Full text of Federal Reserve Bulletin : Articles Compilation 2006 pt. 2

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Reports on the Condition of the
U.S. Banking Industry

Report on the Condition of the U.S. Banking
Industry: Third Quarter, 2005
Aggregate assets at all reporting bank holding companies increased 2.6 percent, or $282 billion, to
$11.2 trillion, with much of the growth coming from
loans to finance real estate. Earnings were strong
despite somewhat higher provisions that arose mainly
from the summer's Gulf Coast hurricanes. Nonperforming asset measures stayed at a historically low
level.
Loans advanced 2.8 percent ($152 billion), to
$5.5 trillion, fueled primarily by increases in residential mortgages ($65 billion) and commercial real
estate loans ($47 billion). Construction loans, which
include loans to finance the construction of new
homes, accounted for roughly half of the increase in
commercial real estate lending. Loans to individuals
other than for credit cards or mortgages continued to
grow at an elevated pace, up 4.4 percent, or $22 billion. Growth in commercial and industrial loans
decelerated from 3.8 percent in the previous quarter
to 1.1 percent, or $11 billion. Similarly, the pace of
increases in home equity lines of credit slowed in
response to higher interest rates, falling to just
0.3 percent, or $1.3 billion. More generally, unused
commitments to lend increased significantly, rising
4.1 percent ($206 billion), to $5.2 trillion, consistent
with reports of a robust outlook for business loans.
Money market assets also increased substantially
($71 billion)—as did money market borrowings
($75 billion)—almost entirely at one of the five large
bank holding companies for which banking operations represent only a small component of the consolidated entity.1 Investment securities expanded
2.6 percent, or $48 billion, to $1.9 trillion, with most
of the growth in Treasury and other debt securities.
1. Financial information for five large bank holding companies
(BHCs) for which banking operations represent only a small component of the consolidated entity is included in the all reporting bank
holding company data shown in table 1, but not in the data for the fifty
large bank holding companies (table 2) or in the data for all other
reporting bank holding companies (table 3). Three of these BHCs are
insurance-oriented and two are brokerage-oriented. At the end of the
third quarter, these five BHCs had combined assets of $925.8 billion,
more than half in the securities and money market assets category. For
further background on the institutions included in each table's data,
see Board of Governors of the Federal Reserve System (2004)
"Report on the Condition of the Banking Industry: Third Quarter,
2003," Federal Reserve Bulletin, vol. 90 (Winter) pp. 47-51.

Funding for the growth in assets was evenly balanced between deposits and short-term borrowings.
Deposit growth for the quarter was concentrated
in time deposits and MMDA and savings accounts,
shifting the overall deposit composition toward
higher-cost categories as transaction accounts
declined. At 1.9 percent ($103 billion), overall
deposit growth lagged the growth in loans, pushing
the loan-to-deposit ratio up slightly to 99.2 percent.
Tier 1 and total risk-based capital ratios fell modestly to 9.16 and 11.9 percent, respectively, continuing the modest downward trend seen over the past
two years. The leverage ratio, however, remained
roughly unchanged at 6.53 percent.
Third quarter net income for all reporting bank
holding companies rose six percent ($2.0 billion), to
$34.7 billion, lifting quarterly returns on equity and
assets to 15.14 percent and 1.25 percent, respectively,
near historic highs. A surge in noninterest income,
spurred by strong trading revenues at large institutions, contributed significantly to earnings improvement. Net interest margins narrowed further, down
three basis points, to 3.06 percent, due to a flatter
term structure, continued competition for loans and
deposits, higher short-term funding rates, and a shift
in deposit mix toward higher-cost certificates of
deposit. Nonetheless, net interest income increased
because of asset growth.
Moderating the improvement in earnings, a substantial increase in provisions for loan losses augmented loan-loss reserves for the first time since
early 2004. Large institutions with credit exposures
on the Gulf Coast accounted for almost half of this
increase. Further contributing to escalating provisions were anticipated losses (largely on credit cards)
from stepped-up personal bankruptcies filed before
the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and, to a
lesser extent, the introduction of higher minimum
credit card payments. Despite the hurricanes and
other one-time factors, however, the nonperforming
assets ratio declined slightly during the quarter to a
low 0.70 percent.
Assets at the fifty large bank holding companies
increased just 0.9 percent, or $75 billion, influenced

Federal Reserve Bulletin • 2006

significantly by Citigroup's sale of life insurance and
annuities operations to an insurance-focused bank
holding company (MetLife) during the quarter.
Although this transaction had no net effect on the
1.

assets of all reporting bank holding companies, aggregate earnings reflected the $2.1 billion gain realized
by Citigroup on this sale.

Financial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2004

Account or ratio *

2005
Q3

Balance sheet
Total assets

6,745,836

7,486,952

7,991,161

8,880,661 10,339,839 9,357,969

9,711,531

9,959,685 10,339,839 10,710,584 10,956,178 11,237,913

Loans
Securities and money market
Allowance for loan losses
Other

3 728 570
2.197.434
-60,376
880.209

3 832 553
2,568,704
-68,833
1,154,529

4,079,878
2,867,137
-74,784
1,118,931

4,435,683
3,302,401
-73,817
1,216,395

5,109,518 4,614,913
3,804,003 3,542,305
-74,590
-76,744
1,500,909 1,277,496

4,802,958
3,580,333
-76,533
1,404,772

4,948,873
3,628,275
-76,045
1,458,582

5,109,518
3,804,003
-74,590
1,500,909

5,185,007
4,064,697
-73,385
1,534,264

Total liabilities

6,227,975

6,901,281

7,350,380

8,177,652

9,453,246 8,613,886

8,938,465

9,107,754

9,453,246

9,820,040 10,035,265 10,310,107

Deposits
Borrowings
Other3

3.771.749 4,025,769 4,357,245 4,705,043
1 991 564 2 073 770 2 244 492 2 630 242
464.662
801,742
748,643
842,367

5,249,488 4,847,908
3 158 539 2 903 088
1,045,219
862,891

5,005,099
2 956 549
976,816

5,064,670
3 055 319
987,765

5,249,488
3,158,539
1,045,219

5,349,230
3,423,243
1,047,567

5,447,870
3,525,387
1,062,008

5,551,289
3,663,114
1,095,704

744,083

773,066

851,931

886,593

890,544

920,913

927,806

4 823 334 4,354,895
353,978
308,543
89,115
79,273

4,426,497
314,258
83,109

4,574,267
313,436
84,723

4,823,334
353,978
89,115

4,910,034
366,430
92,623

5,040,259
367,639
96,658

5,245,823
374,909
98,275

5,506,691
4,240,534
-73,949
1,564,638

517,861

585,671

640,781

703,009

Off-balance-sheet
3 297 511
Unused commitments to lend4
n.a.
Securitizations outstanding5
43.608
Derivatives (notional value, billions)1' . .

3 481 745
276,717
48,276

3 650 669
295,001
57,886

4 097 531
298,348
72,914

73,168
197.695
27,604
200,872
258,213

66,510
224,470
40,661
218,984
302,141

85,732
246,048
45,086
221,516
296,966

107,939
257,537
33,052
250,608
316,338

114,290
280,623
28,606
271,465
357,711

30,721
67,630
7,165
67,222
82,984

25,866
71,451
6,994
73,714
101,029

30,160
72,038
7,383
66,986
87,213

28,853
71,675
7,793
67,661
90,009

32,909
72,817
6,577
73,221
91,256

32,707
73,179
6,823
72,266
91,684

34,702
74,533
9,929
77,490
93,898

-605

4,338

4,598

5,771

5,491

1,978

1,011

2,001

480

417

1,478

471

15.19
1.13
3.58
63.95

11.86
.91
3.61
66.94

14.11
1.11
3.74
62.41

16.28
1.26
3.51
61.76

14.39
1.17
3.38
63.45

17.07
1.33
3.43
61.36

13.50
1.07
3.48
67.09

14.55
1.22
3.44
62.34

13.37
1.12
3.29
64.35

14.86
1.24
3.18
60.47

14.58
1.20
3.09
61.40

15.14
1.25
3.06
61.69

1.09
.64
98.86

1.44
.89
95.20

1.44
1.04
93.63

1.15
.84
94.28

.82
.67
97.33

1.09
.72
95.19

.96
.66
95.96

.89
.60
97.71

.82
.71
97.33

.76
.57
96.93

.71
.52
98.30

.70
.65
99.20

Regulatory capital ratios
Tier 1 risk-based
Total risk-based
^everage

8.84
11.80
6.81

8.92
11.92
6.68

9.22
12.28
6.72

9.58
12.60
6.87

9.37
12.25
6.61

9.54
12.45
6.87

9.39
12.25
6.67

9.34
12.17
6.72

9.37
12.25
6.61

9.31
12.18
6.51

9.30
12.06
6.54

9.16
11.90
6.53

Vumber of reporting bank holding
companies

1,727

1,842

1,979

2,134

2,254

2,193

2,211

2,240

2,254

2,282

2,296

2,288

Total equity

Income statement
Vet income 7
Net interest income
Provisions for loan losses
Non-interest income
Non-interest expense

886,593

5,355,072
4,099,618
-72,954
1,574,443

MEMO

Realized security gains or losses . . . .
Ratios (percent)
Return on average equity
Return on average assets
Vet interest margin s
Efficiency ratio 7
Vonperforming assets to loans and
related assets
Set charge-offs to average loans
^oans to deposits

Footnotes appear on p. B5.

Report on the Condition of the U.S. Banking Industry: Third Quarter, 2005

Financial characteristics of fifty large bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2004
Account or ratio 2'

2000

2001

2002

2003

2005

2004
Q1

7,739,375

7,939,683

8,203,706

8,415,117

8,489,633

Balance sheet
Total assets

5,512,347

5,884,763

6,245,841

7,939,683

7,348,075

7,538,219

^oans
Allowance for loan losses
Other

2.939.971
1 848 917
-49,291
772,750

2.959.024
2 051787
-56,635
930,587

3.142.117 3.389.569 3.930.667
2 282 015 2 627 207 2 906 482
-61,213
-59,381
-59,501
882,923
947,059 1,162,035

3.549.509
2 852 911
-62,004
1,007,660

3.684.995 3.792.824 3.930.667
2 838 186 2 877 270 2 906 482
-61,583
-60,971
-59,501
1,076,621 1,130,251 1,162,035

3.979.426 4.097.703 4.219.537
3 091 535 3 158 002 3 192 465
-58,136
-57,442
-58,214
1,190,882 1,216,854 1,135,846

Total liabilities

5,101,049

5,436,029

5,758,821

6,780,663

6,948,697

7,510,491

Deposits

2,850,567 3,026,178 3,264,019 3,516,299 3,951,188 3,633,531 3,762,700 3,796,536
1 812 975 1 876 054 2 038 758 2 355 463 2 708 953 2 611 397 2 639 524 2 738 503
535,735
546,473
547,083
437,507
533,797
456,044
501,968
590,353

Other3
Total equity
Off-balance-sheet
Securitizations outstanding5
Derivatives (notional value, billions) <• . .
Income statement
Vet income7
Net interest income
Provisions for loan losses
Non-interest income
Non-interest expense

6,904,453

6,373,730

7,250,493

689,190

567,412

589,523

3 387 169 3 802 988 4 485 869
289,905
293,046
348,986
57,766
88,671
72,723

4 054 254
304,545
79,042

4113 338
307,878
82,841

91,039
208,439
25,183
211,357
261,076

25,222
50,921
6,385
53,262
60,842

19,484
52,483
6,201
56,521
74,524

5,158

4,587

1,604

14.71
1.13
3.56
59.59

17.48
1.31
3.36
58.75

14.86
1.19
3.22
60.66

1.56
1.01
97.78

1.56
1.20
96.27

1.22
.97
96.40

8.23
11.58
6.24

8.51
11.95
6.25

8.81
12.18
6.36

411,299

448,734

487,021

530,723

3 074 741
n.a.
43,542

3 238 141
271,825
48,158

60,496
153,662
23,985
181,672
217,113

52,626
166,822
35,739
174,481
224,644

68,391
183,958
39,370
172,740
216,055

87,689
192,467
28,543
195,743
229,509

-610

4,313

5,028

15.86
1.14
3.45
64.08

12.22
.92
3.39
64.63

1.17
.73
103.14
8.21
11.46
6.44

7,082,122

657,253

7,250,493

7,703,132

7,773,889

3,951,188 4,020,766 4,082,670 4,151,706
2 708 953 2 892 529 3 021 302 3 095 761
590,353
597,196
599,160
526,423
689,190

693,216

711,986

715,744

4 241 621 4 485 869
307,325
348,986
84,460
88,671

4 558 373
361,524
92,136

24,069
53,711
6,588
51,253
62,537

23,574
53,496
6,738
54,438
66,697

26,393
53,490
5,759
57,542
66,135

24,925
53,506
6,027
54,795
65,766

27,989
54,063
9,023
60,320
66,509

697

1,744

520

211

1,426

464

18.33
1.39
3.28
58.33

13.31
1.03
3.27
65.00

14.98
1.25
3.29
58.95

14.02
1.19
3.17
61.65

15.28
1.29
3.03
57.15

14.29
1.18
2.93
58.67

15.75
1.32
2.89
58.12

.84
.80
99.48

1.13
.88
97.69

1.00
.78
97.93

.91
.71
99.90

.84
.83
99.48

.78
.69
98.97

.72
.63
100.37

.71
.78
101.63

8.57
11.84
6.16

8.76
12.04
6.36

8.61
11.86
6.14

8.59
11.81
6.22

8.57
11.84
6.16

8.52
11.80
6.09

8.45
11.59
6.06

8.46
11.60
6.16

4 673 678 4 863 599
362,973
370,284
96,303
97,994

MEMO

Realized security gains or losses . . . .
Ratios (percent)
Return on average equity
Return on average assets
Vet interest margin s
ifficiency ratio 7
Vonperforming assets to loans and
related assets
Vet charge-offs to average loans
^oans to deposits
Regulatory capital ratios
Tier 1 risk-based
Total risk-based
^everage
Footnotes appear on p. B5.

Federal Reserve Bulletin • 2006

Financial characteristics of all other reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2004

2005

i in

1,589,910

1,636,640

1,675,090

1,710,394

1,740,972

1,792,900

1,822,494

Balance sheet
Total assets

1,288,955

1,413,460

1,549,066

819 375
360,634
-11,834
120 780

883 606
409,909
-13,133
133 079

966 795
451,610
-14,019
144 680

1,074,102

1,173,211

1,283,194

1,407,590

Sorrowings
Other3

909,354
143,987
20,761

985,476
162,096
25,640

Total equity

101,153

115,744

130,266

141,477

157,514

145,557

145,007

Off-balance-sheet
Jnused commitments to lend4
Securitizations outstanding5
Derivatives (notional value, billions)1' . .

213,707
n.a.
49

233,430
4,567
89

251,594
4,358
88

281,630
4,159
95

324,094
2,877
144

287,259
2,875
121

12,377
43,302
3,448
16,095
37,988

13,745
46,045
4,485
22,330
44,247

16,553
50,867
5,084
24,477
46,820

17,850
52,970
4,292
27,648
51,320

19,586
57,233
3,191
26,369
53,329

-1

734

650

1,021

13.07
1.11
4.30
62.33

12.52
1.12
4.20
63.83

13.52
1.24
4.25
61.14

.78
.33
84.04

.98
.44
83.15

11.80
13.26
8 49
1,652

Securities and money market
Allowance for loan losses
Other
Total liabilities

1,175,255
764 249
319,990
-10,817
101 833

1,710,394

1 032 777 1 068 411
466,532
468,881
-14,595
-14,767
151 927
152 564

1 096 550 1 123 962 1 171 197 1 197 796
477,141
474,698
471 527
469,873
-14,690
-14,812
-15,058
-15,258
151 393
157 124
165 234
170 084

1,491,634

1,520,905

1,552,881

1,583,636

1,629,482

1,656,864

1 224 810 1 250168
228,010
229,563
38,813
41,175

1,278,388
233,512
40,981

1,308,778
231,629
43,229

1,345,045
241,378
43,059

1,378,803
232,044
46,017

154,184

157,514

157,336

163,419

165,630

298,142
3,000
112

315,329
2,757
121

324,094
2,877
144

337,261
2,792
99

350,998
2,667
101

363,465
2,697
95

4,811
13,825
813
6,736
13,109

4,829
13,977
797
6,667
13,098

5,034
14,507
809
6,575
13,266

4,912
14,925
772
6,391
13,856

5,240
15,232
688
6,666
13,958

5,470
15,672
742
6,697
14,022

5,548
15,937
858
7,031
14,350

566

314

111

133

114

13.12
1.20
3.99
62.95

13.25
1.20
3.92
62.66

13.55
1.23
3.96
62.98

13.30
1.20
3.88
62.76

13.49
1.22
3.91
62.82

12.67
1.16
3.94
63.98

13.32
1.22
3.96
62.61

13.64
1.24
3.96
61.89

13.53
1.24
3.93
61.95

1.03
.46
82.18

.98
.39
82.90

.77
.25
85.78

.97
.23
82.99

.87
.25
84.32

.85
.24
85.46

.77
.29
85.78

.75
.17
85.88

.71
.19
87.07

.69
.20
86.87

12.25
13.81
8 78

12.48
14.08
8 91

12.60
14.28
9 05

12.46
14.07
9 15

12.63
14.29
9 11

12.50
14.14
9 10

12.48
14.11
9 14

12.46
14.07
9 15

12.33
13.92
9 12

12.16
13.73
9 11

12.14
13.71
9 16

1,779

1,916

2,071

2,199

2,131

2,149

2,182

2,199

2,227

2,241

2,233

1 096 550
477,141
-14,690
151 393
1,552,881

994 816
467,644
-14,348
141 797
1,444,353

1 075 244 1 166 179 1 278 388 1 198 727
204,894
207,010
233,512
176,691
40,732
34,400
40,981
31,259

Income statement
Net interest income
Provisions for loan losses
Non-interest income
Non-interest expense
MEMO

Realized security gains or losses . . . .
Ratios (percent)
Return on average equity
Return on average assets
Set interest margin s
Efficiency ratio 7
Vonperforming assets to loans and
related assets
Set charge-offs to average loans
^oans to deposits
Regulatory capital ratios
Tier 1 risk-based
Total risk-based
dumber of other reporting bank holding
companies
Footnotes appear on p. B5.

Report on the Condition of the U.S. Banking Industry: Third Quarter, 2005

Nonflnancial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2004
Account
Q1

Bank holding companies that qualify as
financial holding companies ' '• l2
Domestic
Number
Total assets
Foreign-owned B
Number
Total assets
Total U.S. commercial bank
assets l4
By ownership
Reporting bank holding companies
Other bank holding companies
Independent banks
Assets associated with nonbanking
activities^ l5
Insurance
Securities broker-dealers
Thrift institutions
Foreign nonbank institutions
Other nonbank institutions

300
4 497 781

389
5 440 842

9
502,506

10
621,442

11
616,254

12
710,441

14
1,376,333

13
994,672

6,130,086

6,416,080

6,897,215

7,397,903

8,207,714

7,614,478

5 657 210 5 942 670
229,274
230,467
243,603
242,944

6 429 231
227,016
240,968

465
471
477
474
472
470
6 856 173 7 082 367 7 279 238 7 462 622 7 650 658 7 905 412

470
8 055 975

14
14
14
1 117 266 1 193 984 1 376 333

15
1 526168

15
15
1 516 408 1 625 281

7,850,587

8,041,199

8,207,714

8,403,918

8,534,536

6 941 106 7 786 033 7 165 662 7 409 187
219,222
209,176
213,193
211.725
237,575
212,504
235,623
229,675

7 599 697
208.697
232,805

7 786 033 7 991 934 8 119 076 8 293 331
209.176
204.796
206.260
211.750
212,504
207,189
209,199
210,420

8,715,501

426,462
n.a.
91,170
138,977
1,674,267

372,405
630,851
107,422
145,344
561,712

437,503
656,775
133,056
170,630
678,088

579,111
892,571
191,201
216,758
954,849

468,168
713,794
139,713
184,366
844,638

583,073
710,485
156,033
226,094
862,230

579,785
756,869
162,396
230,569
887,848

579,111
892,571
191,201
216,758
954,849

574,466
1,168,482
194,267
219,828
898,472

582,023
1,165,690
201,317
231,564
927,398

594,068
1,231,412
210,182
242,332
961,065

50
25
633

143
n.a.
38
32
743

96
47
32
37
880

102
50
27
42
1,042

97
44
27
39
1,026

100
49
29
42
1,010

101
48
27
41
1,030

98
45
25
40
1,050

97
44
27
39
1,026

97
43
27
38
926

99
46
27
37
885

98
47
24
38
875

21
636,669

23
764,411

26
762,901

27
934,085

29
1,537,208

27
1,145,476

28
1,271,378

28
1,349,900

29
1,537,208

29
1,690,119

30
1,698,197

30
1,811,451

Employees of reporting bank holding
companies (full-time equivalent) . . 1,859,930

1,985,981

1,992,559

2,034,358

2,162,179

2,099,126

2,085,733

2,133,299

2,162,179

2,168,162

2,199,910

2,218,470

5,512,347
5,319,129

5,884,763
5,732,621

6,245,841
6,032,000

6,904,453
6,666,488

7,939,683
7,940,955

7,348,075
7,045,844

7,538,219
7,385,384

7,739,375
7,644,504

7,939,683
7,940,955

8,203,706
8,206,462

8,415,117
8,417,847

8,489,633
8,489,633

78.90

76.60

75.50

75.10

76.80

75.30

76.00

76.80

76.60

76.80

75.50

Number of bank holding companies
engaged in nonbanking activities l2> l5
Insurance
Securities broker-dealers
Thrift institutions
Foreign nonbank institutions
Other nonbank institutions
Foreign-owned bank holding
companies B
Number
Total assets

Assets of fifty large bank holding
companies9-l7
Fixed panel (from table 2)
Fifty large as of reporting date
Percent of all reporting
bank holding companies

n.a.
n.a.
102,218
132,629
1,234,714

435
452
474
5 921 493 6 610 429 7 462 622

2005

n.a.
n.a.

NOTE: All data are as of the most recent period shown. The historical figures may not
match those in earlier versions of this table because of mergers, significant acquisitions or
divestitures, or revisions or restatements to bank holding company financial reports. Data for
the most recent period may not include all late-filing institutions.
1. Covers top-tier bank holding companies except (1) those with consolidated assets of less
than $150 million and with only one subsidiary bank and (2) multibank holding companies
with consolidated assets of less than $150 million, with no debt outstanding to the general
public and not engaged in certain nonbanking activities.
2. Data for all reporting bank holding companies and the fifty large bank holding companies reflect merger adjustments to the fifty large bank holding companies. Merger adjustments account for mergers, acquisitions, other business combinations and large divestitures
that occurred during the time period covered in the tables so that the historical information on
each of the fifty underlying institutions depicts, to the greatest extent possible, the institutions as they exist in the most recent period. In general, adjustments for mergers among bank
holding companies reflect the combination of historical data from predecessor bank holding companies.
The data for the fifty large bank holding companies have also been adjusted as necessary to match the historical figures in each company's most recently available financial
statement.
In general, the data are not adjusted for changes in generally accepted accounting
principles.
3. Includes minority interests in consolidated subsidiaries.
4. Includes credit card lines of credit as well as commercial lines of credit.
5. Includes loans sold to securitization vehicles in which bank holding companies retain
some interest, whether through recourse or seller-provided credit enhancements or by servicing the underlying assets. Securitization data were first collected on the FR Y-9C report for
June 2001.
6. The notional value of a derivative is the reference amount of an asset on which an interest rate or price differential is calculated. The total notional value of a bank holding
company's derivatives holdings is the sum of the notional values of each derivative contract
regardless of whether the bank holding company is apayor or recipient of payments under the
contract. The actual cash flows and fair market values associated with these derivative
contracts are generally only a small fraction of the contract's notional value.
7. Income statement subtotals for all reporting bank holding companies and the fifty large
bank holding companies exclude extraordinary items, the cumulative effects of changes in
accounting principles, and discontinued operations at the fifty large institutions and therefore
will not sum to Net income. The efficiency ratio is calculated excluding nonrecurring income
and expenses.
8. Calculated on a fully-taxable-equivalent basis.
9. In general, the fifty large bank holding companies are the fifty largest bank holding
companies as measured by total consolidated assets for the latest period shown. Excludes a
few large bank holding companies whose commercial banking operations account for only a
small portion of assets and earnings.

