com mercial banks to compete for deposits. 154 While expanded asset powers for thrift institutions might decrease the proportion of thrift investments in the mortgage market, these same powers, depending on the impact of removing the deposit rate differential, might increase the thrifts' share of the deposit market. In any event, the development of a strong secondary mortgage market, innovations in the packaging and selling of mortgages and the existence of governmentsponsored mortgage pools have already reduced the dependence of the mortgage market on thrift institu tions. Increasingly, the mortgage market is becoming more national in scope and is attracting renewed inter est from the contractual thrifts such as pension funds and life insurance companies. It is urgent that we begin an orderly process of fi nancial institutions reform. The piecemeal easing of Regulation Q by the regulatory agencies in response to the prospect of disintermediation must be matched by an accompanying liberalization of thrift powers to address the thrift earnings problem. Thrift institutions need authority to begin the process of adapting their services in response to the more competitive market place. In fact, this process of adaptation should have be gun long ago, when market interest rates were closer to the ceiling rates and competitive pressures from nondepository institutions were less intense. As we noted in our testimony before this committee last year, it will take time for thrift institutions to implement new asset and liability powers and to make necessary ad justments in their portfolio and operating policies. Those commercial banks dependent on retail deposits will also need the opportunity to adjust the services they offer. For these reasons, we supported a gradual phaseout of deposit interest rate ceilings. Events of the last year, however, cast doubt on the feasibility of a gradual phaseout, certainly one which would extend over a 10-year period. For example, since last May, interest rates have risen dramatically. The prime rate charged by commercial banks has gone from 1 1 % percent to the current high of 15% percent. The yield on 3-month Treasury bills has in creased from 9.60 percent to 13.34 percent. By com parison, over this same period, the rate on passbook savings accounts at thrift institutions has gone from 51/4 percent to 51/2 percent. In response to high interest rate and regulatory ad justments in deposit rate ceilings, 1979 profit margins at thrift institutions declined from 1978 levels and are expected to decline sharply in 1980 if interest rates re main at present levels. Adding to the pressure on all depository institutions is the increased competition from nationally based competitors such as securities firms, large financial services companies, mortgage bankers and large re tailers, all of which are seeking to increase their market share of financial services. These developments increase the urgency for prompt action on financial institutions reform. They also mean that the necessary adjustment process will be more painful. Continued delay is unlikely to ease the transition problem and may, in fact, exacerbate it further. It is important to recognize that there may never be a perfect time for implementing major changes in an industry. Moreover, it is impossible to operate with ab solute certainty with respect to the ultimate ramifica tions of change. Alfred Kahn, in a 1978 speech which reviewed his experience as Chairman of the Civil Aero nautics Board during the deregulation of the airline in dustry, told of his conversion from a belief in gradual ism to advocacy of achieving total deregulation as quickly as possible. After participating in this major de regulation of the airline industry, Chairman Kahn noted: What has been genuinely illuminating to me is how rich a comprehension I have acquired of the dis tortion of the transition, and how thoroughly I have as a result been converted to the conclusion that the only way to move is fast. The way to minimize the distortions of the transition I am now thor oughly convinced, is to make the transition as short as possible. Financial Institutions Reform Agenda—A key ele ment of financial institutions reform is elimination of all rate controls on deposits. This will enable commercial banks and thrifts to compete effectively for funds with nondepository institutions. Furthermore, commercial banks will no longer be subject to the competitive dis advantage of the thrift rate differential. There are three other essential components to a fi nancial institutions reform package that should accom pany the elimination of Regulation Q. First, thrifts should be permitted to offer a full array of consumer services including transaction accounts, consumer loans, credit card services and trust services. Those powers are necessary to make thrifts more competitive with commercial banks once Regulation Q ceilings are completely removed. Second, yields on mortgage portfolios must reflect and adjust to changing market interest rates. The high rates of inflation since the mid-1960's and accompany ing high interest rates have made long-term, fixed rate lending unprofitable. If thrift institutions are to continue to depend on relatively short-term liabilities, then their earnings on assets must become more sensitive to changes in market rates of interest. One way to ac complish this objective is to permit them to offer a full range of mortgage instruments with adequate con sumer safeguards, including alternative mortgage in struments such as rollover mortgages. Commercial banks should have the same flexibility. Action must also be taken to remove usury ceilings to make all loans to which such ceilings apply attrac tive and profitable investments. We testified before this subcommittee on April 5, 1979, recommending that state usury laws be repealed, pre-empted by federal law or modified substantially. Congress recently granted temporary relief from such ceilings affecting mortgage loans and certain business and agricultural loans until March 31, 1980. Permanent relief is needed in those states where below market usury ceilings ex ist. Below market usury ceilings divert lending and in vestment activities to markets in which no controls ex ist. Those ceilings reduce the incentive to make certain types of loans and further distort the flow of funds by encouraging out-of-state investments. This injures the very people usury laws were intended to protect. Third, thrift institutions should be permitted to diver sify their assets to include more short-term and liquid assets such as commercial paper, corporate debt se curities, bankers' acceptances, consumer loans and, in the case of mutual savings banks, commercial loans. These additional powers will permit thrifts to shorten the maturity of their asset portfolios as well as provide highly liquid instruments for storing unanticipated or temporary deposit inflows. To be truly useful, the com mercial lending power for mutual savings banks must be accompanied by the power to accept corporate deposits. Regulatory Reform Agenda for the Future—The competition between financial intermediaries both for consumer savings and in offering financial services will continue to intensify in coming years. Our banking statutes, however, continue to reflect the view, preva lent in the 1930's, that the various financial institutions have clearly differentiated functions, each of which should be regulated in a compartmentalized fashion. The commitment of the thrift industry and especially the savings and loan industry to residential mortgage lending, may have reflected voluntary decisions early in their history, but governmental regulations and stat utes now make such specialization largely involuntary. As we have already stated, continuation of governmentally mandated specialization does not provide thrift institutions with the flexibility required to compete effectively in the kind of financial system that is evolv ing. This is why financial institutions reform is neces sary. The process of deregulation, which would begin through enactment of the legislation before us today, should be viewed as one step towards an eventual to tal freeing up of the financial system. Such a process will undoubtedly raise significant issues and may re quire a significant rethinking of our regulatory structure to ensure that all financial intermediaries offering simi lar products and services are able to compete on the same basis and on the same terms and conditions. This principle implies that reserve requirements, lend ing restrictions, geographical barriers, tax treatment and a host of other factors be applied evenhandedly to similar institutions. Legislative Proposals We support the thrust of the legislative proposals presently being considered. Because the OCC has previously testified on many of these proposals, we have provided only summary comments in this testi mony. Interest Bearing Transaction Accounts—H.R. 4986, as passed by the Senate, provides for the nationwide extension to all depository institutions of authority to of fer interest-bearing transaction accounts (NOW ac counts) to individuals and nonprofit organizations. The bill also makes permanent the authorization of auto matic transfer services at commercial banks, remote service units of savings and loan associations and 155 share accounts at federal credit unions. If action is not taken by March 31, the authority for these transaction arrangements will expire. We support these provisions. These services afford the public a substantial benefit. Moreover, authorization of transactions account powers for all thrifts is an essential component of the powers necessary to enable thrifts to compete for de posits in a world without the benefit of deposit rate ceilings and the differential. We also support limiting NOW accounts to individuals and nonprofit organiza tions, but only as an interim step to ease the transition for depository institutions. We believe that this restric tion should be terminated as soon as possible and that ultimately all depository institutions should be permit ted to offer interest-bearing demand deposit accounts to any kind of customer. The Senate version of H.R. 4986 is silent on reserve requirements for commercial banks and thrift institu tions. Thus, existing inequities between member banks and nonmember depository institutions are perpetu ated. Member banks will continue to be required to hold sterile reserves on transaction account balances. Payment of interest on transaction balances will in crease cost pressures on all depository institutions. Thus, the cost to member banks of holding noneaming reserve balances will become even less tenable than it is now. This will exacerbate Federal Reserve member ship attrition. We strongly believe that the public will be better served by insuring that all institutions offering transaction accounts be subject to the same require ments and restrictions, including those pertaining to reserves. Phased Deregulation of Deposit Rate Controls— Four separate approaches to eliminating deposit rate controls are presently under consideration by this sub committee. Section 107 of H.R. 4986, as amended by the Sen ate, provides for the total decontrol by January 1, 1990, of the maximum deposit interest rates which de pository institutions may pay. The bill provides that, beginning on January 1, 1982, and every year thereaf ter through January 1, 1989, rate ceilings on all cate gories of deposits are to be raised by the regulators at least one-half of a percentage point. Flexibility is pro vided in the bill for the Federal Reserve Board to has ten or slow the rate of decontrol, if economic condi tions warrant. The bill also provides for reducing minimum denominations on certificates of deposit to at least $1,000 as soon as feasible by unanimous agree ment of the agencies. Again, if economic conditions warrant, this action could be postponed. In addition, the bill provides that new categories of deposits may be created only if the rate of interest is at least equal to rates on deposits of equivalent maturities. H.R. 6198 provides for a more rapid phasing out of Regulation Q through lifting ceilings on all savings and time deposits by one-half percentage point per year beginning July 1, 1980, and eliminating ceilings at the end of 5 years (July 1, 1985). The bill also directs the agencies to reduce all minimum denomination require ments on all time deposits within 5 years after the date of enactment. In addition, interest rate ceilings would be removed each year on specific deposit categories 156 on the basis of maturity, beginning with ceilings on time deposits with initial maturities of 6 years or more, individual retirement accounts and accounts main tained by qualified pension plans. H.R. 6216 directs the federal financial regulatory agencies to raise the passbook interest rate to an un defined market rate of interest 5 years after enactment of the legislation. The bill does not address the contin uation of ceilings on other deposit categories. Chairman St Germain has proposed a fourth ap proach, which would require the Interagency Coordi nating Committee to raise the ceiling on passbook sav ings accounts by one-half of a percentage point as soon as possible but no later than 1 year after enact ment of legislation. Second, the committee, while oper ating under Regulation Q until 1985, would be directed to take into account market rates of interest and eco nomic conditions and establish more equitable rate ceilings on savings accounts. At the end of 1985, de posit rate controls on all deposits would be removed. The establishment of a date certain for eliminating Regulation Q and a specific schedule for its phaseout is of overriding importance and an essential ingredient in the process of financial reform. Moreover, regulatory discretion to modify the schedule where circum stances warrant is also important. We are in agreement with Chairman St Germain's stated position and Congressman Barnard's sug gested approach in H.R. 6198 that a transition period of 10 years, as provided for in H.R. 4986, is unneces sarily long. We support phaseout of Regulation Q along the lines contained in H.R. 6198, which includes a provision authorizing the Federal Reserve Board, in consultation with the other financial regulatory agen cies, to accelerate or slow the phaseout of deposit rate controls if economically feasible. Expanded Thrift Powers—H.R. 4986 would permit federally chartered savings and loan associations to issue credit cards and engage in credit card opera tions, make and hold unsecured consumer loans and invest in commercial paper, corporate debt securities and bankers' acceptances in an amount not to exceed 20 percent of the assets of the association. H.R. 4986 and, to a lesser degree, H.R. 6198 make a number of other changes in thrift powers and structure. These in clude the authority for savings and loan associations to invest in certain mutual funds, the authority to exercise fiduciary powers, a broadening of thrift residential real estate lending authority to match the powers of na tional banks, the permission for a state stock savings and loan association to obtain a federal charter if it has never previously existed in a mutual form, and the authority for savings and loan associations to issue mutual capital certificates. H.R. 4986 would also allow federally chartered mu tual savings banks to place up to 20 percent of their assets in loans or investments of any kind phased in over an 8-year period, so long as 65 percent of such loans and investments are made within the state where the bank is located or within 50 miles of such state. Federal mutual savings banks would also be permitted to accept demand deposits from any source. H.R. 6198 and H.R. 6216 do not have comparable provisions for expanded powers for federal mutual savings banks and do not include credit card powers for savings and loan associations. H.R. 6198 further sets a 10 percent of assets limitation on expanded savings and loan association asset powers. The OCC supports the broadening of thrift powers as contained in H.R. 4986. The authority for federal savings and loan associations to make consumer loans and issue credit cards will improve their compet itive capabilities by rounding out the range of family fi nancial services, including transactions accounts, that they may offer to consumers. This authority will also improve the ability of thrifts to pay market rates on their short-term liabilities by reducing the average maturity of their assets. We are unaware of any reason for ex cluding "secured" consumer lending from the new thrift powers. We also support providing mutual savings banks with the additional powers contained in H.R. 4986. We question, however, the need for including geographi cal restrictions as part of the expanded mutual savings bank lending authority. Such a restraint limits the free flow of capital and may create inefficiencies with no clear public benefit. We support placing an initial 20 percent of assets limitation on the new thrift lending powers. Savings and loan associations and mutual savings banks will need time to develop expertise in their newly acquired loan areas. For instance, consumer lending entails greater administrative costs relative to the size of the loan and greater risk than mortgage lending. However, consideration may need to be given in the future to raising the percent of assets limitation and perhaps further easing restrictions on thrift asset powers. We expect thrift institutions will continue to concentrate their lending activity in the mortgage market—their area of expertise. However, changes in the marketplace and in regional economic conditions might require their having increased access to liquidity and, at the same time, additional options to improve their earnings flexibility. Real Estate Mortgage Lending Authority—Among the various provisions to expand the asset powers of thrift institutions, H.R. 4986 and H.R. 6198 provide that federally chartered savings and loan associations may invest in, sell or otherwise deal in loans or investments secured by liens on residential real estate to the same extent and in the same manner and amounts without limitation as national banks can pursuant to the provi sions of Section 24 of the Federal Reserve Act, 12 USC 371. By that grant of expanded authority to fed eral savings and loan associations, such institutions will be able to undertake the more flexible and creative approaches to residential real estate lending which are now available to national banks. For example, while most loans by federal savings and loan associations cannot exceed an 80 percent loan-to-value ratio and a $75,000 aggregate limit, national banks may make loans up to 90 percent of appraised value on improved real estate and, more significantly, without dollar limita tions. The application of Section 24 to federal savings and loan associations will also remove geographical limitations, first lien requirements and certain other as set limitations on savings and loan associations. We believe that such authority will provide neces sary increased lending flexibility to federal savings and loan associations. We suggest, moreover, that such authority be extended to federally chartered mutual savings banks to enhance their capacity to compete with other depository institutions. OCC Housekeeping During the first session of the 95th Congress, Chair man St Germain introduced our so-called housekeep ing proposal to amend the National Bank Act and other federal laws principally affecting the OCC. These provisions, which are for the most part intended to streamline certain functions of the agency under exist ing laws, were'included in the Financial Institutions Regulatory Act of 1978 (H.R. 13471), which was favor ably reported out of the House Banking Committee on July 20, 1978. We still believe this legislation is neces sary. The housekeeping provisions in Title III of H.R. 4986 are, for the most part, noncontroversial and affect such matters as the ability of the Comptroller to delegate certain responsibilities in a manner similar to provi sions affecting the Federal Deposit Insurance Corpora tion (FDIC), to revoke a national bank's abused or un used trust powers and to have greater flexibility in scheduling bank examinations. Provision is also in cluded in Title III for terminating the National Bank Closed Receivership Fund. Certain sections of the housekeeping provisions are noteworthy, however, in cluding those affecting real estate holdings of national banks, clarification of OCC rulemaking authority and the recently added restrictions on the interstate estab lishment of trust companies. Other Real Estate Owned—Section 301 of H.R. 4986 would amend the National Bank Act to authorize the Office when necessary to extend for up to 5 years the period for which a national bank may hold real es tate acquired from a debt previously contracted. This provision is designed to provide sufficient regulatory flexibility to deal with situations in which a national bank is unable to dispose of such real estate during the normal 5-year holding period at other than an un reasonably low price which would result in a substan tial loss to the bank. Section 301 also provides us with authority to allow national banks to expend limited funds for the development and improvement of such real estate in certain extenuating circumstances. We believe that this proposed authority is neces sary. We understand that there is some concern, how ever, that the proposed language of the provision, as it is presently drafted, may only authorize development and improvement of such real estate when an applica tion is formally made to the Comptroller and approval is granted. It would only allow such developments or improvements in demonstrably extenuating circum stances. If this provision is enacted in its present form, we would endeavor to establish expedited review processes to minimize any additional regulatory bur dens on national banks. Alternatively, we are available 157 to work with the subcommittee to modify the provision to permit greater procedural flexibility if that is desir able. OCC Rulemaking—Section 308 of H.R. 4986 con cerns the rulemaking authority of the OCC. Recently, the U.S. Court of Appeals for the District of Columbia substantially clarified the Office's authority by deciding that an explicit grant of substantive rulemaking author ity exists under the Financial Institutions Supervisory Act. Formal rulemaking is an essential part of the admin istrative decisionmaking process. It provides for maxi mum public and industry participation in developing standards. In certain cases, as noted by the Court of Appeals, it may be infinitely preferable to case-bycase adjudication. It is necessary, however, that the Congress enact unambiguous legislation. In our opinion, the language of the Senate bill is inadequate to fulfill this need. More particularly, the added phrase "under the Financial In stitutions Supervisory Act of 1966" may cloud certain express grants of specific rulemaking authority under other statutes and grossly impede our ability to coordi nate rulemaking with the other regulatory agencies. The statutory clarification, as originally proposed in H.R. 2229 and H.R. 5280, would provide specific lan guage paralleling the rulemaking authority of the FDIC. We request, therefore, that the added language in Section 308 be stricken and the provision as originally proposed and accepted last year by the House Bank ing Committee by a vote of 34 to 5 in H.R. 13471 be restored. That is, we ask that Section 308 be changed to amend the National Bank Act by adding new Section 5329A to Chapter 4 of Title LXII of the Revised Statutes to read as follows: Except to the extent that authority to issue such rules and regulations has been expressly and ex clusively granted to another regulatory agency, the Comptroller of the Currency is authorized to prescribe rules and regulations to carry out the re sponsibilities of the office. Interstate Trust Companies—Section 312 was not part of our originally proposed housekeeping bill. It was added by the Senate to amend the National Bank Act and the Douglas Amendment of the Bank Holding Company Act to prohibit the chartering and acquisition of trust companies by out-of-state holding companies. This Office has a longstanding policy of favoring a free and open system of competition among all pro viders of financial services. In our opinion, the pro posed provision is overly restrictive and essentially anticompetitive. We therefore oppose its enactment. The interstate establishment of trust company sub sidiaries relates to the broader questions involving all forms of interstate bank holding company activities and market structure. In fact, the Administration is con ducting a study which was undertaken at the request of the Congress to review the entire issue of geo graphic restrictions on bank and holding company ac tivities. We recommend that any legislative action on 158 the issue of interstate trust operations at least await the completion of that report. In our opinion, it would be premature at this time to enact a new restrictive prohibition against one form of holding company activity without reevaluating the prin ciples which long have been applied equally to other types of permissible interstate activities of holding companies. Truth-In-Lending Simplification Our Office has consistently and strongly supported efforts to simplify the Truth-in-Lending Act. While the act is an important consumer protection tool, it has proved to be unwieldy and unnecessarily complex in its present form. This complexity places a costly and wasteful administrative burden on both the lending in dustry and the regulatory agencies and, at the same time, tends to confuse rather than assist the prospec tive borrower. As a result, Truth-in-Lending is often cited as an example of government overregulation, which imposes costs without commensurate benefits. We believe it is time to correct this imbalance of costs and benefits by simplifying both the law and the regulation to focus on the original extremely worthwhile goal of disclosing key loan terms in an understandable manner. We, therefore, strongly support the pending simplification amendments. We support the specific amendments in the Senate bill which clarify the authority of the financial regulatory agencies to provide for reimbursements to consumers harmed by certain violations of the act. These amend ments reflect a recognition of the problems which the agencies encountered in their attempts last year to im plement reimbursement guidelines through administra tive actions. Based on those problems, we believe that any workable reimbursement system must be flexible, operate uniformly among the agencies, incorporate reasonable tolerance levels for lender errors and be limited to a realistic period of retroactivity. Regarding this last point, we oppose proposals to make the bill's reimbursement provisions retroactive to January 1, 1977. The agencies used a 1974 retroactiv ity date in last year's reimbursement program and found that it was too rigid to be fair. We prefer the Sen ate bill's provision, which is modeled on the agencies' proposal as published in the Federal Register last fall. This approach tailors the retroactivity period to the past performance of each individual institution, based on whether or not it responded properly to notification by its regulatory agency that it was in violation of the regulation. This approach to retroactivity recognizes the complexity of the present law and regulation and will not penalize the lending institution which has made good faith efforts to comply with them. We recommend that it be adopted in the final version of the Truth-inLending Simplification and Reform Act. Proposed Moratorium on Foreign Acquisitions We do not believe that a moratorium on foreign ac quisitions of U.S. financial institutions, such as con tained in Title X of the Senate bill, is justified. Such leg islative action would be unwise and inconsistent with the longstanding U.S. policy of free and open capital markets. Our country has traditionally welcomed and encouraged foreign investment in our domestic enter prises, and foreign capital has contributed significantly to our economic development. Our nation's banking policies have been consistent with this open policy toward foreign investment. In adopting the International Bank Act of 1978, the Con gress discarded both proposed restrictions on foreign investment in banking and policies based on reciproc ity in favor of the principle of national treatment. A shift in this policy would be justified only in the face of a clear and present threat to national interests, espe cially in light of the potential costs to our own system of such a shift. We find that there is no evidence that such danger exists. Taking into account both known consummated and approved acquisitions, less than 1 percent of our country's 14,367 insured commercial banks have 10 percent or more foreign ownership. Those institutions account for less than 5 percent of our aggregate com mercial bank assets. Those are modest levels, far from being sufficiently threatening to risk the potential costs of a moratorium. Moreover, we believe that an objec tive review of the concerns raised thus far reveals that potential problems associated with foreign owner ship—especially ownership by foreign institutions— can be dealt with satisfactorily within the existing