10. Excludes predecessor bank holding companies that were subsequently merged into
other bank holding companies in the panel of fifty large bank holding companies. Also
excludes those bank holding companies excluded from the panel of fifty large bank holding companies because commercial banking operations represent only a small part of their
consolidated operations.
11. Exclude qualifying institutions that are not reporting bank holding companies.
12. No data related to financial holding companies and only some data on nonbanking
activities were collected on the FR Y-9C report before implementation of the GrammLeach-Bliley Act in 2000.
13. A bank holding company is considered "foreign-owned" if it is majority-owned by a
foreign entity. Data for foreign-owned companies do not include data for branches and agencies of foreign banks operating in the United States.
14. Total assets of insured commercial banks in the United States as reported in the commercial bank Call Report (FFIEC 031 or 041, Reports of Condition and Income). Excludes
data for a small number of commercial banks owned by other commercial banks that file
separate call reports yet are also covered by the reports filed by their parent banks. Also
excludes data for mutual savings banks.
15. Data for thrift, foreign nonbank, and other nonbank institutions are total assets of each
type of subsidiary as reported in theFR Y-9LP report. Data cover those subsidiaries in which
the top-tier bank holding company directly or indirectly owns or controls more than
50 percent of the outstanding voting stock and that has been consolidated using generally
accepted accounting principles. Data for securities broker-dealers are net assets (that is, total
assets, excluding intercompany transactions) of broker-dealer subsidiaries engaged in activities pursuant to the Gramm-Leach-Bliley Act, as reported on schedule HC-M of the
FR Y-9C report. Data for insurance activities are all insurance-related assets held by the bank
holding company as reported on schedule HC-I of the FR Y-9C report.
Beginning in 2002:Ql, insurance totals exclude intercompany transactions and subsidiaries engaged in credit-related insurance or those engaged principally in insurance agency
activities. Beginning in 2002:Q2, insurance totals include only newly authorized insurance
activities under the Gramm-Leach-Bliley Act.
16. Aggregate assets of thrift subsidiaries were affected significantly by the conversion of
Charter One's thrift subsidiary (with assets of $37 billion) to a commercial bank in the second
quarter of 2002 and the acquisition by Citigroup of Golden State Bancorp (a thrift institution with assets of $55 billion) in the fourth quarter of 2002.
17. Changes over time in the total assets of the time-varying panel of fifty large bank holding companies are attributable to (1) changes in the companies that make up the panel and
(2) to a small extent, restatements of financial reports between periods.
n.a. Not available
SOURCE: Federal Reserve Reports FRY-9C and FR Y-9LP, Federal Reserve National
Information Center, and published financial reports.

Report on the Condition of the U.S. Banking
Industry: Fourth Quarter, 2005
Total assets of reporting bank holding companies
increased slightly (0.7 percent, or $77.8 billion) over
the fourth quarter of 2005, to $11.3 trillion, as robust
growth in loans—particularly real estate loans—was
nearly offset by a scaling back of money market
assets and investment securities portfolios. Noninterest income fell somewhat after a particularly
strong third quarter, contributing to a modest decline
in earnings. However, profitability ratios remained
high and the nonperforming assets ratio held steady at
a low level.
Loans continued to grow briskly, increasing 2.5 percent, or $135 billion, over the quarter. Real estate
loans accounted for almost two-thirds of that expansion. Single-family mortgage loans increased $50 billion, or 3.4 percent (compared with 4.7 percent in the
preceding quarter), with most of the growth reported
to have been in fixed-rate products. Home equity lines
of credit (most of which take the form of variable-rate
loans) fell for the first time since early 1999 as
short-term rates escalated. Commercial real estate
lending increased $41 billion, spurred by a sharp rise
in construction and land development loans up
(7.7 percent, or $27 billion). Commercial and industrial (C&I) loans advanced (up 3.4 percent, or $33 billion), while unused commitments to lend grew 3.6 percent ($191 billion), to $5.4 trillion.
Reporting bank holding companies reduced their
holdings of securities and money market assets
$89 billion over the quarter. The declines in money
market assets (down $70 billion) and money market
liabilities (down $61 billion) were due mostly to
changes at one of the four large bank holding companies at which banking operations account for a small
proportion of the consolidated entity.1 Downsized
investment securities portfolios reflected the adverse
1. Financial information for four large bank holding companies
(BHCs) at which banking operations represent only a small component
of the consolidated entity is included in the data for all reporting bank
holding companies shown in table 1 but not in the data for the fifty
large bank holding companies (table 2) or for all other reporting bank
holding companies (table 3). For background information on the
institutions included in each table, see Board of Governors of the
Federal Reserve System (2004), "Report on the Condition of the

effect of interest rate hikes on the market value of
available-for-sale securities and efforts by bank holding companies to restructure their interest rate risk
positions.
Banking organizations funded asset growth with
deposits (mainly time deposits), which increased
2.5 percent ($138.5 billion). They reduced borrowings $80 billion over the same period, to $3.6 trillion.
Tier 1 and total risk-based capital ratios remained
largely unchanged at 9.14 percent and 11.86 percent
respectively. The leverage ratio was also stable at
6.50 percent.
Net income for the fourth quarter was $33 billion,
5 percent less than for the third quarter, as trading
revenues at large bank holding companies dropped
modestly after a strong third quarter. Net interest
income edged up somewhat despite a 2 basis point
drop in the net interest margin—a decline attributable
to further flattening in the term structure, increased
reliance on higher cost deposits, and competitive loan
pricing. Reflecting overall strong asset quality, loanloss provisions declined moderately despite the effects of a spike in personal bankruptcy filings in
October related to changes in the bankruptcy code.
For 2005 as a whole, net income grew 16.8 percent, to
a record $133.5 billion.
The nonperforming assets ratio improved for the
sixth consecutive quarter, falling 1 basis point, to
0.69 percent, in the fourth quarter of 2005 despite a
modest increase in nonaccrual loans. The rise of
nonaccrual loans largely reflected a midyear clarification of regulatory reporting instructions such that
bank holding companies were required to recognize
on their balance sheets certain delinquent and nonaccruing residential mortgage loans that had been previously securitized and sold in connection with the
issuance of Government National Mortgage Association (GNMA) mortgage-backed securities. Excluding
the effect of the rebooked GNMA loans, nonaccrual
loans would have fallen.

Banking Industry: Third Quarter, 2003," Federal Reserve Bulletin,
vol. 90 (Winter), pp. 47-51.

Federal Reserve Bulletin • 2006

1. Financial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2004
Account or ratio

^001

^00^

^003

^.004

2005

2005
Q2

Balance sheet
9,959,686 10,339,840 10,710,585 10,956,178 11,257,216 11,335,031

7,486,952

^oans

3,832,553 4,079,878 4,435,683
^ 566 ^ ^ 863 ^94 3 ^97 93^
-68,833
-74,784
-73,817
1 156 980 1 pT 774 1 ^ 0 864

5,109,517 5,661,179 4,802,958 4,948,873
3 804 003 4 157 644 3 576 044 3 6 ^ 986
-76,533
-76,045
-74,589
-73,048
1 500 910 1 589 ^56 1 409 065 1 463 87^

5,109,517 5,187,006 5,357,361 5,525,769 5,661,179
3 804 003 4 115 ^ 7 4 144 578 4^46 879 4 157 644
-74,589
-73,384
-72,954
-74,091
-73,048
1 500 910 1 481 737 1 5^7 193 1 558 659 1 589 ^56

Total liabilities

6,901,281

7,350,380

8,177,651

9,453,247 10,395,315 8,938,467

9,453,247

Borrowings
Other

4 0^5 769 4 357 ^45
2,073,869 2,245,146
801 644
747 990

4 705 043
2,630,386

5 ^49 489 5 70^ 150 5 005 101 5 064 670
3,158,539 3,587,786 2,956,594 3,055,917
987 168
1 045 ^ 19 1 105 378 976 77 1

Allowance for loan losses
Other

Off-balance-sheet
Jnused commitments to lend
Derivatives (notional value, billions) . .

7,991,161

8,880,661 10,339,840 11,335,031 9,711,532

Total assets

9,107,754

773,066

851,931

5,438,639 4,426,497
314 ^58
389 504
83,079
99,072

4,574,267
313 436
84,693

133,536
296,375
32,618
295,263
370,959

25,414
70,719
6,750
72,269
99,804

29,303
70,594
6,897
64,150
84,759

28,853
71,675
7,792
67,661
90,009

5,491

1,333

1,012

2,022

16.28
1.26
3.51
61.76

14.48
1.17
3.39
63.45

14.73
1.21
3.09
61.69

13.26
1.05
3.44
67.26

1.44
1.04
93.63

1.15
.84
94.28

.82
.67
97.33

.69
.62
99.28

8.92
11.92
6 68

9.22
12.28
6 7^

9.58
12.60
6 87

9.33
12.21
6 58

1,842

1,979

2,134

2,254

585,671

640,781

703,010

886,594

3,481,744
°76 7 17
48,261

3,650,670
^95 001
57,865

4,097,531
^98 348
72,883

4,823,334
353 978
89,115

66,510
224,470
40,661
218,984
302,141

85,732
246,048
45,086
221,516
296,966

107,939
257,537
33,052
250,608
316,338

114,291
280,621
28,605
271,467
357,711

4,338

4,598

5,771

11.86
.91
3.61
66.93

14.11
1.11
3.74
62.41

1.44
.91
95.20

9,820,042 10,035,271 10,328,190 10,395,315

5 ^49 489 5 349 ^ 5 447 870 5 563 613 5 70^ 150
3,158,539 3,424,839 3,526,569 3,668,250 3,587,786
1 045 ^ 19 1 045 97^ 1 060 833 1 096 3^8 1 105 378
890,543

920,907

929,026

939,716

4,823,334 4,930,902
353 978
366 430
89,115
92,623

5,065,563
367 639
96,658

5,247,569
374 909
98,282

5,438,639
389 504
99,072

32,909
72,815
6,577
73,557
91,505

32,708
73,179
6,823
71,933
91,436

34,834
74,899
9,969
77,484
94,062

33,085
75,483
9,249
72,290
93,957

480

417

1,478

484

-1,046

14.13
1.19
3.37
62.50

13.37
1.12
3.29
64.34

14.86
1.24
3.16
60.50

14.58
1.20
3.08
61.72

15.18
1.25
3.07
61.64

14.32
1.16
3.05
63.82

.96
.66
95.96

.89
.60
97.71

.82
.71
97.33

.76
.57
96.97

.71
.52
98.34

.70
.65
99.32

.69
.72
99.28

9.14
11.86
6 50

9.39
12.25
6 67

9.34
12.17
6 7^

9.33
12.21
6 58

9.27
12.14
6 48

9.26
12.02
6 5^

9.17
11.90
6 53

9.14
11.86
6 50

2,269

")")[[

2,240

2,254

2,282

2,296

2,290

2,269

939,716

886,594

Income statement
Vet income
Net interest income
Provisions for loan losses
Non-interest income
Non-interest expense
MEMO

Realized security gains or losses . . . .

Ratios (percent)
Return on average equity
Return on average assets
Vet interest margin
ifficiency ratio
Vonperfomiing assets to loans and
related assets
Vet charge-offs to average loans
^oans to deposits
Regulatory capital ratios
Tier 1 risk-based
Total risk-based
Vumber of reporting bank holding
companies
Footnotes appear on p. B 11.

Report on the Condition of the U.S. Banking Industry: Fourth Quarter, 2005

Financial characteristics of fifty large bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2004

2005

7,551,049

7,752,394

7,952,942

8,217,299

8,429,140

8,504,118

8,631,229

Balance sheet
Total assets

5,896,628

6,258,073

6,917,002

7,952,942

^oans
Allowance for loan losses
Other

2,966,220
^ 05^ 60^
-56,742
934 547

3,149,737
^ ^81 310
-61,326
888 35^

3,397,895
^ 6^5 476
-59,501
953 131

3,940,022 4,345,561 3,693,983 3,801,975 3,940,022 3,990,831 4,109,294 4,235,596 4,345,561
^ 909 448 3 180 37 1 ^ 836 307 -> 874 450 ^ 909 448 3 144 864 3 ^06 ^10 3 196 071 3 180 371
-59,632
-57,200
-61,709
-61,098
-59,632
-58,262
-57,568
-58,340
-57,200
1 163 104 1 16^ 497 1 08^ 468 1 137 067 1 163 104 1 139 866 1 171 ^05 1 130 79^ 1 16^ 497

Total liabilities

5,447,009

5,770,085

6,385,249

7,262,665

Deposits
Borrowings
Other

3 036 139
1,876,798
534,072

3 ^74 459 3 5^7 010
2,039,878 2,356,069
455,748
502,170

Total equity

449,619

487,988

531,753

690,277

726,710

590,569

658,321

690,277

694,318

713,120

716,903

726,710

Off-balance- sh eet
3,241,683
Jnused commitments to lend
271,825
Securitizations outstanding
48,143
Derivatives (notional value, billions) . .

3,391,297
289,905
57,745

3,807,416
293,046
72,692

4,490,154
348,986
88,671

5,049,642
384,774
98,742

4,117,409
307,878
82,812

4,245,962
307 3^5
84,429

4,490,154
348 986
88,671

4,583,393
361 5^4
92,136

4,703,627
36^ 973
96,303

4,868,253
370 ^84
97,994

5,049,642
384 774
98,742

52,713
167,191
35,763
174,694
225,064

68,483
184,340
39,397
172,960
216,487

87,764
192,829
28,567
195,988
229,974

91,114
208,826
25,218
211,609
261,557

106,471
215,608
29,132
231,103
266,632

19,049
51,844
5,967
55,141
73,420

23,227
52,366
6,110
48,477
60,203

23,598
53,599
6,747
54,501
66,816

26,418
53,595
5,764
57,940
66,508

24,955
53,617
6,034
54,527
65,638

28,019
54,178
9,030
60,388
66,637

27,079
54,218
8,304
58,248
67,848

4,320

5,027

5,159

4,589

1,678

698

1,765

520

211

1,426

464

-423

12.23
.92
3.39
64.64

14.70
1.13
3.56
59.60

17.46
1.31
3.36
58.78

14.97
1.20
3.23
60.68

15.11
1.26
2.92
58.70

12.99
1.00
3.23
65.20

14.42
1.20
3.20
59.04

14.01
1.19
3.17
61.67

15.27
1.29
3.01
57.23

14.28
1.18
2.91
59.12

15.74
1.32
2.89
58.15

15.15
1.25
2.85
61.19

1.56
1.04
97.70

1.56
1.20
96.19

1.21
.97
96.34

.84
.80
99.43

.70
.74
101.36

1.00
.78
97.89

.90
.71
99.85

.84
.83
99.43

.78
.69
98.97

.72
.62
100.36

.71
.78
101.72

.70
.86
101.36

8.24
11.58
6.25

8.52
11.95
6.26

8.81
12.19
6.37

8.57
11.84
6.17

8.44
11.56
6.15

8.62
11.87
6.15

8.59
11.81
6.22

8.57
11.84
6.17

8.53
11.80
6.09

8.46
11.60
6.07

8.47
11.61
6.16

8.44
11.56
6.15

Income statement
Vet income
Net interest income
Provisions for loan losses
Non-interest income
Non-interest expense

8,631,229

7,904,519

3 96^ 539 4 ^87 130
2,709,429 3,074,410
590,698
542,979

6,960,480

7,522,981

7,716,021

7,787,215

3 773 663 3 807 661 3 96^ 539 4 03^ 396
2,640,035 2,739,587 2,709,429 2,894,633
546,782
546,825
590,698
595,952

7,094,073

7,262,665

4 094 4^8
3,023,279
598,314

4 163 8^9 4 ^87 130
3,096,579 3,074,410
526,807
542,979

7,904,519

MEMO

Realized security gains or losses . . . .
Ratios (percent)
Return on average equity
Return on average assets
Vet interest margin
Efficiency ratio
Vonperforming assets to loans and
related assets
Vet charge-offs to average loans
^oans to deposits
Regulatory capital ratios
Tier 1 risk-based
Total risk-based

Footnotes appear on p. Bl 1.

BIO

Federal Reserve Bulletin • 2006

Financial characteristics of all other reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2004

2005

Balance sheet
1,277,090

1,401,228

1,536,518

1,697,136

1,863,085

1,623,811

1,662,071

1,697,136

1,727,381

1,778,877

1,827,312

1,863,085

8 P 179
357,366
-11,727
119,273

875,986
406,771
-13,021
131,492

958,468
448,872
-13,900
143,077

1,087,194
474,175
-14,558
150,325

1,230,065
474,176
-15,380
174,223

1,023,789
464,121
-14,470
150,371

1,059,260
466,412
-14,639
151,038

1,087,194
474,175
-14,558
150,325

1,114,556
471,898
-14,686
155,613

1,161,896
468,280
-14,932
163,634

1,200,814
472,613
-15,274
169,159

1,230,065
474,176
-15,380
174,223

1,162,232

1,271,930

1,396,070

1,540,709

1,694,289

1,479,852

1,508,954

1,540,709

1,571,149

1,616,599

1,661,621

1,694,289

1,064,805
176 ^ 5
30,900

1,155,468
^06 549
34,054

1,267,038
^33 036
40,635

1,408,702
^38 985
46,602

1,213,850

Other

975,514
161 450
25,267

38,458

1,239,043
^ 9 077
40,835

1,267,038
^33 036
40,635

1,297,151
^31 P I
42,877

1,333,287
^40 583
42,729

1,379,003
^36 361
46,256

1,408,702
^38 985
46,602

Total equity

114,859

129,299

140,447

156,427

168,795

143,958

153,117

156,427

156,232

162,278

165,691

168,795

^ 9 887
4,567
89

^47 466
4,358
88

^77 ^
4,159
95

319 808
2,877
144

368 764
2,885
104

^94 070
3,000

310 987
2,757
121

319 808
2,877
144

333 109
2,792
99

346 354
2,667
101

360 557
2,697
102

368 764
2,885
104

13 659
45,676
4,461
22,118
43,828

16,460
50,485
5,058
24,257
46,388

17,774
52,608
4,268
27,403
50,855

19,512
56,844
3,156
26,119
52,848

21,457
63,028
3,188
26,500
56,583

4,812
13,883
787
6,603
12,977

5,018
14,408
801
6,514
13,146

4,888
14,821
763
6,329
13,737

5,214
15,124
683
6,603
13,835

5,440
15,560
735
6,633
13,902

5,650
16,189
890
6,957
14,386

5,153
16,155
880
6,307
14,460

727

651

1,020

564

111

133

114

-186

12.54
1.13
4.20
63.75

13.55
1.25
4.26
61.06

13.16
1.21
3.99
62.85

13.29
1.21
3.93
62.56

13.27
1.21
3.96
61.88

13.35
1.21
3.89
62.66

13.55
1.23
3.92
62.72

12.70
1.17
3.94
63.93

13.35
1.22
3.96
62.54

13.67
1.24
3.97
61.84

13.76
1.26
3.99
61.53

12.35
1.12
3.93
62.68

.99
.44
83.26

1.04
.46
82.27

.99
.39
82.95

.78
.25
85.81

.69
.20
87.32

.88
.25
84.34

.86
.24
85.49

.78
.29
85.81

.75
.17
85.92

.72
.18
87.15

.70
.21
87.08

.69
.24
87.32

12.24
13.80
8.78

12.47
14.08
8.91

12.60
14.28
9.05

12.46
14.08
9.15

12.16
13.7 1
9.18

12.50
14.15
9.09

12.48
14.11
9.14

12.46
14.08
9.15

12.33
13.92
9.12

12.16
13.72
9.11

12.12
13.67
9.14

12.16
13.7 1
9.18

1,778

1,915

2,070

2,198

2,215

2,148

2,181

2,198

Total assets
Securities and money market
Allowance for loan losses
Other
Total liabilities
Deposits

->->~l 5 4 4

Off-balance-sheet
Securitizations outstanding
Derivatives (notional value, billions) . .
Income statement
Net interest income
Provisions for loan losses
Non-interest income
Non-interest expense
MEMO

Realized security gains or losses . . . .

Ratios (percent)
Return on average equity
Return on average assets
Vet interest margin
Efficiency ratio
Vonperforming assets to loans and
related assets
Set charge-offs to average loans
J oans to deposits
Regulatory capital ratios
Tier 1 risk-based
Total risk-based
^everage
dumber of other reporting bank holding

Footnotes appear on p. B 11.

^40

^34

Report on the Condition of the U.S. Banking Industry: Fourth Quarter, 2005

Bll

Nonfinancial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted

Bank holding companies that qualify as
financial holding companies
Domestic
Number
Total assets
Foreign-owned
Number
Total assets
Total U.S. commercial bank
assets
By ownership
Reporting bank holding companies
Other bank holding companies . . .
Independent banks
Assets associated with nonbanking
activities
Insurance
Securities broker-dealers
Thrift institutions
Foreign nonbank institutions
Other nonbank institutions

389
5,440,842
10
621,442

Employees of reporting bank holding
companies (full-time equivalent)
Assets of fifty large bank holding
companies
Fixed panel (from table 2)
Fifty large as of reporting date
Percent of all reporting
bank holding companies

452
6,610,429

474
7,462,622

462
8,191,459

471
7,082,367

477
7,279,238

474
7,462,622

472
7,650,658

470
7,905,412

472
8,075,295

462
8,191,459

12
710,441

14
1,376,333

14
1,561,559

14
1,117,266

14
1,193,984

14
1,376,333

15
1,526,168

15
1,516,408

15
1,625,281

14
1,561,559

6,416,080

6,897,215

7,397,903

8,207,714

8,843,309

7,850,587

8,041,199

8,207,714

8,403,920

8,534,534

8,715,545

8,843,309

5,942,670
230,467
242,944

6,429,231
227,016
240,968

6,941,106
219,222
237,575

7,785,988
209,115
212,611

8,420,308
219,983
203,018

7,409,187
211,725
229,675

7,599,697
208,697
232,805

7,785,988
209,115
212,611

7,991,887
204,739
207,294

8,119,026
206,203
209,306

8,293,342
211,674
210,529

8,420,308
219,983
203,018

426,462
n.a.
91,170
138,977
,674,267

372,405
630,851
107,422
145,344
561,712

437,503
656,775
133,056
170,630

579,111
892,571
191,201
216,758
954,849

594,847
1,170,659
220,819
242,408
976,208

583,073
710,485
156,033
226,094
862,230

579,785
756,869
162,396
230,569
887,848

579,111
892,571
191,201
216,758
954,849

574,466
1,168,482
194,267
219,829
898,420

582,023
1,165,688
201,317
231,566
927,425

594,068
1,231,410
210,811
242,333
961,269

594,847
1,170,659
220,819
242,408
976,208

96
47
32
37
80

102
50
27
42
1,042

97
44
27
39
1,026

97
46
26
35
845

101
48
27
41
1,030

98
45
25
40
1,050

97
44
27
39
1,026

97
43
27
38
926

99
45
27
37
886

98
46
25
38
873

97
46
26
35
845

23
764,411

26
762,901

27
934,085

29
1,537,208

29
1,747,765

28
1,271,378

28
1,349,900

29
1,537,208

29
1,690,119

30
1,698,197

30
1,811,451

29
1,747,765

1,985,981

1,992,559

2,034,358

2,162,179

2,241,443

2,085,733

2,133,299

2,162,179

2,168,165

2,199,910

2,221,004

2,241,443

5,896,628
5,732,621

6,258,073
6,032,000

6,917,002
6,666,488

7,952,942
7,940,955

8,631,229
8,631,229

7,551,049
7,385,384

7,752,394
7,644,504

7,952,942
7,940,955

8,217,299
8,206,462

8,429,140
8,417,847

8,504,118
8,489,633

8,631,229
8,631,229

Number of bank holding companies
engaged in nonbanking activities
Insurance
Securities broker-dealers
Thrift institutions
Foreign nonbank institutions
Other nonbank institutions
Foreign-owned bank holding
companies
Number
Total assets

435
5,921,493

NOTE: All data are as of the most recent period shown. The historical figures may not
match those in earlier versions of this table because of mergers, significant acquisitions or
divestitures, or revisions or restatements to bank holding company financial reports. Data for
the most recent period may not include all late-filing institutions.
1. Covers top-tier bank holding companies except (1) those with consolidated assets of
less than $150 million and with only one subsidiary bank and (2) multibank holding companies with consolidated assets of less than $150 million, with no debt outstanding to the general public and not engaged in certain nonbanking activities.
2. Data for all reporting bank holding companies and the fifty large bank holding companies reflect merger adjustments to the fifty large bank holding companies. Merger adjustments account for mergers, acquisitions, other business combinations and large divestitures
that occurred during the time period covered in the tables so that the historical information
on each of the fifty underlying institutions depicts, to the greatest extent possible, the institutions as they exist in the most recent period. In general, adjustments for mergers among
bank holding companies reflect the combination of historical data from predecessor bank holding companies.
The data for the fifty large bank holding companies have also been adjusted as necessary
to match the historical figures in each company's most recently available financial statement.
In general, the data are not adjusted for changes in generally accepted accounting
principles.
3. Includes minority interests in consolidated subsidiaries.
4. Includes credit card lines of credit as well as commercial lines of credit.
5. Includes loans sold to securitization vehicles in which bank holding companies retain
some interest, whether through recourse or seller-provided credit enhancements or by servicing the underlying assets. Securitization data were first collected on the FR Y-9C report for
June 2001.
6. The notional value of a derivative is the reference amount of an asset on which an interest rate or price differential is calculated. The total notional value of a bank holding company's derivatives holdings is the sum of the notional values of each derivative contract regardless of whether the bank holding company is a payor or recipient of payments under the
contract. The actual cash flows and fair market values associated with these derivative contracts are generally only a small fraction of the contract's notional value.
7. Income statement subtotals for all reporting bank holding companies and the fifty large
bank holding companies exclude extraordinary items, the cumulative effects of changes in
accounting principles, and discontinued operations at the fifty large institutions and therefore
will not sum to Net income. The efficiency ratio is calculated excluding nonrecurring income and expenses.
8. Calculated on a fully-taxable-equivalent basis.
9. In general, the fifty large bank holding companies are the fifty largest bank holding
companies as measured by total consolidated assets for the latest period shown. Excludes a
few large bank holding companies whose commercial banking operations account for only a
small portion of assets and earnings.

10. Excludes predecessor bank holding companies that were subsequently merged into
other bank holding companies in the panel of fifty large bank holding companies. Also excludes those bank holding companies excluded from the panel of fifty large bank holding
companies because commercial banking operations represent only a small part of their consolidated operations.
11. Exclude qualifying institutions that are not reporting bank holding companies.
12. No data related to financial holding companies and only some data on nonbanking
activities were collected on the FR Y-9C report before implementation of the GrammLeach-Bliley Act in 2000.
13. A bank holding company is considered "foreign-owned'' if it is majority-owned by a
foreign entity. Data for foreign-owned companies do not include data for branches and agencies of foreign banks operating in the United States.
14. Total assets of insured commercial banks in the United States as reported in the commercial bank Call Report (FFIEC 031 or 041, Reports of Condition and Income). Excludes
data for a small number of commercial banks owned by other commercial banks that file
separate call reports yet are also covered by the reports filed by their parent banks. Also excludes data for mutual savings banks.
15. Data for thrift, foreign nonbank, and other nonbank institutions are total assets of
each type of subsidiary as reported in the FR Y-9LP report. Data cover those subsidiaries in
which the top-tier bank holding company directly or indirectly owns or controls more than
50 percent of the outstanding voting stock and that has been consolidated using generally
accepted accounting principles. Data for securities broker-dealers are net assets (that is, total assets, excluding intercompany transactions) of broker-dealer subsidiaries engaged in activities pursuant to the Gramm-Leach-Bliley Act, as reported on schedule HC-M of the
FR Y-9C report. Data for insurance activities are all insurance-related assets held by the
bank holding company as reported on schedule HC-I of the FR Y-9C report.
Beginning in 2002:Q1, insurance totals exclude intercompany transactions and subsidiaries engaged in credit-related insurance or those engaged principally in insurance
agency activities. Beginning in 2002:Q2, insurance totals include only newly authorized insurance activities under the Gramm-Leach-Bliley Act.
16. Aggregate assets of thrift subsidiaries were affected significantly by the conversion of
Charter One's thrift subsidiary (with assets of $37 billion) to a commercial bank in the second quarter of 2002 and the acquisition by Citigroup of Golden State Bancorp (a thrift institution with assets of $55 billion) in the fourth quarter of 2002.
17. Changes over time in the total assets of the time-varying panel of fifty large bank holding companies are attributable to (1) changes in the companies that make up the panel and
(2) to a small extent, restatements of financial reports between periods.
n.a. Not available
SOURCE: Federal Reserve Reports FRY-9C and FR Y-9LP, Federal Reserve National Information Center, and published financial reports.

Legal Developments

Legal Developments: Fourth Quarter, 2005

ORDERS ISSUED UNDER BANK HOLDING
COMPANY ACT

Orders Issued Under Section 3 of the Bank Holding
Company Act

ABC Bancorp
Moultrie, Georgia
Order Approving the Merger of Bank Holding
Companies
ABC Bancorp ("ABC"), a financial holding company
within the meaning of the Bank Holding Company Act
("BHC Act"), has requested the Board's approval under
section 3 of the BHC Act 1 to merge with First National
Bane, Inc. ("FNB"), St. Marys, Georgia, and acquire its
subsidiary banks, First National Bank ("First NationalGeorgia"), also of St. Marys, and First National Bank
("First National-Florida"), Orange Park, Florida.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 50,348 (2005)). The time for filing
comments has expired, and the Board has considered
the application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
ABC, with total consolidated assets of approximately
$1.3 billion, operates subsidiary insured depository institutions in Alabama, Georgia, and Florida. In Georgia, ABC
is the 15th largest depository organization, controlling
deposits of approximately $722.4 million, which represent less than 1 percent of the total amount of deposits
of insured depository institutions in the state ("state
deposits"). 3 In Florida, ABC is the 186th largest depository organization, controlling deposits of approximately
$108.9 million, which represent less than 1 percent of state
deposits in Florida.
FNB, with total consolidated assets of approximately
$269.5 million, operates subsidiary depository institutions
1. 12U.S.C. §1842.
2. Immediately after the merger of FNB into ABC, First NationalGeorgia will be merged into The First Bank of Brunswick ("Bank of
Brunswick"), Brunswick, Georgia, a subsidiary bank of ABC. The
proposed merger by Bank of Brunswick is subject to approval by the
Federal Deposit Insurance Corporation ("FDIC") under section 18(c)
of the Federal Deposit Insurance Act (12 U.S.C. § 1828(c)).
3. Asset, deposit, and ranking data are as of June 30, 2005, and
reflect merger activity as of November 15, 2005.

in Georgia and Florida. In Georgia, FNB is the 132nd
largest depository organization, controlling deposits of
approximately $118.9 million. In Florida, FNB is the
227th largest depository organization, controlling deposits
of approximately $68.4 million.
On consummation of the proposal, ABC would have
consolidated assets of approximately $1.5 billion. In
Georgia, ABC would become the 13th largest depository organization, controlling deposits of approximately
$841.3 million, which represent less than 1 percent of state
deposits. In Florida, ABC would become the 131st largest
depository organization controlling deposits of approximately $177.3 million, which represent less than 1 percent
of state deposits.

4. A bank holding company's home state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on July 1, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).
5. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch (12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(l)(A) and
6. 12 U.S.C. §§ 1842(d)(l)(A)-(B) and 1842(d)(2)(A)-(B). ABC is
adequately capitalized and adequately managed, as defined by applicable law. First National-Florida has been in existence and operated for
at least the minimum period of time required by applicable state law
(three years). On consummation of the proposal, ABC would control
less than 10 percent of the total amount of deposits of insured
depository institutions in the United States and less than 30 percent
of the total amount of deposits of insured depository institutions in
Florida. All other requirements of section 3(d) of the BHC Act would
be met on consummation of the proposal.

Federal Reserve Bulletin • 2006

Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would be
in furtherance of any attempt to monopolize the business of
banking in any relevant banking market. The BHC Act also
prohibits the Board from approving a proposed bank acquisition that would substantially lessen competition in any
relevant banking market unless the Board finds that the
anticompetitive effects of the proposal clearly are outweighed in the public interest by the probable effect of
the proposal in meeting the convenience and needs of the
community to be served.7
ABC and FNB do not compete directly in any relevant
banking market. Based on all the facts of record, the Board
has concluded that consummation of the proposal would
have no significant adverse effect on competition or on the
concentration of banking resources in any relevant banking
market and that competitive factors are consistent with
approval.

Financial, Managerial, and Supervisory

and FNB are well capitalized and would remain so on
consummation of the proposal.8
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of ABC, FNB, and their subsidiary banks, including assessments of their management, risk-management
systems, and operations. In addition, the Board has considered its supervisory experiences and those of the other
relevant banking supervisory agencies with the organizations and their records of compliance with applicable banking law. ABC and its subsidiary depository institutions are
considered to be well managed. The Board also has considered ABC's plans for implementing the proposal, including
the proposed management after consummation.9
Based on all the facts of record, including a review of
the comments received, the Board concludes that considerations relating to the financial and managerial resources
and future prospects of the organizations involved in the
proposal are consistent with approval, as are the other
supervisory factors under the BHC Act.

Considerations
Convenience and Needs Considerations

7. 12U.S.C. §1842(c)(l).

8. First National-Georgia is not currently well capitalized, but as
noted, ABC intends to merge that bank into Bank of Brunswick on
consummation of the proposal. Bank of Brunswick would be well
capitalized after consummation of that bank merger, and the Board has
considered ABC's plans for the operation of the resulting bank and
has consulted with the federal and state regulators responsible for
supervising Bank of Brunswick.
9. A commenter asserted that ABC has exercised a controlling
influence over FNB or its subsidiary banks without receiving the prior
approval of the Board as required under the BHC Act. The Board has
considered these comments in light of the Agreement and Plan of
Merger ("Merger Agreement") between ABC and FNB, and other
information provided by ABC about its relationship with FNB. ABC
has confirmed to the Board that, despite certain provisions of the
Merger Agreement, it has limited and will limit its relationships with
FNB before consummation of the proposal in the following ways:
no officers, directors, or agents of ABC have served or will serve as
directors or management officials of FNB or its subsidiary banks;
ABC has not installed, and will not require installation of, any of its
policies and procedures (including but not limited to ABC's credit
policy) at First National or its subsidiary banks; ABC has not made
and will not make credit or underwriting decisions with respect to any
loan applications made to First National or its subsidiary banks;
and ABC has not exercised and will not otherwise exercise a controlling influence over the management or policies of FNB or its subsidiary banks. ABC has confirmed that, although one of its employees
attended meetings of the boards of directors of FNB and its subsidiary
banks as an observer before the filing of the application, no directors,
officers, or agents of ABC will attend such board meetings before
consummation of the proposal.
10. 12U.S.C. §2901 etseq.

Legal Developments

supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome neighborhoods, in evaluating bank expansionary
proposals.11
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of the subsidiary banks of ABC and FNB, data
reported by ABC and FNB under the Home Mortgage
Disclosure Act ("HMDA"),12 other information provided
by ABC, confidential supervisory information, and public
comment received on the proposal. A commenter opposed
the proposal and alleged, based on data reported under
HMDA, that ABC engaged in discriminatory treatment
of minority individuals in its home mortgage lending
operations.

B. HMDA and Fair Lending Record
The Board has carefully considered the lending records
and HMDA data of ABC and FNB in light of public
comment about their respective records of lending to
minorities. A commenter alleged, based on 2004 HMDA
11. 12U.S.C. §2903.
12. 12U.S.C. §2801 etseq.
13. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
14. The appendix lists the most recent CRA performance ratings of
ABC's subsidiary banks.

data, that ABC disproportionately denied applications for
HMDA-reportable loans by Hispanic applicants. The commenter also asserted that ABC made higher-cost loans to
African Americans and Hispanics more frequently than to
nonminorities.15 The Board reviewed HMDA data for 2003
and 2004 reported by each subsidiary bank of ABC in its
assessment areas.16
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they are insufficient by themselves to conclude whether or not ABC is excluding any
racial or ethnic group or imposing higher credit costs on
those groups on a prohibited basis. The Board recognizes
that HMDA data alone, even with the recent addition of
pricing information, provide only limited information about
the covered loans.17 HMDA data, therefore, have limitations that make them an inadequate basis, absent other
information, for concluding that an institution has engaged
in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by ABC and FNB with fair lending
laws. In the fair lending reviews that were conducted in
conjunction with the most recent CRA evaluations of the
subsidiary depository institutions of ABC and FNB, examiners noted no substantive violations of applicable fair
lending laws.
The record also indicates that ABC has taken steps to
ensure compliance with fair lending and other consumer
protection laws.18 ABC represented that it currently
15. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield
for U.S. Treasury securities of comparable maturity by 3 percentage
points for first-lien mortgages and 5 percentage points for second-lien
mortgages (12 CFR 203.4).
16. Only six of ABC's twelve subsidiary banks originated HMDAreportable loans: Bank of Brunswick; Southland Bank, Dothan, Alabama; Tri-County Bank, Trenton, Florida; Heritage Community Bank,
Quitman, Georgia; Citizens Bank-Wakulla, Crawfordville, Florida;
and First National Bank of South Georgia ("South Georgia Bank"),
Albany, Georgia.
17. The data, for example, do not account for the possibility that
an institution's outreach efforts may attract a larger proportion of
marginally qualified applicants than other institutions attract and do
not provide a basis for an independent assessment of whether an
applicant who was denied credit was, in fact, creditworthy. In addition, credit history problems, excessive debt levels relative to income,
and high loan amounts relative to the value of the real estate collateral
(reasons most frequently cited for a credit denial or higher credit cost)
are not available from HMDA data.
18. A commenter questioned the completeness of information provided by ABC about its policies and procedures for ensuring compliance with fair lending laws. After the commenter expressed this

Federal Reserve Bulletin • 2006

conducts quarterly compliance reviews of each bank's
loans, along with annual fair lending reviews involving
comparative-file analyses. ABC also stated that it maintains a second-review program for its residential lending.
In addition, ABC requires all its employees to participate
annually in fair lending and CRA compliance training.
ABC has indicated that it will institute its current fair
lending policies and procedures at the banks acquired from
FNB.
The Board also has considered the HMDA data in light
of other information, including ABC's CRA lending programs and the overall performance records of the subsidiary banks of ABC and FNB under the CRA.19 These
established efforts demonstrate that the institutions are
active in helping to meet the credit needs of their entire
communities.

C. Conclusion on Convenience and Needs and CRA
Performance
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by ABC, comments received on the proposal, and confidential supervisory information. The Board notes that the proposal
would expand the banking products and services available
to customers of FNB. Based on a review of the entire
record, and for the reasons discussed above, the Board
concludes that considerations relating to the convenience
and needs factor and the CRA performance records of
the relevant depository institutions are consistent with
approval.

concern, the Board received additional information from ABC about
its fair lending compliance program.
19. A commenter asserted that the absence of any denied, withdrawn, or incomplete applications in the 2004 HMDA data reported
by South Georgia Bank demonstrated the bank's violation of HMDA
or the Equal Credit Opportunity Act. Commenter provided no evidence that the HMDA data are, in fact, inaccurate. The OCC, as the
primary federal supervisor of South Georgia Bank, is responsible for
evaluating the bank's compliance with HMDA and fair lending laws.
The Board has consulted with the OCC about South Georgia Bank's
record of compliance with these laws.

Deputy Secretary of the Board

20. A commenter requested that the Board hold a public meeting or
hearing on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes a
timely written recommendation of denial of the application. The
Board has not received such a recommendation from the appropriate
supervisory authority. Under its regulations, the Board also may, in its
discretion, hold a public meeting or hearing on an application to
acquire a bank if a meeting or hearing is necessary or appropriate to
clarify factual issues related to the application and to provide an
opportunity for testimony (12 CFR 225.16(e)). The Board has considered carefully the commenter's request in light of all the facts of
record. In the Board's view, the commenter had ample opportunity to
submit its views, and in fact, submitted written comments that the
Board has considered carefully in acting on the proposal. The commenter's request fails to demonstrate why the written comments do
not present its views adequately or why a meeting or hearing otherwise would be necessary or appropriate. For these reasons, and based
on all the facts of record, the Board has determined that a public
meeting or hearing is not required or warranted in this case. Accordingly, the request for a public meeting or hearing on the proposal is
denied.

Legal Developments

Appendix
CRA Ratings of ABC's Subsidiary Banks
Bank

CRA Rating

Date

Supervisor

Southland Bank,
Dothan, Alabama
American Banking Company,
Moultrie, Georgia
Citizens Security Bank,
Tifton, Georgia
The First Bank of Brunswick,
Brunswick, Georgia
First National Bank of South Georgia,
Albany, Georgia
Heritage Community Bank,
Quitman, Georgia
Cairo Banking Company,
Cairo, Georgia
Merchants and Farmers Bank,
Donalsonville, Georgia
Citizens Bank-Wakulla,
Crawfordville, Florida
Tri-County Bank,
Trenton, Florida
Central Bank & Trust,
Cordele, Georgia
Bank of Thomas County,
Thomasville, Georgia

Satisfactory

June 2002

FDIC

Satisfactory

June 2003

FDIC

Satisfactory

March 2003

FDIC

Satisfactory

February 2004

FDIC

Satisfactory

November 1999

OCC

Satisfactory

October 2003

FDIC

Satisfactory

May 2003

FDIC

Satisfactory

November 2002

FDIC

Outstanding

September 1999

FDIC

Satisfactory

April 2005

FDIC

Satisfactory

November 2002

FDIC

Satisfactory

October 2004

FDIC

Bank of America Corporation
Charlotte, North Carolina
Order Approving the Merger of Bank Holding
Companies
Bank of America Corporation ("Bank of America"), a
financial holding company within the meaning of the Bank
Holding Company Act ("BHC Act"), has requested the
Board's approval under section 3 of the BHC Act1 to
merge with MBNA Corporation ("MBNA"), Wilmington,
Delaware, and acquire MBNA's two subsidiary banks.2
Bank of America also proposes to acquire MBNA s Edge
corporation, organized under section 25A of the Federal
Reserve Act.3
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 44,650 (2005)). The time for filing
comments has expired, and the Board has considered the
1. 12U.S.C. §1842.
2. Bank of America also has requested the Board's approval to
hold and exercise an option that allows Bank of America to purchase
up to 19.9 percent of MBNA's voting securities if certain events occur.
This option would expire on consummation of the proposal by Bank
of America to merge with MBNA. In addition, Bank of America
proposes to acquire the nonbanking subsidiaries of MBNA in accordance with section 4(k) of the BHC Act (12 U.S.C. § 1843(k)).
3. 12 U.S.C. §611 et seq.

proposal and all comments received in light of the factors
set forth in the BHC and Federal Reserve Acts.4
Bank of America, with total consolidated assets of
approximately $1.3 trillion, is the second largest depository
organization in the United States.5 Bank of America operates six depository institutions6 with branches in 29 states
and the District of Columbia, and it engages nationwide in
numerous permissible nonbanking activities.
MBNA, with total consolidated assets of approximately
$63 billion, operates two depository institutions, MBNA
America Bank, National Association ("MBNA Bank")
and MBNA America (Delaware), N.A. ("MBNA Delaware
Bank"), both of Wilmington, Delaware, with branches
only in Delaware. MBNA is the 23rd largest depository
organization in the United States. It also engages in a broad
range of permissible nonbanking activities.
On consummation of the proposal, Bank of America
would remain the second largest depository organization in
the United States, with total consolidated assets of approximately $1.3 trillion. The combined organization would
operate under the name of Bank of America Corporation.
4. Thirteen commenters expressed concerns on various aspects of
the proposal.
5. Asset and national ranking data are as of September 30, 2005,
and reflect mergers and acquisitions as of December 1, 2005.
6. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.