framework of laws and regulations. At the same time, we recognize that significant pub lic policy issues have been raised regarding foreign ownership of U.S. financial institutions. We support, therefore, the General Accounting Office study into those issues initiated by Chairman St Germain and other efforts to illuminate this complex and, at times, troubling subject. Remarks of H. Joe Selby, Senior Deputy Comptroller for Operations, before the 40th Assembly for Bank Directors, Palm Springs, Calif., February 22, 1980 In September 1978, I appeared before the 32nd as sembly in Colorado Springs and spoke on the chang ing standards of bank regulation and their effects on the responsibilities of bank directors. I related how the standards of bank regulation had not, in effect, changed but rather the emphasis which regulators place on those standards had changed and how the increasing complexities of the industry had enlarged the director's role in assuring the bank's soundness and success. Today, I will talk about the evolving responsibilities of the bank director, and yet the fundamental responsi bilities have changed very little. It is a fact that your le gal responsibilities as a bank director have increased substantially as a result of congressional actions on social concerns. In addition, you must deal with the fact that the bank exists in a changing marketplace where there's no choice but to compete, and you must be concerned with the cost and burden of regulation, since the banking business is a heavily regulated busi ness. Unfortunately, it is going to continue that way in the future. Membership on a bank's board should be consid ered an honor, and the ability to attract or bring busi ness to a bank may be a relative factor in the choice of a director. However, those do not define the function of a bank director nor describe the important responsibil ities the person assumes in joining a bank's board of directors. In essence, a director has a legal duty to su pervise the business of the bank diligently and in good faith. Shareholders, depositors and creditors have the right to expect no less. Throughout the last decade, an enormous amount of press was devoted to the bank director's role. Nu merous commentators stated that the duties and re sponsibilities of a director had undergone profound change. Admittedly, we witnessed, and will continue to witness, the imposition of an increasing number of le gal strictures on directors and their banks. We can also expect that the dynamics of the banking system will continue to pulsate from further innovation and de velopment. This will also increase the demands on bank directors. Nonetheless, it is misleading to assert that the fundamental role of the bank director has been appreciably altered. What has, in fact, occurred is a transformation in perception of the mission for which a bank exists and a groundswell of new, novel bank services and operations. Viewed in proper perspec tive, the climate of ever-increasing requirements may best be viewed as attempts to establish the operating procedures and internal controls which, when fol lowed, will help any board of directors in meeting to day's public and private expectations for the banking community. Regulators have not been misled by pronounce ments of change in director responsibilities. Federal regulation of the commercial banking industry is more than 117 years old, and during that time, we have al ways assigned tremendous import to the duties and responsibilities of the bank director. We have held, consistently, that a director must be a leader, impart ing an amassed knowledge and business expertise to attain the goal of a prosperous, safe and sound institu tion servicing its community. Examiners sometimes have to impress bank direc tors with the extent of their duties and responsibilities. Unless bank directors realize the importance of their positions and act accordingly, they are failing to dis charge their obligations to shareholders and deposi tors. They are also failing to take advantage of the op portunity to exercise a sound and beneficfal influence on the economies of their communities. The OCC has 159 compiled what we feel to be eight major duties and re sponsibilities of a bank director. They are: • To select competent executive officers and to dispense with officers who prove unable to meet reasonable standards of executive ability and efficiency; • To effectively supervise the bank's affairs—the character and degree of supervision required involves reasonable business judgment and confidence and sufficient time to become in formed about the bank's affairs; • To adopt and follow sound practices and objectives—the directors must provide a clear framework of objectives and policies within which the chief executive officer must operate and administer the bank's affairs; • To avoid self-servicing practices—a selfserving board, whether weak or strong in other respects, has historically worked to the bank's detriment; • To be informed on the bank's condition and management policies, through usable data which show the direction the bank is taking and the implications of change if policies are fol lowed; • To maintain reasonable capitalization—a bank's capital base supports growth while pro tecting depositors against the uncertainties of investing funds; • To observe banking laws, rules and regu lations—speaking as a regulator, this almost goes without saying, but directors must exer cise care to see that laws are not violated; • To insure that the bank has a beneficial influ ence on the economy of its community—this is very difficult to quantify, directors have a contin uing responsibility to provide banking services which will be conducive to well-balanced eco nomic growth. What, specifically, has happened to make your cor porate lives a jungle of seemingly tedious—and often apparently extraneous—rules, regulations and require ments? In part, the proliferation of new requirements was fostered by the birth of broad-based social activ ism which permeated the national conscience. The year 1969 may be viewed as a watershed, the dawn ing of this new era, for in that year Congress passed the Truth-in-Lending Act. This act was not the omega of congressional action in the arena of social mea sures. On the contrary, passage of the act merely presaged a decade of enforcement and compliance legislation that had little to do with the fundamental business of banking. Unfortunately, it also ignored the need for structural reform. The litany of socially oriented legislation includes such items as equal credit opportunity, affirmative action, home mortgage disclo sure, fair housing, community reinvestment, etc. Each of those proposed to alleviate perceived social prob lems and were well intended. The end result to the banking community and, therefore, you, however, was a maze of exacting strictures which, if violated, even inadvertently, could lead to sizable adverse impact on 160 the financial posture and public image of your respec tive corporations. During this period of unprecedented congressional action, banks were also confronted with a rapidity of change under which the industry was evolving. The re cessionary period of the early 1970's, when large banks at home and abroad failed, placed the banking industry prominently in the news media. Confidence remains the key to our economic system, and confi dence is derived from the public's collective percep tion of the soundness and integrity of our financial institutions—a perception based largely on the pub lic's judgment of the individuals who manage our banks. Not all was bleak during this period, however. The resiliency of the industry was manifested in the latter half of the decade as bank performance laid to rest fears of pervasive weakness and susceptibility. Fur thermore, the marketplace witnessed an enormous in flux of new services, more efficient techniques and fresh sources of competition. Those elements aggra vated the already heavy demands on the bank direc tor. Competition continued to thrive and grow as bank holding companies expanded across state borders with increasing frequency via their subsidiaries. Nu merous states liberalized or abolished branching re strictions. While facilities grew, internal capabilities to deal with expansion were enhanced by more sophisti cated data processing systems. Creativity and innovation were hallmarks of the period as well. Increasingly, banks shunned traditional asset management techniques and focused instead on directing their financial destiny. Funding sources were aggressively sought, and not merely by the gi ants of the industry. Concurrently, competition for retail business swelled. "Brick and mortar" facilities were supplemented or replaced by automatic teller ma chines. New services were introduced and elaborate total customer packages were marketed. Competition from the thrifts also forced banks into action as nego tiable order of withdrawal accounts, automatic transfer arrangements, etc., lured depositors away. Interindus try competition flourished and helped boost the stam pede to salvage the customary deposit core. Today, we cannot pick up a newspaper or periodical without somewhere reading of money market certificates of deposit, money market mutual funds or such arrange ments as payment of interest on credit card credit bal ances. Again, directors found themselves struggling to help their banks adequately meet the growing compe tition and to formulate controls and reviews ensuring maintenance of profitability, liquidity and soundness. What many would term the apex of the directors' plight happened later in the era. Legislative oversight of the banking community has never suffered from want, and the significance of accelerated change within the industry was not lost on Congress. Certainly, the public and government perception of the system's stability and integrity was damaged by large bank fail ures, fears of expanded foreign competition and own ership and revelation of questionable self-serving practices by highly visible former bank officials. Moti vated by their concern and fortified by the public out- one of the proposed acquisitions has been consum mated. I am happy to report that the condition of the bank has improved significantly in the year since the acquisition was consummated. The OCC has acted on notices within an average time of 43 days. The average processing time for no tices filed by U.S. citizens has been 42 days, and the average time for notices filed by foreign persons has been 60 days. That time difference largely results from the additional time required to retrieve and carefully verify information on foreign individuals. The fact that the small sample size makes the averages misleading should be noted. One foreign change-in-control notice which took 94 days to process distorts the foreign average. The relationship of the CBCA and the Bank Holding Company Act should be recognized. Corporate acqui sitions subject to the prior approval provisions of the Bank Holding Company Act are not subject to the CBCA. Foreign Bank Holding Company Act acquisi tions are likely to be far more significant than acquisi tions by individuals in terms of gross economic impact. However, if one looks at frequency of transactions, rather than the gross assets involved, foreign individ ual acquisitions are significant. As I noted previously, more than half of the foreign acquisitions since 1970 have been by individuals. More importantly, they present much thornier issues for the supervisor. In particular, gathering information on foreign indi viduals, especially from third parties, is not an easy task, given the time frame within which we must oper ate. Indeed, there may not be the same quantity or quality of information available on individuals (foreign or U.S. citizens) as there is on domestic and foreign corporations. Although law and custom in many, if not most, countries do not provide for the U.S. type of in formation disclosure, the regulatory and reporting framework in many countries are designed to make available at least certain types of financial information about a corporation. In addition, foreign bank regula tors may have access to detailed information about in digenous banks and bank holding companies, the usual corporate acquirers of U.S. banks, which they will share. Here, it is important to remember that the CBCA per mits the interdiction of an acquisition when the filing party ". . . neglects, fails, or refuses to furnish the ap propriate federal banking agency all the information required by the appropriate federal banking agency." (Emphasis added.) That provision is invaluable. It places on the filing person an affirmative duty to supply all information, ap propriately verified, which we believe to be necessary to complete a fair and complete review of the pro posed transaction. Those who balk at providing neces sary information may be disapproved. On occasion, adverse information received in con nection with a change-of-control notice might not be of sufficient quality to warrant disapproval, but it may nonetheless be appropriate to trigger further scrutiny during the ongoing supervisory and examination process. It may, for example, trigger special examina tion procedures, and supervisory action may be taken 224 after the change in control, if necessary. We will, of course, continue to hone and refine our information gathering techniques as more experience is gained under the law. GAO Recommendations Turning to the specific recommendations of the GAO report, GAO suggests, when processing a notice of proposed change in control, that the appropriate fed eral bank regulator: • Contact the foreign individual acquirer's home country banking regulator to determine the ac quirer's financial reputation and • Deny those applicants who are given unfavor able referrals from their regulator. We endorse the GAO's first recommendation without qualification. It is fully consistent with our present pol icy. We have opened and maintained relationships with other regulators, including state bank supervisors and authorities in other countries. Our domestic and foreign field offices serve as listening posts. Our Multinational Banking personnel are well informed on activities in the international arena. The usefulness of those formal and informal lines of communication in obtaining the kind of background information useful in the supervisory process is readily apparent. In addi tion, where necessary, we seek information on individ ual proposed acquirers from other state or federal agencies and elsewhere, although federal statutes make the exchange of information among federal agencies somewhat difficult. That process is important whether foreign or U.S. citizens are seeking control of a bank. As previously mentioned, especially where in dividual foreign investors are concerned, neither do mestic or foreign bank regulators may be familiar with the proposed acquirer. In such cases, we have pur sued and will continue to pursue all other available sources for relevant information. The GAO also seems to recommend interdiction solely on the basis of an unfavorable referral received from a home country regulator. Although it is not clear, we presume the GAO is addressing issues which arise under the "financial resources" standard and the "competency, integrity and experience" standards of the law. Polling foreign regulators to the extent that they have and will share relevant information is useful and necessary. If the GAO intends to suggest that a foreign regulator should be able automatically to force a denial through an "unfavorable referral," however, we do not agree. While the opinions of foreign bank regulators can, of course, be given appropriate weight, we believe that the ultimate decision under the statute must rest with the appropriate federal agency after consideration of all available information. CBCA should be viewed as an initial, large mesh screen within our comprehensive system of bank su pervision, examination and regulation. It does not and was never intended to provide a perfect and certain net, barring entry to all but the most qualified. But it has proven a valuable supervisory tool for shielding the banking sector from individuals with questionable foreign controlling shareholder and, in the extreme, re voke the bank's charter and seize its assets. Resort by U.S. authorities to extreme measures is not anticipated to be necessary with regard to foreign bank holding companies, which have a major stake in maintaining a good reputation in world markets. That consideration, together with the reasonable expectation that such companies will wish to safeguard their U.S. bank in vestments, makes it highly unlikely that foreign bank holding companies would intentionally cause damage to a U.S. bank subsidiary. Reports, cooperative interchange among supervi sors and available enforcement remedies can be ex pected to provide U.S. authorities with the necessary means to obtain information and ensure responsible performance most effectively when the foreign owner of a U.S. banking organization is a foreign bank hold ing company. In general, there is less basis for confi dence that any combination of those approaches would always be effective if serious problems were to arise out of control of a U.S. bank by foreign individ uals. However, our systems for detection of significant misdealing and for limiting risk to the system arising out of the difficulties of any individual institution lead us to conclude that the potential enforcement problems here are well within the bounds of acceptability. Change in Bank Control Act of 1978 You have also requested our comments regarding the Change in Bank Control Act of 1978 (CBCA), Title VI of the Financial Institutions Regulatory and Interest Rate Control Act of 1978. The following comments deal principally with the application of the CBCA to foreign investment in U.S. banks. In addition, we will address the specific recommendations made by the GAO con cerning the CBCA. At the outset, let me state that the CBCA is an extremely valuable supervisory tool, espe cially in the context of foreign acquisitions. It should be noted that the first of a series of re quired periodic reports on the act, together with agency recommendations for changes, is due before the end of March 1981. A more detailed analysis of our experience with the act, as it applies to both domestic and foreign acquistions, will be made at that time. We may also, after consultation with the other regulatory agencies, make specific recommendations for appro priate legislative actions at that time. The CBCA was enacted to close a gap in our super visory scheme. Corporate acquisitions of banks have been regulated by the Bank Holding Company Act since 1956. Not until the enactment of the CBCA, how ever, were acquisitions of banks by individuals subject to similar federal scrutiny. The need for that type of legislation was exemplified by the so called "rent-abank schemes," which were investigated by this sub committee in 1976. Testimony offered during the hear ings at that time indicated that in some cases banks were being bought by persons intent on using the bank's resources for the purpose of self-dealing. The evidence also indicated that in many, if not most, of those cases the federal supervisory agencies knew very little about the new owners of the institutions. I have personally supported some type of changein-control legislation since assuming my duties as Comptroller in 1977. My support for a federal changein-control statute was based, in part, on my experience as Superintendent of Banks for the State of New York, where similar change-in-control legislation is in effect. My tenure in New York made me aware of what a valu able tool such legislation can be, especially in monitor ing and screening proposed acquisitions by foreign nationals. However, my experience in the financial sector has also made me sensitive to the impact that such legisla tion can have on the individual rights of the sellers of bank securities and the need to avoid legislation which would unnecessarily infringe on the ability of the bank ing system to raise capital. Congress addressed those concerns in crafting a statute which' strikes a balance among those compet ing regulatory, economic and legal interests. The law limits administrative discretion by providing for a no tice format with strict time frames for agency action rather than an application procedure, achieving a deli cate equilibrium between demonstrated supervisory needs and individual property rights. Before turning to the GAO's recommendations, I would like to briefly summarize our experience under the CBCA and comment on certain concerns unique to the gathering of information on foreign individuals and the use of that information in our supervisory process. OCC Experience to Date From March 10, 1979, the effective date of the CBCA, through August 30, 1980, the OCC received 110 notices of proposed changes in control—53 in 1979 and 57 this year. Of that number, three were withdrawn prior to any action, three were disapproved and 14 are pending. The OCC did not object to 90 of the acquisitions of control. Six proposed change-in-control notices—less than 5 percent of the total—have been filed by foreign per sons. One such notice was withdrawn prior to any action. Letters of intent not to disapprove the other proposed changes in control were issued in the other five instances. Total assets of those five banks aggre gated $180 million as of March 31, 1980. The average asset size of the acquired banks was approximately $36 million. Disapprovals of proposed changes in control have been rare. Two of the three disapprovals issued so far, all affecting proposed domestic acquirers, were based on the proposed acquiring party's insufficient financial capacity to service the debt that would be incurred. One other proposed change in control was disap proved because the acquiring party's record of performance as a controlling person in another bank was less than satisfactory. Approximately 75 percent of the banks for which a notice of change in control was received were not sub jects of significant supervisory concern. The remaining 25 percent were subject to more than normal supervi sory attention by the OCC. Three of that latter category were targets for acquisition by foreign individuals. Only 223 plement those systems to provide reports in accordance with U.S. generally accepted accounting principles would impose substantial cost and reporting burdens on them. We are not convinced that such bur dens are justified by any supervisory necessity for the GAAP requirement. The Y-7 report would require a de tailed discussion of the accounting principles used in preparing the information submitted, facilitating trans lation and understanding of the information required for supervisory purposes. The OCC believes that reports, such as the pro posed Y-7 and Y-8(f) reports, should provide an ade quate base from which U.S. supervisors could monitor the condition and trends of foreign banking organiza tions on an ongoing basis. The U.S. banking agencies could use the reports for analysis and evaluation of an individual foreign bank or groups of banks. Finally, the analyses and the report information about intercom pany transactions, affiliates and insider interests would be available to bank examiners during their inspec tions of the U.S. subsidiary banks. It is only realistic to anticipate that situations will arise in which information provided by reports is inade quate to deal with a particular supervisory question or problem. Standardized reports cannot possibly cap ture all the variances in law and convention which for eign banks face. Bank financial reports may not reflect all aspects of banks' earnings or condition. Thus, the U.S. supervisors may have occasion to request sup plementary information directly from the foreign bank or to obtain it onsite with the cooperation of the bank and its regulator. That, in fact, is how the OCC pro ceeded with its review of the Hongkong and Shanghai Banking Corporation when Marine Midland Bank ap plied for a national charter. We do not rule out the possibility that a foreign owner of a U.S. bank might refuse to disclose neces sary supervisory information requested by a U.S. banking agency. That refusal in itself would justify U.S. supervisory concern and trigger requests for coopera tion and assistance from foreign supervisors and closer surveillance of the U.S. subsidiary bank. While the nature and depth of prudential bank supervision varies among countries, foreign banking authorities can generally provide U.S. supervisors with necessary assistance. Furthermore, foreign supervisors share with U.S. banking agencies a vital interest in maintain ing confidence in the international banking system. Any lack of cooperation by a foreign supervisor to re solve an international supervisory concern would jeop ardize the international integrity and reputation of all banks under the control of that supervisor. Supervisory Cooperation The growing internationalization of the banking in dustry has caused the supervisory authorities from the leading industrialized nations to work toward better co operation and communication. Events affecting bank ing organizations and markets in one country can have ripple effects elsewhere. The expansion of banking or ganizations from the home country into other locations necessitates working relationships and coordination among parent company and host country supervisors. 