Federal Reserve Bulletin • 2006

Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the bank
holding company's home state if certain conditions are
met. For purposes of the BHC Act, the home state of Bank
of America is North Carolina,7 and MBNA's subsidiary
banks are located in Delaware.8
The Board may not approve an interstate proposal under
section 3(d) if the applicant controls, or on consummation of the proposed transaction would control, more than
10 percent of the total amount of deposits of insured
depository institutions in the United States ("nationwide
deposit cap"). The nationwide deposit cap was added to
section 3(d) when Congress broadly authorized interstate
acquisitions by bank holding companies and banks in the
Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 ("Riegle-Neal Act")- 9 The intended purpose
of the nationwide deposit cap was to help guard against
undue concentrations of economic power.10 Although the
nationwide deposit cap prohibits interstate acquisitions by
a company that controls deposits in excess of the cap, it
does not prevent a company from exceeding the nationwide deposit cap through internal growth and effective
competition for deposits or through acquisitions entirely
within the home state of the acquirer.''
As required by section 3(d), the Board has carefully
considered whether Bank of America controls, or on consummation of the proposed transaction would control,
more than 10 percent of the total amount of deposits of
insured depository institutions 12 in the United States. The
Board calculated the percentage of total deposits of insured
depository institutions in the United States and the total
deposits that Bank of America controls, and on consumma-

tion of the proposal would control, in the same manner as
described in the Board's order in 2004 approving Bank of
America's acquisition of FleetBoston Financial Corporation ("BOA/Fleet Transaction"). 13
The Board used the deposit data reported by depository
institutions to the FDIC and the Office of Thrift Supervision ("OTS"). Each insured bank in the United States must
report data regarding its total deposits in accordance with
the definition of "deposit" in the FDI Act on the institution's Consolidated Report of Condition and Income ("Call
Report"). 14 Each insured savings association similarly
must report its total deposits on the institution's Thrift
Financial Report ("TFR"). Deposit data for FDIC-insured
U.S. branches of foreign banks and federal branches of
foreign banks are obtained from the Report of Assets and
Liabilities of U.S. Branches and Agencies of Foreign Banks
("RAL"). These data are reported on a quarterly basis to
the FDIC and are publicly available.
The Call Report, TFR, and RAL represent the best and
most complete data reported by all insured depository
institutions in the United States.15 Consequently, the Board
has relied on the data collected in these reports to calculate
the total amount of deposits of insured depository institutions in the United States and the total amount of deposits
held by Bank of America, both before and on consummation of the proposed transaction, for purposes of applying
the nationwide deposit cap in this case. The line items for
total domestic deposits on the Call Report, TFR, and RAL
do not require reporting of the total amount of deposits as
defined in section 3(0 of the FDI Act. Therefore, the Board
has calculated Bank of America's share of the total amount
of deposits of insured depository institutions in the United
States using the items on the Call Reports, TFRs, and
RALs, and the formulation described in the attached
appendix and the BOA/Fleet Order.16 This formulation,

7. See 12 U.S.C. § 1842(d). A bank holding company's home state
is the state in which the total deposits of all banking subsidiaries of
such company were the largest on July 1, 1966, or the date on which
the company became a bank holding company, whichever is later.
8. For purposes of section 3(d) of the BHC Act, the Board considers a bank to be located in the states in which the bank is chartered or
headquartered or operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7)
and 1842(d)(l)(A) and (d)(2)(B).
9. Pub. L. No. 103-328, 108 Stat. 2338 (1994).
10. See S. Rep. No. 102-167 at 72 (1991).
11. One commenter asserted that the nationwide deposit cap does
not allow for internal growth above 10 percent of the total amount
of deposits of insured depository institutions in the United States,
and another commenter urged the Board to order Bank of America to
reduce its share of nationwide deposits.
12. The BHC Act adopts the definition of "insured depository
institution" used in the Federal Deposit Insurance Act (12 U.S.C.
§ 1811 et seq.) ("FDI Act"). See 12 U.S.C. § 1841(n). The FDI Act
contains an identical nationwide deposit cap applicable to bank-tobank mergers and, consequently, many of the terms used in the
nationwide deposit cap in the BHC Act refer to terms or definitions
contained in the FDI Act. The FDI Act's definition of "insured
depository institution" includes all banks (whether or not the institution is a bank for purposes of the BHC Act), savings banks, and
savings associations that are insured by the Federal Deposit Insurance
Corporation ("FDIC") and insured U.S. branches of foreign banks,
as each of those terms is defined in the FDI Act. See 12 U.S.C.
§1813(c)(2).

13. See Bank of America Corporation, 90 Federal Reserve Bulletin
217, 219 (2004) ("BOA/Fleet Order"). The terms "United States"
and "State" are not defined in the BHC Act. For the reasons explained
in the BOA/Fleet Order, the Board believes that the term "United
States" includes the 50 states, the District of Columbia, Puerto Rico,
Guam, American Samoa, the Virgin Islands, the Northern Mariana
Islands, the islands formerly referred to as the Trust Territory of
the Pacific Islands, and any territory of the United States. All banks
operating in those areas are eligible for FDIC deposit insurance and
are subject to the jurisdiction of the FDIC in the same manner as other
FDIC-insured banks. This definition is also consistent with the definition of "United States" contained in the Board's Regulation Y, which
governs applications under section 3 of the BHC Act.
14. Section 3(d) of the BHC Act also specifically adopts the
definition of "deposit" in the FDI Act. 12 U.S.C. § 1842(d)(2)(E)
(incorporating the definition of "deposit" at 12 U.S.C. § 1813(0).
15. BOA/Fleet Order at 220.
16. BOA/Fleet Order at 235. Several commenters questioned
whether the proposed acquisition would violate the nationwide deposit
cap, and one commenter suggested that the Board should rely on the
Summary of Deposits ("SOD") data collected annually by the FDIC
or that the Board not follow the formulation used in the BOA/Fleet
Transaction. As noted in the BOA/Fleet Order, SOD data disclose an
institution's deposits broken out by branch office. However, SOD data
are not, and are not intended to be, an exact representation of deposits
as defined in the FDI Act. Rather, these data are intended to provide
a useful proxy for the size of each institution's presence in various
banking markets primarily for the purpose of conducting examina-

Interstate Analysis

Legal Developments

which the Board developed in consultation with staff of the
FDIC, conforms the data on Call Reports, TFRs, and RALs
as closely as possible to the statutory definition of deposits
in the FDI and BHC Acts.17
Based on the latest Call Report, TFR, and RAL data
available for all insured depository institutions, the total
amount of deposits of insured depository institutions in the
United States is approximately $6,195 trillion. Also based
on the latest Call Report, Bank of America (including all
its insured depository institution affiliates) controls deposits of approximately $570.9 billion and MBNA (including all its insured depository institution affiliates) controls
deposits of approximately $28.1 billion. Bank of America,
therefore, currently controls approximately 9.2 percent
of total U.S. deposits. On consummation of the proposed
transaction, Bank of America would control approximately
9.7 percent of the total amount of deposits of insured
depository institutions in the United States.
Therefore, the Board finds that Bank of America does
not now control, and on consummation of the proposed
transaction would not control, an amount of deposits that
would exceed the nationwide deposit cap.
Section 3(d) also prohibits the Board from approving a
proposal if, on consummation, the applicant would control
30 percent or more of the total deposits of insured depository institutions in any state in which both the applicant
and the organization to be acquired operate an insured
depository institution, or such higher or lower percentage
that is established by state law.18 This prohibition does not
apply in this case because there are no states in which both
Bank of America and MBNA operate insured depository
institutions.
All other requirements of section 3(d) of the BHC Act
also would be met on consummation of the proposal.19
Based on all the facts of record, the Board is permitted to
approve the proposal under section 3(d) of the BHC Act.

tions and performing competitive analyses in local banking markets.
Consequently, use of SOD data would require a variety of adjustments, most of which would be based on Call Report, TFR, and RAL
data. Moreover, SOD data are collected only once a year at the end
of the second quarter, which means that the most recent SOD data
provide an estimation of deposits held by institutions almost six
months ago. Call Report data, on the other hand, are collected each
quarter, with the most recent data representing deposits as of September 30, 2005. Given the limitations of SOD data, the Board believes
that Call Report, TFR, and RAL data provide a more complete and
accurate representation of the amount of deposits held by the institutions involved in this transaction and by all insured depository institutions in the United States as of the date the Board has considered the
proposal than SOD data provide.
17. BOA/Fleet Order at 220.
18. 12 U.S.C. § 1842(d)(2)(B)-(D).
19. Bank of America is adequately capitalized and adequately managed as defined in the Riegle-Neal Act (12 U.S.C.
§1842(d)(l)(A)). MBNA's subsidiary banks have been in existence
and operated for the minimum age requirements established by applicable state law. See 12 U.S.C. § 1842(d)(l)(B); see also Order of
the Delaware State Bank Commissioner ("Delaware Commissioner")
dated October 14, 2005. The other requirements in section 3(d) of the
BHC Act also would be met on consummation of the proposal.

Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly. It also
prohibits the Board from approving a proposal that would
substantially lessen competition in any relevant banking
market unless the anticompetitive effects of the proposal
are clearly outweighed in the public interest by the probable effect of the proposal in meeting the convenience and
needs of the community to be served.20 The Board has
carefully considered the competitive effects of the proposal
in light of all the facts of record, including public comments on the proposal.
Some commenters argued that the proposed merger
would have adverse competitive effects. Many of these
commenters expressed concern that large bank mergers in
general, or the proposed merger of Bank of America and
MBNA in particular, would have adverse effects on competition nationwide, especially among credit card issuers.
Some commenters also contended that the proposed merger
would result in higher fees and costs.
To determine the effect of a proposed transaction on
competition, it is necessary to designate the area of effective competition between the parties, which the courts have
held is decided by reference to the relevant "line of commerce" or product market and a geographic market. The
Board and the courts have consistently recognized that the
appropriate product market for analyzing the competitive
effects of bank mergers and acquisitions is the cluster of
products (various kinds of credit) and services (such as
checking accounts and trust administration) offered by
banking institutions.21 Several studies support the conclusion that businesses and households continue to seek this
cluster of services.22 Consistent with these precedents and
studies, and on the basis of the facts of record in this case,
the Board concludes that the cluster of banking products
and services represents the appropriate product market for
analyzing the competitive effects of this proposal.
In defining the relevant geographic market, the Board
and the courts have consistently held that the geographic
market for the cluster of banking products and services is
local in nature. MBNA's subsidiary banks are located and

20. 12 U.S.C. §1842(c)(l).
21. See Chemical Banking Corporation, 82 Federal Reserve Bulle
tin 239 (1996) and the cases and studies cited therein. The Supreme
Court has emphasized that it is the cluster of products and services
that, as a matter of trade reality, makes banking a distinct line of
commerce. United States v. Philadelphia National Bank, 374 U.S.
321, 357 (1963); accord United States v. Connecticut National Bank,
418 U.S. 656 (1974); United States v. Phillipsburg National Bank, 399
U.S. 350 (1969).
22. Cole and Wolken, Financial Services Used by Small Busi
nesses: Evidence from the 1993 National Survey of Small Business
Finance, 81 Federal Reserve Bulletin 629 (1995); Elliehausen and
Wolken, Banking Markets and the Use of Financial Services by
Households, 78 Federal Reserve Bulletin 169 (1992); Elliehausen and
Wolken, Banking Markets and the Use of Financial Services by
Small- and Medium-Sized Businesses, 76 Federal Reserve Bulletin
726 (1990).

Federal Reserve Bulletin • 2006

hold deposits only in Delaware. Bank of America does not
maintain branches or hold deposits in Delaware. Accordingly, Bank of America and MBNA do not compete
directly in any relevant banking market as currently defined
by the Board and the courts.
Although the Board believes that the cluster of services
appropriately defines the market for analyzing competitive
effects of bank acquisitions, the Board has also reviewed
the competitive effects of this proposal based on an alternative approach that recognizes that the business of MBNA
is focused narrowly on issuing credit cards. Even viewing
competitive effects on this basis, however, the proposal is
unlikely to have a significantly adverse effect on competition. The Board notes that the submarket for credit card
issuance is only moderately concentrated and would remain
so after consummation of the proposal (whether evaluated by number of accounts, dollar balances outstanding,
or dollar volume year-to-date). In addition, issuing credit
cards is an activity that is conducted on a national or global
scale, with relatively low barriers to entry and with numerous other large financial organizations providing these
services.
The Department of Justice has conducted a detailed
review of the competitive effects of the proposal and has
advised the Board that consummation of the proposal
would not likely have any significantly adverse effect on
competition. In addition, the appropriate banking agencies
have been afforded an opportunity to comment and have
not objected to the proposal.
Based on all the facts of record, the Board has concluded
that consummation of the proposal would have no significant adverse effect on competition or on the concentration
of banking resources in any relevant banking market and
that competitive factors are consistent with approval.

Financial, Managerial, and Other Supervisory Factors
Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. In
reviewing these factors, the Board has considered, among
other things, confidential reports of examination and other
supervisory information from the primary federal supervisors of the organizations involved in the proposal. In
addition, the Board has consulted with the relevant supervisory agencies, including the Office of the Comptroller
of the Currency ("OCC"), the Securities and Exchange
Commission ("SEC"), and the Delaware Commissioner.
The Board also has considered publicly available financial
and other information on the organizations and their
subsidiaries, all information on the proposal's financial and
managerial aspects submitted by Bank of America and
MBNA during the application process, and public comments received by the Board on the proposal.
The Board received several comments criticizing the
financial and managerial resources of Bank of America,

MBNA, or their respective subsidiaries.23 Some commenters expressed concerns about the credit card lending
practices of Bank of America, MBNA, or the credit card
industry in general.24
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary depository institutions and significant
nonbanking operations. In this evaluation, the Board considers a variety of areas, including capital adequacy, asset
quality, and earnings performance. In assessing financial
factors, the Board has consistently considered capital
adequacy to be especially important. The Board also evaluates the financial condition of the combined organization at
consummation, including its capital position, asset quality,
and earnings prospects, and the impact of the proposed
funding of the transaction.
Bank of America, MBNA, and their subsidiary banks are
well capitalized and would remain so on consummation of
the proposal.25 Based on its review of the financial factors
in this case, the Board finds that Bank of America has
sufficient financial resources to effect the proposal. The
proposed transaction is structured as a share exchange and
partial cash purchase. Bank of America will use existing
cash resources to fund the cash purchase of shares.
The Board also has considered the managerial resources
of Bank of America, MBNA, and the combined organization. In evaluating the managerial resources of a banking
organization in an expansion proposal, the Board considers
assessments of an organization's risk management—that
is, the ability of the organization's board of directors and
senior management to identify, measure, monitor, and control risk across all business and corporate lines in the
organization—to be especially important.26 The Board has
23. Commenters also expressed concerns about the following matters: (1) MBNA's legislative lobbying efforts; (2) the amount of Bank
of America's and MBNA's political campaign contributions; and
(3) past or potential job losses or outsourcing as a result of this or past
mergers. These contentions and concerns are outside the limited
statutory factors that the Board is authorized to consider when reviewing an application under the BHC Act. See Western Bancshares, Inc. v.
Board of Governors, 480 F.2d 749 (10th Cir. 1973).
24. Several commenters alleged that Bank of America, MBNA,
and generally the credit card industry engaged in "deceptive" credit
card lending practices through, among other practices, universal
default clauses in credit card agreements, misleading advertising of
interest rates, and confusing fee structures. Some of these commenters
urged the Board to impose conditions requested by the commenters in
light of the concerns expressed about the credit card industry. Based
on consultations with the primary supervisor of the credit card lending
subsidiaries of Bank of America and MBNA, there does not appear to
be any evidence of noncompliance with existing laws and regulations
that would weigh against approval of the application.
25. Some commenters alleged that the compensation for MBNA's
senior management under severance agreements or other compensation agreements is excessive. The Board notes that the severance and
compensation agreements have been disclosed to shareholders and
that Bank of America would remain well capitalized on consummation.
26. See Revisions to Bank Holding Company Rating System,
69 Federal Register 70,444 (2004). One commenter questioned
whether the combined organization would present special risks to the

Legal Developments

reviewed the examination records of Bank of America,
MBNA, and the subsidiary depository institutions of each
organization, including assessments of their management,
risk-management systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of the other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law.27 Bank of America, MBNA, and their
subsidiary depository institutions are considered to be well
managed.
In addition, the Board reviewed Bank of America's
plans for implementing the proposal, including the proposed management and operation of the combined organization's credit card activities after consummation. The
Board considered Bank of America's record of successfully integrating acquired institutions and credit card businesses into its existing operations.
The Board also considered the existing compliance systems and internal audit programs at Bank of America and
its subsidiary depository institutions and significant nonbanking subsidiaries, and the assessments of these systems
and programs by the relevant federal supervisory agencies.
The Board consulted with the OCC, the primary federal
regulator of Bank of America's and MBNA's subsidiary
depository institutions.28 The Board also considered confidential supervisory information and consulted with the
SEC about Bank of America's nonbanking securities
activities. Moreover, the Board considered information provided by Bank of America on enhancements the organization has made to its compliance systems and programs as

federal deposit insurance funds or the financial system in general. The
commenter also expressed concerns about Bank of America's financial resources, risk management, and future prospects. These concerns
were based entirely on public information about Bank of America's
investments in China and its credit card lending to small businesses,
and on the commenter's perception of the combined institution's
possible exposure to interest-rate and credit risks and risks in general.
As noted, the Board has reviewed publicly available information as
well as confidential supervisory information in assessing the financial and managerial resources of Bank of America, MBNA, and the
proposed combined organization.
27. Some commenters expressed concern about press reports
regarding the loss and theft of some of Bank of America's customer
data and contended that greater risks to customer data would exist on
consummation of the proposal. Bank of America and MBNA have
policies and procedures in place to address the sharing and safeguarding of customer information. Other commenters alleged that Bank of
America's lead bank, Bank of America, N.A. ("BA Bank"), Charlotte, North Carolina, has violated California labor law by charging
fees to individuals without accounts at BA Bank who cash paychecks
issued by Bank of America's payroll customers. The litigation about
this matter is still pending. The Board will continue to monitor this
issue and consult with the OCC, the primary federal supervisor of BA
Bank.
28. The Board received comments asserting that Bank of America
lacks sufficient policies and procedures and other resources to prevent
money laundering based, in part, on reports that BA Bank and other
subsidiaries of Bank of America held accounts for certain international leaders or their families. As part of its review of managerial factors, the Board reviewed confidential supervisory information
on the policies, procedures, and practices of Bank of America and its
subsidiary banks to comply with the Bank Secrecy Act and consulted
with the OCC.

part of an ongoing review, development, implementation,
and maintenance of effective risk-management policies
and programs for its operations. 29 After careful consideration of all the facts of record, the Board has determined
that Bank of America's managerial resources, including its
risk-management systems, are consistent with approval.
Based on these and all the facts of record, including a
review of all the comments received, the Board concludes
that considerations relating to the financial and managerial resources and future prospects of Bank of America,
MBNA, and their respective subsidiaries are consistent
with approval of the proposal. 30 The Board also finds that
the other supervisory factors that it must consider under
section 3 of the BHC Act are consistent with approval.

Convenience and Needs

Considerations

In acting on a proposal under section 3 of the BHC Act, the
Board is required to consider the effects of the proposal on
the convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institutions under the Community Reinvestment
29. Some commenters asserted that the Board should deny Bank of
America's application based on press reports of various investigations
or litigation regarding certain past tax planning, mutual fund, and
structured-finance transactions with certain domestic and international
corporate entities. The Board has consulted with the SEC on these
matters and notes that the SEC has generally concluded its investigations into the mutual fund matters. The Board also has reviewed Bank
of America's compliance with the Written Agreement with the Federal Reserve Bank of Richmond concerning the organization's mutual
fund-related activities. In addition, Bank of America has settled most
matters involving structured-finance transactions and revised its policies regarding such transactions. The Board will continue to monitor developments on the tax-planning-vehicle investigations, which
involve matters beyond the jurisdiction of the Board. Importantly,
Bank of America has taken actions to enhance corporate governance
capabilities, improve its monitoring of mutual fund operations, and
provide more stringent disclosure requirements for structured-finance
clients.
30. Several commenters reiterated the concerns they expressed in
comments on the BOA/Fleet Transaction about Bank of America's
relations with unaffiliated third parties engaged in subprime lending,
check cashing, automobile-title lending, and operating pawnshops.
They asserted that Bank of America performed inadequate due diligence to screen for "predatory" loans, and some commenters urged
Bank of America to adopt particular factors or methods for such
screening. Several commenters also criticized Bank of America for its
investment in Ownlt Mortgage ("Ownlt"), formerly Oakmont Mortgage Company, Woodland Hills, California. Bank of America represented that its investment in Ownlt is a passive, noncontrolling
investment. As a general matter, the activities of the consumer finance
businesses identified by the commenters are permissible, and the
businesses are licensed by the states where they operate. See BOA/
Fleet Order 217, at 223 n.29 (2004). Moreover, none of these commenters provided evidence that Bank of America had originated,
purchased, or securitized "predatory" loans or otherwise engaged in
abusive lending practices. Bank of America provides warehouse linesof-credit to subprime lenders and other consumer finance companies,
and purchases subprime mortgage loans from unaffiliated lenders and
securitizes pools of subprime mortgage loans. Bank of America has
policies and procedures to help ensure that the subprime loans it purchases and securitizes are in compliance with applicable state and
federal consumer protection laws.

CIO

Federal Reserve Bulletin • 2006

Act ("CRA"). 31 The CRA requires the federal financial
supervisory agencies to encourage financial institutions to
help meet the credit needs of local communities in which
they operate, consistent with their safe and sound operation, and it requires the appropriate federal financial supervisory agency to take into account an institution's record
of meeting the credit needs of its entire community, including low- and moderate-income ("LMI") neighborhoods,
in evaluating bank expansionary proposals. The Board
has carefully considered the convenience and needs factor
and the CRA performance records of the subsidiary depository institutions of Bank of America and MBNA, including public comments on the effect the proposal would
have on the communities to be served by the resulting
organization.
In response to the Board's request for public comment
on this proposal, several commenters submitted comments that expressed concern about the lending records of
Bank of America or MBNA, recommended approval only
if subject to conditions suggested by the commenter, or
opposed the proposal. Some commenters who opposed the
proposal alleged that Bank of America has not addressed
the diversity and community reinvestment needs of California communities.32 A commenter who neither supported
nor opposed the proposal expressed concern that the acquisition of MBNA could negatively affect Delaware's LMI
residents if MBNA s current CRA programs were altered.33
In addition, some commenters expressed concern, based on
data submitted under the Home Mortgage Disclosure Act
("HMDA"), 34 that Bank of America and MBNA engaged
in disparate treatment of minority individuals in home
mortgage lending.
Bank of America stated that it would work to combine
the community development and community investment
activities of the two institutions to strengthen and meet the

31. 12U.S.C. §2901 etseq.
32. These commenters reiterated allegations made during the BOA/
Fleet Transaction that Bank of America has not been responsive to
California community groups and has failed to work with local government in addressing California's unique and diverse needs, particularly in San Diego. The commenters also criticized BA Bank for not
providing adequate banking services or products to LMI residents in
California.
33. Several commenters criticized Bank of America's performance
under its previous community reinvestment pledges, urged the Board
to require Bank of America to provide specific pledges or plans, or
asked the Board to condition its approval on a commitment by Bank
of America to improve its CRA record. The Board views the enforceability of such third-party pledges, initiatives, and agreements as
matters outside the CRA. The Board has consistently explained that
an applicant must demonstrate a satisfactory record of performance
under the CRA without reliance on plans or commitments for future
action. Moreover, the Board has consistently found that neither the
CRA nor the federal banking agencies' CRA regulations require
depository institutions to make pledges or enter into commitments or
agreements with any organization. See BOA/Fleet Order at 232-33.
Instead, the Board focuses on the existing CRA performance record of
an applicant and the programs that an applicant has in place to serve
the needs of its CRA assessment areas at the time the Board reviews a
proposal under the convenience and needs factor.
34. 12 U.S.C. § 2801 et seq.

banking needs of its communities and that it has no current
plans to discontinue any products or services of MBNA. 35

A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the appropriate
federal supervisors' examinations of the CRA performance
records of the relevant insured depository institutions. An
institution's most recent CRA performance evaluation is a
particularly important consideration in the applications process, because it represents a detailed, on-site evaluation of
the institution's overall record of performance under the
CRA by its appropriate federal supervisor.36
Bank of America's lead bank, BA Bank, received an
"outstanding" rating at its most recent CRA performance
evaluation by the OCC, as of December 31, 2001 ("2001
Evaluation"). 37 MBNA's lead bank, MBNA Bank, also
received an "outstanding" rating at its most recent CRA
performance evaluation by the OCC, as of April 4, 2005.
All other subsidiary banks of Bank of America and MBNA
subject to the CRA received "satisfactory" ratings at their
most recent CRA performance evaluations by the OCC. 38
CRA Performance of BA Bank. The 2001 Evaluation of
BA Bank was discussed in the BOA/Fleet Order?9 Based
on a review of the record in this case, the Board hereby
reaffirms and adopts the facts and findings detailed in that
order concerning BA Bank's CRA performance record.
Bank of America provided the Board with additional information about its CRA performance since its 2001 Evaluation and the BOA/Fleet Order. The Board also consulted
with the OCC with respect to BA Bank's CRA performance since the 2001 Evaluation.40
In the 2001 Evaluation, examiners commended BA
Bank's overall lending performance, which they described
as demonstrating excellent or good lending-test results in
all its rating areas. Examiners reported that the distribution
of HMDA-reportable mortgage loans among areas of different income levels was good, and they commended BA
Bank for developing mortgage loan programs with flexible
underwriting standards, such as its Neighborhood Advantage programs, which assisted in meeting the credit needs

35. Bank of America represented that it is evaluating the products
and services currently offered by MBNA and that no decisions have
been made about the aspects of Bank of America's community development program in Delaware.
36. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
37. The evaluation period for the 2001 Evaluation was January 1,
2000, through December 31, 2001.
38. Bank of America, National Association (USA), Phoenix, Arizona, received a "satisfactory" rating, as of December 31, 2001;
MBNA Delaware Bank received a "satisfactory" rating, as of April 7,
2003.
39. See BOA/Fleet Order at 225-229.
40. One commenter forwarded a number of consumer complaints
regarding BA Bank that had been filed with various regulators. The
Board has consulted with, and forwarded these letters to, the OCC's
consumer complaint function.

Legal Developments

of BA Bank's assessment areas.41 Examiners also reported
that the bank's small business lending was excellent or
good in the majority of its rating areas, and they commended the distribution of small business loans among
businesses of different sizes in several of BA Bank's
assessment areas. 42 In addition, examiners noted in the
2001 Evaluation that BA Bank's level of community development lending was excellent.
Since the 2001 Evaluation and the BOA/Fleet Order, BA
Bank has maintained a substantial level of home mortgage,
small business, and community development lending. The
bank originated more than 395,000 HMDA-reportable
home mortgage loans totaling more than $102 billion
throughout its assessment areas in 2004. Bank of America
reported that more than 103,000 of those loans totaling
more than $10.6 billion were originated to LMI individuals
through Bank of America's various affordable mortgage
products, such as loans requiring no or low down payments, as well as FHA and VA products.43 From October 1,
2003, through September 30, 2004, BA Bank was recognized by the SBA as the leading small business lender in
the country, based on its origination of almost 13,000 SBA
loans totaling more than $451 million. Bank of America
represented that BA Bank's total community development
lending reached approximately $2.3 billion in 2004.
In the 2001 Evaluation, examiners reported that BA
Bank consistently demonstrated strong investment-test
performance, noting that its performance was excellent or
good in the majority of its assessment areas. During the
evaluation period, BA Bank funded more than 17,000
housing units for LMI families through its community
development investments throughout its assessment
areas.44 Examiners commended BA Bank for taking a
leadership role in developing and participating in complex
investments that involved multiple participants and both
public and private funding.
Since the 2001 Evaluation, BA Bank has continued its
strong community-development investment activity in its
assessment areas. Bank of America represented that BA
Bank made more than $1 billion in qualifying investments
in 2004 and that BA Bank's subsidiary community development corporation had helped develop more than 6,000
41. Some commenters criticized Bank of America's record of
serving the credit needs of LMI residents in the San Diego area. In the
2001 Evaluation, BA Bank received an "outstanding" rating under
the lending test in its California assessment areas. Bank of America
represented that it has consistently increased lending and investment
in San Diego each year since the evaluation. For example, Bank of
America represented that its overall amount of CRA lending and
investment in San Diego totaled $271.6 million in 2001 and had
increased to $322.1 million by the end of 2003.
42. In this context, "small business loans" are loans with original
amounts of $ 1 million or less that are secured by nonfarm, nonresidential properties or are commercial and industrial loans to U.S. addresses.
43. In June 2003, Bank of America began a new nationwide loan
program to support the construction of 15,000 new affordable housing
units within three years.
44. Bank of America also has provided grants to nonprofit organizations, such as ACCION and the New Mexico Community Development Loan Fund, that originate microloans in amounts as low as $500
and promote SBA programs.

Cl 1

housing units in LMI census tracts or for LMI individuals
since 2002.
Examiners commended BA Bank's service performance
throughout its assessment areas in the 2001 Evaluation.45
They reported that the bank's retail delivery systems were
generally good and that the bank's distribution of branches
among geographies of different income levels was adequate. 46 Examiners also commended BA Bank for its community development services, which typically responded
to the needs of the communities served by the bank
throughout its assessment areas.
CRA Performance of MBNA Bank. As noted, MBNA
Bank received an overall "outstanding" rating in its April
2005 evaluation.47 MBNA Bank engages primarily in
credit card operations and is designated as a limited purpose bank for purposes of evaluating its CRA performance.
As such, it is evaluated under the community development
test, and examiners may consider the bank's community
development investments, loans, and services nationwide
rather than only in the bank's assessment area.48
Examiners reported that during the evaluation period,
MBNA Bank had a level of qualified community development investments commensurate with its size, financial
capacity, and available opportunities. During the evaluation period, MBNA made financial commitments totaling
$454.6 million for qualified investments and community
development loans. In addition, examiners reported that
MBNA Bank provided $48.9 million in qualified grants
that benefited more than 360 community development
organizations and programs and contributed an additional
$58.3 million to nonprofit agencies providing consumer
credit counseling throughout the United States.
Examiners commended MBNA Bank's responsiveness
to the credit needs of its assessment area. They reported
that MBNA Bank was highly responsive to the credit needs
of LMI individuals and communities and offered many
affordable housing programs for LMI individuals and families. Examiners noted that MBNA Bank substantially met
the affordable housing needs of its assessment area through
both qualified investments and community development
loans. In addition, examiners commended the bank's commitment to enhancing educational opportunities for disadvantaged students from LMI families. They also reported
45. Some commenters asserted that Bank of America should augment its array of banking services to LMI customers in California
and specifically criticized Bank of America for not providing certain
deposit products designed for LMI customers that were recommended
by California community groups. Although the Board has recognized
that banks can help to serve the banking needs of communities by
making certain products or services available on certain terms or at
certain rates, the CRA neither requires an institution to provide any
specific types of products or services nor prescribes their costs to the
consumer.
46. Some commenters alleged that Bank of America does not
maintain banking centers in LMI communities in the San Diego area.
Bank of America noted that 28 of its 74 banking centers in the
San Diego area (38 percent) were in LMI census tracts, as of September 2005.
47. The evaluation period was from January 1, 2002, through
December 31, 2004.
48. See 12 CFR 25.25.

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Federal Reserve Bulletin • 2006

that MBNA Bank was very responsive to small-business
financing needs in the assessment area.

B. HMDA Data and Fair Lending Record
The Board has carefully considered the lending record
and HMDA data of Bank of America and MBNA in light
of public comments received on the proposal. One commenter alleged, based on 2004 HMDA data, that Bank of
America denied the home mortgage loan applications of
African-American and Hispanic borrowers more frequently
than those of nonminority applicants in various states, the
District of Columbia, and Metropolitan Statistical Areas
("MSAs"). Another commenter alleged that, based on
2003 HMDA data, MBNA denied home mortgage loan
applications from African Americans and Hispanics more
frequently than applications from nonminorities in certain markets. The commenters also alleged that Bank of
America, MBNA, and their subsidiaries made higher-cost
loans more frequently to African-American and Hispanic
borrowers than to nonminority borrowers.49 The Board
reviewed the 2003 and 2004 HMDA data reported by Bank
of America, MBNA, and their subsidiary banks. 50
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial groups in
certain local areas, they provide an insufficient basis by
themselves on which to conclude whether or not Bank of
America or MBNA is excluding or imposing higher credit
costs on any racial or ethnic group on a prohibited basis.
The Board recognizes that HMDA data alone, even with
the recent addition of pricing information, provide only
limited information about the covered loans.51 HMDA
data, therefore, have limitations that make them an inadequate basis, absent other information, for concluding that
an institution has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by credit49. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield
for U.S. Treasury securities of comparable maturity by 3 percentage
points for first-lien mortgages and 5 percentage points for second-lien
mortgages (12 CFR 203.4).
50. These data were analyzed to reflect the BOA/Fleet Transaction.
The Board reviewed HMDA-reportable loan originations for various
MSAs individually, as well as for the metropolitan portions of BA
Bank's and MBNA's assessment areas statewide.
51. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

worthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by the subsidiary depository and lending institutions of Bank of America and MBNA with fair
lending laws. Examiners noted no substantive violations
of applicable fair lending laws in the examinations of the
depository institutions controlled by Bank of America or
MBNA. In addition, the Board has consulted with the
OCC, the primary federal supervisor of Bank of America's
and MBNA s subsidiary banks.
The record also indicates that Bank of America and
MBNA have taken steps to ensure compliance with fair
lending and consumer protection laws. Bank of America
and MBNA have corporate-wide policies and procedures
to help ensure compliance with all fair lending and other
consumer protection laws and regulations. Bank of America's and MBNA's compliance programs include fair lending policy and product guides, compliance file reviews,
testing of their HMDA data's integrity, and other qualityassurance measures. In addition, Bank of America and
MBNA represented that their consumer real estate associates receive and will continue to receive compliance training that includes courses in fair lending laws, privacy laws,
information security, HMDA reporting, and ethics. Furthermore, Bank of America's fair-lending monitoring program has been significantly expanded in the area of pricing review and analysis to accommodate recent HMDA
changes concerning the reporting of loan pricing. Bank
of America also has undertaken an extensive analysis to
interpret and respond to HMDA pricing results. Bank of
America has stated that its fair lending policies will continue to apply to current Bank of America operations and
that it will review any modifications of MBNA's operations
that might be required after consummation of the proposal.
The Board also has considered the HMDA data in light
of other information, including Bank of America's and
MBNA's CRA lending programs and the overall lending performance records of the subsidiary banks of Bank of
America and MBNA under the CRA. These established
efforts demonstrate that the institutions are active in helping to meet the credit needs of their entire communities.

C. Branch Closings
Several commenters expressed concerns about the proposal's possible effect on branch closings. The Board
has carefully considered these comments in light of all the
facts of record. Bank of America has represented that it is
not planning any merger-related branch closings and that
any such closings, relocations, or consolidations would
be minimal because there is no geographic overlap with
MBNA. Bank of America's branch closure policy entails
a review of many factors before any closing or consolidation of a branch, including an assessment of the branch,
the marketplace demographics, a profile of the community

Legal Developments

where the branch is located, and the effect on customers.
The most recent CRA evaluation of BA Bank noted favorably the bank's record of opening and closing branches.
The Board also has considered the fact that federal
banking law provides a specific mechanism for addressing
branch closings. 52 Federal law requires an insured depository institution to provide notice to the public and to the
appropriate federal supervisory agency before closing a
branch. In addition, the Board notes that the OCC, as the
appropriate federal supervisor of BA Bank, will continue to
review the bank's branch closing record in the course of
conducting CRA performance evaluations.

D. Conclusion on Convenience and Needs
Considerations
The Board has carefully considered all the facts of record,
including reports of evaluation of the CRA performance
records of the institutions involved, information provided
by Bank of America and MBNA, comments received on
the proposal, and confidential supervisory information.
The Board notes that the proposal would expand the availability and array of banking products and services to the
customers of MBNA, including access to almost 6,000
Bank of America banking centers. Based on a review of the
entire record, and for reasons discussed above, the Board
concludes that considerations relating to the convenience
and needs factor, including the CRA performance records
of the relevant depository institutions, are consistent with
approval of the proposal. 53

Foreign Activities
Bank of America proposes to acquire MBNA's Edge corporation, organized under section 25A of the Federal Reserve

52. Section 42 of the FDI Act (12 U.S.C. §1831r-l), as implemented by the Joint Policy Statement Regarding Branch Closings
(64 Federal Register 34,844 (1999)), requires a bank to provide the
public with at least a 30-day notice and the appropriate federal
banking agency with at least a 90-day notice before the date of the
proposed branch closing. The bank also is required to provide reasons
and other supporting data for the closure, consistent with the institution's written policy for branch closings.
53. One commenter reiterated comments he made in connection
with the BOA/Fleet Transaction, urging the Board not to approve the
proposal until Bank of America meets certain "commitments" regarding its lending programs in Hawaii and its goal for mortgage lending
to Native Hawaiians on Hawaiian home lands. See BOA/Fleet Order
at 232-33. As noted in that order, Bank of America's publicly
announced plans to engage in certain lending programs in Hawaii
were not commitments to the Board, and these plans were not conditions to the Board's approvals in earlier applications by Bank of
America or its predecessors. See id. As also previously noted, the
Board views the enforceability of such third-party pledges, initiatives,
and agreements as matters outside the CRA. Bank of America has
represented that since the BOA/Fleet Transaction, Bank of America's
loans and investments in Hawaii that qualify under its understanding
with the state of Hawaii Department of Hawaiian Home Lands have
increased from approximately $70 million to more than $99 million.

C13

Act.54 The Board concludes that all the factors required
to be considered under the Federal Reserve Act and the
Board's Regulation K are consistent with approval of the
proposal.

Conclusion
Based on the foregoing, and in light of all the facts of
record, the Board has determined that the application and
notice should be, and hereby are, approved.55
In reaching its conclusion, the Board has considered all
the facts of record in light of the factors that is required
to consider under the BHC Act and other applicable statutes. 56 The Board's approval is specifically conditioned on
compliance by Bank of America with the conditions in
this order and all the commitments made to the Board in
connection with the proposal. For purposes of this transaction, these commitments and conditions are deemed to
be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be
enforced in proceedings under applicable law.57

54. Bank of America intends to acquire MBNA's foreign operations under section 4(c)(13) of the BHC Act and section 25 of the
Federal Reserve Act (12 U.S.C. §601 et seq.) pursuant to the general
consent procedure of section 211.9 of Regulation K (12 CFR
55. Several commenters requested that the Board hold a public
meeting or hearing on the proposal. Section 3 of the BHC Act does
not require the Board to hold a public hearing on an application unless
the appropriate supervisory authority for the bank to be acquired
makes a written recommendation of denial of the application. The
Board has not received such a recommendation from the appropriate
supervisory authorities. Under its regulations, the Board also may, in
its discretion, hold a public meeting or hearing on an application to
acquire a bank if necessary or appropriate to clarify factual issues
related to the application and to provide an opportunity for testimony
(12 CFR 225.16(e)). The Board has considered carefully the commenters' requests in light of all the facts of record. In the Board's view, the
commenters had ample opportunity to submit their views and, in fact,
submitted written comments that the Board has considered carefully
in acting on the proposal. The commenters' requests fail to demonstrate why written comments do not present their views adequately or
why a meeting or hearing otherwise would be necessary or appropriate. For these reasons, and based on all the facts of record, the Board
has determined that a public meeting or hearing is not required or
warranted in this case. Accordingly, the requests for a public meeting
or hearing on the proposal are denied.
56. One commenter also requested that the Board delay action
or extend the comment period on the proposal. As previously noted,
the Board has accumulated a significant record in this case, including
reports of examination, confidential supervisory information, public
reports and information, and considerable public comment. As also
noted, the commenters had ample opportunity to submit their views
and provided substantial written submissions that the Board has considered carefully in acting on the proposal. Moreover, the BHC Act
and Regulation Y require the Board to act on proposals submitted
under those provisions within certain time periods. Based on a review
of all the facts of record, the Board has concluded that the record in
this case is sufficient to warrant action at this time and that a further
delay in considering the proposal, extension of the comment period, or
a denial of the proposal on the grounds discussed above or on the
basis of informational insufficiency is not warranted.
57. One commenter reiterated his request from the BOA/Fleet
Transaction that certain Federal Reserve System staff and Board

C14

Federal Reserve Bulletin • 2006

The proposal may not be consummated before the 15th
calendar day after the effective date of this order, or later
than three months after the effective date of this order
unless such period is extended for good cause by the Board
or by the Federal Reserve Bank of Richmond, acting
pursuant to delegated authority.
By order of the Board of Governors, effective December 15, 2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Appendix
Calculation of the Nationwide Deposit Cap
For purposes of applying the nationwide deposit cap, the
total amount of deposits held by insured banks in the
United States was computed by first calculating the sum of
total deposits in domestic offices as reported on Schedule RC of the Call Report, interest accrued and unpaid on
deposits in domestic offices as reported on Schedule RC-G
of the Call Report, and the following items reported on
Schedule RC-O of the Call Report: unposted credits,
uninvested trust funds, deposits in insured branches in
Puerto Rico and U.S. territories and possessions, unamortized discounts on deposits, the amount by which demand
deposits would be increased if the reporting institution's
reciprocal demand balances with foreign banks and foreign offices of other U.S. banks that were reported on a net
basis had been reported on a gross basis, amount of assets
netted against demand deposits, amount of assets netted
against time and savings deposits, demand deposits of
consolidated subsidiaries, time and savings deposits of
consolidated subsidiaries, and interest accrued and unpaid
on deposits of consolidated subsidiaries. From that sum,
subtract the amount of unpaid debits and unamortized
premiums.
The total amount of deposits held by insured U.S.
branches of foreign banks was computed by first calculating the sum of the following items reported on Schedule O
of the RAL: total demand deposits in the branch, total time
and savings deposits in the branch, interest accrued and
unpaid on deposits in the branch, unposted credits, demand
deposits of majority-owned depository subsidiaries and
wholly owned nondepository subsidiaries, time and savings deposits of majority-owned depository subsidiaries
and wholly owned nondepository subsidiaries, interest
members recuse themselves from consideration of the application, or
alternatively, that the application be dismissed because of the commenter's allegations of conflicts of interests between Federal Reserve
System staff and Bank of America. See BOA/Fleet Order at 234 n.89.
For the reasons stated in the BOA/Fleet Order, the Board concludes
that no conflicts of interests exist that would require recusal from
consideration or dismissal of this proposal. See id.

accrued and unpaid on deposits of majority-owned depository subsidiaries and wholly owned nondepository subsidiaries, the amount by which demand deposits would be
increased if the reporting institution's reciprocal demand
balances with foreign banks and foreign offices of other
U.S. banks that were reported on a net basis had been
reported on a gross basis, amount of assets netted against
demand deposits, amount of assets netted against time and
savings deposits, demand deposits of consolidated subsidiaries, and time and savings deposits of consolidated subsidiaries. From that sum, subtract the amount of unpaid debits.
The total amount of deposits held by insured savings
associations in the United States was computed by taking
the sum of total deposits in domestic offices reported on
Schedule SC of the TFR, deposits held in escrow and
accrued interest payable-deposits, both as reported on
Schedule SC of the TFR, plus the following items reported
on Schedule SI of the TFR: time and savings deposits
of consolidated subsidiaries, outstanding checks drawn
against Federal Home Loan Banks and Federal Reserve
Banks, demand deposits of consolidated subsidiaries, assets
netted against demand deposits, and assets netted against
time and savings deposits.
Because insured banks and savings associations that are
subsidiaries of other insured banks and savings associations have been consolidated into their parent institutions for reporting purposes, the individual data for subsidiary insured depository institutions have not been added
in order to avoid double counting deposits held by these
institutions.

Bank of Montreal
Montreal, Canada
Order Approving the Merger of Bank Holding
Companies
Bank of Montreal ("BMO") and its U.S. subsidiaries,
Harris Financial Corp. ("HFC") and Harris Bankcorp, Inc.
("Harris"), both of Chicago, Illinois (collectively, "Applicants"), each financial holding companies within the meaning of the Bank Holding Company Act ("BHC Act"), have
requested the Board's approval under section 3 of the BHC
Act to acquire Edville Bankcorp, Inc. ("Edville") and its
subsidiary bank, Villa Park Trust & Savings Bank ("Villa
Park Bank"), both of Villa Park, Illinois.1
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 51,065 (2005)). The time for filing
comments has expired, and the Board has considered the
application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
1. 12 U.S.C. § 1842. Pursuant to the merger agreement, Harris will
form Omaha Acquisition Corporation ("Omaha"), Wilmington, Delaware, a wholly owned subsidiary of Harris, to merge with and into
Edville. Immediately after this merger, Omaha would merge with and
into Harris (with Harris as the survivor), and Harris would directly
acquire Villa Park Bank.

Legal Developments

BMO, with total consolidated assets of approximately
$237.4 billion, is the fifth largest banking organization
in Canada.2 BMO is the 32nd largest depository organization in the United States, controlling deposits of $26 billion
through its four U.S. depository institutions with branches
in Arizona, California, Florida, Illinois, Indiana, and Washington.3 In Illinois, BMO operates the third largest depository organization through two subsidiary depository institutions, Harris National Association ("Harris N.A."), 4
Chicago, and NLSB, Plainfield, both of Illinois.5 BMO
controls deposits of approximately $22.1 billion, which
represent 8 percent of the total amount of deposits of
insured depository institutions in the state ("state
deposits")- 6
Edville, with total consolidated assets of approximately
$286.6 million, operates one depository institution, Villa
Park Bank, with branches only in Illinois.7 Villa Park Bank
is the 138th largest insured depository institution in Illinois, controlling deposits of approximately $240.5 million.
On consummation of the proposal, BMO would have
consolidated assets of approximately $237.7 billion and
would control deposits of $26.2 billion, which represent
less than 1 percent of the total amount of deposits of
insured depository institutions in the United States. BMO
would continue to operate the third largest depository
organization in Illinois, controlling deposits of approximately $22.3 billion, which represent 8 percent of state
deposits.

Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would be
in furtherance of an attempt to monopolize the business of
banking in any relevant banking market. The BHC Act also
prohibits the Board from approving a bank acquisition that
2. Asset data are as of July 31, 2005, and Canadian ranking data
are as of December 31, 2004. In this context, insured depository
institutions include commercial banks, savings banks, and savings
associations.
3. Deposit and U.S. and state ranking data are as of March 31,
2005.
4. On May 27, 2005, Applicants reorganized and consolidated 26
of their 30 subsidiary banks, including their lead bank, Harris Trust
and Savings Bank ("HTSB"), Chicago, into Harris N.A. BMO also
operates a limited-charter national bank, Harris Central National Association, Roselle, Illinois, which provides cash-disbursement services
only.
5. BMO operates two other depository institutions, Harris Bank
National Association, Scottsdale, Arizona, and Mercantile National
Bank of Indiana, Hammond, Indiana.
6. The operations of Harris N.A. and NLSB in Illinois were considered collectively to determine BMO's state rankings and percentage
of deposits. Harris N.A. controls deposits of approximately $21.3 billion and NLSB controls deposits of $883 million.
7. Asset data are as of September 30, 2005. Edville is currently
engaged in a limited number of real estate management and investment activities that are not permissible for a bank holding company.
Applicants have committed to conform these investments and activities to the requirements of the BHC Act, including by divestiture if
necessary, within two years of consummating the proposal.