222 Supervisory authorities have benefited from increas ing communications, formal and informal contacts, and efforts to coordinate their activities. The Committee on Banking Regulations and Supervisory Practices, formed in 1974 under the auspices of the Bank for In ternational Settlements, is perhaps the single most im portant forum for constructive interchange and cooper ative efforts among supervisors of different countries. The committee's main focus has been development of broad principles and standards upon which bank supervisors can agree, notwithstanding the various dif ferences in banking laws and regulatory practices among the countries represented. For instance, the committee has supported international standards for bank accounting on a more consolidated basis than now exists in many countries. The committee also serves as a vital clearinghouse wherein bank supervisors compare supervisory ap proaches, identify gaps in the regulatory coverage of international banking, develop guidelines to demar cate the responsibilities of host and parent authorities and exchange information of a sensitive nature derived from a variety of sources. The committee has been in strumental, for example, in promoting legislation abroad to facilitate arrangements among supervisors for confidential exchanges of information. The Euro pean Economic Community (EEC), in its first banking directive, provides for exchanges of banking informa tion among member banking authorities to strengthen the bank supervisory process within the EEC. On that point, we strongly support the recommendation of the Federal Reserve Board in its "Report to the Congress on the International Banking Act" that the IBA be amended to provide additional specific statutory au thority for confidential treatment of exchanges of infor mation between foreign bank holding companies and U.S. banking agencies and between those agencies and their foreign counterparts Other important initiatives have been undertaken by bank supervisors on an international basis to foster the study, improvement and coordination of supervisory methods. Whenever supervisors from different coun tries meet, whatever their immediate purpose, there is always an invaluable side effect in cementing old con tacts or forging new ones and further developing the network that can be tapped, when the need arises, to obtain information or to obtain support or assistance in dealing with an international bank supervisory problem. Formal Enforcement Action There is no question that foreign owners of a U.S. bank could conceivably escape certain formal en forcement remedies traditionally used by U.S. authori ties, and, short of that result, that legal enforcement processes would be encumbered in the international context. Formal enforcement remedies can, of course, be applied forcefully and unambiguously to the foreign-owned U.S. bank, and as a practical matter, that is a key point. To the foreign owner, the most pow erful consideration is the potential loss of investment. U.S. authorities can prohibit expansion, interdict divi dend payments, render the investment useless to a in the home country, which is critically dependent, of course, on established contacts, communications and cooperative attitudes. There is no question that the most difficult supervi sory challenge related to foreign acquisitions of U.S. banks is the verification of the character and financial integrity of foreign individuals who seek or have control of U.S. banks. Those individuals often submit financial statements showing complex overseas holdings through family or group relationships. Foreign individ uals generally are not subject to the ongoing supervi sion of foreign banking authorities. Nevertheless, the record of U.S. banks controlled by foreign individuals has been good to date. As in the case of domestic in dividual control, foreign individual control has been a factor in some U.S. bank failures. Problems associated with acquisitions by foreign individuals will be dis cussed in the section of this testimony covering the Change in Bank Control Act. Unlike foreign individuals, foreign banking organiza tions are subject to established supervisory systems which provide the U.S. banking agencies with ade quate measures to determine whether the foreign banking organizations are sources of strength to the U.S. banks they control. The Bank Holding Company Act and the International Banking Act, as well as es tablished communications with foreign supervisors and the marketplace, enable U.S. bank supervisors to verify the financial integrity of foreign banking organi zations on a regular basis. Required Reports Two new reports proposed by the Federal Reserve Board would significantly improve U.S. authorities' cur rent information on foreign banking organizations. The proposed reports would require foreign banking or ganizations to file, on a periodic basis, financial and organizational information essentially equivalent to that required from domestic bank holding companies. The first new report—FR Y-8(f)—covers intercom pany transactions between foreign bank holding com panies and all affiliates, including their U.S. bank sub sidiaries. The report would be filed quarterly and should provide an effective basis in most instances not only for monitoring intercompany transactions but also, more generally, for enabling U.S. supervisors to deter mine whether foreign parent companies serve as a continuing source of strength to their U.S. subsidiary banks. The report would show the degree of interde pendence between a foreign banking organization and its U.S. subsidiary bank and how the U.S. bank per forms in its global network. The second part—FR Y-7—would represent a dramatic expansion in the amount and detail of super visory information to be filed annually by foreign bank ing organizations. The Y-7 would require foreign bank holding companies to submit consolidated balance sheets and detailed information about earnings, capi tal accounts and reserves. Information about share holders, directors, officers and related companies also would be required. Supervisory information about shareholders, direc tors, officers and related companies, as well as a de tailed discussion of the accounting principles used in preparing the Y-7, would also be provided. That would include statements as to how majority and associated companies are carried and valued. The Y-7 proposal does not require foreign banking organizations to complete the Y-7 in accordance with U.S. generally accepted accounting practices (GAAP). The GAO recommended that U.S. banking agencies require foreign banks to submit reports in accordance with GAAP. The U.S. banking agencies believe that such a requirement is impractical and that complete consolidation of subsidiaries could generate less meaningful information for supervisory purposes than that required in the Y-7. In addition, a GAAP require ment would be contrary to laws and conventions in some countries and would impose an undue reporting burden on many foreign banks. In effect, the Y-7 would request foreign bank holding companies to report es sential bank supervisory information while accommo dating the vast reporting systems those banks already have in place, as well as the laws and conventions within which those banks must operate. Foreign bank holding companies' main line of busi ness is banking, and fundamental bank accounting does not vary significantly from country to country. However, consolidation and disclosure of bank ac counts do vary among nations. Recognizing the evolv ing interdependence of the multinational banking sys tem, the International Accounting Standards Com mittee and other international groups, as well as the world's banking supervisors, are working for har monization of national accounting practices. Yet, every country still imposes or encourages its own bank re porting standards, reflecting its own concerns for maintaining confidence and stability in its national banking system. For instance, some governments, be cause of their desire to have banks report steady, not fluctuating, earnings and dividends, mandate that banks not disclose publicly all earnings and reserves. Another possible problem of requiring complete consolidation of subsidiaries arises from the fact that banking laws of many countries do not require com plete separation of banking and commerce, and per mit banks to have equity holdings in nonfinancial com panies. Given the wide range of some banks' investments, it would be difficult to capture all perti nent information in a meaningful consolidated format, and the result could be a confusing mix of financial and commercial accounts, possibly misrepresenting the principal business of the foreign bank and detract ing from the usefulness of the reports for bank supervi sory purposes. In fact, because of that potential for misrepresentation, many U.S. multinational companies do not consolidate their financial subsidiaries. Foreign banks have established complex account ing and reporting systems to report financial results of their multinational operations in accordance with home country requirements. Those systems are reviewed and audited by accounting firms, and U.S. supervisors can generally rely on the quality and integrity of the au dit and accounting work done by those firms. To re quire foreign banking organizations to modify and sup- 221 der a new policy for phasing in interstate acquisitions, such benefits could be required of large bank acquisi tions by domestic or foreign banks alike, even when the antitrust implications of the proposal are not ad verse. Domestic or foreign acquirers of large banks would have to satisfy the public benefit standard. How ever, the same standards would apply in either case, and the present unfairness problem would be re solved. If Congress should proceed with phasing out the Douglas Amendment, there would be an increased number of potential purchasers for any bank desiring or needing affiliation to enhance its competitive pros pects or to strengthen its current position. Any selling institution would clearly benefit from the larger number of eligible bidders. New acquisition opportunities also would be opened for domestic institutions. U.S. banks would thus stand to gain as both buyers and sellers. It seems likely that there would be strong mutual inter ests in certain types of transactions—for example, re gional or interregional combinations of like-sized banks. The key point is to create new possibilities for acquisitions or combinations that could offer benefits to the domestic banking system and the public it serves. International Bank Supervisory Matters The GAO report discusses difficulties U.S. banking authorities may face in exercising supervisory control over foreign owners of U.S. banks and supervising for eign bank holding companies and direct operations of foreign banks in this country. It is true that the dynamic growth and increasing complexity of the interdepen dent, multinational banking system poses challenges to bank supervisory authorities throughout the world. Our experience in international supervisory activities can shed some light on the tools and techniques re quired for adequate understanding and regulatory control in the case of ownership by foreign banks and individuals. The rest of this testimony summarizes our observations on existing and proposed supervisory measures and remaining concerns in that area, acqui sitions by foreign individuals under the Change in Bank Control Act and our experience to date in imple menting the International Banking Act. U.S. Supervisory Authority and Foreign Ownership of U.S. Banks The basic supervisory goals of U.S. bank regulatory agencies are to assure the safety and soundness of in dividual banks and the entire banking system, and to monitor and enforce banks' compliance with all appli cable laws, regulations and orders. Effective bank su pervision depends on broad examination authority and the ability to obtain accurate, timely information con cerning operations of banks and bank holding com panies. Foreign acquisitions have raised concerns about the ability of U.S. authorities to obtain adequate information on proposed foreign acquirers and to exer cise effective supervision of foreign-controlled banks. Foreign ownership does raise supervisory difficulties not present with domestically owned banks. U.S. au 220 thorities cannot probe directly and unilaterally over seas into the affairs of foreign owners of U.S. banks. Some foreign banks use, and their governments may even mandate, accounting and disclosure practices quite different from those required in the United States. Under the laws of their countries most foreign banks are allowed to conduct a wider range of financial activ ities than U.S. laws permit U.S. banks. Notwithstanding those special challenges, we be lieve that existing supervisory tools are adequate to ensure the safety and soundness of foreign-owned banks. Most importantly, those banks are U.S. banks, after all, and subject to the same comprehensive su pervision, examination and sanctions as any domestic bank. In recent years, U.S. bank regulatory agencies have gained significant new enforcement powers and have developed more rigorous and flexible bank ex amination and monitoring techniques, including computer-based early warning systems and improved analyses of intragroup transactions. The OCC is further strengthened in dealing with international banking mat ters by virtue of its substantial international bank exam ination experience. U.S. authorities' ability to supervise foreign-owned banks has been enhanced by the increasing commun ication and cooperation among bank supervisors of many countries that have evolved since the interna tional banking problems of 1974. Regular meetings and other contacts and exchanges with foreign super visors are now a common occurrence. That is impor tant. The cooperation of bank supervisors in other countries allows U.S. authorities to gain deeper insight and verification when necessary to supplement infor mation obtained from reports required from foreign owners or applicants to acquire U.S. banks. The agen cies are also in regular contact with the marketplace through their examination of U.S. multinational banks. Those examinations provide direct access to current information on international banking developments. Concerns Three basic concerns have been expressed about the effectiveness of U.S. supervisory authority with re spect to foreign ownership of U.S. banks. Can U.S. au thorities adequately evaluate foreign banking organi zations and individuals seeking to acquire U.S. banks? Will sufficient information be available in a timely man ner and on an ongoing basis to enable effective moni toring of developments in foreign-controlled U.S. bank ing organizations? Are U.S. authorities' enforcement powers adequate to ensure necessary changes in bank policies or personnel when the controlling inter ests are located overseas? A valid concern about potential information prob lems is indicated in the first two questions. U.S. author ities do not routinely have direct access to financial records of existing or prospective foreign owners and must rely primarily on reports filed by them. Verification of reported information may be difficult in some cases and impossible in others, particularly when nondisclo sure provisions, like privacy laws in the United States, exist in the foreign party's home country. A major re course in such situations is to the supervisory authority would represent a clear and significant breach of prin ciple and shift of U.S. policy. Although GAO now calls for a specific time limit on a moratorium, we remain concerned that even a short time frame could be dam aging. Moreover, the possibility of an extended mora torium would persist. Another potentially serious consequence of the mor atorium proposal is of special concern to all U.S. bank supervisors. A moratorium would eliminate the possi bility of foreign acquisition and strengthening of U.S. banks that are troubled or weak but not at the point of bankruptcy or insolvency. Such positive effects have, of course, characterized a significant number of foreign acquisitions to date, as the GAO report itself empha sizes. We believe that it would be short-sighted to cut off a potentially important source of additional capital for our banking system. Rationale for Constructive Change The confinement of U.S. banking organizations' fullservice banking activity to a single state is not only anomalous and unfair relative to foreign banks' acquisiton opportunities but also outmoded and, in our opinion, a serious impediment to rational development of a strong U.S. banking system that could best serve the needs of the American public. Rather than setting up barriers to foreign acquisitions, Congress should begin lifting the barriers to interstate expansion of do mestic institutions. The Congress has quite accurately perceived the confluence of issues surrounding for eign bank expansion and U.S. bank confinement in this country. The IBA placed new limits on multistate expansion by foreign institutions but also called for a review of old limits on domestic institutions. That law also called for revising the Edge Act expansion rules to facilitate interstate expansion of foreign and domes tic banks in international or trade-related activities. We have consistently supported gradual elimination of restrictions on bank expansion, in the interest of in creasing competitive opportunities and in maximum reliance on the discipline of the marketplace to bring about the efficient production and delivery of financial services. The advantages of such a program are clear and need only be recapitulated briefly: • Full-service banking expansion by U.S. banks would supplant and to some extent replace the less efficient alternative means now available for establishing interstate presence, such as loan production offices, Edge Act facilities and nonbank affiliates—devices that have been used in part as second-best solutions to legal confinement. • Domestic banks would be able to match the multistate facilities of foreign banks, over 60 of which have multistate banking operations which are grandfathered under the IBA. • Banking institutions would be better able to re spond to the competitive challenges of nonbank providers of financial services, companies whose innovative successes have been attribut able, in part, to the legal restraints on banks. • A means would be provided for orderly evolu tion of our financial services industry in an in creasingly competitive and complex banking environment, subject to dynamic technological change, uncertainty about volatile interest rates, and inflation. • New growth opportunities would be made avail able to domestic institutions, which have stead ily lost ground in the rankings of the world's largest banks; interstate acquisitions could be structured and regulated to foster a stronger, more competitive domestic system. • No longer would domestic banks seeking to en hance their competitive ability or needing as sistance through affiliation with a larger institu tion be limited to foreign bank partners; new possibilities for procompetitive domestic bank acquisitions and combinations would be cre ated. The last point is nearest to the heart of the matter in these hearings. That is where the foreign acquisition and interstate banking issues have their major inter section. At this juncture, we must begin to formulate new rules to govern acquisitions of healthy banks, in cluding large bank combinations, not merely extraordi nary measures to provide for the rescue of failing insti tutions. We fully support H.R. 7080, of course, but, in the context under discussion here, that proposal must be regarded as the minimum required legislative ad justment to the realities of the financial marketplace to day. Looking beyond emergency acquisitions, there are many alternative proposals for opening up inter state expansion opportunities for U.S. banks and bank holding companies. At a miminum, the Congress should devise a practical plan for phasing out the Douglas Amendment restrictions on interstate bank holding company acquisitions. In devising a plan for phasing out the Douglas Amendment, Congress may find most troublesome the acquisitions of large and sound banks. Such transac tions will raise concerns not addressed by traditional banking structure and antitrust concepts. Those con cerns are likely to be especially pressing in a transition period for phasing out the Douglas Amendment. To address concerns arising in the context of acquisitions of large banks, Congress might consider fashioning a policy that would require proponents to demonstrate not only that the'proposal would pass muster under traditional antitrust standards but also that there are substantial public benefits to be derived from the transaction. Benefits of a specific transaction might include some combination of factors such as the following: strengthening of the capital position of the acquired or resulting bank, improved management resources or special expertise, provision of new or better services to customers of the acquired institutions, gains in effi ciency to be realized by the resulting combination, or enhanced competition in markets served by the ac quired or acquiring bank, stemming from any of the above factors or others. However, the benefits requi site to an approval could not be mere tokens. Benefits such as those just discussed have been recognized in foreign acquisitions of U.S. banks. Un219 own laws and policies that has been widely recog nized. GAO is correct to emphasis this unfairness to do mestic institutions. However, to elevate this concern as the sole basis for recommending a moratorium is an other matter. Alternative reasons for supporting a mor atorium were explicitly considered and, in our view, properly rejected by GAO. GAO does not support a moratorium on any other grounds and indeed rejects as insufficient or unsubstantiated those concerns that the soundness of acquired banks may be jeopardized, that U.S. banking agencies lack adequate tools for controlling foreign entry or activity, or that existing for eign ownership of U.S. banking assets is perceived as too high. Since the fairness issue is thus isolated as GAO's ra tionale for a limited moratorium, the question can be squarely posed and addressed: Is this sole concern adequate grounds for even a limited moratorium? The GAO finds it to be "compelling." We disagree. In our opinion, the inequity is overstated by GAO, and the potential costs of the recommended moratorium are not given appropriate consideration. Thus, while we share the GAO's concern about the unfairness to U.S. banks, we urge the Congress to reject the proposed moratorium. The Congress should move expeditiously to resolve the problem of unfairness which arises under existing law by creating new opportunities for domestic banks. Specifically, the OCC endorses a relaxation of the Douglas Amendment constraint on interstate bank holding company acquisitions. It is time to consider new public policy that ad dresses both foreign and interstate acquisitions by re laxing existing restrictions and creating new standards that apply even-handedly to both types of transac tions. Before considering a possible basis for such a policy, we should state the concerns that lead us to oppose the moratorium proposal as a way to solve the unfairness problem. Our concerns are, first, that GAO has overstated the extent of the inequity and, second, that GAO has given insufficient weight to possible ad verse consequences of its recommendation. Unfairness Problem in Perspective The fairness issue must be put in perspective. The actual number of foreign banks able or likely to take advantage of opportunities for large U.S. bank acquisi tions is limited by several factors. Most importantly, the recently enacted International Banking Act (IBA) limits foreign banks to a single home state, in effect treating them the same as U.S. banks once they have estab lished an initial banking presence in the United States. Although foreign banks may change their home state, it seems reasonable to expect that they will continue to concentrate U.S. banking activities in money center lo cations where they have overwhelmingly located their operations to date. A foreign bank already established here is subject to the same restrictions as domestic banks—it cannot acquire a new bank subsidiary out side its home state and any proposed acquisition within its home state would be subject to the same an 218 titrust scrutiny as a domestic acquisition. In that situa tion, the unfairness question does not apply. That point should be taken into account in evaluating the fairness issue, particularly since such a large number of the major foreign banks are already established here. The latest data indicate that 41 of the top 50 non-U.S. banks (based on December 31, 1979, ranking by de posits, American Banker) presently have branches or subsidiary banks in the United States. The home state provision limits the probable scope of foreign banks' prospective acquisition advantage. The extent of the unfairness is limited further, pro spectively, by the fact that a number of the largest for eign banks cannot realistically be viewed as likely buyers, at least at this time. This is because some are actually rather specialized institutions with limited or nonexistent international activities (for example, "cen tral banks" for savings or cooperative banks in their home countries), and others must avoid U.S. acquisitions—and resultant bank holding company status—to retain their present investments in U.S. se curities affiliates. In addition, it must be recognized that the number of large U.S. banks available for pur chase in money center locations, where foreign bank ing activity has been concentrated, is limited and likely to remain so. The unfairness problem will persist in the absence of a moratorium—unless U.S. laws are changed—but those considerations suggest that the actual number of foreign acquisitions dependent on exploiting an un fair advantage may be quite limited. Adverse Consequences of a Moratorium The GAO does not claim to have assessed the pos sible consequences of a limited moratorium but stated its belief that "resolving the policy conflicts outweighs any potential costs." The possible consequences of a moratorium need to be weighed carefully. Several con siderations are extremely important. First, any morato rium, however limited, would represent a fundamental conflict with the general U.S. policy of nonintervention with respect to international investment. Reimposition of a moratorium could damage the interest of U.S. banks abroad and possibly the interests of other U.S. investors as well. U.S. banks have a substantial overseas presence, far exceeding foreign banks' aggregate assets held in this country. As for overall investment of all multina tional exterprises, year-end 1979 figures indicate that "our direct investment position overseas approached $193 billion, nearly four times the total of foreign in vestment here."f Because the consequences of such action are potentially quite serious, the possibility, however remote, of foreign government retaliation against new barriers erected by the United States, should not be overlooked. Even a limited moratorium tStatement of Vincent D. Travaglini of the International Trade Admin istration, Department of Commerce, before the Subcommittee on Consumer Protection and Finance of the Committee on Interstate and Foreign Commerce, House of Representatives, in hearings on H.R. 7791, "The Reciprocity in Foreign Investment Act," September 9, 1980, p. 5. rate citizens. The record to date does not indi cate any problems in that area. • Whether any level of foreign ownership of U.S. banks is "unacceptable" in some sense is a na tional policy question involving social, political, economic and foreign policy considerations. There is no clear basis for identifying any par ticular aggregate foreign share of U.S. banking resources as a threshold level to trigger policy concern. Considering the evidence to date, we have con cluded, as did the Federal Reserve Board, that no concern about foreign acquisition of U.S. banks now justifies reimposition of a moratorium on foreign take overs. Our conclusion is based on examination of all the facts that have been assembled about foreign ac quisitions to date and the performance of foreignowned banks. The factual record does not support fears that have been expressed or the opinion that a mortaorium is needed because foreign acquirers may damage the safety and soundness of U.S. banks or because foreign ownership may jeopardize the exten sion of credit to particular communities or industries, diminish competition in U.S. financial markets, compli cate or distort monetary policy, or otherwise threaten vital national interests. In summary, the facts do not justify imposing a moratorium on the basis of such fears. The possibility always exists that foreign banks may act contrary to U.S. interests, particularly when such banks are government-owned or sponsored. Most countries have mixed economies and in many cases government involvement in the banking system is sub stantial. Government-controlled banks could be used to promote government policy objectives that run counter to U.S. interests. However, foreign government-owned banks have had operations in this country for years through branches and, to a lesser ex tent, subsidiary banks. Their record to date does not indicate any problems arising from conflicting national objectives. Even in the unlikely event that a hostile for eign government attempted to harm the U.S. economy or financial system through a state-owned bank's branch or subsidiary here, the government, including U.S. regulatory authorities, has adequate tools to de tect and stop such action. We do not believe that the potential for such an action poses any significant risk. The GAO report does not support the fears ex pressed by some opponents of foreign takeovers, but recommends a moratorium on quite different grounds. The GAO argues that a moratorium is needed because foreign banks are able to make acquisitions of U.S. in stitutions that are precluded for domestic banks and bank holding companies by U.S. law and policy, and that the inequity is so grave that it should not be al lowed to continue. That argument is the single most important and controversial part of the GAO report and the conclusion which we find most troublesome. GAO Report The GAO report factually recounts and describes foreign bank expansion in the United States and as sesses the subsequent performance of banks ac quired by foreign interests. It includes a brief review and appraisal of the legal and supervisory framework affecting foreign bank expansion and operations in the United States and a discussion of the relative competi tive opportunities accorded to domestic and foreign banks. The report will surely serve as a valuable re source document for all persons interested in the na ture, extent and control of foreign bank operations. It should be noted that the GAO's findings generally agree with the conclusions of the studies by the OCC and the Federal Reserve Board. Indeed, our staff re viewed the GAO draft report and offered numerous technical comments, many of which were incorporated into the final report. Others are included in our com ment letter which is reprinted as Appendix XIII of the report. For the sake of an informed public consideration of the issues, several important conclusions from GAO's study warrant special emphasis, particularly the find ings that foreign acquisitions have generally had posi tive effects on the acquired banks, that existing regula tory and supervisory mechanisms are adequate to control foreign bank entry and activity and that the cur rent extent of foreign control of U.S. banking assets is not considered "too high," nor can a reasonable threshold level triggering legitimate concern be identi fied by objective analysis. Our discussion today of international bank supervi sory matters will cover the views of the OCC on several specific GAO recommendations to the banking agen cies. Most importantly, we oppose GAO's major policy recommendation of a moratorium. Opposition to a Moratorium The GAO report recommends that Congress enact a limited moratorium on acquisi tion of domestic banks with total assets of $100 million [or more] by foreign banks or bank holding companies unless such acquisitions are neces sary to prevent bankruptcy or insolvency. GAO recommends that the moratorium: should continue for only as long as necessary for the Congress to fully address [but not necessarily resolve] the basic policy conflicts regarding inter state banking, antitrust considerations, and for eign acquisitions of U.S. banks. In response to agency concerns that resolution of those matters could easily require a long period of time, GAO urges the Congress to "set an expiration date for the moratorium and a specific timetable for the actions it will take to address the policy issues." The GAO report states clearly that the moratorium recommendation is founded in the "basic unfairness" resulting from foreign banks' ability, in some circum stances, to purchase large U.S. banks that are unavail able, in practice, for acquisition by domestic banking organizations because of federal and state restrictions on bank expansion and antitrust policy. That is indeed an inequitable situation, an anomalous result of our 217 acquisitions of U.S. banks and analyze the possible ef fects of foreign ownership.