C15

would substantially lessen competition in any relevant
banking market unless the anticompetitive effects of the
proposal are clearly outweighed in the public interest by
the probable effect of the proposal in meeting the convenience and needs of the community to be served.8
Harris N.A. and Villa Park Bank compete directly in the
Chicago banking market in Illinois.9 The Board has carefully reviewed the competitive effects of the proposal in
this banking market in light of all the facts of record,
including the number of competitors that would remain in
the market, the relative shares of total deposits in depository institutions in the market ("market deposits") controlled by Harris N.A. and Villa Park Bank,10 the concentration level of market deposits and the increase in this
level as measured by the Herfindahl-Hirschman Index
("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 11 and other characteristics of
the markets.
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in the Chicago banking market. After consummation, the Chicago banking market would remain unconcentrated, as measured by the HHI. In this market, the
increase in concentration would be small and numerous
competitors would remain.12
The Department of Justice also has reviewed the anticipated competitive effects of the proposal and advised the
8. 12U.S.C. §1842(c)(l).
9. The Chicago banking market is defined as Cook, Du Page, and
Lake Counties, all in Illinois. NLSB does not compete in the Chicago
banking market.
10. Deposit and market share data are as of June 30, 2004, and are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has
included thrift deposits in the market share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal Reserve
Bulletin 52 (1991).
11. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly concentrated if the post-merger HHI exceeds 1800. The Department of
Justice ("DOJ") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger
HHI is at least 1800 and the merger increases the HHI more than
200 points. The DOJ has stated that the higher-than-normal HHI
thresholds for screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limitedpurpose and other nondepository financial entities.
12. After the proposed acquisition, the HHI would increase
3 points, to 756. BMO operates the third largest depository institution
in the market, controlling deposits of $18.5 billion, which represent
10 percent of market deposits. Edville operates the 71st largest depository institution in the market, controlling deposits of approximately
$241.5 million, which represent less than 1 percent of market deposits.
After the proposed acquisition, BMO would continue to operate the
third largest depository institution in the market, controlling deposits
of approximately $18.7 billion, which represent approximately 10 percent of market deposits. One hundred and eighty-seven depository
institutions would remain in the banking market.

C16

Federal Reserve Bulletin • 2006

Board that consummation of the proposal would not likely
have a significant adverse effect on competition in any
relevant banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Chicago banking market in which
Harris N.A. and Villa Park Bank directly compete or in any
other relevant banking market. Accordingly, based on all
the facts of record, the Board has determined that competitive considerations are consistent with approval.

Financial, Managerial, and Supervisory

Considerations

Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved
in the proposal and certain other supervisory factors. The
Board has considered these factors in light of all the facts
of record, including confidential reports of examination,
other supervisory information from the various U.S. banking supervisors of the organizations involved in the proposal, publicly reported and other financial information,
information provided by the Applicants, and public comment on the proposal.13 The Board also has consulted with
the Canadian Office of the Superintendent of Financial
Institutions ("OSFI"), which is responsible for the supervision and regulation of Canadian banks.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial condition of the combined organization at consummation, including its capital position, asset quality, and earnings prospects, and the impact of the proposed funding of
the transaction.
Based on its review of these factors, the Board finds that
Applicants have sufficient financial resources to effect the
13. A commenter criticized HTSB's managerial resources based on
its decision to have a lending relationship with an unaffiliated, nontraditional provider of financial services, a rent-to-own company. As
a general matter, these types of businesses are licensed by the states
where they operate and are subject to applicable state law. Applicants
stated that HTSB's business relationship with this provider is limited
to serving as an administrative agent and extending credit consistent
with applicable legal requirements. Applicants also represented that
they do not play any role in the business decisions, leasing, or credit
practices of the borrower. In addition, the loan document executed by
the borrower to HTSB contains representations, warranties, and covenants that the borrower obtains and maintains all necessary licenses
to conduct its operations and complies with state law.

proposal. Applicants will use existing resources to effect
the proposal as a cash purchase. Applicants and their subsidiary depository institutions are well capitalized and
would remain so on consummation of the proposal.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of Applicants, Edville, and their subsidiary depository institutions, including assessments of their management, risk-management systems, and operations. In addition, the Board has considered its supervisory experiences
and those of the other relevant banking supervisory agencies with the organizations and their records of compliance
with applicable banking law. Applicants, Edville, and their
subsidiary depository institutions are considered to be well
managed. The Board also has considered Applicants' plans
for implementing the proposal, including the proposed
management after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial resources and future prospects of the organizations
involved in the proposal are consistent with approval, as
are the other supervisory factors under the BHC Act.
Section 3 of the BHC Act also provides that the Board
may not approve an application involving a foreign bank
unless the bank is subject to comprehensive supervision
or regulation on a consolidated basis by the appropriate
authorities in the bank's home country.14 As noted, the
home country supervisor of BMO is the OSFI.
In approving applications under the BHC Act and the
International Banking Act ("IBA"), 15 the Board previously
has determined that BMO was subject to home country
supervision on a consolidated basis by the OSFI. 16 Based
on this finding and all the facts of record, the Board has
concluded that BMO continues to be subject to comprehensive supervision on a consolidated basis by its home country supervisor.
In addition, section 3 of the BHC Act requires the Board
to determine that an applicant has provided adequate assurances that it will make available to the Board such information on its operations and activities and those of its affiliates that the Board deems appropriate to determine and
14. 12 U.S.C. § 1842(c)(3)(B). Under Regulation Y, the Board uses
the standards enumerated in Regulation K to determine whether a
foreign bank is subject to consolidated home country supervision. See
12 CFR 225.13(a)(4). Regulation K provides that a foreign bank will
be considered subject to comprehensive supervision or regulation on a
consolidated basis if the Board determines that the bank is supervised
or regulated in such a manner that its home country supervisor
receives sufficient information on the worldwide operations of the
bank, including its relationship with any affiliates, to assess the bank's
overall financial condition and its compliance with laws and regulations. See 12 CFR 211.24(c)(l).
15. 12 U.S.C. §3101 etseq.
16. See, e.g., Bank of Montreal/Mercantile Bancorp, Inc., as noted
in Federal Reserve Release, H.2. no. 51, p. 4 (December 14, 2004);
Bank of Montreal/New Lennox Holding Company, as noted in Federal
Reserve Release, H.2. no. 19, p. 2 (May 4, 2004); Bank of Montreal/
Lakeland Financial Corp., as noted in Federal Reserve Release,
H.2. no. 2, p. 2 (January 10, 2004); Bank of Montreal, 80 Federal
Reserve Bulletin 925 (1994).

Legal Developments

enforce compliance with the BHC Act.17 The Board has
reviewed the restrictions on disclosure in the relevant jurisdictions in which BMO operates and has communicated
with relevant government authorities concerning access to
information. In addition, BMO previously has committed
to make available to the Board such information on its
operations and those of its affiliates that the Board deems
necessary to determine and enforce compliance with the
BHC Act, the IBA, and other applicable federal laws.
BMO also previously has committed to cooperate with the
Board to obtain any waivers or exemptions that may be
necessary to enable BMO and its affiliates to make such
information available to the Board. In light of these commitments, the Board concludes that BMO has provided
adequate assurances of access to any appropriate information the Board may request. Based on these and all other
facts of record, the Board has concluded that the supervisory factors it is required to consider are consistent with
approval.

A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
17.
18.
19.
20.

See 12 U.S.C. § 1842(c)(3)(A).
12 U.S.C. §2901 etseq.
12 U.S.C. §2903.
12 U.S.C. §2801 etseq.

C17

B. HMDA and Fair Lending Record
The Board has carefully considered Applicants' lending
record and HMDA data in light of public comment
received on the proposal. The commenter alleged, based on
2004 HMDA data, that HTSB denied the home mortgage
and refinance applications of African-American and Hispanic borrowers more frequently than those of nonminority
applicants in the Chicago Metropolitan Statistical Area
("Chicago MSA"). The commenter also alleged that
HTSB made higher-cost loans more frequently to AfricanAmerican and Hispanic borrowers than to nonminority
borrowers.22 The Board reviewed HTSB's HMDA data
for 2004 in the Chicago MSA, which included the bank's
assessment area.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they are insufficient by them21. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
22. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 percentage points
for first-lien mortgages and 5 percentage points for second-lien mortgages (12 CFR 203.4).

C18

Federal Reserve Bulletin • 2006

selves to conclude whether or not HTSB is excluding any
racial or ethnic group or imposing higher credit costs on
those groups on a prohibited basis. The Board recognizes
that HMDA data alone, even with the recent addition of
pricing information, provide only limited information about
the covered loans.23 HMDA data, therefore, have limitations that make them an inadequate basis, absent other
information, for concluding that an institution has engaged
in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by the subsidiary depository institutions of Applicants with fair lending laws. In the fair
lending review conducted in conjunction with the 2002
CRA Evaluation, examiners noted no substantive violations of applicable fair lending laws by HTSB. In addition,
the Board has consulted with the OCC, the primary federal
supervisor of Harris N.A., HTSB's successor institution.
The record also indicates that Applicants have taken
steps to ensure compliance with fair lending laws and other
consumer protection laws. Applicants have centralized the
compliance functions performed by their Corporate Compliance Department ("CCD") and CRA Office, which have
responsibility for planning, administering, monitoring, and
reviewing the organization's responsibilities under the fair
lending and consumer protection laws on a corporate-wide
basis. In addition, Applicants' Corporate Audit Department
periodically conducts a separate fair lending audit to ensure
compliance with Applicants' policies and procedures. The
CCD and CRA Office have implemented uniform fair
lending policies, procedures, and training programs at
Applicants' subsidiary depository institutions. The CCD
also conducts annual reviews of the banks for their fair
lending and consumer protection compliance monitoring,
which includes a fair lending comparative file review. Any
notable exceptions or deviations discovered during a
review are reported, investigated, and addressed at the
appropriate managerial levels. The CCD's last comparative
file review covered 2004 HMDA-reportable refinance
transactions and was completed in September 2005. Applicants represented that the exceptions identified in this
review were investigated, that no fair lending issues were
found, and that the results of this review were disseminated
23. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

to senior management. Applicants intend to institute their
centralized compliance structure and implement their fair
lending policies and procedures at Villa Park Bank after
the merger.
The Board also has considered the HMDA data in light
of other information, including the Applicants' CRA lending programs and the overall performance records of the
subsidiary banks of Applicants and Edville under the CRA.
These established efforts demonstrate that the institutions
are active in helping to meet the credit needs of their entire
communities.
Conclusion on CRA Performance Records
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by Applicants,
comments received on the proposal, and confidential supervisory information. The Board notes that the proposal
would expand the availability and array of banking products and services to Edville's customers, including access
to expanded branch and ATM networks. Based on a review
of the entire record, and for the reasons discussed above,
the Board concludes that considerations relating to the
convenience and needs factor and the CRA performance
records of the relevant depository institutions are consistent with approval.

Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved.24 In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act and other
applicable statutes.25 The Board's approval is specifically
24. A commenter requested that the Board hold a public hearing or
meeting on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for any of the banks to be acquired
makes a timely written recommendation of denial of the application.
The Board has not received such a recommendation from any supervisory authority. Under its rules, the Board also may, in its discretion,
hold a public meeting or hearing on an application to acquire a bank
if a meeting or hearing is necessary or appropriate to clarify factual
issues related to the application and to provide an opportunity for
testimony (12 CFR 225.16(e)). The Board has considered carefully
the commenter's requests in light of all the facts of record. In the
Board's view, the public has had ample opportunity to submit comments on the proposal and, in fact, the commenter has submitted
written comments that the Board has considered carefully in acting
on the proposal. The commenter's request fails to demonstrate why
its written comments do not present its views adequately or why a
meeting or hearing otherwise would be necessary or appropriate. For
these reasons, and based on all the facts of record, the Board has
determined that a public hearing or meeting is not required or warranted in this case. Accordingly, the request for a public hearing or
meeting on the proposal is denied.
25. The commenter also requested that the Board extend the comment period and delay action on the proposal. As previously noted, the

Legal Developments

conditioned on compliance by Applicants with the conditions imposed in this order and the commitments made to
the Board in connection with the application. For purposes
of this action, the conditions and commitments are deemed
to be conditions imposed in writing by the Board in connection with its findings and decision herein and, as such,
may be enforced in proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Federal Reserve Bank of Chicago, acting
pursuant to delegated authority.
By order of the Board of Governors, effective November 10, 2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Cathay General Bancorp
Los Angeles, California
Order Approving the Acquisition of a Bank
Cathay General Bancorp ("Cathay"), a bank holding company within the meaning of the Bank Holding Company
Act ("BHC Act"), has requested the Board's approval
under section 3 of the BHC Act 1 to acquire up to 100 percent of the outstanding shares of Great Eastern Bank, New
York, New York.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 54,555 (2005)). The time for filing
comments has expired, and the Board has considered the
application and all comments received in light of the
factors set forth in section 3 of the BHC Act.

Board has accumulated a significant record in this case, including
reports of examination, confidential supervisory information, public
reports and information, and public comment. In the Board's view, the
commenter has had ample opportunity to submit its views and, in fact,
has provided multiple written submissions that the Board has considered carefully in acting on the proposal. Moreover, the BHC Act and
Regulation Y require the Board to act on proposals submitted under
those provisions within certain time periods. Based on a review of all
the facts of record, the Board has concluded that the record in this case
is sufficient to warrant action at this time and that neither an extension
of the comment period nor further delay in considering the proposal is
necessary.
1. 12U.S.C. §1842.
2. Cathay entered into agreements with certain shareholders of
Great Eastern Bank under which Cathay was granted the option to
acquire 41 percent of the bank's outstanding common shares ("option
shares"), subject to receipt of regulatory approval and certain other
restrictions. Cathay may attempt to acquire additional shares of Great
Eastern Bank directly from other shareholders or, if possible, to enter
into a definitive merger agreement with Great Eastern Bank.

C19

Cathay, with total consolidated assets of approximately
$6 billion, operates one depository institution, Cathay
Bank, also in Los Angeles, with branches in California,
Massachusetts, New York, Washington, and Texas. Cathay
Bank is the 116th largest insured depository institution
in New York State, controlling deposits of approximately
$213 million, which represent less than 1 percent of the
total amount of deposits of insured depository institutions
in the state ("state deposits"). 3
Great Eastern Bank is the 97th largest insured depository institution in New York, controlling deposits of
approximately $278 million, representing less than 1 percent of the total amount of state deposits. On consummation of the proposal, Cathay would become the 73rd largest
depository organization in New York, controlling deposits
of approximately $491 million, which represent less than
1 percent of state deposits.
Great Eastern Bank's management opposes the proposal
and has submitted comments to the Board urging denial on
several grounds. The Board previously has stated that, in
evaluating acquisition proposals, it must apply the criteria
in the BHC Act in the same manner to all proposals,
regardless of whether they are supported or opposed by
the management of the institutions to be acquired.4 Section 3(c) of the BHC Act requires the Board to review each
application in light of certain factors specified in the BHC
Act. These factors require consideration of the effects of
the proposal on competition, the financial and managerial resources and future prospects of the companies and
depository institutions concerned, and the convenience and
needs of the communities to be served.5
In considering these factors, the Board is mindful of the
potential adverse effects that contested acquisitions might
have on the financial and managerial resources of the
company to be acquired and the acquiring organization. In
addition, the Board takes into account the potential for
adverse effects that a prolonged contest may have on the
safe and sound operation of the institutions involved. The
Board has long held that, if the statutory criteria are met,
withholding approval based on other factors, such as
whether the proposal is acceptable to the management of
the organization to be acquired, would be outside the limits
of the Board's discretion under the BHC Act.6

3. Asset, deposit, and ranking data are as of June 30, 2005. In this
context, insured depository institutions include commercial banks,
savings banks, and savings associations.
4. See Central Pacific Financial Corp., 90 Federal Reserve Bulle
tin 93, 94 (2004) ("Central Pacific"); North Fork Bancorporation,
Inc., 86 Federal Reserve Bulletin 161, 768 (2000) ("North Fork");
The Bank of New York Company, Inc., 74 Federal Reserve Bulletin
257, 259 (1988) ("BCWY").
5. In addition, the Board is required by section 3(c) of the BHC Act
to disapprove a proposal if the Board does not have adequate assurances that it can obtain information on the activities or operations of
the company and its affiliates, or in the case of a foreign bank, if such
bank is not subject to comprehensive supervision on a consolidated
basis. See 12 U.S.C. § 1842(c).
6. See Central Pacific; FleetBoston Financial Corporation, 86 Fed
eral Reserve Bulletin 751, 752 (2000); North Fork; BONY.

C20

Federal Reserve Bulletin • 2006

As explained below, the Board has carefully considered
the statutory criteria in light of all the comments and
information provided by Great Eastern Bank and the
responses submitted by Cathay.7 The Board also has carefully considered all other information available, including
information accumulated in the application process, supervisory information of the Board and other agencies, relevant examination reports, and other public comments. In
considering the statutory factors, particularly the effect of
the proposal on the financial and managerial resources of
Cathay, the Board has received detailed financial information, including the terms and cost of the proposal and the
resources that Cathay proposes to devote to the transaction.
After reviewing the proposal in light of the requirements
of the BHC Act, and for the reasons explained below, the
Board has determined to approve the application subject
to the conditions established herein by the Board. The
Board's decision is conditioned on the requirement that
Cathay's offer not differ in any material aspect from the
terms that it has provided to the Board. Accordingly, if
Cathay amends or alters the terms of the offer as described
by Cathay to the Board or is unable to complete all aspects
of its proposal, it must consult with the Board to determine
whether the difference is material to the Board's analysis
and conclusions regarding the statutory factors and, therefore, would require a modification to this order, a new
application, or further proceedings before the Board.
In reviewing this proposal, the Board has taken into
account the potential for adverse effects on the financial
and managerial resources of the companies involved if
there is prolonged delay in consummation of the proposal.
As discussed below, the Board has followed its standard
practice of requiring that consummation of the proposal be
completed within three months from the date of this order.
If the transaction is not concluded within this period, the
Board will review carefully any requests by Cathay to
extend the consummation period and would expect to grant
an extension only if the Board is satisfied that the statutory
factors continue to be met.

7. Great Eastern Bank contends that, by entering into option agreements with stockholders of Great Eastern Bank, Cathay violated
section 3(a) of the BHC Act, which prohibits a bank holding company
from taking any action that would cause a bank to become a subsidiary of a bank holding company or from acquiring direct or indirect
ownership or control of 5 percent of the voting shares of a bank
without the prior approval of the Board. Another commenter also
objected to the fact that Cathay had notified the option grantors of its
intent to acquire the options before receiving regulatory approval.
Under the option agreements, Cathay does not own or have power
to vote the option shares and may not actually purchase or vote the
shares until it has received regulatory approval.
Under the Board's regulations, a company that enters into an
agreement pursuant to which the rights of a holder of voting securities
of a bank are restricted in any manner is presumed to control those
securities. The presumption does not apply, however, when the agreement relates to restrictions on transferability and continues only for
the time necessary to obtain approval from the appropriate federal
supervisory authority with respect to acquisition by the company of
the securities (12 CFR 225.31(d)(ii)). The Board has reviewed the
option agreements and concluded that Cathay's proposal meets those
requirements.

The Board's decision and conclusions on this proposal
are limited to the application of the statutory factors set out
in the BHC Act. The Board expresses no view or recommendation on whether this transaction is in the best interests of the shareholders or whether this or any other proposed acquisition involving Great Eastern Bank should
be accepted by the management or shareholders of Great
Eastern Bank.

8. A bank holding company's home state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on July 1, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).
9. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch (12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(l)(A) and
10. 12 U.S.C. §§ 1842(d)(l)(A)-(B), 1842(d)(2)(A)-(B). Cathay is
adequately capitalized and adequately managed, as defined by applicable law. Cathay's proposed acquisition of Great Eastern satisfies the
minimum age requirement imposed by New York law. On consummation of the proposal, Cathay Bank would control less than 10 percent
of the total amount of deposits of insured depository institutions in the
United States and less than 30 percent of the total amount of deposits
of insured depository institutions in New York. All other requirements
of section 3(d) of the BHC Act would be met on consummation of the
proposal.
11. 12 U.S.C. §1842(c)(l).

Legal Developments

Cathay and Great Eastern Bank compete directly in
the Metro New York banking market.12 The Board has
reviewed carefully the competitive effects of the proposal
in this banking market in light of all the facts of record,
including the number of competitors that would remain in
the market, the relative shares of total deposits in depository institutions in the market ("market deposits") controlled by Cathay Bank and Great Eastern Bank,13 the
concentration level of market deposits and the increase in
this level as measured by the Herfindahl-Hirschman Index
("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 14 and other characteristics of
the market.
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in the Metro New York banking market. On
consummation, the Metro New York banking market would
remain unconcentrated, as measured by the HHI, and the
increase in concentration would be small.15 Numerous
competitors would remain in the market.
The Department of Justice also has reviewed the competitive effects of the proposal and advised the Board that
consummation of the proposal likely would not have a
12. The Metro New York banking market is defined as: Bronx,
Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, Sullivan, Ulster, and Westchester counties
in New York; Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, and Warren
counties and portions of Mercer County in New Jersey; Pike County
in Pennsylvania; and Fairfield County and portions of Litchfield and
New Haven counties in Connecticut.
13. Deposit and market share data are as of June 30, 2005, based
on ownership of depository institutions as of November 30, 2005, and
reflect calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has
included thrift deposits in the market share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal Reserve
Bulletin 52 (1991).
14. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly concentrated if the post-merger HHI exceeds 1800. The Department
of Justice ("DOJ") has informed the Board that a bank merger
or acquisition generally will not be challenged (in the absence of
other factors indicating anticompetitive effects) unless the post-merger
HHI is at least 1800 and the merger increases the HHI more than
200 points. The DOJ has stated that the higher-than-normal HHI
thresholds for screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limitedpurpose and other nondepository financial entities.
15. Cathay operates the 133rd largest depository institution in the
Metro New York market, controlling deposits of $213 million, which
represent less than 1 percent of market deposits. Great Eastern Bank
is the 118th largest depository institution in the market, controlling
deposits of approximately $278 million, which represent less than
1 percent of market deposits. After the proposed acquisition, Cathay
would operate the 81st largest depository institution in the market,
controlling deposits of approximately $491 million, which represent
less than 1 percent of market deposits. Two hundred and fifty-eight
depository institutions would remain in the banking market. The HHI
would remain unchanged at 1069.

C21

significantly adverse effect on competition in any relevant
banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment and
have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the banking market in which Cathay
and Great Eastern Bank directly compete or in any other
relevant banking market. Accordingly, based on all the
facts of record, the Board has determined that competitive
considerations are consistent with approval.

Financial, Managerial, and Supervisory

Considerations

Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered these factors in light of all the facts
of record, including confidential reports of examination,
other supervisory information from the primary federal
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, information provided by the applicant, and public comments
received on the proposal.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board expects banking organizations contemplating expansion to maintain strong capital
levels substantially in excess of the minimum levels specified by the Board's Capital Adequacy Guidelines. Strong
capital is particularly important in proposals that involve
higher transaction costs or risks, such as proposals that are
contested. The Board also evaluates the financial condition
of the combined organization at consummation, including
its capital position, asset quality, and earnings prospects,
and the impact of the proposed funding of the transaction.
Cathay, Cathay Bank, and Great Eastern Bank are all
well capitalized and would remain so on consummation of
the proposal. Based on its review of the record, the Board
also believes that Cathay has sufficient financial resources
to effect the proposal. Cathay has described the terms and
costs of its proposal. Cathay proposes to acquire the shares
of Great Eastern Bank with cash and shares of Cathay's
common stock.
The Board also has considered the managerial resources
of Cathay and Cathay Bank and the proposed combined
bank. The Board has reviewed the examination records of
Cathay, Cathay Bank, and Great Eastern Bank, including

C22

Federal Reserve Bulletin • 2006

assessments of their management, risk-management systems, and operations.16 In addition, the Board has considered its supervisory experiences and those of the other
relevant banking supervisory agencies with the organizations and their records of compliance with applicable banking law. Cathay, Cathay Bank, and Great Eastern Bank are
all considered to be well managed.17
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial resources and future prospects of the organizations
involved in the proposal are consistent with approval, as
are the other supervisory factors under the BHC Act.

Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act,
the Board also must consider the effects of the proposal on
the convenience and needs of the communities to be served
and take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").18 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank
expansionary proposals.19
The Board has considered carefully all the facts of
record, including the CRA performance evaluations of
Cathay Bank and Great Eastern Bank, data reported by
Cathay Bank and Great Eastern Bank under the Home
Mortgage Disclosure Act ("HMDA")20 in 2003 and 2004,
small business lending data reported under the CRA, other
information provided by Cathay, confidential supervisory
16. A commenter expressed concern about Cathay's managerial
record in light of a recent memorandum of understanding ("MOU")
with the Federal Deposit Insurance Corporation ("FDIC") requiring
Cathay Bank to correct deficiencies in its compliance with the Bank
Secrecy Act. The FDIC terminated the MOU in September 2005 after
determining that Cathay Bank had achieved substantial compliance
with its terms. The Board has reviewed the managerial factors in this
case in light of the MOU and the steps taken by Cathay to address
those issues.
17. Great Eastern Bank alleged that Cathay has violated the Securities Act of 1933 because, under the option agreements, Cathay is
offering to exchange its shares for shares of Great Eastern Bank in an
unregistered transaction. In addition, Great Eastern Bank alleges that
Cathay violated federal securities laws in connection with the proposed exchange of shares of Cathay's common stock for Great
Eastern Bank shares. The SEC, rather than the Board, has jurisdiction
to investigate and adjudicate any violations of federal securities laws.
The Board has consulted with the SEC regarding these matters and
expects that Cathay will effect this transaction in a manner that
complies with federal securities laws.
18. 12U.S.C. §2901 etseq.
19. 12U.S.C. §2903.
20. 12 U.S.C. § 2801 et seq.

information, and public comment received on the proposal.
A commenter criticized Cathay's record of small business
lending and the organization's performance under the services test portion of its CRA evaluation.

21. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
22. Examiners evaluated Cathay Bank's CRA performance in the
bank's three assessment areas in California and in its assessment areas
in New York and Texas. The substantial majority of the bank's loans
were in the Los Angeles and San Francisco assessment areas. The
evaluation period for the lending and service tests was January 1,
2002, through December 31, 2003. The evaluation period for the
investment test was January 22, 2001, through February 23, 2004.

Legal Developments

C23

business loans exceeded the aggregate market data 23 and
that 59.6 percent of the bank's total number of loans was in
amounts of less than $250,000.24 Examiners commended
the bank's use of innovative and flexible lending programs
to serve the credit needs of its assessment area.
Cathay Bank received an overall "outstanding" rating
under the investment test in the 2004 CRA Evaluation.
Examiners reported that Cathay Bank's qualified investments, which totaled more than $50 million during the
evaluation period, demonstrated excellent responsiveness
to the credit and community economic development needs
of the bank's assessment areas. In addition, examiners
commended the bank's use of complex investments to
support community development initiatives, particularly
affordable housing projects.
In the 2004 CRA Evaluation, Cathay Bank received a
"needs to improve" rating under the service test.25 Examiners noted, however, that Cathay Bank's delivery systems
for services were reasonably accessible to all geographies,
including LMI areas, and to individuals of different income
levels. Examiners reported that Cathay Bank provided a
limited level of community development services. Cathay
has represented that since the bank's last CRA evaluation,
Cathay Bank has increased its participation in community
development programs, such as providing financial literacy
training and participating in seminars for small business
owners. Cathay Bank Foundation reports that during 2005,
it has donated a total of $225,000 to nonprofit organizations for CRA-related activities. To increase Cathay's
outreach to all communities, more than 65 percent of the
funds granted by the foundation went to nonprofit organizations serving minority and disadvantaged communities
other than Asian-American communities. In addition,
Cathay has made contributions during 2005 to sponsor
CRA-related events in California and New York, including
events marketed to non-Asian communities.

mended the bank's level of consumer lending to LMI
borrowers. Examiners noted that the bank's overall geographic distribution of loans was satisfactory given the
demographics of the bank's assessment area. In addition,
examiners reported that the bank's community development activities in its assessment areas included a line of
credit to a nonprofit community development corporation,
an investment in a community development credit union
that served primarily LMI individuals, and financial contributions to organizations that provided services to LMI
individuals and neighborhoods.

Great Eastern Bank. As noted, Great Eastern Bank
received an overall "satisfactory" rating at its April 2003
evaluation.26 Examiners reported that the bank's overall
record of lending to borrowers of different income levels,
including LMI individuals, and businesses of different
sizes was outstanding in light of the demographics of the
bank's assessment area.27 Examiners particularly com-

approved but not accepted. The commenter provided no evidence that
the bank's limited home mortgage lending activity violated any laws
or that its HMDA data were inaccurate. Great Eastern Bank generally
makes home mortgage loans to its business customers on an accommodation basis and, accordingly, would not necessarily be expected to
have loans in those categories that concerned the commenter. Because
the bank made a limited number of HMDA-reportable loans during the evaluation period, HMDA-related lending was not included
in the examiners' analysis of Great Eastern Bank's overall CRA
performance.
28. A commenter requested that the Board hold a public meeting or
hearing on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes
a timely written recommendation of denial of the application. The
Board has not received such a recommendation from the appropriate
supervisory authorities. Under its regulations, the Board also may, in
its discretion, hold a public meeting or hearing on an application to
acquire a bank if necessary or appropriate to clarify factual issues
related to the application and to provide an opportunity for testimony
(12 CFR 225.16(e)). The Board has considered carefully the commenter's request in light of all the facts of record. In the Board's view, the
commenter had ample opportunity to submit its views, and in fact,
submitted written comments that the Board has considered carefully
in acting on the proposal. The commenter's request fails to demonstrate why the written comments do not present its views adequately
and fails to identify disputed issues of fact that are material to the
Board's decision that would be clarified by a public meeting or

23. For purposes of the evaluation, "small business loans" are
loans that have original amounts of $1 million or less and are either
secured by nonfarm or nonresidential real estate or are classified as
commercial and industrial loans.
24. A commenter expressed concern that Cathay Bank provided
few small business loans in certain counties. Although the Board has
recognized that banks can help to serve the banking needs of communities by making certain products or services available, the CRA does
not require an institution to provide any specific types of products or
services, including small business loans in certain amounts.
25. A commenter expressed concern about Cathay's CRA performance record based on the "needs to improve" rating under the
service test.
26. The evaluation period was March 13, 2001, through April 6,
2003.
27. The commenter also expressed concern that Great Eastern
Bank's 2004 HMDA data were "homogenous" and showed approved
and originated loans but no loans that were denied, withdrawn, or

B. Conclusion on CRA Performance Records
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by Cathay,
comments received on the proposal, and confidential supervisory information. The Board notes that the proposal
would expand the banking products and services available
to customers of Great Eastern Bank. Based on a review of
the entire record, and for the reasons discussed above, the
Board concludes that considerations relating to the convenience and needs factor and the CRA performance records
of the relevant depository institutions are consistent with
approval.

Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved.28 In reaching its conclusion, the Board

C24

Federal Reserve Bulletin • 2006

has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act.29 The
Board's approval is specifically conditioned on compliance
by Cathay with the conditions imposed in this order and
the commitments made to the Board in connection with
the application. In particular, in the event of any material
change in the transaction, such as a material change in the
price, financing, terms, conditions, or structure of the transaction, or an inability to complete all the aspects of the
transaction as proposed, Cathay must consult with the
Board to determine whether the change is consistent with
the Board's action in this case, or whether further Board
action is necessary. The Board reserves the right in the
event of significant changes in the proposal to require a
new application from Cathay. For purposes of this action,
the conditions and commitments are deemed to be conditions imposed in writing by the Board in connection with
its findings and decision herein and, as such, may be
enforced in proceedings under applicable law.
In previous cases, the Board has recognized that a prolonged contest for ownership of a banking institution might
result in adverse effects on the financial and managerial
resources of the organizations or other factors. The BHC
Act does not provide a specific time period for consummation of a transaction. Generally, however, the Board
requires consummation of an approved transaction within
three months from the date of the Board's order to ensure
that there are no substantial changes in an applicant's or
target's condition or other factors that might require the
Board to reconsider its approval.
In this case, although prolonged delay may have a
negative impact on Cathay and Great Eastern Bank, a
short delay should not affect the financial or managerial
resources of either organization or other factors so severely
as to warrant denial of the proposal. Accordingly, the
Board has followed its standard practice and requires that
the transaction be consummated within three months after
the effective date of this order unless that period is
extended by the Board. If Cathay requests an extension of
time to consummate the proposal, the Board will examine
carefully all relevant circumstances, and the impact of any
extension on those resources and on the other statutory
factors that the Board must consider under the BHC Act.
hearing. For these reasons, and based on all the facts of record, the
Board has determined that a public meeting or hearing is not required
or warranted in this case. Accordingly, the request for a public
meeting or hearing on the proposal is denied.
29. The commenter also requested that the Board extend the comment period on the proposal. As previously noted, the Board has
accumulated a significant record in this case, including reports of
examination, confidential supervisory information, public reports and
information, and public comment. As also noted, the commenter had
ample opportunity to submit its views and, in fact, provided written
submissions that the Board has considered carefully in acting on the
proposal. Moreover, the BHC Act and Regulation Y require the Board
to act on proposals submitted under those provisions within certain
time periods. Based on a review of all the facts of record, the Board
has concluded that the record in this case is sufficient to warrant action
at this time and that extension of the comment period or denial of the
proposal on the basis of the comments discussed above or on informational insufficiency is unwarranted.

The Board may require Cathay to provide supplemental
information if necessary to evaluate the managerial and
financial resources of Cathay and Great Eastern Bank or
other factors at the time any extension is requested. The
Board would extend the consummation period only if it is
satisfied that the statutory factors continue to be met.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board.
By order of the Board of Governors, effective December 13,2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Hudson Valley Holding
Yonkers, New York

Corp.

Order Approving the Acquisition of a Bank
Hudson Valley Holding Corp. ("Hudson Valley") has
requested the Board's approval under section 3 of the Bank
Holding Company Act ("BHC Act") 1 to acquire New
York National Bank ("NYNB"), Bronx, New York. Hudson Valley operates one subsidiary insured depository institution, Hudson Valley Bank, also in Yonkers.2
Notice of the proposal, affording interested persons an
opportunity to comment, has been published in the Federal
Register (70 Federal Register 22,314 (2005)) .3 The time
for filing comments has expired, and the Board has considered the application and all comments received in light of
the factors set forth in section 3 of the BHC Act.
Hudson Valley, with total consolidated assets of approximately $1.9 billion, is the 41st largest depository organization in New York, controlling deposits of approximately
$1.4 billion, which represent less than 1 percent of the total
amount of deposits of insured depository institutions in the
state ("state deposits"). NYNB, with total consolidated
assets of approximately $133 million, is the 156th largest insured depository institution in New York, controlling
deposits of approximately $118 million. On consummation
of the proposal, Hudson Valley would become the 40th
largest depository organization in New York, controlling

1. 12U.S.C. §1842.
2. Hudson Valley proposes to convert NYNB to a state-chartered
bank and to operate it as a separate subsidiary. NYNB would be
merged with and into an interim national bank, NYNB Bank, N.A.,
and immediately thereafter the interim national bank would be converted to NYNB Bank, a bank chartered by the state of New York.
Applications for these transactions were filed with the Office of the
Comptroller of the Currency ("OCC") and the New York State
Banking Department.
3. 12CFR262.3(b).

Legal Developments

deposits of approximately $1.5 billion, which represent
less than 1 percent of state deposits.4
Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would
be in furtherance of an attempt to monopolize the business
of banking. The BHC Act also prohibits the Board from
approving a bank acquisition that would substantially
lessen competition in any relevant banking market unless
the anticompetitive effects of the proposal are clearly outweighed in the public interest by its probable effect in
meeting the convenience and needs of the community to be
served.5
Hudson Valley and NYNB compete directly in the Metro
New York banking market.6 The Board has reviewed carefully the competitive effects of the proposal in this banking
market in light of all the facts of record.7 In particular, the
Board has considered the number of competitors that would
remain in the market, the relative shares of total deposits of
depository institutions in the market ("market deposits")
controlled by Hudson Valley and NYNB, 8 the concentration level of market deposits and the increase in this level
as measured by the Herfindahl-Hirschman Index ("HHI")
under the Department of Justice Merger Guidelines ("DOJ
Guidelines"), 9 and other characteristics of the market.
4. Asset data are as of March 31, 2005. Deposit data and state
rankings are as of June 30, 2005, and are adjusted to reflect mergers
and acquisitions completed through December 5, 2005.
5. 12U.S.C. §1842(c)(l).
6. The Metro New York banking market includes: Bronx, Dutchess,
Kings, Nassau, New York, Orange, Putnam, Queens, Richmond,
Rockland, Suffolk, Sullivan, Ulster, and Westchester counties in New
York; Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth,
Morris, Ocean, Passaic, Somerset, Sussex, Union, and Warren counties and portions of Mercer County in New Jersey; Pike County in
Pennsylvania; and Fairfield County and portions of Litchfield and
New Haven counties in Connecticut.
7. Hudson Valley has 19 branches, including two branches in
Bronx County. NYNB has six branches, including its main office in
Bronx County.
8. Deposit and market share data are as of June 30, 2005, are
adjusted to reflect subsequent mergers and acquisitions through
December 5, 2005, and are based on calculations in which the deposits
of thrift institutions are included at 50 percent. The Board previously
has indicated that thrift institutions have become, or have the potential
to become, significant competitors of commercial banks. See, e.g.,
Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989);
National City Corporation, 70 Federal Reserve Bulletin 743 (1984).
Thus, the Board regularly has included thrift deposits in the market
share calculation on a 50 percent weighted basis. See, e.g., First
Hawaiian, Inc., 11 Federal Reserve Bulletin 52 (1991).
9. Under the DOJ Guidelines, a market is considered moderately
concentrated if the post-merger HHI is between 1000 and 1800, and
highly concentrated if the post-merger HHI exceeds 1800. The Department of Justice has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI by more than
200 points. The Department of Justice has stated that the higher-thannormal HHI thresholds for screening bank mergers for anticompetitive effects implicitly recognize the competitive effects of limitedpurpose lenders and other nondepository financial institutions.

C25

Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in the Metro New
York banking market, and numerous competitors would
remain in the market.10 The Department of Justice also has
reviewed the anticipated competitive effects of the proposal and advised the Board that consummation would not
likely have a significantly adverse effect on competition in
any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Metro New York banking market or
in any other relevant banking market and that competitive
considerations are consistent with approval.

Financial, Managerial, and Supervisory

Considerations

Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and banks involved in the proposal and
certain other supervisory factors. The Board has considered these factors in light of all the facts of record, including confidential reports of examination and other supervisory information received from the federal and state
banking supervisors of the organizations involved, publicly
reported and other financial information, information provided by Hudson Valley, and public comment received on
the proposal.
In evaluating financial factors in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial condition of the combined organization at consummation, including its capital position, asset quality, and earnings prospects, and the impact of the proposed funding of
the transaction.
Based on its review of these factors, the Board finds that
Hudson Valley has sufficient financial resources to effect
the proposal. The transaction will be funded by a divi-

10. Hudson Valley operates the 45th largest depository institution
in the market, controlling deposits of approximately $1.4 billion,
which represent less than 1 percent of market deposits. NYNB operates the 174th largest depository institution in the market, controlling
deposits of approximately $118 million. After the proposed acquisition, Hudson Valley would operate the 43rd largest depository institution in the market, controlling deposits of approximately $1.5 billion,
which represent less than 1 percent of the market. The HHI would
remain unchanged at 1069. Two hundred and fifty-eight depository
institutions would remain in the banking market after consummation
of this proposal.

C26

Federal Reserve Bulletin • 2006

dend from Hudson Valley Bank to Hudson Valley. Hudson
Valley and its subsidiary bank are well capitalized and
would remain so on consummation of this proposal.
The Board also has considered the managerial resources
of Hudson Valley, Hudson Valley Bank, and NYNB and
the effect of the proposal on these resources. The Board has
reviewed the examination records of Hudson Valley and
its subsidiary banks and NYNB, including assessments of
their management, risk-management systems, and operations. In addition, the Board has considered its supervisory
experiences and those of the other relevant banking supervisory agencies with the organizations and their records
of compliance with applicable banking law. Hudson Valley
and its subsidiary depository institution are considered to
be well managed. The Board also has considered Hudson
Valley's plans for implementing the proposal, including
the proposed management after consummation.
After careful consideration of all the facts of record, the
Board has determined that Hudson Valley's managerial
resources, including its risk management, are consistent
with approval. In reaching this conclusion, the Board considered the existing compliance and internal audit programs at Hudson Valley and Hudson Valley Bank and the
assessment of these systems and programs by the relevant
federal and state supervisory agencies. The Board also has
consulted with the Federal Deposit Insurance Corporation
("FDIC"), the primary federal regulator of Hudson Valley
Bank, and the bank's state regulator. In addition, the Board
has considered information provided by Hudson Valley on
enhancements it has made and is currently making to its
systems and programs as part of an ongoing review, including development, implementation, and maintenance of
effective compliance policies and programs.11
Based on all the facts of record, including a review of
the public comments received and information provided by
Hudson Valley and by the primary federal and state regulators of the organizations involved, the Board concludes
that considerations relating to the financial and managerial
resources and future prospects of Hudson Valley, Hudson
Valley Bank, and NYNB are consistent with approval, as
are the other supervisory factors under the BHC Act.
Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served
and take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA"). 12 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
11. A commenter urged the Board to deny the application, because
Hudson Valley disclosed in filings with the Securities and Exchange
Commission that the FDIC had found deficiencies in Hudson Valley
Bank's consumer compliance program.
12. 12U.S.C. §2901 etseq.

sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank
expansionary proposals.13
The Board has considered carefully all the facts of
record, including the CRA performance evaluation records
of Hudson Valley Bank and NYNB, data reported by
Hudson Valley Bank and NYNB in 2004 under the Home
Mortgage Disclosure Act ("HMDA"), 14 small business
lending data reported by the banks under the CRA, other
information provided by Hudson Valley, confidential
supervisory information, and public comment received
on the proposal. A commenter criticized Hudson Valley
Bank's record of small business lending, alleging that it
disproportionately lent to businesses in middle- and upperincome census tracts and did not provide enough loans to
businesses in LMI census tracts.15 Specifically, the commenter alleged that Hudson Valley Bank's business plan
focused on affluent customers and that the bank made few
home mortgage loans and small business loans in LMI or
predominantly minority communities. The commenter also
asserted, based on data reported under HMDA, that Hudson Valley Bank has engaged in discriminatory treatment
of minority individuals in its home mortgage operations.

Legal Developments

B. CRA Performance of Hudson Valley Bank and
NYNB
Hudson Valley Bank. As noted above, Hudson Valley Bank
received an overall "satisfactory" rating at its most recent
CRA performance evaluation. Although Hudson Valley
Bank received a rating of "needs to improve" under the
investment test, the bank received a rating of "high satisfactory" under the lending test. In addition, the FDIC
stated that it gave greater weight to small business lending
in evaluating the bank's overall lending record because
small business loans constituted such a large percentage
of its loan portfolio.18 The examiners concluded that the
bank's record of lending, in light of the product lines
offered by the bank, reflected good distribution among
customers of different income levels and that the bank had
been a leader in originating community development loans
in the assessment area.19
Hudson Valley Bank is one of the leading small business
lenders in LMI census tracts in its assessment area.20 Small
business loans represented more than 85 percent of the
number and dollar amount of the bank's total loans originated in its assessment area in 2003. The examiners noted
that Hudson Valley Bank's small business lending (by total
number and dollar amount as a percentage of total loans) in
LMI census tracts in its assessment area approximated
the volume for the aggregate of all lenders ("aggregate
lenders"). 21
In their review of 2003 HMDA data, examiners found
that although the bank's residential mortgage loans in LMI
areas in its assessment area compared unfavorably with the
distribution by the aggregate lenders, the bank's distribution of such loans to borrowers of different income levels
was adequate.22 They also noted that the bank's percentage
of home purchase loans to LMI borrowers approximated or
exceeded the percentage for the aggregate lenders.23

18. For purposes of this analysis, small business loans included
business loans with an original amount of $1 million or less.
19. Although the Board has recognized that depository institutions
help to serve the banking needs of communities by making a variety
of products and services available, neither the CRA nor the federal
banking agencies' CRA regulations require an institution to provide
any specific types of products or services in its assessment areas.
20. The examiners also noted that the aggregate data for small
business loans in this area included several large credit card banks
that recorded each advance drawn on their cards as an individual
small business loan, which might have overstated their activity in the
assessment area.
21. The lending data of the aggregate of lenders represent the
cumulative lending for all financial institutions that have reported
HMDA data in a particular area. In 2004, Hudson Valley Bank's total
dollar value and originations for small business lending in LMI census
tracts in its assessment area approximated or exceeded the aggregate
lenders' performance.
22. Examiners noted that the bank's opportunities to make residential loans in LMI areas were limited by a low percentage of owneroccupied units in the assessment area and by a low median income
that was substantially less than the median value of residential
properties.
23. In 2004, Hudson Valley Bank received 91 mortgage applications, which resulted in 42 mortgage loans in its assessment area.

C27

Examiners also commended Hudson Valley Bank for
its role as a leader in providing community development
loans in its assessment area. As of September 30, 2004,
its outstanding community development loans and commitments totaled $32.9 million. Examiners noted that
the majority of the bank's community development lending
supported social services programs for economically disadvantaged residents in the assessment area.
The bank received an overall rating of "high satisfactory" under the service test. The examiners found that
Hudson Valley Bank provided a commendable level of
support to its community. The evaluation noted that the
bank's retail banking services were reasonably available to
all segments of the assessment area through online banking, an ATM network, and extended branch hours. The
examiners also commended Hudson Valley Bank for providing a relatively high level of community development
services.
NYNB. As previously noted, NYNB received an "outstanding" rating at its most recent CRA performance
evaluation. Examiners found that NYNB's overall lending
activity demonstrated responsiveness to the credit needs
of its assessment area. NYNB provides banking services
to an area that is significantly underserved by other banking institutions. Examiners reported that the bank's level
of qualified community development investments in its
assessment area was good relative to the size and capacity
of the institution. The examiners also noted that the bank's
investments and community development services had
increased credit availability in the assessment area.