* I would like to submit those papers for the hearing record. Along with other bank regulatory agencies, the Comptroller's Office is actively monitoring current developments in that area. The Federal Reserve issued an important staff study on June 30 summarizing its findings and observations on the record of foreign acquisition of U.S. banks to date and the adequacy of existing regulatory and su pervisory tools. The extensive report prepared by the Government Accounting Office (GAO) for this subcom mittee is the latest addition to our growing fund of knowledge on the subject. Rather than discussing those studies in detail, we will simply recapitulate some of the major findings, which have no significant dispute. Background Foreign acquisitions of existing U.S. banks are largely a phenomenon of the 1970's, particularly the latter half of the decade. From 1970 through the first half of 1980, there have been 96 foreign acquisitions of U.S. banks, 39 by foreign banking institutions and 57 by individuals. The median asset size of foreignacquired banks is less than $50 million. Foreign acqui sitions reflect primarily the long-run strategic interests of bank acquirers and economic and political features of the U.S. market that are attractive to foreign inves tors. Formerly weak or failed U.S. banks are dispropor tionately represented among foreign acquisitions. De pressed bank stock prices and a weak dollar may also have been factors facilitating foreign acquisitions, but their significance is unclear. Another factor reflected in foreign acquisition of U.S. banks is an historical trend toward an increasing transnational banking presence. The increasing interest on the part of foreign banks in retail and "middle market" banking activities mirrors U.S. banks' growing interest in such "nontraditional" banking markets overseas. Findings with Respect to Major Concerns The studies to date provide evidence that should ameliorate the concerns which have been expressed *John E. Shockey and William B. Glidden, Foreign-Controlled U.S. Banks: The Legal and Regulatory Environment; Diane Page and Neal Soss, Some Evidence on Transnational Banking Structure; Wil liam A. Longbrake, Melanie Quinn and Judith A. Walter, Foreign Ownership of U.S. Banks: Facts and Patterns; Judith A. Walter, Foreign Acquisition of U.S. Banks: Motives and Tactical Considerations; Thomas A. Loeffler and William A. Longbrake, Prices Paid by Foreign Interests to Acquire U.S. Banks; Judith A. Walter, Supervisory Performance of Foreign-Controlled U.S. Banking Organizations; Blair B. Hodgkins and Ellen S. Goldberg, Effect of Foreign Acquisition on the Balance Sheet Structure and Earnings Performance of American Banks; Ellen S. Goldberg, Analysis of Current Operations of ForeignOwned U.S. Banks; Ellen S. Goldberg, Comparative Cost Analysis of Foreign-Owned U.S. Banks; Steven J. Weiss, The Competitive Balance Between Domestic and Foreign Banks in the U.S.; C. Stewart Goddin and Steven J. Weiss, U.S. Banks' Loss of Global Standing; Steven J. Weiss, A Critical Evaluation of Reciprocity in Foreign Bank Acquisitions; Wm. Paul Smith and Steven J. Weiss, Potential Acquisition Partners for Large U.S. Banks: The Discriminatory Effects of Law and Policy; Steven J. Weiss, Competitive Standards Applied to Foreign and Domestic Acquisitions of U.S. Banks 216 with regard to supervisory, community service, com petitive and national interest implications of foreign ac quisition and ownership of U.S. banks: • The supervisory record of acquired banks has been strong, generally, and many acquired in stitutions have been strengthened by their for eign owners. • While foreign ownership, particularly ownership by foreign individuals, does pose some special challenges for U.S. supervisors, existing proce dures are adequate and will be further strength ened by measures currently under consideration. • The financial performance of acquired banks has been satisfactory; no unfavorable compari son vis-a-vis domestically owned banks can be made. • The evidence does not suggest that foreign owners reorient the activities of acquired banks so as to neglect the needs of local communities or to favor home country industry at the ex pense of U.S. companies. • Many foreign bank acquisitions have procompetitive effects through the strengthening of ac quired banks' capital or management and the provision of new services or specialized exper tise, thereby enabling the acquired institution to more effectively challenge larger rivals in com petitive banking markets. • The ability of foreign banks to acquire large U.S. banks has helped maintain or enhance the competitive position and world rank of some in dividual acquirers but has not had a significant impact on the overall global standing or com petitive abilities of U.S. multinational banks. • U.S. regulators apply statutory criteria evenhandedly to foreign and domestic acquirers, but because of interstate banking prohibitions, state branching and bank holding company re strictions and antitrust laws, foreign banks are able to acquire large U.S. banks that are fore closed to domestic banking institutions. • U.S. banks generally lack opportunities to ac quire large banks overseas, although that is largely attributable to structural characteristics of foreign banking markets or to socio economic policy considerations that may differ from traditional U.S. policies. • Shareholders of acquired banks have received attractive terms from foreign buyers, and U.S. bank shareholder interests are generally pro moted by permitting foreign acquisitions, espe cially when domestic bank acquirers are ruled out by U.S. law or policy. • For monetary policy purposes, the Federal Re serve now has adequate authority over foreign bank operations, and there is no evidence to date that foreign or foreign-owned banks are unresponsive to Federal Reserve policy. • Foreign-owned banks may conceivably be sub ject to conflicting policy objectives of their home government versus U.S. national inter ests, but foreign banks have good reasons to see that their U.S. subsidiaries are good corpo- met. We must be mindful of the legitimate concern for the small, financially weak borrower who may fall prey to disreputable lending practices. In those parts of the country where credit markets are not yet reasonably competitive, there is pressing need for minimum safe guards to protect the rights of those most vulnerable. We, therefore, have reservations with respect to spe cific provisions in H.R. 7735. We believe a sweeping elimination of consumer usury laws such as contem plated in the bill could have an adverse effect on con sumers in states which have established adequate le gal safeguards. Some states have enacted small loan acts, retail installment credit sales laws, automobile sales finance acts or other credit codes, such as the Uniform Consumer Credit Code. Those laws often limit or prohibit prepayment penalties, late fees, attorney's fees, use of the Rule of 78's or acquisition fees. To the extent that those measures contain reasonable provi sions to protect small borrowers, unsophisticated con sumers or the public in general, we would be con cerned with their blanket removal. We also believe that serious consideration should be given to any transitional problems that might arise as a consequence of an immediate lifting of usury ceilings. Individuals with large outstanding balances on openend lines of credit should not have to experience pos sible serious difficulties in handling unanticipated in creases in their monthly payments caused by sudden increases in their finance charges. One approach would be to require that the former interest rate be re tained on the present outstanding balance. We do not believe that excluding transaction fees from the computation of the finance charge in connec tion with open-end credit transaction disclosures, as proposed in H.R. 7735, would be appropriate. In fact, it would appear that such a proposal is inconsistent with the purpose of the Truth-in-Lending Act. Disclo sure of the finance charge provides consumers with a measure for comparison shopping for credit. A finance charge is basically a cost to the consumer conditioned by or incidental to an extension of credit according to the Truth-in-Lending Act and its implementing Regula tion Z. We see no reason to exclude transaction fees from the finance charge computation, since such fees are obviously directly related to the cost of credit to the consumer. We also believe that transaction fees should be reflected in the disclosed annual percent age rate. The OCC supports consideration by Congress of federal pre-emption of usury ceilings on consumer credit. In the current environment of inflation and high interest rates, fixed-rate usury laws are counterproduc tive. As I have stated earlier, they tend either to restrict the availability of credit or encourage abuses by un regulated lenders. Recent legislation which provides for the phasing out of interest rate ceilings on deposits by March 1986 represents an important step towards creating a competitive marketplace. Meaningful reform of usury laws combined with protection of consumers against anticompetitive practices fits logically into that legislative pattern. Statement of John G. Heimann, Comptroller of the Currency, before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the House Committee on Banking, Finance and Urban Affairs, Washington D.C., September 25, 1980 These hearings are indeed timely, and I welcome this opportunity to express the views of the Office of the Comptroller of the Currency on foreign acquisitions and related policy issues. In response to the subcom mittee's invitation letter of August 27, 1980, we will also discuss some current international bank supervisory matters, including the Office's experience and obser vations on the implementation and operation of the In ternational Banking Act (IBA) and the Change in Bank Control Act (CBCA). Events of the last few years have brought into sharp focus important policy questions affecting the future structure and long-run development of banking in the United States. Foreign acquisitions of U.S. financial in stitutions have dramatically highlighted that our banks operate in a competitive arena which is ever more per vasively global in scope. The challenge of international bank competition now affects banks throughout the country. It is no longer a phenomenon limited solely to major money center locations. For years, pressure has been building for relief from the legal restraints that ar tificially confine the expansion of U.S. institutions' full service banking operations to a single state. Some of that pressure is internally generated, deriving from rapid technological change and new initiatives of nonbank revivals. Pressure from the increasing foreign bank expansion in this country also demonstrates that the geographic restraints on U.S. banks have become outmoded. Those artificial restraints impede the ra tional development of strong domestic institutions that can best serve the banking needs of the American public and maintain leadership in the worldwide finan cial arena. Foreign Acquisitions The Comptroller's Office has completed a series of 14 staff papers which examine the record of foreign 215 obtain credit. Instead, good risk customers may be forced to "double-up" by acquiring costly multiple loans to get the amount of credit they desire. Moreover, because credit is an essential ingredient to commerce, restrictions such as usury ceilings that limit credit availability may tend to adversely affect em ployment and dampen economic growth. For example, a 1977 study by Gustely and Johnson showed that in Tennessee, which until 1978 had a constitutional inter est cap of 10 percent, the economy grew faster than the national economy except when market interest rates rose above the state usury ceilings. For instance, between 1974 and 1976, when market rates rose above the usury ceilings, the study found that Tennes see's annual loss in production averaged $50 million; the annual loss of jobs averaged 7,000; the annual loss of retail sales averaged $80 million; and the an nual loss of assets in financial intermediaries averaged $1.25 billion. Because lending practices are regulated at the state level, variations in state usury rates distort the geo graphic distribution of credit as well. That is apparent from differences in business activity among various states. Arkansas, which has a 10 percent constitutional usury limit, is a notable example. In a 1976 study of Texarkana by Holland and Lynch, it was noted that there were distinct differences between the types of firms on the Texas side of the city and those on the Ar kansas side. There was considerably less retail trade on the Arkansas side, despite the approximately equal distribution of Texarkana's population between the states. The majority of automobile dealers, appliance stores and other businesses that rely on consumer credit had moved to the Texas side of the city. Clearly, inefficiency and inconvenience result from such locational patterns. Timeliness for Change The inescapable conclusion, we believe, was well stated 116 years ago by the first Comptroller of the Currency, Hugh McCulloch. McCulloch took issue with the caprice of state usury laws in his initial report to Congress and concluded: "Where money is abundant it is cheap, where scarce it is dear; and no legislation has been able to control the effect of this general law." Congress has recognized the problems associated with usury ceilings. With enactment of the Depository Institutions Deregulation and Monetary Control Act of 1980, state usury ceilings on first lien mortgage loans were pre-empted. The act also authorized for 3 years a usury ceiling on business and agricultural loans of $25,000 or more at the greater of the state usury ceil ing or 5 percentage points in excess of the Federal Reserve discount rate. However, the act permits states to override those federal pre-emptions prior to April 1, 1983. In addition, for all other types of loans, the act provided that all federally insured lenders may lend at the greater of 1 percentage point in excess of the Fed eral Reserve's discount rate or the rate permitted by state law. While those provisions of the act represent a step to wards creating a more competitive, less regulated en 214 vironment, further reforms are needed. The flexible federal usury ceiling on agricultural and business loans is only temporary. In addition, the maximum rate authorized the act is currently too low to provide relief from state usury ceilings on consumer loans. The cur rent Federal Reserve discount rate is 10 percent. Be cause most state usury laws establish ceilings at or above 12 percent, the provision of the act which per mits federally insured lenders to charge a rate on con sumer loans of 1 percentage point in excess of the dis count rate is not effective in providing lenders relief from usury laws. Retention of usury ceilings is also inconsistent with the direction Congress has moved in phasing out de posit interest rate ceilings. With the ultimate elimination of all deposit rate limitations, changes in the average cost of funds to depository institutions will reflect more closely changes in market rates of interest. If banks and other financial institutions are to maintain their long-term viability, they must be able to adjust interest charges and fees to accommodate their cost of funds and operating expenses. When market interest rates are above usury ceilings, it is difficult for institutions to pay market rates for deposits. Therefore, if ceilings on consumer loans are set at unrealistically low levels, commercial banks will find it increasingly difficult to engage profitably in consumer lending, amid high and volatile costs. Finally, state usury ceilings are quickly becoming an anachronism in a financial system which is becoming national in scope. Legal restrictions that attempt to set the terms and conditions for local lending are becom ing less and less effective. Households in New York may use bank credit cards issued by a California bank and, therefore, be subject to the less restrictive Califor nia usury ceilings. Similarly, lenders in a state subject to low usury limits may increase their purchases of outof-state loans or may sell their loanable funds in unreg ulated national markets such as the interbank federal funds market. While some individuals and institutions may be able to adapt to usury ceilings, the impact of the ceilings on the availability of credit in the local community can still be quite severe. Recommendations We support congressional consideration of an over ride of state usury ceilings on consumer lending. Such action would recognize existing market realities and result in substantial public benefits. While we would prefer that the problem of usury ceil ings be resolved at the state level, we recognize that individual state actions may not come in time to ac commodate the increasing demands of the credit mar ket. Moreover, it is clear that no state legislature acting alone has the power to bring about change on a na tional scale. Since the problem transcends political boundaries and the states find it difficult to adopt con sistent solutions, federal involvement to remove the ceilings may be the best approach. In moving toward elimination of usury limits, it is im portant that the objective of protecting weak and un wary borrowers from unscrupulous lenders also be Justice can be made. If an institution is recalcitrant and refuses to adopt corrective measures required by the OCC, proceedings can be instituted to terminate FDIC insurance or revoke a national bank's charter. The vast array of regulations, reports, onsite exami nation procedures and other supervisory tools pres ently available should assure that MMB will be pro- tected in its dealings with HSBC and related entities. Supervisory initiatives being implemented specifically in connection with bank holding companies and multinational banking organizations should result in stronger coordination among the three U.S. bank regu latory agencies and increased cooperation with super visory authorities from other countries. Statement of Lewis G. Odom, Jr., Senior Deputy Comptroller, before the Subcommittee on General Oversight of the House Committee on Small Business, Washington, D.C., September 23, 1980 I appreciate the opportunity to present the views of the Office of the Comptroller of the Currency on H.R. 7735, a bill which provides for the pre-emption of state usury ceilings on consumer credit. This statement does not necessarily reflect the views of the adminis tration. We have been concerned for some time with the im pact of usury ceilings on the availability of credit in lo cal markets. As we have stated on several occasions, usury laws should be repealed, pre-empted or sub stantially modified because they create arbitrary dis tortions in our capital market system. In opposing usury ceilings we have carefully weighed the costs and potential benefits of usury laws. Usury laws have persisted because they are widely perceived as a means of protecting small and unso phisticated borrowers from unscrupulous lenders by limiting the power of lenders to charge exorbitant inter est rates. However, in practice, usury ceilings have either had minimal effect or have been harmful. When market rates rise above artificially set usury ceilings, borrowers perceived to be marginal risks generally have been unable to obtain credit from commercial banks or other financial institutions, and credit has flowed from regulated markets to other markets not subject to usury ceilings. This has occurred during every period of high interest rates over the last 15 years. Goals vs. Effects Evidence collected over several years overwhelm ingly indicates that the elimination of usury ceilings would be in the public interest. Generally, usury laws: • Fail to accomplish their desired objectives; • Have an adverse effect on production and em ployment; and • Distort the allocation of credit among markets and states. Usury ceilings set below market rates of interest have generally eliminated conventional credit sources, particularly to high-risk or low-income borrowers. This occurs because lenders subject to low usury ceilings generally stop lending to high-rish borrowers when they are unable to charge interest rates high enough to yield a reasonable rate of return. Instead, they seek out preferred low-risk borrowers or lend in markets not subject to the ceilings. Thus, the intended beneficia ries of usury ceilings, the high-risk and small bor rowers, are those most likely to be hurt by such ceil ings and must either go without credit or borrow from nonconventional and unregulated lenders. Even individuals who are considered low risks may be unable to obtain credit if the total cost of making small loans exceeds the rate allowable under usury ceilings. Because of the substantial fixed costs associ ated with originating and servicing consumer loans, the break-even rate a lender must charge on small and short-term consumer loans is quite high. For example, the 1978 functional cost analysis com piled by the Federal Reserve System estimated that for a medium-size commercial bank, the average cost of making and servicing a $1,000 consumer loan payable in 12 monthly installments is $157.13. This includes $54.24 to process the application, $45.12 to collect and process 12 payments, $52.41 for the cost of funds and $5.36 to cover the average expected default loss on a loan of that type. To break even, the bank would have to charge an annual rate of about 22 percent. The break-even rate on smaller and shorter term loans is even higher because loan acquisition and col lection costs are fixed with respect to the size and ma turity of the loan. The estimated cost of making and servicing a 1-year $500 loan with 12 payments would be $128.14. To break even, an interest rate of over 30 percent would have to be charged. Therefore, be cause of the costs of originating and servicing con sumer loans, it is not surprising that financial institu tions in states with restrictive usury ceilings are reluctant to make small and short-term consumer loans. Institutions operating in markets subject to usury re strictions are discouraged from offering a full array of lending services. Commercial banks may avoid mak ing smaller, more costly consumer loans except to pre ferred customers. When low legal-loan size limits are combined with low ceilings on interest rates, the num ber of loans may increase, but low-income or high-risk customers may still find it difficult, if not impossible, to 213 agree, notwithstanding significant differences in bank ing laws and regulatory practices among the countries represented. For example, a 1975 concordat estab lished agreement in a number of areas of bank super vision. Most pertinent to the present discussion, it was recognized that practical cooperation should be pro moted on a reciprocal basis in three ways: (1) the di rect transfer of information between host (branch of subsidiary bank) and parent (bank or bank holding company) supervisory authorities; (2) direct inspec tions by parent authorities in the territory of the host authority; and (3) indirect inspections by host authori ties at the request of parent authorities. The committee also serves as a clearinghouse wherein supervisors identify gaps in the regulatory coverage of interna tional banking, compare supervisory approaches, ex change information of a sensitive nature derived from a variety of sources and suggesting potential banking problems, and develop further guidelines to demar cate the responsibilities of host and parent supervi sors. Although Hong Kong is not represented on the Cooke Committee, the authorities there have commit ted to abide by the basic supervisory principles and strategies that are established and implemented by the G-10 countries. Since Hong Kong is a major inter national banking market, the government has a strong incentive to assure that the institutions operating in that market remain reputable and financially sound. OCC bank examination procedures (Comptroller's Handbook for National Bank Examiners) emphasize a probe into the management, ownership and activities of customers new to the U.S. bank since its preceding supervisory examination. That inquiry generally de velops information about relationships between the bank and its foreign bank holding company group. Ex amination procedures also emphasize another type of inquiry, i.e., an inquiry into whether the relationship complies with 12 USC 371c, the statute governing affil iate transactions. The OCC, however, can have diffi culty tracing a transaction abroad for precise determi nation of compliance with 12 USC 371c. The cooperation of foreign bank supervisors may assist in that tracing, depending on the degree to which the disclosure laws of a particular nation permit such an investigation. Nevertheless, when the OCC cannot be satisfied that transactions between a U.S. bank and its foreign affiliates are in conformity with legal require ments, it can institute specialized supervisory enforce ment measures to stop intragroup activities. OCC bank examination procedures require close scrutiny of intra group activities. (See Appendix C for detailed regular examination procedures associated with insider and affiliate transactions.) In addition, Sections 203, 204 and 813 of the Comptroller's Handbook for National Bank Examiners require examination of intragroup money market dealings and the profits/losses accruing to a U.S. bank from such dealings. Bank holding companies, domestic or foreign, influ ence the activities of a subsidiary bank with other hold ing company entities and with customers common to the holding company and other holding company units. The influence may be exerted through policies 212 centralized at the parent level or through holding com pany representatives place in the subsidiary bank as key bank officers and/or as members of the bank's board of directors. Intragroup and group-related transactions can be detected through NBSS and the FR Y-8 reporting sys tems. NBSS would detect unusual changes in a bank's balance sheet and operations statement categories which could represent intragroup activities. For in stance, NBSS would reflect increases in other ex penses (in amount and as a percent of average as sets). NBSS also would report changes in borrowings or interest margins which might indicate the occur rence of transfer pricing. The proposed quarterly FR Y8(f) will assist detection because the report requires a U.S. bank to report all intragroup transactions by vol ume and type. Unusual activities disclosed through either system would lead to a specialized bank exami nation. Ordinary examination procedures are also de signed to identify intragroup activities and concentra tions (Appendix C). If unsafe and unsound intercompany transactions or group-related concentra tions are discovered, then specialized supervisory enforcement measures can be instituted. However, as is generally true with all areas of bank examinations, OCC supervisory resources cannot pos sibly audit all transactions between a large subsidiary and its affiliates abroad and completely prevent im proper intragroup activities. To police intragroup trans actions, supervisory authorities must also rely on the quality of a bank's internal policies and controls, exter nal audits by public accountants and information from external market intelligence, which often is accurate and directs supervisors to potential problems. Al though the proposed FR Y-8(f) will assist U.S. supervi sors in monitoring intragroup activities, the area is a warranted supervisory concern. Sanctions—Finally, buttressing the system of U.S. bank regulation and supervision is a comprehensive set of legal and administrative sanctions that can be applied against banks and bank-related individuals and companies that commit violations of law or partici pate in unsafe or unsound banking practices. Direc tors and officers have a fiduciary duty to pursue poli cies that are in the best interest of the bank. Directors of a national bank are personally liable in damages for willful violations of the National Bank Act. The most general administrative remedies are provided by 12 USC 1818, which empowers the appropriate federal banking agency to issue a cease and desist order against a bank or any director, officer, employee, agent or person participating in the conduct of the af fairs of the bank that the agency finds is violating a law or regulation or is engaging in an unsafe or unsound practice. The order may require the bank or person to take "affirmative action" to correct the conditions re sulting from any such violation or practice. In addition, the banking agency may impose civil money penalties on a bank and bank-related individuals for violations of various banking statutes and regulations, including the restrictions on lending to affiliates. Removal of bank of ficers and directors is possible in specified circum stances, and criminal referrals to the Department of tives with respect to foreign bank holding companies to promote two broad goals: first, to assure that the U.S. subsidiary bank is operated in a safe and sound manner and, second, to assure that the parent bank holding company is a source of strength to the U.S. bank. Those initiatives include increasing examiner surveillance of intercompany transactions and com mon customer credits, soliciting the views of foreign bank regulatory authorities with regard to foreign banks subject to their jurisdiction, improving the qual ity of annual financial information on foreign bank hold ing companies, and requiring quarterly reports on transactions between the U.S. subsidiary bank and its foreign parent. The Federal Reserve's Y series of reports deals di rectly with intragroup activities. The present FR Y-8 re quires domestic bank holding companies to file quar terly reports on intragroup transactions. Soon the Federal Reserve will issue final regulations covering new reporting requirements for foreign bank holding companies. The first report is a revision to the Annual Report of Foreign Bank Holding Companies (FR Y-7) which would require foreign bank holding companies at en try, and annually thereafter, to submit detailed supervi sory information about their consolidated condition, shareholders, officers and directors, and affiliates. To ensure identification of significant affiliates, the pro posed report requires foreign bank holding companies to submit: Subsidiaries (FR Y-8(f)). The Federal Reserve pro poses that this report be filed quarterly for a 2-year period. The report is designed to monitor intragroup transactions and ensure U.S. supervisors that foreign bank holding companies are serving as a source of fi nancial strength to their U.S. bank subsidiaries. Specif ically, the report requests data on the following intra group activities: • An organization chart showing the names of all entities of which the foreign bank holding com pany owns or controls 25 percent or more, as well as showing the location of the entity and the manner in which the 25 percent or more control is exercised; • A list of each shareholder who directly or indi rectly owns, controls or holds, with the power to yote, 5 percent or more of any class of out standing shares of a foreign bank holding com pany. Such listing is to include the name of the shareholder and the beneficial owner of the shares, the principal residence or office of the shareholder and beneficial owner and the num ber and percentage of each class of voting se curities, or the equivalent thereof, owned, con trolled or held with power to vote the shares. • A list of each director and executive officer, or equivalent, of the foreigh bank holding com pany which shows the person's name, principal location and country of citizenship, principal oc cupation, if other than employment with the for eign bank holding company, and title or posi tion with the bank holding company and number and percentages of each class of vot ing securities, or the equivalent thereof, owned, controlled or held, with power to vote, of the for eign bank holding company and its related en tities. Examination Procedures—OCC onsite bank exami nation procedures and market intelligence have been the traditional supervisory means for detecting the re lationships of a foreign bank holding company and its affiliates with a U.S. subsidiary national bank. Most for eign bank holding companies are major multinational organizations which publish annual reports disclosing most affiliations. Any affiliate relationship not so dis closed generally is minor but still known to the banking community at large. The OCC has access to banking community information through periodic bank exami nations and contacts with U.S.-based multinational banks and through regular communications with bankers, other U.S. bank supervisors, foreign bank supervisors and other U.S. and foreign government entities. For instance, supervisory and examination initiatives, particularly with respect to the multinational banking organizations, are taking place in the context of in creasing cooperation among authorities in the devel oped nations of the world. The most important interna tional forum is the Committee on Banking Regulations and Supervisory Practices, known informally as the Cooke Committee after its incumbent chairman. Estab lished in 1974, that committee includes representa tives from the supervisory authorities and central banks of the countries of the Group of Ten (G-10) plus Switzerland and Luxembourg. It has a secretariat pro vided by the Bank for International Settlements at Basel (Switzerland) and meets regularly three times a year. The committee's main focus has been to establish broad principles on which the supervisors could The second report proposed by the Federal Reserve Board is a Report of Intercompany Transactions for Foreign Bank Holding Companies and Their U.S. Bank • Transfer of assets, e.g., securities and loans; • Expenses paid by a U.S. subsidiary to other group members, e.g., interest expenses or service fees; • Liabilities and claims between the U.S. subsidi ary bank and group members, e.g., deposits or borrowings; • U.S. bank subsidiary participation in loans origi nated or syndicated by other bank holding company members, including guarantees and standby letters of credit; • Compensating balances between the U.S. sub sidiary and other group members; • U.S. bank subsidiary loans or commitments made in connection with credit extended by third parties to other bank holding company members; and • Foreign exchange transactions, including infor mation about the profitability of those transac tions to the U.S. subsidiary bank or the affiliated counterparty. 211 kets. In that context, it is important to note that the OCC has established a mutually beneficial relationship with the banking authorities in Hong Kong as a result of the examinations of U.S. banks which OCC con ducts semiannually in the colony. Laws and Authorities—Agreements and assurances aside, it is, of course, fundamental that MMB, as any national bank, must comply with a vast array of laws and regulations (See Appendix B.) that are specifically designed to promote the safety and soundness of the national banking system. For example, a national bank in the United States can invest only in government obli gations and in certain other types of investment securi ties that are, by definition, marketable and nonspeculative in nature. Bank directors may periodically declare dividends out of net profits, but only if there is an adequate surplus fund. A national bank is restricted in the amount of money it may borrow, in the types and amounts of real estate loans it may make, in the amount of credit it may extend to a single borrower and in the type and amount of drafts and bills of ex change it may accept. Extensions of credit to insiders—officers, directors, shareholders who own more than 10 percent of a class of securities, and their related interests—are limited as to type, cannot exceed specified individual and aggre gate amounts, cannot be preferential in any way and require the prior approval of a disinterested majority of the bank's entire board of directors. The executive offi cers and principal shareholders of a bank must file an annual report with the board of directors concerning any indebtedness they may have with a correspondent bank. A bank must file annually a publicly available re port with the appropriate federal banking agency list ing its principal shareholders and all of its officers and directors who are indebted, or whose related interests are indebted, to the bank or one of its correspondents, along with the aggregate amount of indebtedness. Section 23A of the Federal Reserve Act (12 USC 371c) deals specifically with intercompany transac tions and provides that a member bank cannot lend to or make investments in any affiliated institution, includ ing the bank's parent holding company, in excess of 10 percent of the bank's capital stock and surplus. A 20 percent lending limit is imposed on all affiliate transactions in the aggregate. The term "affiliate" in cludes any corporation, business trust, association or similar organization which is controlled by the bank or by controlling shareholders of the bank or any organi zation which owns or controls a majority of the stock of the bank or can elect a majority of the bank's directors. Any extension of credit by the bank to an affiliate must ordinarily be secured by specified collateral having a market value in excess of such extension of credit. Loans to individuals associated with an affiliate are deemed to be extensions of credit to the affiliate. Any foreign person or organization, wherever located, falls within the coverage of those provisions. Section 2(h) of the Bank Holding Company Act specifically states that the application of the law: . . . shall not be affected by the fact that the trans action takes place wholly or partly outside the 210 United States or that a company is organized or operates outside the United States. The federal bank regulatory agencies have broad examination authority to enforce compliance with those and all other applicable laws and regulations. Under the Federal Deposit Insurance Act, for example, the appropriate federal banking agency, or its designated representatives: . . . are authorized to administer oaths and affirma tions, and to examine and take and preserve testi mony under oath as to any matter in respect to the affairs or ownership of any [insured] bank or insti tution or affiliate thereof. The attendance of witnesses and the production of documents "may be required from any place in any state or in any territory or other place subject to the ju risdiction of the United States. . . ." The National Bank Act provides that refusal to give to the OCC "any infor mation required" in the course of examination of any affiliate of a national bank, including the parent holding company, subjects the bank to forfeiture of its "rights, privileges, and franchises. . . ." Each of the bank regu latory agencies has authority to demand information in the form of regular or special reports sworn to be ac curate and complete by appropriate bank officials. Failure to submit complete and timely reports exposes a bank and its management to civil penalties. Submis sion of false statements to examiners, falsification of bank records or false reports to the regulator consti tute a felony punishable by fine and imprisonment. Reporting Requirements—Banking agencies in the United States and elsewhere, including Hong Kong, conduct two forms of examinations—remote and onsite. Remote examination traditionally has emphasized monitoring through various reporting requirements. In the U.S., current reporting requirements provide data for computerized analysis of banks, with that analysis then directing or assisting onsite examination. The OCC and the Federal Reserve currently require, from large banks and holding companies such as MMB, specialized reports of condition which facilitate remote examination of the bank and its holding com pany. The OCC has developed and continues to strengthen its National Bank Surveillance System (NBSS) for all national banks and especially for U.S. multinational banks. The OCC has also established a Multinational Banking Department (headed by a Dep uty Comptroller) which quarterly conducts a sophisti cated quantitative analysis of the largest national banks, including MMB. The OCC's requirements in clude reports that permit sophisticated analysis of a bank's earnings and capital formation, financial plan ning, strategic new business planning, funding man agement and changes in balance sheet composition and earnings components. It should be pointed out, however, that OCC's reporting requirements are only likely to permit detection on a remote basis of immod erate intragroup activities which would cause unusual changes in a bank's earnings and balance sheet com position. The Federal Reserve is undertaking several initia- analysis of foreign-owned banks' performance in the U.S. shows that they tend to have a higher overall cost of funds than geographically similar domestically owned peers. Finally, it is conceivable that foreign banks' ability to offer services abroad (directly or through affiliates) which U.S. institutions are unable to provide here could attract a certain amount of business from U.S. multinational firms at the expense of domestic banks. That possibility is limited by the fact that U.S. banks could respond to most substantial challenges through their activities overseas, where they have greater free dom to engage in nonbanking activities. There is no evidence that U.S. banks have been seriously hurt by foreign banks' ability to offer a broader range of serv ices in other markets. There is certainly no stampede of U.S. banks seeking foreign bank holding company affiliation to reap such perceived advantages. On the whole, there is no reason to believe that U.S. banks are adversely affected because foreign banks are allowed to own nonfinancial enterprises. Present U.S. policy constitutes a reasonable adjustment to the realities of multinational banking and the different laws and practices prevalent in other nations. The balance of essentially equal competitive opportunity is not dis turbed by the exemption of foreign nonfinancial activi ties, and the national treatment policy objective is intact. What consideration was given by the OCC, in its review of the charter conversion application of Marine Midland Bank, to the nonfinancial overseas activities of the Hongkong organization? The OCC's review of the charter conversion applica tion by MMB included an inquiry into HSBC since the Federal Reserve, on March 16, 1979, had approved, under the Bank Holding Company Act, a proposed ac quisition by HSBC of control of MMB's parent holding company (MMBI). The OCC's inquiry into HSBC's direct and indirect affiliations found that most of those affiliations, includ ing nonfinancial units, were insignificant to the overall activities and financial condition of HSBC. Accord ingly, the OCC concentrated on the activities and fi nancial condition of the small number of material HSBC investments to determine their quality and the expertise with which HSBC monitored and managed those affiliations. The objectives of OCC's inquiry into HSBC were to determine the degree to which HSBC might be a source of ongoing financial strength to MMB and to determine what managerial support HSBC might provide MMB if necessary. The OCC con sidered HSBC's direct and indirect nonfinancial activi ties in terms of the effect on HSBC's potential financial and managerial support to MMB. The Federal Reserve, in its decision of March 16, 1979, approving HSBC's proposal to acquire control of MMBI stated, among other things, its conclusion that HSBC would be a source of financial and managerial strength to MMB. While the OCC did not review the Federal Reserve de cision, and had no authority to do so, its onsite exami nation of HSBC produced no evidence that would ne cessitate reconsideration of that conclusion by the Federal Reserve. (See Appendix A for a chronology of the OCC's process in dealing with the conversion ap plication.) How will present regulations, reporting requirements and examination procedures control inappropriate transactions between MMB and other components of the HSBC organization? The OCC does not anticipate inappropriate transac tions between MMB and the HSBC group. HSBC ac quired control of MMBI to expand its global banking network. That acquisition involves an investment by HSBC of $314 million. Therefore, it is reasonable to ex pect that HSBC will not endanger its investment, repu tation and long-term global strategy by entering into in appropriate or abusive transactions with MMB. The OCC does anticipate a certain amount of intragroup activity between MMB and the rest of the HSBC group. Such activity would represent natural exten sions of commercial business arising from the U.S. bank's affiliation with a foreign bank holding company. For instance, a foreign bank holding company can nor mally be expected to redirect some of its U.S. corres pondent business from other U.S. banks to its subsidi ary. A foreign bank holding company also can be expected to "market" its U.S. subsidiary bank to group-related clients as a dollar lending source or as a source of services not offered by other members of the parent group, such as trust or data processing serv ices. Intragroup transactions are also common be tween a foreign parent's U.S. subsidiary bank and the U.S. branch or agency of the parent. Those transac tions may range from settlement of intragroup ac counts to participation in loans to traditional, "institu tional relationship" clients of the foreign bank holding company group. Although supervisory experience shows no patterns of abuse in intragroup transactions between a U.S. subsidiary bank and its foreign bank holding company system, federal banking agencies continue to scruti nize closely all such transactions. The supervisory tools available for monitoring and controlling intra group activities include supervisory arrangements, laws and authorities, reporting systems, examination procedures and sanctions. Supervisory Arrangements—As the OCC stated on January 28, 1980, in announcing its decision to ap prove the conversion of MMB, the OCC and MMB en tered into a supervisory agreement in which MMB agreed to maintain procedures to segregate and iden tify transactions with or involving affiliated entities, and HSBC agreed to provide or give the OCC access to in formation the OCC deems necessary to enable it ade quately to discharge its supervisory responsibility with respect to MMB. HSBC also gave assurances to OCC that it will not permit any of its nonbank subsidiaries to borrow from MMB or its affiliates. Finally, there are un derstandings among the world's supervisory authori ties which emphasize the need for bank supervisory cooperation to assure the integrity of financial market transactions and the banking institutions in those mar- 209 tion in the United States, many countries have tradi tionally permitted and, in some cases, actively encour aged close business relationships between banks and nonfinancial firms. The challenge for U.S. policy has been to accommodate such differences so that foreign banks may compete in this country on an equitable basis, while at the same time preserving the separa tion of banking and commerce in our domestic markets. U.S. Policy Toward Foreign Banks' Nonfinancial Investments and Activities—U.S. policy has been de signed, in essence, to insulate the U.S. market from the combination of banking and commerce permitted overseas and to minimize possible competitive disad vantages to U.S. banks stemming from foreign banks' involvement with commercial enterprises. The Bank Holding Company Act was amended in 1966, 1970, and again in 1978—as part of the IBA—to permit for eign bank participation in our banking markets on a basis consistent with those objectives. Foreign bank holding companies' operations in the U.S. have been subject to the separation of banking and nonbanking activities'according to standards simi lar to those applied to domestic institutioQs. As a con dition of entry, the Federal Reserve Board has required foreign bank holding companies to divest their U.S. se curities affiliates or other nonbanking companies whose activities are inconsistent with restrictions im posed on domestic banking institutions. Neither Congress or the Federal Reserve, however, has presumed to attempt to restrict foreign banks' overseas operations or investments so as to conform with our domestic requirements. Instead, Congress deliberately provided that foreign nonbanking activities and investments of foreign banking organizations may be exempt from the nonbanking prohibitions of U.S. law. The Federal Reserve Board has implemented reg ulations to carry out the congressional policy. The wisdom of that policy is made clear by consid ering the practical impact of the alternative approach, namely attempting to impose the U.S. nonbanking pro hibition on the overseas activities of foreign banks. Any such attempt would represent an unwarranted extra territorial extension of U.S. regulatory principles to countries with quite different well-established stan dards of their own. If the foreign policies permitting the combination of banking and commerce were a matter of grave concern and there were doubts about our ability to insulate U.S. markets from possible adverse effects, it would, of course, be possible to impose our will by denying entry to foreign banking organizations with substantial nonfinancial interests and requiring di vestiture of such interests by foreign banking organiza tions already operating here. Such action would, in ef fect, amount to putting up a discriminatory screen against foreign entry, denying most foreign banks any opportunity to compete in our markets. Retaliation by foreign governments would likely follow, to the clear detriment of our own commercial interests. Most im portantly, perhaps, we would deny ourselves the bene fit of foreign competition, expertise and capital in our own domestic financial markets. We believe that the present U.S. policy poses no 208 significant threat to the separation of banking and commerce in the United States or to the domestic competitive position of U.S. banks. The exemption of foreign banking organizations from U.S. nonbanking prohibitions does represent differential treatment of foreign concerns, but it represents a deliberate policy choice and does not compromise the principle of na tional treatment. Foreign banking organizations do have some advantage because of the exemption, but it is important to consider whether any such advantage is significant or important in the balance of domestic competitive opportunity. Competitive Impact of the Exemption—The possibil ity of adverse competitive impacts on domestic banks in U.S. markets from foreign banks' overseas nonfinan cial activities or investments has received very little at tention. One reason for this is that there has been no outpouring of complaints or charges concerning unfair competitive practices. Nonetheless, it may be worth considering the different ways that U.S. banks could be affected by foreign banks' involvement with nonfi nancial enterprises overseas. First, if foreign nonbank companies operating in the United States channel their banking business exclu sively to related foreign-owned banks in this country, U.S. banks are denied an opportunity to gain domestic business. Present laws and regulations preclude do mestic operations of direct commercial affiliates and prohibit preferential credit extension to exempt nonbank companies. Even so, home-country ties may be informal, and relationships may exist even though no clear determination of control is warranted. While some foreign corporations undoubtedly follow those homecountry ties, such a tendency is little different from nor mal business practices of multinational companies which can be expected to gravitate toward homecountry banks whether or not formal or informal rela tionships exist. Some concentration of loans to homecountry multinational corporations has been noted by bank examiners, particularly in the loan portfolios of foreign-owned banks that were established de novo and whose activities typically complement those of the worldwide group. In the same way, U.S. banks' over seas activity is heavily oriented to serving the needs of U.S. multinationals. As multinational banking competi tion intensifies, however, traditional home-country loy alties are tending to weaken or break down. It has also been argued that affiliated nonbank com panies could channel funds to foreign-owned banks at below-market rates or borrow funds at noncompetitive rates, thereby indirectly subsidizing the foreign-owned banks' U.S. operations. If this occurred, the foreignowned banks would have an advantage in competing for other business not affected by such nonmarket" be havior. That type of activity is not unknown among multinational corporations. There is, of necessity, a compensatory loss to the nonbank firms whose nonmarket transactions indirectly subsidize the foreignowned banks. Such activity would tend, therefore, to be self-limiting in most circumstances. Moreover, it would affect only a small segment of foreign bank ac tivity in the United States. Indirect evidence suggests that this type of cross-subsidy is not a problem: Our ship of overseas nonfinancial enterprises by foreign bank holding companies? (2) What consideration was given by the OCC, in its review of MMB's charter con version application, to the nonfinancial overseas activi ties of the Hongkong organization? (3) How will present regulations, reporting requirements and exam ination procedures control inappropriate transactions between MMB and other components of the Hongkong organization? Our statement responds to each of those questions, and, in addition, a comprehensive descrip tion of the OCC's decisionmaking process relating to the MMB conversion application, a summary of appli cable laws and regulations and a detailed description of regular examination procedures associated with in sider and affiliate transactions are attached as appen dices.* U.S. National Treatment Policy and Foreign Banks' Involvement with Nonfinancial Enterprises The structure of the financial sector in any nation re flects many factors, including historical traditions, overall size and diversity of financial markets and par ticular government policy objectives which underlie laws and regulations defining and, limiting the permis sible business of banking institutions. In the United States, the size, complexity and diversity of the econ omy have fostered an unparalleled development of fi nancial services. Government policy has historically enforced the separation of banking and commerce, .leading to the creation of a structure wherein involve ment of banks with nonfinancial enterprises, whether directly or through affililates, is more narrowly circum scribed than in many other industrial countries and wherein financial markets are highly segmented. Into this structure, we have welcomed the entrance of for eign competitors and have defined their permissible activities in terms of the principle of national treatment, which asserts that foreign banking organizations should be able to compete in domestic markets on es sentially equal terms vis-a-vis domestic institutions. Foreign banking organizations operating in the United States are permitted ownership of overseas nonfinancial enterprises. In our opinion, that does not violate the principle of national treatment. In a world characterized by complex multinational banking rela tionships and by the diverse traditions and policy inter ests of individual nations, implementation of a national treatment policy requires a balancing of competitive factors rather than strict equality of regulatory require ments. The statutory exemption for overseas nonbanking involvement of foreign banking institutions operat ing in the United States reflects a practical response by Congress to differences in other nations' banking systems. There is no evidence that the exemption has caused a competitive imbalance between foreign and domestic banks in this country. National Treatment in Principle and Practice—Our government has followed a policy of openness to for eign trade and investment throughout most of our his* The appendices are not attached to this statement because of space limitations. They are available elsewhere. tory. The principle of national treatment is in keeping with the general U.S. policy of avoiding impediments to the free flow of capital across our national borders. The Federal Reserve Board has based its regulation of foreign bank holding companies on the national treat ment approach, and the Congress, in enacting the In ternational Banking Act of 1978 (IBA), adopted na tional treatment as the basis for federal regulation of foreign banking operations. The intent of our national treatment policy is to es tablish a federal regulatory framework which is nondiscriminatory in its effects on domestic and foreign banks operating in this country and which affords for eign banks essential equality of competitive opportunity vis-a-vis domestic institutions in similar circum stances, t In practice, an equitable competitive balance be tween foreign and domestic banks in a particular country may not be achieved by applying identical regulations and requirements to each. Because of in herent differences in the structure and operations of foreign banks, some differential regulatory treatment may be necessary. This was clearly recognized by Congress in its deliberations on the IBA. A House re port noted that: . . . the same regulatory structure of foreign and domestic banks will not result in equal treatment and discretion is needed to devise a regulatory framework which is appropriate to the actual oper ations and status of foreign banking institutions. Several provisions of the IBA illustrate clearly the de liberate effort by Congress to adjust regulatory require ments to obtain a reasonable balance of competitive opportunity for foreign and domestic banks. The U.S. commitment to the policy of separation of banking and commerce is clear and strong. It reflects a policy objective that is not generally shared by other nations of the world, including some which are the homes of major multinational banks. Unlike the situafln the IBA, Congress rejected reciprocity as an alternative basis for U.S. federal regulation of foreign banks. National treatment is a pref erable approach, in our view, for several reasons: (1) Reciprocity would conflict with the U.S. policy of neutrality with regard to interna tional capital flows by selectively restricting investment from certain countries; (2) Reciprocity represents a reactive rather than a positive approach; national treatment is a flexible approach that enables the host country to adopt a policy that best serves its interests, irrespec tive of other governments' views; (3) In significant practical ways, reciprocity would create an administrative nightmare, entailing de tailed differentiation of regulation on a country-by-country basis; (4) Experience in international relations, generally, has demonstrated that reciprocal arrangements tend to degenerate to the lowest com mon denominator of permitted activities, restricting options available to all affected parties; and (5) Reciprocity is conceptually ambig uous as a basis for policy: It can be interpreted in several different ways and, internationally, it is implemented quite differently by var ious nations. (For a more complete discussion, see Report to Congress on Foreign Government Treatment of U.S. Commercial Banking Organizations, Department of the Treasury, 1979, pp. 3, 20-21.) Several states impose reciprocity requirements on foreign banks as a means of applying pressure on other countries to open their markets to competition by banks from that state. The U.S. govern ment has chosen to apply pressure instead through diplomatic and other channels (ibid., Ch. 36). In its regulation of federal branches and agencies of foreign banks, the OCC has determined that it is not bound by state reciprocity requirements (12 CFR 28). 207 ing law enforcement mechanisms and laws to deter mine if conflicting statutory purposes may unjustifiably frustrate law enforcement purposes. Recent Amendments to 31 CFR 103 The Department of the Treasury has recently adopted certain amendments to its regulations regard ing financial record-keeping and reporting of currency and foreign transactions. The amendments generally affect banks by requiring that (1) the reports required to be filed under the regulation be more timely, (2) the banks retain certain reports for 5 years, (3) more com plete identification be obtained regarding customers whose cash transactions exceed $10,000, (4) the ex emption for established customers maintaining a de posit relationship be limited to retail businesses and (5) reports be filed regarding certain presently exempt transnational currency transactions. With certain exemptions, a financial institution within the United States must file a Currency Transaction Re port, Internal Revenue Service (IRS) Form 4789, for each deposit, withdrawal or exchange of currency or other transaction which involves more than $10,000 in currency. That report is required to be filed with the IRS on or before the 45th day following the date on which the transaction occurred. The recent amend ment would require that such reports be filed within 15 days after the day on which the transaction occurred. The recent amendment is to provide enhanced capa bility to monitor and to assure compliance with the act. The second amendment to the regulations requires financial institutions to retain a copy of each Currency Transaction Report for 5 years. No such retention was previously required. Although many banks routinely re tain copies of such reports, that requirement will en sure that copies would be available for the use by bank regulatory agencies that have responsibility for examining bank compliance with the reporting require ment. Previously, the regulations did not require that finan cial institutions obtain adequate information regarding the identity of individuals whose transactions exceed $10,000 in cash. Under the recent amendments, a fi nancial institution must obtain and record additional specific information regarding the name and address of the person presenting the transaction and record the identity, account number and social security or tax payer identification number, if any, of the person whose account such transaction is being effected. Verification of aliens may be by passport or other offi cial documentation evidencing foreign nationality or residence. Verification of identity, in any other case, may be by any document normally acceptable as a means of identification when cashing checks, such as a driver's license or credit card. In each instance, the method of verification must be recorded on the report. Banks previously were not required to report cur rency transactions with established customers in amounts which the bank may reasonably conclude do not exceed amounts commensurate with the custom ary conduct of the business, industry or profession of the customer. That regulatory exemption has been lim ited to retail establishments and certain other busi nesses and further requires that banks maintain a list identifying the location and character of exempt busi nesses to be furnished to Treasury on request. Lastly, banks were not required to report transac tions solely with, or originated by, financial institutions or foreign banks. The exclusion for such transactions has been limited to domestic banks to alert the Depart ment of the Treasury of unusal transnational move ments of currency. The intent of those amendments is to provide Treas ury with increased capability to monitor and assure compliance with the Bank Secrecy Act and to provide additional information concerning possible illegal flows of currency in the United States. We believe that the recent regulatory amendments may also facilitate the investigation of narcotics trafficking, tax evasion and other "white collar" criminal activities; however, it should be recognized that the Bank Secrecy Act and its implementing regulations are limited tools for use by law enforcement officials in pursuing criminals. Ex panded agency cooperation and assistance to detect unlawful conduct would better assure the eradication of criminal elements from our society. We are prepared to assist in such an effort to the fullest extent possible under the existing law. Statement of John G. Heimann, Comptroller of the Currency, before the Subcommittee on Commerce, Consumer and Monetary Affairs of the House Committee on Government Operations, Washington, D.C., June 25, 1980 The subcommittee has requested testimony regard ing foreign bank takeovers of U.S. banks and the mat ter of the recent Hongkong and Shanghai Banking Corporation (HSBC) acquisition of Marine Midland Bank (MMB) in particular. The subject is broad, but in asmuch as we have been specifically asked to present rency on three particular issues, the testimony will focus on those specific concerns. In connection with the HSBC acquisition of 51 per cent of the common stock of the holding company of MMB, three questions have been posed: (1) How does the principle of national treatment apply to the present of more than a sample of millions of daily cash trans actions. Our policy, therefore, is to first assess the bank's internal and external controls and audits with the objective of evaluating their adequacy under the recordkeeping procedures. It is essential that the banks themselves have adequate internal and external controls in place to ensure their routine compliance with existing regulatory requirements. The second step of our examination is to sample transactions occurring in those bank asset and liability accounts which are relevant to the recordkeeping and reporting requirements. Finally, if those procedures disclose operational inadequacies or possible illegal conduct, we perform an indepth examination of the problem areas and make appropriate criticisms and referrals to the Department of the Treasury. Since implementation of the financial recordkeeping regulations, this Office has worked closely with repre sentatives of the Department of the Treasury responsi ble for enforcement of the law. On a quarterly basis, the OCC refers all possible violations of the Bank Se crecy Act which were discovered through the exami nations conducted in the preceding 3 months. Appen dix A* summarizes our reported experience for 1979 with bank violations of the act. During the last quarter of 1979, 10 national banks in Florida were reported to Treasury as having had one or more possible violations of the recordkeeping and reporting requirements. Only one of those banks, how ever, was cited for possible violation of the currency reporting provisions of the regulation. In that case, the required reports were prepared before the close of the examination. Problems Encountered by OCC Regarding NarcoticsRelated Money or Banks Alleged to be Controlled by Drug Traffickers The principal problems we have experienced in this area are, first, the inability of either the OCC or banks themselves to identify "drug-related money" or to de termine "control" of a particular bank by drug traffick ers of their associates. Second, existing laws encum ber our ability to communicate and coordinate activities with other law enforcement agencies. It should be recognized that commercial banks can be used as facilities through which drug traffickers and others can launder cash without violating the laws and regulations governing cash transactions. The Bank Se crecy Act and its regulations require only that banks report certain currency transactions and maintain cer tain records. There exists no obligation that the institu tion inquire into the source or intended use of large amounts of currency brought into or taken out of the bank. Historically, in the absence of a credit relation ship, banks have been under no such obligation to in quire into the private financial affairs of their cus tomers. We have no statutory authority to require such inquiry. * Appendix A is not included in the Annual Report because of space limitations. The appendix is available elsewhere. Similarly, a bank customer in a currency transaction is under no duty to disclose the source or intended, use of his or her money. Large deposits and with drawals of cash—which may be typical of narcotics trafficking activities and numerous legitimate business activities—are not in and of themselves illegal. Illegal ity results only if the required reports are knowingly not made and necessary records are not maintained. Our ability to prevent criminal elements from obtain ing control of a bank has been recently enhanced. Persons involved in narcotics or other unlawful activi ties may become associated with a bank through ac quiring an ownership interest. To prevent such, we re quire detailed financial and biographical information from all organizers and initial directors of any new bank and from any individual or group prior to their ac quiring control of an established national bank. Based on that and additional information obtained through our investigations, we attempt to screen the owners and organizers of national banks. While that procedure is somewhat effective, we recognize that such scrutiny may not in every case uncover all of the information necessary to properly evaluate the proposed acquirer or official. It is therefore possible that persons bent on illegal activity may, in fact, acquire control of or be come employed by a national bank. When that hap pens and sufficient probative information comes to our attention, we will and have used the statutory power of our Office to ensure that the bank is run in accordance with all applicable laws, rules and regulations and in a safe and sound manner. In addition, when during examinations or back ground investigations we uncover information indica ting violations of law, we have closely assisted law en forcement officials in their followup efforts. Our cooperation has led to several investigations, prosecu tions and convictions for criminal activities that had in volved the use of financial institutions. Although our review processes are unable to un cover all information, we believe that those reviews coupled with our examination activities generally dis courage undesirable individuals from using national banks. Notwithstanding our successes and the need to co operate with other agencies to inform them of discov ered illegal transactions, our ability to freely exchange information with other agencies has been severely re stricted. In light of statutory proscriptions, contacts be tween this Office and other agencies have been cur tailed. This, unfortunately, seriously detracts from coordinated federal efforts to attack the financial as pects of narcotics trafficking. Coordinated financial in vestigations are necessary to effectively address those problems. We believe that unwarranted barriers to the exchange of information between agencies should be eliminated to the fullest extent possible. In the context of drug trafficking, we believe that it is essential for the experts in regulated industries to work closely with prosecutors and investigatory agencies to understand and follow winding paper trails of financial transactions often leading through several banks and corporate shells. We, therefore, believe it to be ex tremely important for Congress to reexamine the exist205 Financial Integrity and Social Repsonsibility of Banks A study recently released by the Department of the Treasury indicates that net receipts of currency through the Jacksonville and Miami offices of the Fed eral Reserve increased from $921 million in 1974 to in excess of $4 billion in 1979. Such a volume of cur rency, whether a product of legal or illegal activities, passing through the financial institutions in those areas in and of itself would not create serious problems for individual banks handling the currency inflow. The sta bility of a particular institution is not likely to be under mined by large inflows of currency if such funds are in vested by the institution so as to match assets with those potentially volatile deposits. Although the financial threat of such funds is mini mal, the integrity of a bank or its officers nonetheless may be called into question because of the type of customers with which it deals. The perceived integrity of an institution can be compromised by forces be yond the normal investment and operating policies of the bank. In addition to the individual criminal liability of bank officers, which arises when such individuals can be proven to be knowingly aiding or abetting the commission of specific crimes, loss of public confi dence could occur if a bank or its officers is disclosed to be dealing routinely with elements of the criminal community. The vast majority of our nation's banks are, we be lieve, fully aware of this threat and are sensitive to pre serving their earned reputations as responsible mem bers of the communities. Few bankers would allow their institutions to be used in furtherance of criminal conduct. When such conduct is discovered, we use the full force of our regulatory powers to ensure its cur tailment and the removal of culpable individuals from the conduct of the bank's business. OCC Efforts Regarding Narcotics-Related Money in Florida Banks. Although, as earlier indicated, the supervisory re sponsibilities of the bank regulatory agencies under existing law and regulations are basically limited to compliance monitoring activities under the Bank Se crecy Act, we have undertaken to assist law enforce ment investigations to the fullest extent possible. We have undertaken, among other things, to: • Coordinate to the extent possible with all fed eral, state, local and international supervisory, investigatory and prosecutorial agencies; • Obtain information available from other agen cies when we review any application for a new bank charter and any change in control of the ownership of a national bank; • Supply expert witnesses and counsel to work with the law enforcement community in under standing financial transactions; • Participate in such groups as the Interagency Study Group on International Financial Transac tions formed to improve coordination and coop eration among concerned agencies and INTER POL conferences on international fraud; • Render assistance and coordinate with bank 204 • • • • regulatory agencies in foreign countries, includ ing the Caribbean Island jurisdictions; Provide training to our examiners, examiners of other agencies and countries, and investigatory agencies in the detection and prosecution of fi nancial crimes; Adopt and periodically revise examination pro cedures applicable to determining compliance with the Bank Secrecy Act and its regulations; Refer violations to the appropriate agencies and to require banks through formal and infor mal enforcement actions to comply with all ap plicable laws and regulations; and To remind the chief executive officers of all na tional banks of their responsibility to have ade quate policies and procedures which assure total bank compliance with the act and newly revised regulations. In addition to our routine monitoring activites, since the Department of the Treasury's study of currency flows in the Florida area, our staff has participated on an interagency task force, which includes representa tives from the Department of the Treasury, the Internal Revenue Service and the Bureau of Customs, to de velop specialized detailed procedures to assist in tracking such funds in certain Florida institutions. The OCC is also testing expanded examination pro cedures, developed under the auspices of the Federal Financial Institutions Examination Council, to identify unusual currency flows and to ascertain bank compli ance with the reporting requirements of the recently re vised Treasury regulations. OCC Examination Procedures for Monitoring Bank Compliance with the Bank Secrecy Act. Our responsibilities under the act and implementing regulations of the Department of the Treasury, con tained in 31 CFR 103, are basically limited to compli ance monitoring activities. To carry out our responsibil ities, the bank regulatory agencies, in cooperation with the Department of the Treasury, devised a check list for examiners to use in reviewing a bank's compliance with regulations. The procedures of this Office require that possible violations of the Bank Secrecy Act's re porting requirements be listed in the report of exami nation. Regional offices have been instructed to estab lish adequate followup procedures to ensure subsequent compliance by delinquent banks. Copies of our examination procedures and related materials were provided earlier to the committee. All possible vi olations disclosed in examination reports are reported to the Department of Treasury for disposition. Bank compliance with the Bank Secrecy Act regula tions is checked during our examinations, under our established procedures. As a practical matter, how ever, we are not physically in each bank on a contin uous basis since onsite examinations are conducted on a periodic basis with many months intervening. In addition, the volume of cash transactions in 4,448 na tional banks with over 17,000 branches throughout the United States alone—and through many additional overseas offices—precludes our analysis and review any changes in the process of setting margin require ments should be implemented only after careful study by those thoroughly familiar with the intricacies of the markets. Another common control device is position limits. During the turmoil in the silver market, such limits were imposed by the two principal exchanges. However, as indicated in the Commodity Futures Trading Commis sion's report to the Senate Agricultural Committee, those limits were not rigorously enforced. Uniform po sition limits should be explored as a means for pre- venting unreasonably large and speculative concen trations. In summary, we believe that both congressional and regulatory action is warranted in light of the events leading up to late March and thereafter. At the same time we must move with care, since the futures mar kets play an important role in the U.S. economy by providing producers and consumers with means of hedging against severe price fluctuations. Accord ingly, we recommend that a comprehensive evaluation of the issues precede legislative or regulatory action. Statement of Paul M. Homan, Senior Deputy Comptroller for Bank Supervision, and Robert B. Serino, Director of the Enforcement and Compliance Division, before the Senate Committee on Banking, Housing and Urban Affairs, Washington D.C., June 6, 1980 We are pleased to appear before this committee to testify concerning your inquiry into the effects of unusally large cash flows, which presumably include drug-related funds, on banks in southern Florida. The Office of the Comptroller of the Currency is charged by the Congress with general supervisory responsibility over the activities of national banks. The statutory man date of the Comptroller is to determine whether na tional banks operate both in conformance with safe and sound banking practices and in compliance with the many and varied statutes affecting bank conduct, including the Currency and Foreign Transactions Re porting Act. That law is designed to assist law enforce ment officials in detecting and prosecuting criminal conduct by documenting certain fund flows which could involve such activities. More commonly known as the Bank Secrecy Act, that law requires banks to obtain and preserve finan cial information and to file certain reports which have a high degree of usefulness in criminal, tax or regulatory investigations and proceedings. Essentially, the act re quires banks to record and retain the details of certain customer financial dealings and, in some cases, to re port information which is deemed likely by the Secre tary of the Treasury to be useful in subsequent law en forcement investigations and prosecutions. The act requires, among other things, that financial institutions maintain records of their customers' identi ties, make microfilm copies of checks and similar in struments and keep records of certain other items. It specifically requires that certain foreign and domestic financial transactions be reported to the federal gov ernment. The implementing regulations require banks to file reports with the Department of the Treasury of customer transactions involving deposit, withdrawal, exchange or other payment of currency in amounts of $10,000 or more. The legislative history of the act emphasizes its pur pose to facilitate investigation of narcotics trafficking, tax evasion and other "white collar" criminal activities. Banks and other financial institutions have been per ceived to be frequent intermediaries in a growing vari ety of transactions involving movements of large sums of money derived from both legal and illegal sources. Since banks act as depositories or clearinghouses for virtually all transfers of large sums of money, criminals have presumably made use of them as part of their op erations. Inasmuch as such criminal elements fre quently carry on their activities in cash, they may leave no recorded evidence of to whom money is paid or when. Cash is essentially a fungible commodity which leaves no audit trail. When money is withdrawn from a bank in currency and then transported to or from the United States by courier there remains no record of the money leaving or entering the country. A principal pur pose of the Bank Secrecy Act is to reduce those evi dentiary problems by establishing a trail of records available to government scrutiny and use in law en forcement efforts. The OCC shares the concern of the committee and law enforcement officials regarding the possible use of our nation's financial institutions by criminal elements in the handling of funds obtained through illegal activi ties. We are aware that the large inflows and outflows of currency, especially in the Florida area, may be di rectly related to illegal drug traffic. Nevertheless, the ability of either the banks or this agency to determine the source of such funds is severely limited. Separat ing and identifying illegitimate currency flows from le gitimate financial transactions involving divergent eco nomic activities is a complex and time-consuming process which would require an extensive coordinated investigatory commitment of resources by a number of agencies. Unlike the several law enforcement agencies whose investigatory functions under the Bank Secrecy Act are extensive, the bank regulatory agencies have limited responsibilities under that act. We are not empowered to conduct criminal investigations. Essentially, the bank regulatory agencies are charged with determin ing whether banks retain records and report certain in formation required under the act and regulations. You have requested that we comment on several enumerated issues of interest to the committee. 203 vestors to buy into the market as well, escalating the upward trend in price and movement. Even though silver is produced and supplied from multiple sources, as the tables attached to this testi mony illustrate,* regulators became concerned in late 1979 that the American exchanges might not be able to continue supplying silver at the rate at which specu lators were purchasing positions and equally con cerned about the effect those speculators were having on silver prices. It was at that point that two factors converged and a reversal in the silver markets began to take place. First, during January, February and March 1980, pri vate supplies of silver began to pour into the market. Smelters were running at a round-the-clock pace— thus affecting the price in the spot market and, subse quently, at the exchanges. Second, the exchanges, af ter consultation with the regulators, took actions in late 1979 and early January 1980 in the form of position limits, and increased margin requirements to discour age large concentrations of holdings by investors. Regulatory Response Based on information gathered by the OCC from meetings with other regulatory agencies, from conver sations with a variety of market participants and from special examinations of a number of national banks, we believe that during the rapid rise of silver prices, principal credits to the Hunts came from commodity, commercial and brokerage firms and international in stitutions. At that time, most of the credit directly avail able through the U.S. domestic banking system to the Hunts appears to have been extended for the normal business use of Hunt-related companies. Loans made directly to the Hunts by banks when silver prices be gan falling were generally protected by underlying collateral. In terms of assessing systemic risks, our concerns extended to the exposure which could be indirectly transmitted to the banking system as a result of finan cial difficulties of brokers, commodity dealers and cer tain commercial firms, which could have had their abil ities to service normal business obligations to the banking system undermined if they took large losses arising from transactions involving the Hunt silver trading. The regulators have testified concerning their roles in monitoring the accumulation of silver by the Hunts and their efforts to determine the causes of the aberra tions in the marketplace. As we noted at the beginning of our testimony, a number of key questions have arisen as a consequence of the Hunt activity in the sil ver market. A question of particular concern to us is whether the various regulators had sufficient informa tion available following March 26th to make an immedi ate determination as to exposures and risks. The answer to this last question is no. A determina tion, in an orderly fashion and within an expedient time frame, of the cause and related effects of the problem was not possible. The primary reasons were the diffi* The tables for this statement were not included because of space constraints. The tables are available from other sources. 202 culty in obtaining information on actions by the holding companies of the securities firms, in obtaining com plete information on the exposure of the Hunts (partic ularly vis-a-vis private investors and foreign institu tions) and finally the lack of a central coordinator and focal point for all of the information obtained by the various agencies. While coordination has taken place with respect to recent events, there is room for im provement. The OCC has conducted a basic review of its super visory powers relating to the national banking system and is basically satisfied that it has the tools necessary to deal directly with the banks. We do not have the ability, however, to obtain timely information on the indirect exposure of the banks via the brokerage houses. For example, from our discus sions with the banking community, we learned that the banks that did the lending were not aware for the most part that the brokerage houses were lending funds to the Hunts. A bank lending funds to a brokerage house which is an established customer generally looks to the brokerage firm for repayment and bases its credit analysis on the collateral and credit worthiness of the firm rather than on the credit worthiness of the firm's customers. Banks lending funds to brokerage houses to finance their silver positions did so on the basis that those positions had been fully hedged by the firm. It is important to note at this juncture that there is no sys tem in place to determine on a consolidated basis to what extent brokerage houses and their affiliates may have extended credit to their customers to finance po sitions in the futures market. The level of exposure, therefore, of the brokerage firms to potential problems in the futures market is uncertain. The OCC does not have a primary function in com modities regulation and therefore does not have the professional expertise to comment on all aspects of the commodities-related questions. We do have questions, however, which relate to the proposed regulation of the market. It appears that S. 2704 Which seeks to address some of these problems we have discussed this morning is very broad in scope. The language of the bill would seem to em brace not only financial futures on an organized ex change, but also the underlying cash markets them selves and forward commitments, including foreign exchange contracts among banks and corporate cus tomers. We do not believe that it was the intent to re strict foreign exchange contracts which are necessary to facilitate trade, commerce and normal interbank flows. We are also concerned about the process used to establish margin requirements on the exchanges. In creased margin requirements, which raise the amount of capital required to take a position, will tend to de crease the number of participants in the commodities market and, as a consequence, will reduce the liquid ity in the market. Too high a margin requirement by one exchange may also drive participants to other fu tures exchanges both domestic and overseas. Margin requirements should be set sufficiently high to cover any initial losses resulting from an adverse price change. Because of the complexity of those markets, Statement of John G. Heimann, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C., May 29, 1980 I am pleased to appear here today to begin a dis cussion concerning the events of mid-March in the fi nancial markets and the broader policy questions re lating to futures trading. We welcome the opportunity to work with the Congress and the other regulators to take steps which will improve the understanding and increase the stability of those markets. Many questions have been raised as a result of the mid-March events which cannot yet be answered. Those questions should be answered before legisla tive and regulatory action is taken. We believe the an swers will only be forthcoming through careful study and through comprehensive understanding of the mar ketplace. We therefore suggest that further study be conducted to determine answers to these questions: • Was the marketplace threatened by fluctuations in silver prices? • Did the government have accurate, timely and sufficient information? • Were limitations on periodic price changes ade quate? • Were margin requirements adequate? • Who should set margin requirements? Should they be standardized for all of the exchanges? • Should limits be placed on the percentage of an exchange's commodity stocks which may be purchased by an individual, partnership or cor poration? Who should set limits? • Should regulations be set to limit the amount of credit used to finance the acquisition or mainte nance of positions? • Should there be regulations governing the type of collateral used to finance credits? Should the underlying commodity be eligible as collateral? • How would regulatory changes affect liquidity in the marketplace? • How is the existing regulatory structure affected by tax law?, • What would be the effect of changes in our reg ulatory structure vis-a-vis the ability of our ex changes to compete with the overseas ex changes? their purchases and sales. It should be noted that most futures positions are eliminated before the speci fied delivery date. The commodities are not actually delivered, but rather an opposite contract is bought or sold to close the position. For the hedger, the futures contract is a temporary substitute for an actual cash transaction. Another participant in the market is the speculator who does not produce, grow or process the particular product. Instead the speculator places his capital at risk, attempting to take advantage of price fluctuations in the futures market. The term "speculator" has ac quired certain notoriety. However, in this context, the speculator assumes the hedger's risk by taking the op posite side of the hedger's contract. The speculator supplies the essential liquidity to the market, acting as an intermediary between the users and producers. A primary attraction of the futures market to the speculator is the great profit potential, along with com mensurate risk, as a result of the speculator's ability to leverage capital. Limitations are placed on the trading activities of the speculator and hedger. The trader in the futures market, when establishing a position, is re quired to meet a margin requirement by putting up a security deposit or earnest money. The amount of money advanced by the trader is not a partial payment for the product—it might be better viewed as a perfor mance bond that can be used to cover any initial losses caused by adverse price movements. Limitations may also be placed by either the broker age firm or exchange on the positions of individual customers and on the amount the price of a particular contract can rise or fall on a given day. Of primary im portance, of course, is the evaluation by the brokerage firm of the liquidity of its customers. Finally, the Com modity Futures Trading Commission has emergency powers to set margins and position limits after public hearings. This morning I would like to look specifically at what appears to have happened recently in the silver mar ket and at the regulators' capabilities to respond, and then comment briefly on S. 2704 which is before the committee today. Function of the Futures Markets It is important to recognize that the futures markets provide a means for individuals and corporations to buy and sell contracts for future delivery of various commodities at a fixed price. These commodities range from agricultural products, such as pork bellies, lumber and wheat, to financial instruments, such as Treasury bills and foreign currencies, to metals, such as gold, silver and copper. Producers and consumers of the commodities who use the futures market as an insurance policy are called hedgers. Through the fu tures market, hedgers gain price protection, thereby stabilizing income, reducing procurement and inven tory costs and gaining greater flexibility in the timing of Recent Events in the Silver Market In late summer 1979, the federal government be came aware that several traders in the silver market, including the Hunts, were acquiring large amounts of silver and silver futures. It now appears that as the price of silver went up and the Hunts reinvested their paper profits into greater holdings, they did not insure that they were sufficiently liquid to cover possible in creased margin requirements set by exchanges or losses incurred as a result of decreases in the price. As the price of silver began to increase, reports be gan to circulate in the marketplace and Hi the press that the Hunts were accumulating an extremely large silver position. Such rumors naturally caused other in201 In the past, the FDIC has been able to avoid any sig nificant payout in the case of a large insitirtion in threatened condition. Our success to date may not al ways be repeated, and further statutory changes are necessary, in our opinion, to assure the future sound ness of our financial system. First, and perhaps most important, the structure of present law severely limits the number of potential ac quirers for very large institutions. The present Bank Holding Company Act limits interstate acquisitions and forces the FDIC to look for either a domestic in-state acquisition partner or a foreign partner. Some state laws have even precluded an acquisition by an in state bank or holding company. Additionally, the pool of potential domestic acquisition partners becomes more limited with a large bank in distress. There are several reasons for that. If a statutory merger or acqui sition is contemplated, short of receivership and with out any form of FDIC assistance, the takeover bank must be large enough to absorb the risks of the failing bank and must have, or be able to obtain, sufficient capital and management to support a sudden expan sion of its deposit base. Those risks are likely to in clude significant overseas exposures the larger the size of the problem bank, and even the nation's largest banks may be unwilling to take on sizable foreign risks, for example, without government support. Moreover, FDIC assistance, short of receivership, can only be provided in very narrow circumstances under existing law. Thus, prior to providing assistance to a failing bank, the FDIC must find that the continued operation of the institution is essential to provide ade quate banking service to its community. Second, such open-bank FDIC assistance is only workable if the in stitution possesses management and organizational capabilities sufficient to assure viable long-term opera tions. Even if FDIC financial support or indemnities are provided in connection with a purchase and assump tion transaction of an institution out of receivership, the management of the takeover bank will probably also be expected to acquire a substantial portion of the as sets and branch offices of the failing bank. The num ber of healthy domestic banks in a state capable of even a government-assisted takeover of a large bank in distress decreases rapidly as the size of the failing bank increases. Under existing law, of course, none of those larger banks or their parent holding companies would be eli gible to acquire such a problem bank unless they op erated in the same state, even assuming the terms of the transaction could be worked out to their satisfac tion. Moreover, even in the same state, relative size dif ferences between the first and second largest banks suggest that, antitrust considerations aside, the neces sary capital and management resources might pre clude supervisory approval of an acquisition. This problem is illustrated in the following table. For exam ple, in state A the largest bank is almost twice as large as the second largest bank. It is doubtful that the sec ond largest bank would have the necessary resources 200 to acquire the largest, especially under the circum stances that might surround the failure of the largest. Ten-State Example Nonmoney Center States Total assets of largest bank as a percentage of total assets of second largest State A State B State C State D State E State F State G State H State 1 State J 195% 226 202 532 188 300 188 169 195 345 It is also important to note that while foreign acquisi tion partners with sufficient resources to absorb very large failed institutions may be an option in a particular case, the recently enacted International Banking Act incorporates a provision restricting multistate acquisi tions, similar to that contained in the Bank Holding Company Act. The number of potential foreign ac quirers is thus also dwindling under the new law. Fur thermore, a potential foreign acquirer may be dis suaded from a particular purchase because of the location of the failed institution in a state of secondary financial significance to the potential acquirer. The existing paucity of potential acquisition partners for very large failed banks is both undesirable and troublesome. The potential lack of partners increases the likelihood that the FDIC will not be able to arrange a purchase and assumption transaction in a particular case. Conversely, if the pool of potential purchasers is increased, the FDIC has a much better chance to ar range a transaction. In our opinion, a large FDIC pay out could cause an incalculable loss of confidence in the banking system both at home and abroad. We be lieve it is also important to minimize ripple effects that might occur from the loss of a major financial institu tion. The economic environment of 1979 was reflected in strong performance by the banking system, particu larly in asset quality and earnings. However, we be lieve that an economic downturn has begun, and the banking system will reflect this in the coming period. As the banking system continues to grow and diver sify and as the economic environment becomes more complex, the need for flexible supervisory methods to monitor and guide its development in a variety of eco nomic circumstances grows apace. We are bending all efforts toward improving our supervisory capacity to assure continued health of the banking system and the vital role it plays in our nation's financial and economic life. nificant discounts from book value, have made the largest banking companies reluctant to raise new equity from external sources. As we have previously testified, we evaluate capital adequacy on an institution-by-institution basis and firmly believe that no degree of capitalization can sub stitute for sound lending and investment policies, sound earnings performance, experienced and com petent management, planned growth and adequate in ternal controls. Capital ratios are useful screening de vices but by themselves are not a complete measure of the adequacy of an individual bank's capital ac counts. We are continuing to bring regulatory pressure to bear on individual banks to correct capital shortfalls. Our corrective supervisory actions usually begin as a part of the examination process. In certain instances, where we believe that additional capital is necessary to the safe and sound operation of a bank, we use for mal and informal administrative actions or the corpo rate approval process to bring about improvement. Those techniques provide a flexible means for correct ing capital inadequacies in the overwhelming propor tion of national banks. The largest national banks play a pivotal role in the national and international financial community. Be cause of their size and importance to the banking in dustry and the economy, they have a unique responsi bility to help preserve stability and confidence in the financial system. It is of particular importance that those institutions maintain capital positions which are adequate to support the volume and variety of activi ties they undertake and to assure continuing public confidence in their operations and in the industry as a whole. While we believe that the present capital levels of the largest banking companies are generally adequate to withstand the likely pressures of the early 1980's, we have concern about the long-term trend toward in creased leverage in those companies. Therefore, we have initiated, and are presently implementing, a pro gram to assure that certain institutions either maintain or improve current equity capital ratios, depending on their individual circumstances. We expect those banking companies to develop and implement consolidated capital plans which will maintain or improve their equity capital ratios over time. Improved equity ratios can be achieved by var ious means, including control of asset growth rates im provement of earnings and earnings retention and of ferings of equity or equity-equivalents. We recognize that the corporate strategies developed to meet those objectives must permit flexibility to accommodate un anticipated pressures and events. Nevertheless, we in tend to monitor each company's plan on an ongoing basis and use our supervisory powers, if necessary, to assure those objectives are met. Improving Agency Flexibility to Manage Problem Situations—In a system with as many financial organi zations as ours, it is inevitable that a few institutions will find themselves in financial distress periodically. In the current environment of economic softening, mone tary and credit restraint and interest rate volatility, the financial regulatory agencies must be especially dili gent, creative and effective at managing such situa tions. The financial regulators have an extensive array of tools available for managing such situations without impairing public confidence in the safety and sound ness of the system as a whole. Some of those tools, such as access to the Federal Reserve discount win dow, the cease and desist order or the purchase and assumption transaction, are familiar. Sometimes situa tions arise, which recently occurred with a relatively large bank in an Eastern urban center, that require the application of uncommon techniques. In that case, a unique cooperative effort between the Federal Deposit Insurance Corporation (FDIC) and a group of privata banks resulted in an assistance package which, if im plemented, should ward off an unnecessary and po tentially damaging problem for the bank, the public it serves and the banking community. Nonetheless, in keeping with the concerns of this committee and the responsibility of financial regulators in attempting to anticipate and prepare for possible systemic shocks, we strongly recommend the enact ment of the legislative proposal developed by the fi nancial regulatory agencies and introduced in the Sen ate as S. 2575. The proposal would assure the continuous availability of adequate financial services by permitting the interstate acquisition of very large failed depository institutions in extraordinary circum stances. An extraordinary acquisition would be permitted only in a situation involving a commercial bank in receiver ship with assets in excess of $1.5 billion, a thrift institu tion in receivership with assets in excess of $1 billion, or one of the three largest such banks or thrift institu tions in a state, and only after determination by the Federal Financial Institutions Examination Council that an emergency exists in a particular case and that an intrastate sale is not feasible. The proposed legislation also would provide the Federal Home Loan Bank Board, the FDIC and the National Credit Union Admin istration with greater flexibility to assist financially trou bled banks and thrift institutions. In our opinion, this proposal is a necessary and pru dent safeguard to assure the continued soundness of our financial intermediary system in these volatile times. Under existing law, in the case of a bank failure, the FDIC as receiver may arrange for purchase of the assets and assumption of the liabilities, including the deposits of the closed institution, by another institution or make a payout from federal insurance funds to de positors up to $100,000 per account. The Federal Sav ings and Loan Insurance Corporation (FSLIC) has sim ilar options in the case of a failed savings and loan association. Under the proposed legislation, the FDIC and FSLIC would be better able to assure the contin ued services of the failed institution to the public while simultaneously minimizing the attendant costs to the funds in a case involving an extremely large commer cial bank or thrift institution. Such added federal flexi bility will also avoid damage to public confidence and to national and international markets which might fol low an FDIC payoff of a large insured bank. 199 The past year can be characterized as one of evolu tion for the department. In addition to organizational planning and staffing efforts, personnel played a prominent and active role in designing, conducting and analyzing all phases of the examination process. At year-end, examinations had either been completed or were in process for each of the 10 multinational banks. Initial efforts to develop specialized examina tion procedures concentrated on strategic planning, treasury functions and capital formation. A periodic visitation program is being implemented as an extension of the examination process. That su pervisory program emphasizes limited scope, brief du ration and high degree of examiner flexibility. Its objec tive is to obtain more frequent and timely information on the financial condition, activities and plans of the multinational banking corporations. An historical data base is being constructed for a fi nancial monitoring program to yield both performance and projection monitoring capabilities. The goal is to permit continual evaluation of the current performance of each institution and to attain the capacity to antici pate the financial impact of planned internal strategies or external economic or legislative factors. Also incorporated into the Multinational Banking structure is the supervisory responsibility for the inter national banking activities of all national banks. In this regard, Multinational Banking is responsible for man aging OCC's role in the Interagency Country Exposure Review Committee process, which was formalized in 1979. To gauge the magnitude and the trends developing within the banking system regarding country risk expo sure, the three federal bank regulatory agencies insti tuted a semiannual country risk report in 1977 for banks with substantial foreign operations. Using infor mation from that report and other sources, the'Country Risk Exposure Review Committee attempts to measure when the level of exposure of the U.S. banking system to a particular country warrants comment. Although, for various reasons, the imposition of legal limits on country exposure in relation to a bank's capital is im practical, examination procedures used for individual banks call for an evaluation of systems employed by the bank to monitor and control country risk expo sures. Banks are expected to have established coun try risk exposure limits, based on an evaluation of the political, social and economic climate in each country. Regional Bank Review Program—A Regional Bank Review Program has been started to develop an in creased awareness of the activities and direction of approximately 100 large regional banking companies with aggregate assets of $275 billion. The program will provide centralized review and analysis of the condi tion and performance of the regional banks through a comprehensive OCC management information system and visitations to those banking companies. The pro gram will encourage an ongoing dialogue between the OCC and senior members of regional banking com panies. The program will also bring together market, industry and banking company information to provide 198 OCC management, in Washington and the regional of fices, with timely input for their supervisory decisions. Bank Holding Company Examinations—In an effort to increase the efficiency of bank holding company in spections and subsidiary bank examinations, the fed eral banking agencies are implementing a recommen dation of the Federal Financial Institutions Examination Council to coordinate the examinations of all bank holding companies with consolidated assets exceed ing $10 billion and certain classes of companies re quiring special supervisory attention. In addition, the agencies are attempting to coordinate examinations of all other bank holding companies and their bank sub sidiaries where resources permit. To reduce examination time and still provide ade quate supervision to each national bank, the OCC is developing a system for examining multibank holding companies and their national bank subsidiaries. Our goal is to examine, in cooperation with the Federal Re serve, the parent company and the individual banks from the holding company level using the company's plans, policies and internal monitoring mechanisms, including management information systems, as source material. By using information available at the holding company, we may reduce the frequency of onsite ex aminations or significantly reduce the time spent at in dividual banks. Our ability to implement that concept may differ from one bank holding company to another because of or ganizational differences. What we do in a specific case will depend on the degree to which a company is involved in managing the subsidiary banks. Our great est efficiencies will come when the holding company provides policy direction, monitors the subsidiary bank's performance, audits the reports it receives and displays the depth of capital and managerial re sources to support its subsidiaries. Capital Adequacy—The nominal decline in the equity-to-assets ratio for the national banking system in 1979 is not a systemic problem, but rather, reflects the significant impact which declining equity positions in the largest banks have on the aggregate ratio. Infla tion has contributed to a level of asset growth which has outpaced the ability of most of the largest banks to augment their capital accounts, either from retained earnings or from external sources. Increases in the proportion of earning assets, im proved rates of return on assets and reduced loan loss provisions have all contributed to an improving level of bank earnings. And banks have been retaining a larger share of those improved earnings. The 35 larg est bank holding companies retained over 68 percent of their earnings in 1979, as compared to 67 percent in 1978 and 64 percent in 1977. However, maintaining the status quo of the equity-to-asset relationship re quires that banks increase earnings at a rate which, af ter taxes and dividends, matches the rate of inflationinduced asset growth. Earnings growth in the system's largest banks has not been equal to that task. In addi tion, markets have not been receptive to the equities of depository financial institutions in recent years. As a result, low earnings multiples, and in certain cases sig- An important part of our enforcement effort also in cludes our coordination and cooperation with other agencies in investigating and prosecuting bank fraud cases. Because of our concern for that aspect of su pervision, we have developed a specific training course, available to other agencies, in the nuances of bank fraud matters. Our employees are, on a continual basis, assisting other agencies in that area. We indicated in our testimony last year that the Right to Financial Privacy Act of 1978 might impede our abil ity to work effectively with other federal agencies. After over a year of working under its proscriptions, we be lieve it has created additional difficulties for this Office in coordinating with the other regulatory agencies and with prosecutorial and investigatory agencies. Con gress should consider amendments to the act which will avoid unnecessarily inhibiting coordination among federal agencies and resolve ambiguities which threaten to interfere with the Justice Department's in vestigation and prosecution of offenses. Current Economic and Financial Environment The economic and financial instability which had been growing through 1979 reached dramatic propor tions in the first part of 1980. Short-term and long-term interest rates reached extraordinarily high levels, ex emplified by the 20 percent prime rate. The long-term bond market posted severe losses on outstanding se curities. Substantial fluctuations in commodity markets, particularly silver, threatened to create turmoil in the fi nancial markets. On March 14, the President and the Federal Reserve announced a program of fiscal and monetary restric tion designed to reduce inflation and reestablish an environment conducive to orderly economic activity. As the President noted at the time, the effort to control inflation will not be without cost. Recent months have given evidence of significant softening in the economy. The pace of real gross na tional product growth slowed from an annual rate of 2 percent in the fourth quarter of 1979 to 1.1 percent in the first quarter of this year. Housing starts and do mestic auto sales, which had been weakening in 1979, declined dramatically in early 1980. Interest rates have begun to ease with remarkable swiftness, some rates falling as much as 1 percentage point per week. The increase in the unemployment rate from 6.2 percent in March to 7 percent in April lends further support to the view that the economy has entered a period of reces sion. If this period is like earlier periods of cyclical downturn, the financial system will not be immune to a certain amount of difficulty. Adverse economic conditions impact on the banking system through many channels. Liquidity usually suf fers first, but modern central banking techniques have the capacity to reduce the severity of liquidity prob lems. The regulatory agencies have shown a willing ness and ability to act promptly to prevent a local situ ation from turning into a systemic liquidity crisis. Nonetheless, as we note later in this testimony, certain measures designed to improve regulatory flexibility to handle severe economic disruptions are, in our judg ment, prudent and warranted at this time. Another feature of deteriorating economic conditions is the reduction in the quality of assets held by deposi tory institutions. Declines in production, income and sales in a recession reduce the ability of some bor rowers to continue orderly servicing of their debts. A greater than average proportion of loans becomes past due, goes into default or in some other way re quires increased management attention. A recession increases the number of personal and business bankruptcies and thereby results in increased loan losses. The extent of the asset quality problems that banks will face in the next few years depends on the breadth, severity and duration of the recession. In addition to the concerns on the domestic front, we see increased perceptions of risk in the international arena arising from the near doubling in Organization of Petroleum Exporting Companies (OPEC) oil prices in 1979 and political unrest in the Near East. The interna tional burden of recycling is of significant magnitude, but with perhaps less prospect than in the period after 1973-74 that real oil prices or the OPEC surpluses will decline substantially over the next few years. Recent legislative and regulatory and monetary pol icy changes will also differentiate the environment of 1980 and subsequent years from that of 1979. The De pository Institutions Deregulation and Monetary Control Act of 1980 initiates a process of evolution toward a more competitive environment among all depository in stitutions. While welcoming that process, we recognize that it will present a challenge to many institutions. Many banks, especially smaller suburban and rural in stitutions, will have to pay more careful attention to pricing their services, especially with respect to new services such as NOW accounts. Banks will also have to adjust to new competition from thrift institutions for consumer, commercial and trust business. Continued erosion of cheap, stable funding from core deposits seems likely as the phase-out of Regulation Q brings depository institutions into greater competitive align ment with the money markets. The new techniques of monetary control adopted by the Federal Reserve in October and the credit control program adopted in March require accommodating changes in the behavior of banks. Again, we believe those measures will be beneficial to the banking sys tem and the economy in the long run, but we recog nize that they may create specific difficulties for some banks in the short run. Supervisory Matters The OCC continues with specific steps to improve the capacity to supervise the national banking system in light of the complexity of the current economic envi ronment. Multinational Banking Department—The Multina tional Banking Department was created to centralize the supervision of those large national banks which operate through diverse multinational structures. In 1979, the 10 largest national banks, each with an ac tive presence domestically and in the international marketplace, formed the nucleus of the responsibility of the Multinational Banking Department. 197 Ratios of Average Equity Capital to Average Assets (percent) (Largest bank holding companies) Year Five largest 10 largest 35 largest 1975 1976 1977 1978 1979 3.86 4.06 4.02 3.96 3.80 4.05 4.18 4.14 4.07 3.91 4.29 4.53 4.47 4.29 4.17 The equity pattern was not uniform across all na tional banks. The smaller banks, those with assets un der $100 million, added to their capital positions, on average, during 1979, showing an increase in equity capital as a percentage of total assets from 7.83 per cent at year-end 1978 to 8.07 percent at year-end 1979. Banks with assets over $1 billion, on the other hand, experienced a decline from a ratio of 4.70 per cent at year-end 1978 to 4.63 percent at year-end 1979. The 10 largest national banks increased the amount of equity capital through retained earnings in 1979 by $1.7 billion, or 11.4 percent; yet, despite this, the banks were unable to keep pace with asset growth of 14.5 percent and recorded a decline in the equityto-asset ratio of .11 percentage points to a level of 4.02 percent at year-end. Equity Capital of National Banks by Size ($ millions) Total equity Size class 1978 1979 Less than $100 million $ 9,371 $ 9,703 $100 million to $1 billion 11,479 12,279 More than $1 billion 28,349 32,315 Ten largest 14,966 16,669 Equity as percent of assets 1978 1979 7.83 8.07 6.76 6.89 4.70 4.13 4.63 4.02 Banks Under Special Supervision and Bank Failures—One of our most direct supervisory pro grams concerns national banks characterized by the uniform financial institutions rating system as having "financial, operational or managerial weaknesses so severe as to pose a serious threat to continued finan cial viability," that is, 4- and 5-rated banks. The num ber of such institutions decreased to 49 at year-end 1979, compared to 55 the previous year. Those 49 banks accounted for 1.1 percent of all national banks and held 1.45 percent of the assets of all national banks. A significant improvement in 3-rated banks, those which do not have a strong possibility of failure or in solvency but still warrant some supervisory concern, was noted in 1979. The number of those national banks dropped from 251 in 1978 to 217 in 1979. We view that improvement as a reflection of several influences, including the economic climate; timely de tection of and supervisory reaction to problems or po 196 tential problems; and implementation of effective re medial measures by the respective banks' owners and management. Three small national banks failed in 1979. Each of those failures was managed by the federal banking authorities with minimal disruption to the communities served by those banks. Additionally, one bank was merged to avert failure. The OCC believes strongly in protecting and foster ing competition in the financial system. Protecting competition, however, is not necessarily synonymous with protecting individual competitors. To the extent consistent with statutory requirements, we believe in relatively free entry by private entrepreneurs willing to risk their capital to form a new bank, and we believe in relatively free exit from the system when circum stances warrant. The disappearance of banks should not be viewed as an index of the success or failure of the supervisory structure as long as the banking sys tem as a whole is not disrupted. Our supervisory pro cedures are aimed at early detection and remedial ef forts for individual bank problems principally to avoid systemic disruptions. Enforcement Activities Involving National Banks— The principal means of eliminating problems in na tional banks continues to be the daily supervision given through the examination process, the report of examination provided to the bank and the meetings held with the bank management and the directors. In the vast majority of cases, bank problems once identi fied are promptly resolved. That ongoing supervisory process accomplishes early resolution of the majority of banking problems we encounter. In some cases, however, more formal enforcement procedures are required. Over the past several years, the OCC's increasing use of the administrative reme dies provided under the Financial Institutions Supervi sory Act of 1966 (FISA) and strengthened by the Fi nancial Institutions Regulatory and Interest Rate Control Act of 1978 (FIRA) has helped resolve many problems in national banks. At the beginning of 1978, there were 235 actions brought pursuant to the cease and desist powers outstanding against national banks. In 1979, 95 additional actions were started. At yearend 1979, 218 actions remained outstanding. We believe that our increased use of formal enforce ment powers has acted and will continue to act as a deterrent to bank managers and owners. We believe that through our consistent approach to enforcement and regular publication of summaries of enforcement actions taken, many problems will be averted in the fu ture. In addition to the formal enforcement actions brought pursuant to FISA and FIRA, the OCC in 1979 continued to develop appropriate rules, policies and procedures for implementing the new powers given by FIRA. Under those new powers, we conducted investi gations into areas relating to removal of bank officials, manipulation of bank stocks and municipal securities dealers' activities. We also used the cease and desist power against individuals. Civil money penalty cases were instituted for change-in-control violations and certain other violations of statutes and regulations. Past Due Loans at National Banks— December 31, 1979 ($ millions) Amount Amount Percent outstanding past due past due Domestic office loans Real estate Commercial and industrial Consumer All other $136,248 $5,598 4.1 155,768 104,367 59,013 6,296 3,551 3,170 4.0 3.4 5.4 Subtotal 455,396 18,615 4.1 Foreign office loans Total 111,354 566,750 1,855 20,470 1.7 3.6 Liquidity—The liquidity of the national banking sys tem was increasingly strained through 1979. Strong credit demand in 1979 resulted in continued loan port folio expansion. The fevered competition for deposit dollars among both depository and nondepository in stitutions resulted in a shift from traditional deposit in struments. Those two factors are largely responsible for the lower level of liquidity in the system. The ratio of loans to deposits, a traditional measure of liquidity, has deteriorated through the post-1974-75 recession period, rising from 65.3 percent at the end of 1975 to 69 percent at year-end 1978 and 70.4 per;i u cu y e a i - e i i u The larger banks are traditionally more dependent on rate-sensitive liabilities to fund their assets. Banks with total assets in excess of $1 billion, on average, funded 36.6 percent of assets with rate-sensitive liabili ties at year-end 1978, and that figure increased to 41.1 percent by year-end 1979. The smaller banks, on the other hand, are less dependent in an absolute sense upon rate-sensitive liabilities than the large banks but experienced a much greater growth in such depend ence in 1979. The ratio of rate-sensitive funds to total assets in banks with total assets of less than $100 mil lion almost doubled from 11.26 percent at year-end 1978 to 22.02 percent at year-end 1979. That develop ment has significant implications for the smaller banks which will have to practice asset and liability manage ment with greater sophistication as they become more dependent on rate-sensitive funds than when they could rely more heavily on traditional core deposits. Capital—The total equity capital of the national banking system grew by 10.4 percent in 1979, reach ing a level of over $54 billion by year-end. Strong earn ings performance for the year as a whole permitted addition to capital through retained earnings, but did not match the pace of inflation-induced asset growth. In consequence, the conventional equity-to-asset ratio for the system as a whole decreased to 5.45 percent at year-end 1979 from 5.51 percent at year-end 1978. i ;11 » . Equity Capital of National Banks ($ millions) Loan-to-Deposit Ratio (percent) Year-end National banks All insured commercial banks Year-end Total equity 65.3 64.6 66.3 69.0 70.4 63.4 63.2 64.7 67.4 68.4 1975 1976* 1977 1978 1979 $36,654 41,325 44,999 49,199 54,298 1975 1976 1977 1978 1979 As noted earlier, traditional sources of deposit funds have become more volatile as a consequence of infla tion and the greater availability of rate-sensitive instru ments. Traditional savings deposits, for example, de clined during 1979 from 21.3 percent of all domestic deposits at national banks to 18.6 percent by yearend. The 6-month money market certificate, on the other hand, increased from 2.2 percent of domestic deposits to 9.3 percent by year-end. Rate-Sensitive Funds NBSS Banks (All member banks and selected nonmember banks) Size class Less than $100 million $100 million to $1 billion More than $1 billion Ratio of rate-sensitive funds to total assets (percent) 1978 1979 11.26 21.23 36.55 22.02 29.27 41.13 Annual percent increase equity assets 9.2 12.7 8.9 9.3 10.4 3.8 7.7 13.1 12.0 11.7 Equity as percent of assets 5.61 5.87 5.65 5.51 5.45 * Addition to equity for 1976 is affected by changes in definitions. Equity Capital of All Insured Commercial Banks ($ millions) Year-end Total equity 1975 1976* 1977 1978 1979 $64,276 72,266 79,291 87,430 97,244 Annual percent increase equity assets 8.8 12.4 9.7 10.3 11.2 4.7 7.9 13.3 12.6 12.2 Equity as percent of assets 5.87 6.11 5.92 5.80 5.75 * Addition to equity for 1976 is affected by changes in definition. 195 the 10 national banks most active internationally, the corresponding figures are 41.6 percent of total assets and 88.1 percent of foreign assets. The largest 10 banks accounted for over 85 percent of the growth of foreign office assets in 1979. Earnings—National bank earnings for 1979 as a whole continued the trend of improvement of the post1974-75 recession period. Return on average assets (ROA) reached .84 percent, up from .76 percent in 1978; and return on average equity (ROE) reached 14.4 percent, up from 13.4 percent the previous year. Income Before Securities Transactions of National Banks ($ millions) Year Income Annual percent increase 1975 1976 1977 1978 1979 $4,207 4,477 5,060 6,268 7,406 2.4 6.4 13.0 23.9 18.2 11.7 11.4 11.8 13.4 14.4 nf All *« D ~ * ^ . ^ OA Insured Commercial Banks ($ millions) Year Income 1975 1976 1977 1978 1979 $ 7,146 7,615 8,726 10,899 13,126 NA 6.5 14.6 24.9 20.4 Income From International Operations of National Banks, 1978-79 ($ millions) ROA ROE (percept) (percent) .68 .68 .70 .76 .84 Annual percent increase $13.1 billion, representing an increase of 20.4 percent from the 1978 figure. Return on average assets for the commercial banking system as a whole in 1979 was .8 percent, essentially unchanged from the previous year, while return on equity for 1979 was 14.3 percent, up from 13.1 percent in 1978. The 20 largest bank holding companies reported a lower average return on assets of .64 percent than the industry as a whole but, because of their generally higher leverage, reported a higher return on equity of 14.8 percent. International operations continued to provide a sig nificant share of income for the 111 national banks with foreign offices. International operations provided 25" percent of their aggregate net income, down slightly from 28 percent in 1978. ROA ROE (percent) (percent) .7 .7 .7 .8 .8 11.3 11.0 11.5 13.1 14.3 The factors which appear most responsible for over all earnings improvement are lower loan loss provi sions (reflecting the general strength of the economy) and better control of overhead and other noninterest expenses. Despite this improvement for the year as a whole, there is evidence of a softening of earnings per formance in the latter part of the year as the cost of funds escalated and net interest margins narrowed, especially at the banks which are more dependent on purchased and other rate-sensitive liabilities to fund their operations. In 1979, the commercial banking system as a whole reported income before securities transactions of Year Number banks with foreign offices 1978 1979 104 111 Net income International from share of Net international net income income operations (percent) $3,421 4,211 $ 969 1,063 28 25 The very largest bank holding companies in the sys tem show higher proportions of total assets at foreign offices and similarly derive larger proportions of total income from foreign operations, which accounted for 49 percent of the aggregate net income of the five largest bank holding companies in 1979. Asset Quality—Continuing a trend that began in 1977, the level of classified assets again declined in 1979. Total classified assets as a percentage of gross capital funds were reduced from 38 percent in 1978 to 32 percent in 1979. Classified assets are viewed as a lagging indicator of the health of the economy, and this trend, therefore, reflects the improvement since the 1974-75 recession. Banks continued to resolve the many loan problems which were spawned before and during the 1974-75 economic downturn, and there was further success in reducing the volume of nonperforming assets. Loan delinquencies edged up slightly during the year but, at 4.1 percent of domestic outstandings and 1.7 percent of foreign office outstandings, were not yet considered a serious problem in the aggregate. How ever, increased loan delinquencies may serve as a leading indicator of the current economic environment. Past Due Loans at National Banks, 1975-79 (percentage past due) Year-end Real estate Commercial Consumer Other Domestic total Loans at foreign offices Total 1975 1976 1977 1978 1979 6.9 5.8 4.5 3.8 4.1 4.3 3.7 3.3 3.5 4.0 3.5 3.0 3.0 3.3 3.4 5.7 4.3 4.2 4.2 5.4 5.0 4.2 3.7 3.6 4.1 NA NA NA 1.6 1.7 NA NA NA 3.2 3.6 194 Size Distribution of National Banks ($ billions) Assets Size class Less than $50 million $50 to $100 million $100 million to $1 billion $1 to $10 billion More than $10 billion Number of banks 1979 1978 3,075 711 669 99 10 2,868 760 703 107 10 (Percent share of system assets) 1978 1979 $67.5 (6.8) 52.8 (5.3) 178.3 (17.9) 282.8 (28.4) 414.9 (41.6) $69.9 (7.8) 49.8 (5.6) 169.9 (19.0) 240.5 (27.0) 362.2 (40.6) Size Distribution of All Insured Commercial Banks ($ billions) Assets Size class Less than $50 million $50 to $100 million $100 million to$1 billion $1 to $10 billion More than $10 billion Number of banks 1978 1979 11,356 1,615 1,236 148 17 11,051 1,764 1,367 158 17 (Percent share of system assets) 1979 1978 213.8 112.1 301.2 345.2 535.7 (14.2) (7.4) (20.0) (22.9) (35.5) 217.4 122.0 333.7 401.9 616.4 (12.9) (7.2) (19.7) (23.8) (36.4) Foreign Office Assets of National Banks* ($ billions) Year Foreign office assets Annual percent increase Domestic office assets Annual percent increase Foreign office share of total assets (percent) 1975 1976 1977 1978 1979 $100.3 120.9 145.4 169.9 204.0 NA 20.6 20.2 16.9 20.0 $553.4 583.3 651.4 722.3 792.3 3.6 5.4 11.7 10.9 9.7 15.3 17.2 18.2 19.1 20.5 Includes Edge Act subsidiaries in the United States. Foreign Office Assets of All Insured Commercial Banks* ($ billions) Year Foreign office assets Annual percent increase Domestic office assets Annual percent increase Foreign office share of total assets (percent) 1975 1976 1977 1978 1979 $147.6 175.1 206.0 239.8 291.1 NA 18.6 17.1 16.9 21.4 $ 947.8 1,007.3 1,133.4 1,268.2 1,400.3 4.2 6.3 12.5 11.9 10.4 13.5 14.8 15.3 15.9 17.2 Includes Edge Act subsidiaries in the United States. tutions are becoming increasingly aware of the prob lems of long-term, fixed rate lending funded by short-term liabilities. Increasingly, those lenders are either refusing to lend long-term or insisting on loans with floating or renegotiable rates. While that may re duce the interest rate risk of future investments, it does not address the problem of long-term, fixed rate loans in existing portfolios. The larger banks have had substantial experience at managing assets and liabilities in a volatile, highly competitive environment. Many thirft institutions and smaller commercial banks need to develop greater management expertise to deal successfully with an en vironment where core deposits erode in favor of interest-sensitive funding sources, and interest rates themselves display great variability. Moreover, as those institutions enter the 1980's, an increasingly competitive marketplace will provide no easy transition period for them to raise the yield on their portfolios to better approximate market rates of in terest. The financial marketplace continues to become broader and more competitive within particular indus tries, across industry lines and across geographic boundaries. Financial service providers, some regu lated and some unregulated, engage in a variety of ac tivities we have traditionally associated with commer cial banking. Savings and loan associations, credit unions, mutual savings banks, securities firms, finance companies, computer and data processing companies and larger retailers are offering similar banking serv ices and competing for the same customers as com mercial banks. Current economic and financial problems have been years in the making. They became progressively more severe through 1979, but their most startling symp toms became visible only late in the year and, even more dramatically, in early 1980. They set the stage for much of what we will be discussing in future years, without producing their most visible effects on the con dition or performance of the banking system as of 1979. Condition of the National Banking System in 1979 The strength of the economy in 1979 was, as ex pected, reflected in the condition of the national bank ing system, which continued the post-1974-75 reces sion trend of improvement as measured by certain traditional standards. Asset quality and earnings im proved systemwide. Capital-to-asset relationships de clined only nominally. However, results were not uni formly good, since systemic liquidity declined during the year and interest margins declined in the fourth quarter. Within those overall patterns, results were de cidedly different for banks in different size classes. The following discussion of the condition of the na tional banking system is organized around the topics of asset growth, earnings, asset quality, liquidity and capital. The discussion focuses on national banks, but for the sake of completeness and comparability, much of the statistical information is provided also for the en tire commercial banking system. Information is also presented in this section of the testimony on the record 192 of banks under special supervision, bank failures and enforcement activities involving national banks in 1979. Asset Growth—Consolidated domestic and foreign assets of the national banking system drew by 11.7 percent in 1979 to almost $1 trillion, continuing the trend of growth in bank assets induced by inflation. An illustration of this is the expansion in the average size of national banks from $138 million at year-end 1975 to $224 million at the end of 1979. Consolidated Assets of National Banks ($ millions) Number Year-end of banks 1975 1976 1977 1978 1979 4,744 4,737 4,655 4,564 4,448 Assets Annual percent increase Consumer Assets price index $653,751 704,329 796,851 892,274 996,284 3.8 7.7 13.1 12.0 11.7 7.0 4.8 6.8 9.0 13.4 Consolidated Assets of All Insured Commercial Banks ($ millions) Year-end Number of banks Assets Annual percent increase 1975 1976 1977 1978 1979 14,467 14,494 14,439 14,372 14,357 $1,095,389 1,182,391 1,339,393 1,508,217 1,691,474 4.7 7.9 13.3 12.6 12.2 Asset growth, however, was not uniform across banking organizations. In 1979, continuing recent trends, the 10 largest banks in the system grew at a more rapid pace (14.5 percent) than the system as a whole (11.7 percent). This resulted in an increased share of national bank assets accounted for by the 10 largest banks (41.6 percent in 1979 as opposed to 40.6 percent in 1978). In 1979, 117 national banks had total assets of greater than $1 billion, up from 109 in 1978. Those banks accounted for 70 percent of all na tional bank assets, up from 67.6 percent the previous year. Also continuing a recent trend was the more rapid pace of asset growth at foreign offices of national banks than at domestic offices. In 1979, foreign office assets grew by 20 percent, more than twice the 9.7 percent rate of growth of domestic office assets. For eign office assets now represent over 20 percent of to tal assets of the national banking system. Only 111 national banks are active internationally, and they are not all equally active. Indeed, the five na tional banks which are most active internationally ac count for about one-third of all national bank assets, but 80 percent of all national banks' foreign assets. For Statement of John G. Heimann, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, Washington, D.C., May 21, 1980 I am pleased to appear before this committee to present the views of the Office of the Comptroller of the Currency on the condition of the national banking system. These annual hearings make an important contribution to public understanding of the financial system and its significant role in the economic life of our nation. The condition and performance of the financial sys tem as a whole are intimately related to the overall ec onomic environment. Periods of general economic prosperity tend to be reflected in healthy results for the financial system. Such was the case for the national banking system in 1979. We believe the national banking system as a whole is in sound condition to withstand the likely pressures of the early 1980's. However, the condition and performance of individual banking institutions are heavily influenced by management decisions and the local economic environment, and will vary from one in stitution to another. Therefore, a supervisory matter, which we will dis cuss in greater detail later in this testimony, concerns the legislative proposal developed by the members of the Federal Financial Institutions Examination Council to provide greater regulatory flexibility in managing the situation of the failure of a large depository institution. The provisions of that proposal would be used only in extraordinary circumstances when other mechanisms could not assure uninterrupted availability of financial services. In light of the uncertainties we face, we be lieve the provisions of that proposal provide additional tools which would prove beneficial to the banking sys tem and the banking public. This testimony begins with a brief overview of the economic and financial environment in 1979, proceeds to a discussion of the condition of the national banking system in 1979 and then discusses the current eco nomic climate and certain supervisory matters, includ ing that legislative proposal. The Economic and Financial Environment in 1979 In 1979, overall rates of economic growth slowed from 1978 levels but were still unexpectedly strong. The gross national product grew at 11.3 percent in nominal terms and 2.3 percent in real terms. Nineteen seventy-nine opened amid expectations of an economic recession following the tighter monetary policy stance undertaken by the Federal Reserve in November 1978. The Federal Reserve initiated another round of monetary tightening in October 1979, renew ing expectations of an economic slowdown. The auto mobile and housing industries did slow down, but de spite the expectations of most forecasters, the economy as a whole did not, although recent evidence strongly indicates that the long-anticipated recession is now under way. In 1979, many of the financial stresses and strains created by prolonged inflation manifested themselves in more visible ways than previously. Consumer price inflation worsened from an annual rate of under 10 per cent in late 1978 to over 13 percent by late 1979. Inter est rates displayed great volatility and moved sharply upward. The Federal Reserve discount rate rose from 9.5 to 12 percent, the prime lending rate from 11.75 to over 15.25 percent and the 6-month Treasury bill rate from 9.5 percent to almost 12 percent. The decidedly upward trends in inflation and interest rates, which have been in evidence since the 1960's continued in 1979. High interest rates significantly raise the opportunity cost of holding funds in noninterest earning demand accounts and low-yielding passbook and time deposits. In recent years, financial institutions introduced and refined a series of financial innovations to provide higher returns on funds than is permitted from more traditional deposit instruments. The most commented upon innovations in 1979 were in the retail area. The 6-month money market cer tificate of deposit, bearing an interest rate linked to the Treasury bill rate, expanded from $79 billion, or 5 per cent of domestic deposits at commercial banks and thrift institutions, at year-end 1978 to $271 billion, or 16 percent of domestic deposits, by the end of last year. For the commercial banking industry, money market certificate balances expanded from $23 billion to $103 billion during the year, accounting for 10 percent of to tal domestic deposit funds by year-end. The other financial innovation which attracted a great deal of attention in 1979 is the money market mutual fund, which represents direct competition for deposit funds from outside the depository sector. Dur ing the year, the number of funds rose from 61 to 76, and total assets mushroomed from $11 to $45 billion. The availability of those market-yielding instruments is revolutionizing the liability structure of the smaller and retail-oriented depository institutions. Banks and thrift institutions can no longer depend on a stable "core" of deposits insensitive to changes in market in terest rates. The effect of those new instruments was a relatively large increase in the average cost of funds at depository institutions in 1979, but the disintermediation pressures of previous high-interest rate periods were substantially reduced. Deposit funds were, there fore, more readily available than in the last highinterest rate cycle, but at a much higher cost. The result of that rapid increase in the cost of funds was a rethinking of investment and lending practices. By raising the cost of deposits and making them more sensitive to changes in market interest rates through deposit instruments such as the money market certifi cates, high interest rates prompted institutions to be gin pricing their loans and services more in line with costs. High and varying interest rates also forced financial institutions to pay more attention to matching the matu rities of their assets and liabilities. Most financial insti191 nancial services permitted to the host country's institutions in the entrant's home country? Or should it adopt a rule of national treatment— i.e., permitting a foreign entrant to compete equally with similarly situated financial institu tions in the host country? • What is the appropriate mode and instrumental ity for disciplining an international financial insti tution whose performance threatens the longterm stability of the marketplace? These are but a sample of some of the thornier questions posed by the confrontation between diverse national supervisory systems and the reality of interna tional financial interdependence. Indeed, not all these problems have been satisfactorily resolved by all the relevant governments, although rough working an swers do exist for most of them. Meeting in Basel (Switzerland) in 1974, central bankers from the major industrialized countries developed a "concordat" con cerning the responsibilities of home and host country authorities for the lender-of-last-resort function and for the bank examination and supervision function. The progress in multilateral cooperation demonstrated in the "concordat" is encouraging. The practical key to resolving these problems for all participating countries in the commercial banking field, and more generally across the broad spectrum of fi nancial institutions, is increased multilateral coopera tion among national financi