C. HMDA and Fair Lending Record
The Board has considered carefully Hudson Valley Bank's
lending record and HMDA data in light of public comment
about its record of lending to minorities. The commenter
expressed concern, based on 2004 HMDA data, that
Hudson Valley Bank disproportionately excluded or denied
applications by African-American and Hispanic applicants
for HMDA-reportable loans. In support of this assertion,
the commenter also referenced Hudson Valley Bank's low
number of home mortgage applications from and originations to African-American and Hispanic applicants. The
Board reviewed the HMDA data for 2004 reported by
Hudson Valley Bank in its assessment area, which is part
of the Metro New York banking market.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they are insufficient by themselves to conclude whether or not Hudson Valley Bank is
excluding any racial or ethnic group, or imposing higher
credit costs on these groups, on a prohibited basis. The
Board recognizes that HMDA data alone, even with the
recent addition of pricing information,24 provide only lim24. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for

C28

Federal Reserve Bulletin • 2006

ited information about the covered loans.25 HMDA data,
therefore, have limitations that make them an inadequate
basis, absent other information, for concluding that an
institution has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully in light of other information, including
examination reports that provide an on-site evaluation of
compliance by Hudson Valley Bank with fair lending laws
and the CRA performance records of Hudson Valley Bank
and NYNB that are detailed above. In the fair lending
review conducted in conjunction with its CRA evaluation,
examiners noted no substantive violations of applicable
fair lending laws by Hudson Valley Bank. The Board
has also consulted with the primary banking supervisors
of Hudson Valley Bank and NYNB about this proposal
and the compliance records of the banks since their last
examinations.
The record also indicates that Hudson Valley Bank has
taken steps to help ensure compliance with fair lending
laws and other consumer protection laws. Hudson Valley
Bank has implemented comprehensive operating procedures and quality control measures to confirm that appropriate consumer compliance policies and procedures are
followed. The bank has implemented increased compliance
training for staff, including semiannual updates on relevant
issues for all employees, and annual updates for all personnel whose responsibilities include providing information
about the Bank's loan products and services. In addition,
the bank has established a system for compliance monitoring by senior management and the board of directors.
The Board also has considered the HMDA data in light
of other information, including the overall CRA performance record of Hudson Valley Bank and NYNB. These
efforts demonstrate that the institutions are active in meeting the convenience and needs of their communities and
that their records of performance are consistent with
approval of this proposal.

loans on which the annual percentage rate (APR) exceeds the yield
for U.S. Treasury securities of comparable maturity by 3 percentage
points for first-lien mortgages and 5 percentage points for second-lien
mortgages (12 CFR 203.4).
25. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

D. Conclusion on Convenience and Needs and CRA
Performance
The Board has carefully considered all the facts of record,
including reports of examination of the CRA performance
records of the institutions involved, comments received
on the proposal, information provided by Hudson Valley,
and confidential supervisory information. The Board notes
that the proposal would provide customers of the combined
entity with access to a broader array of products and services in expanded service areas, including trust services,
internet banking, and telephone banking service. Based on
a review of the entire record, and for the reasons discussed
above, the Board concludes that considerations relating
to the convenience and needs factor and the CRA performance records of the relevant depository institutions are
consistent with approval.

Conclusion
Based on the foregoing and all facts of record, the Board
has determined that the application should be, and hereby
is, approved.26 In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the BHC Act.27 The Board's

26. The commenter requested that the Board hold a public meeting
or hearing on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes
a timely written recommendation of denial of the application. The
Board has not received such a recommendation from the appropriate
supervisory authorities. Under its rules, the Board also may, in its
discretion, hold a public meeting or hearing on an application to
acquire a bank if a meeting or hearing is necessary or appropriate to
clarify factual issues related to the application and to provide an
opportunity for testimony (12 CFR 225.16(e)). The Board has considered carefully the commenter's request in light of all the facts of
record. In the Board's view, the commenter had ample opportunity to
submit its views and, in fact, submitted written comments that have
been considered carefully by the Board in acting on the proposal. The
commenter's request fails to demonstrate why its written comments
do not present its views adequately or why a meeting or hearing
otherwise would be necessary or appropriate. For these reasons, and
based on all the facts of record, the Board has determined that a public
meeting or hearing is not required or warranted in this case. Accordingly, the request for a public meeting or hearing on the proposal is
denied.
27. The commenter also requested that the Board delay action or
extend the comment period on the proposal. As previously noted, the
Board has accumulated a significant record in this case, including
reports of examination, confidential supervisory information, public
reports and information, and public comment. As also noted, the
commenter has had ample opportunity to submit its views and, in fact,
has provided substantial written submissions that the Board has considered carefully in acting on the proposal. Moreover, the BHC Act
and Regulation Y require the Board to act on proposals submitted
under those provisions within certain time periods. Based on a review
of all the facts of record, the Board has concluded that the record in
this case is sufficient to warrant action at this time, and that further
delay in considering the proposal, extension of the comment period, or
denial of the proposal on the grounds discussed above or on the basis
of informational insufficiency is not warranted.

Legal Developments

approval is specifically conditioned on compliance by Hudson Valley with the conditions imposed in this order and
the commitments made to the Board in connection with the
application. For purposes of this transaction, the conditions
and commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause
by the Board or the Federal Reserve Bank of New York,
acting pursuant to delegated authority.
By order of the Board of Governors, effective December 6, 2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board
NBT Bancorp Inc.
Norwich, New York
Order Approving the Merger of Bank Holding
Companies
NBT Bancorp Inc. ("NBT"), a bank holding company
within the meaning of the Bank Holding Company Act
("BHC Act"), has requested the Board's approval under
section 3 of the BHC Act 1 to merge with CNB Bancorp,
Inc. ("CNB"), and thereby acquire its subsidiary bank,
City National Bank and Trust Company ("City National
Bank"), both of Gloversville, New York.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 48,953 (2005)). The time for filing
comments has expired, and the Board has considered the
application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
NBT, with total consolidated assets of approximately
$4.4 billion, operates one depository institution, NBT
Bank, with branches in New York and Pennsylvania. NBT
Bank is the 28th largest depository institution in New
York, controlling deposits of approximately $2.4 billion,
which represent less than 1 percent of the total amount of
deposits of insured depository institutions in the state
("state deposits"). 3
1. 12U.S.C. §1842.
2. NBT's only subsidiary bank, NBT Bank, National Association
("NBT Bank"), also of Norwich, has filed an application with the
Office of the Comptroller of the Currency ("OCC") to merge City
National Bank into NBT Bank under section 18(c) of the Federal
Deposit Insurance Act (12 U.S.C. § 1828(c)).
3. Deposit, ranking, and asset data are as of June 30, 2005. In this
context, insured depository institutions include commercial banks,
savings banks, and savings associations.

C29

CNB, with total consolidated assets of approximately
$419 million, operates one insured depository institution,
City National Bank. The bank is the 85th largest insured
depository institution in New York, controlling deposits
of approximately $344 million. On consummation of the
proposal, NBT would become the 25th largest depository
organization in New York, controlling deposits of approximately $2.7 billion, which represent less than 1 percent of
state deposits.

Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would
be in furtherance of an attempt to monopolize the business
of banking in any relevant banking market. The BHC Act
also prohibits the Board from approving a bank acquisition
that would substantially lessen competition in any relevant
banking market unless the anticompetitive effects of the
proposal are clearly outweighed in the public interest by
the probable effect of the proposal in meeting the convenience and needs of the community to be served.4
NBT and CNB compete directly in the Albany banking
market in New York.5 The Board has reviewed carefully
the competitive effects of the proposal in this banking
market in light of all the facts of record, including the
number of competitors that would remain in the market,
the relative shares of total deposits in depository institutions in the Albany market ("market deposits") controlled
by NBT Bank and City National Bank,6 the concentration
level of market deposits and the increase in this level as
measured by the Herfindahl-Hirschman Index ("HHI")
under the Department of Justice Merger Guidelines ("DOJ
Guidelines"), 7 and other characteristics of the market.

4. 12 U.S.C. §1842(c)(l).
5. The Albany banking market is defined as Albany, Columbia,
Fulton, Greene, Hamilton, Montgomery, Rensselaer, Saratoga,
Schenectady, Schoharie, Warren, and Washington counties in New
York.
6. Deposit and market share data are as of June 30, 2005, and are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has
included thrift deposits in the market share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal Reserve
Bulletin 52 (1991).
7. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly concentrated if the post-merger HHI exceeds 1800. The Department of
Justice ("DOJ") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger
HHI is at least 1800 and the merger increases the HHI more than
200 points. The DOJ has stated that the higher-than-normal HHI
thresholds for screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limitedpurpose and other nondepository financial entities.

C30

Federal Reserve Bulletin • 2006

Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in the Albany market. On consummation, the
Albany banking market would remain moderately concentrated, as measured by the HHI. The increase in concentration would be small and numerous competitors would
remain in the market.8
The Department of Justice also has reviewed the anticipated competitive effects of the proposal and advised the
Board that consummation of the proposal would not likely
have a significantly adverse effect on competition in any
relevant banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Albany banking market or in any
other relevant banking market. Accordingly, based on all
the facts of record, the Board has determined that competitive considerations are consistent with approval.

Financial, Managerial, and Supervisory

Considerations

Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered these factors in light of all the facts
of record, including confidential reports of examination,
other supervisory information from the primary federal
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, and
information provided by the applicant.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial condition of the combined organization at consummation, including its capital position, asset quality, and earnings prospects, and the impact of the proposed funding of
the transaction.
8. NBT operates the ninth largest depository institution in the
Albany banking market, controlling deposits of approximately
$579.9 million, which represent approximately 2.6 percent of market
deposits. CNB is the twelfth largest depository institution in the
market, controlling deposits of approximately $343.7 million, which
represent approximately 1.5 percent of market deposits. On consummation, NBT would operate the eighth largest depository institution
in the market, controlling deposits of approximately $923.6 million,
which represent approximately 4.1 percent of market deposits. The
HHI would increase 28 points, to 1745.

NBT and NBT Bank are well capitalized and would
remain so on consummation of the proposal. Based on its
review of the record, the Board believes that NBT has
sufficient financial resources to effect the proposal. The
proposed transaction is structured as a share exchange and
cash purchase. NBT will issue trust preferred securities to
fund the cash portion of the transaction.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of NBT, CNB, and their subsidiary banks, including assessments of their management, risk-management
systems, and operations. In addition, the Board has considered its supervisory experiences and those of the other
relevant banking supervisory agencies with the organizations and their records of compliance with applicable
banking law. NBT, CNB, and their subsidiary depository
institutions are considered to be well managed. The Board
also has considered NBT's plans for implementing the
proposal, including the proposed management after
consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial resources and future prospects of the organizations
involved in the proposal are consistent with approval, as
are the other supervisory factors under the BHC Act.

Legal Developments

the commenter expressed concern about NBT Bank's rating under the service test in its most recent CRA performance evaluation.

A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance
evaluation is a particularly important consideration in the
applications process, because it represents a detailed,
on-site evaluation of the institution's overall record of
performance under the CRA by its appropriate federal
supervisor.12
NBT Bank received an "outstanding" rating at its most
recent CRA evaluation by the OCC, as of July 6, 2004
("2004 CRA Evaluation"). 13 City National Bank received
a "satisfactory" rating at its most recent CRA performance
evaluation by the OCC, as of January 27, 2003. 14 After
consummation of the proposed series of transactions, NBT
will direct the resulting institution to adopt the community development program, including products, services,
outreach, and initiatives, that is currently in place at NBT
Bank.
In its 2004 CRA Evaluation, NBT Bank received an
overall "outstanding" rating under the lending test. Examiners reported that NBT Bank's lending levels reflected
excellent responsiveness to the credit needs of its communities. Furthermore, examiners noted that NBT Bank's
distribution of loans showed a good penetration among
geographies and customers of different income levels and
among businesses of different revenue sizes.
Examiners commended NBT Bank's lending activity in
the New York assessment areas and noted that its overall
geographic distribution of loans was good. In NBT Bank's
New York assessment areas where examiners conducted a
full-scope review, they noted that the bank's percentage of
home purchase loans in moderate-income geographies generally exceeded the percentage of owner-occupied housing
units in these geographies.15 Moreover, the market share
12. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
13. Examiners evaluated NBT Bank's CRA performance in its
11 assessment areas in New York and Pennsylvania. In determining
NBT Bank's overall rating, examiners gave the greatest weight to the
bank's performance in the assessment areas in New York. The evaluation period for home mortgage and small business loans was January 1, 2001, through December 31, 2002. The evaluation period for
community development loans and the investment and service tests
was September 17, 2001, through July 6, 2004.
14. The evaluation period for City National Bank's CRA performance was January 1, 2000, through December 31, 2002. A commenter alleged that City National Bank's CRA examination was
dated, but this comment referred to the bank's 1999 CRA examination.
15. These areas included the Albany region, consisting of Montgomery, Saratoga, Schoharie, and Schenectady counties, and the

C31

for home purchase loans made to LMI borrowers exceeded
NBT Bank's overall market share for all home purchase
loans. Examiners also took into consideration programs
offered by NBT Bank to address the credit needs of LMI
individuals and geographies. These programs included a
partnership with the State of New York Mortgage Agency
to increase home ownership opportunities for LMI households through subsidized loans and closing-cost assistance. 16 Examiners noted that NBT Bank also had partnerships with a number of nonprofit agencies through which
it offered an affordable housing mortgage product to LMI
individuals and participated in the Federal Home Loan
Bank of New York's First Home Club program that aided
low-income borrowers. The First Home Club program
provides down payment and closing cost assistance to
participating low-income borrowers by providing matching
funds to augment participants' savings.
The 2004 CRA Evaluation also found that the bank
demonstrated an excellent overall record of serving the
credit needs of small businesses. Examiners concluded that
the overall geographic distribution of small loans to businesses and farms was good, particularly in the bank's
Albany Assessment Area.
Examiners commended NBT Bank for its level of community development lending throughout its assessment
areas in the 2004 CRA Evaluation. During the evaluation
period, NBT Bank originated 19 community development
loans totaling $25.7 million in New York and Pennsylvania, the majority of which supported affordable housing
initiatives.
NBT Bank received an overall "outstanding" rating
under the investment test in the 2004 CRA Evaluation,
reflecting what examiners reported as an "excellent" level
of qualified investments in various assessment areas. The
bank's qualified investments in New York during the evaluation period totaled approximately $19.8 million.
NBT Bank received a "low satisfactory" rating in the
2004 CRA Evaluation under the service test overall and in
its New York assessment areas. In Pennsylvania, NBT
Bank was rated "high satisfactory" under the service test.
Examiners reported that the bank's branches in its assessment areas were reasonably accessible to individuals and
geographies of different income levels. Examiners also
reported that NBT Bank's hours and services offered in its
assessment areas were good and that the bank offered
services that provided easy access to funds for low-income
people who received government assistance at its
branches.17 Examiners commended NBT Bank for supportnorthern portion of Albany County ("Albany Assessment Area"), and
the Southern Tier Region, consisting of Chenango, Delaware, and
Otsego counties, and portions of Madison, Greene, and Ulster counties, all in New York.
16. NBT Bank originated almost $1.6 million in loans to LMI
borrowers through the agency's programs during the evaluation
period.
17. The commenter requested that the Board require NBT to file
branch closing information as part of this proposal. The Board notes
that federal banking law provides a specific mechanism for addressing
branch closings. Federal law requires an insured depository institution
to provide notice to the public and to the appropriate federal super-

C32

Federal Reserve Bulletin • 2006

ing community development services throughout its assessment areas that promoted or facilitated affordable housing,
services, and economic development in LMI areas and for
LMI individuals.

B. HMDA and Fair Lending Record
The Board has considered carefully NBT Bank's and City
National Bank's lending records and HMDA data in light
of public comment about their records of lending to minorities. A commenter expressed concern, based on 2004
HMDA data, that NBT Bank disproportionately denied
applications for HMDA-reportable loans by AfricanAmerican and Hispanic applicants. The commenter also
expressed concern that the 2003 and 2004 HMDA data
indicated that NBT Bank and City National Bank made
few home purchase loans to minority applicants and that
the banks received few applications from minority individuals. Based on the 2004 HMDA data, the commenter
also criticized NBT Bank for making higher-cost mortgage
loans.18 The Board reviewed the HMDA data for 2003 and
2004 reported by NBT Bank and City National Bank in the
Albany-Schenectady-Troy Metropolitan Statistical Area.19
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves to conclude whether or not NBT Bank
or City National Bank is excluding any racial or ethnic
group or imposing higher credit costs on those groups on a
prohibited basis. The Board recognizes that HMDA data
alone, even with the recent addition of pricing information,
provide only limited information about the covered loans.20

visory agency before closing a branch. Section 42 of the Federal
Deposit Insurance Act (12 U.S.C. § 1831r-l), as implemented by the
Joint Policy Statement Regarding Branch Closings (64 Federal Regis
ter 34,844 (1999)), requires that a bank provide the public with at least
a 30-day notice and the appropriate federal supervisory agency and
customers of the branch with at least a 90-day notice before the date of
the proposed branch closing. The bank also is required to provide
reasons and other supporting data for the closure, consistent with the
institution's written policy for branch closings. In addition, the Board
notes that the OCC, as the appropriate federal supervisor of NBT
Bank, will continue to review its branch closing record in the course
of conducting CRA performance evaluations.
18. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield
for U.S. Treasury securities of comparable maturity by 3 percentage
points for first-lien mortgages and 5 percentage points for second-lien
mortgages (12 CFR 203.4). NBT Bank stated that some of its HMDAreported loans are higher-priced loans because they are for the purchase of manufactured housing and represented that these loans generally have a higher credit risk and are secured by collateral that
decreases in value. The bank also stated that a loan's administrative
cost might cause it to be priced differently.
19. The Albany-Schenectady-Troy Metropolitan Statistical Area
is defined as Albany, Saratoga, Schenectady, Schoharie, and Rensselaer counties in New York.
20. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of margin-

HMDA data, therefore, have limitations that make them
an inadequate basis, absent other information, for concluding that an institution has engaged in illegal lending
discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by NBT Bank and City National Bank
with fair lending laws. In the fair lending reviews of NBT
Bank and City National Bank conducted in conjunction
with their most recent CRA evaluations, examiners noted
no substantive violations of applicable fair lending laws by
either bank.
The record also indicates that NBT has taken steps to
help ensure compliance with fair lending laws and other
consumer protection laws. NBT represented that it performs significant monitoring of compliance in its mortgage
lending operations through a wide variety of audit and
review methods, including file reviews, statistical analyses,
and exception reviews. One such review method at NBT
Bank is a "second-look" program for all residential mortgage loan applications initially scheduled for denial. Under
this program, a manager or other supervisory officer
reviews such applications to ensure that they were properly
evaluated and to determine whether the applicants qualify
for another loan product offered by NBT Bank. Furthermore, NBT Bank primarily offers conventional mortgage
products such as those offered by government-sponsored
enterprises that conform to secondary-market underwriting
guidelines. NBT Bank's mortgage program includes riskpriced procedures consistent with these guidelines and it
uses automated software for underwriting and pricing mortgage loans. In addition, NBT Bank stated that it will
conduct a quarterly review of the overall distribution of its
mortgage loan applications and originations, including the
distribution of lending to minority individuals, in the
Albany Assessment Area for a period of at least two years
after consummation of the proposal.
The Board also has considered the HMDA data in light
of other information, including the CRA lending programs
described above and the overall performance records of
NBT Bank and City National Bank under the CRA. These
established efforts demonstrate that the institutions are
active in helping to meet the credit needs of their entire
communities.

ally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

Legal Developments

C33

C. Conclusion on Convenience and Needs and CRA
Performance Records

By order of the Board of Governors, effective December 14, 2005.

The Board has carefully considered all the facts of record,
including reports of evaluation of the CRA performance
records of the institutions involved, HMDA data reported
by NBT Bank and City National Bank, information provided by NBT, comments received on the proposal, and
confidential supervisory information. The Board notes that
the proposal would expand the availability and array of
banking products and services to the customers of City
National Bank, including access to expanded branch and
ATM networks. Based on a review of the entire record, and
for the reasons discussed above, the Board concludes that
considerations relating to the convenience and needs factor
and the CRA performance records of the relevant depository institutions are consistent with approval.

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

Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act.21 The
Board's approval is specifically conditioned on compliance
by NBT with the conditions imposed in this order and the
commitments made to the Board in connection with the
application. For purposes of this action, the conditions
and commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision herein and, as such, may be enforced in proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Federal Reserve Bank of New York,
acting pursuant to delegated authority.
21. A commenter requested that the Board hold a public hearing or
meeting on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for any of the banks to be acquired
makes a timely written recommendation of denial of the application.
The Board has not received such a recommendation from any supervisory authority. Under its rules, the Board also may, in its discretion,
hold a public meeting or hearing on an application to acquire a bank if
necessary or appropriate to clarify factual issues related to the application and to provide an opportunity for testimony (12 CFR 225.16(e)).
The Board has considered carefully the commenter's requests in light
of all the facts of record. In the Board's view, the commenter had
ample opportunity to submit comments on the proposal and, in fact,
submitted written comments that the Board has considered carefully
in acting on the proposal. The commenter's request fails to demonstrate why written comments do not present its views adequately or
why a meeting or hearing otherwise would be necessary or appropriate. For these reasons, and based on all the facts of record, the Board
has determined that a public hearing or meeting is not required or
warranted in this case. Accordingly, the request for a public hearing or
meeting on the proposal is denied.

ROBERT DEV. FRIERSON

Deputy Secretary of the Board

New York Community Bancorp,
Westbury, New York

Inc.

Order Approving the Merger of Bank Holding
Companies
New York Community Bancorp, Inc. ("NYCB"), a bank
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval pursuant to section 3 of the BHC Act 1 to merge
with Long Island Financial Corp. ("LIFC"), and thereby
acquire its subsidiary bank, Long Island Commercial Bank
("LICB"), both of Islandia, New York.
Notice of the proposal, affording interested persons
an opportunity to submit comments, has been published
(70 Federal Register 55,858 (2005)). The time for filing
comments has expired, and the Board has considered the
application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
NYCB, with total consolidated assets of approximately
$25 billion, operates two depository institutions, New
York Community Bank ("NY Community Bank"), with
branches in New Jersey and New York, and New York
Commercial Bank ("NY Commercial Bank"), 2 both of
Flushing, New York.3 NYCB is the 11th largest depository
organization in New York, controlling deposits of approximately $11.2 billion, which represent less than 2 percent of
the total amount of deposits of insured depository institutions in the state ("state deposits").
LIFC, with total consolidated assets of approximately
$532 million, operates one depository institution, LICB,
with branches only in New York. LIFC is the 80th largest
insured depository institution in New York, controlling
deposits of approximately $420 million.
On consummation of the proposal, NYCB would have
consolidated assets of approximately $25.5 billion. NYCB
would remain the 11th largest depository organization in
New York, controlling deposits of approximately $11.6 billion, which represent less than 2 percent of state deposits.

1. 12U.S.C. §1842.
2. NY Commercial Bank, a wholly owned subsidiary of NY Community Bank, is a limited-purpose bank that only accepts municipal
deposits.
3. Asset data are as of September 30, 2005, and statewide deposit
and ranking data are as of June 30, 2005. Data reflect subsequent
merger activity through December 13, 2005. In this context, insured
depository institutions include commercial banks, savings banks, and
savings associations.

C34

Federal Reserve Bulletin • 2006

Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approving a proposed bank acquisition that would result in a
monopoly or would be in furtherance of any attempt to
monopolize the business of banking in any relevant banking market. In addition, section 3 prohibits the Board from
approving a proposed bank acquisition that would substantially lessen competition in any relevant banking market
unless the anticompetitive effects of the proposal are
clearly outweighed in the public interest by its probable
effect in meeting the convenience and needs of the community to be served.4
NYCB and LIFC compete directly in the Metro New
York banking market (New York banking market).5 The
Board has carefully reviewed the competitive effects of the
proposal in this banking market in light of all the facts of
record. In particular, the Board has considered the number
of competitors that would remain in the banking market,
the relative shares of total deposits in depository institutions in the market ("market deposits") controlled by
NYCB and LIFC, 6 the concentration level of market deposits and the increase in this level as measured by the
Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 7
and other characteristics of the market.
Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in the New York
banking market. After consummation of the proposal, the
New York banking market would remain moderately con-

4. 12U.S.C. §1842(c)(l).
5. The Metro New York banking market includes: Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond,
Rockland, Suffolk, Sullivan, Ulster, and Westchester counties in
New York; Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, and Warren
counties and portions of Mercer County in New Jersey; Pike County
in Pennsylvania; and Fairfield County and portions of Litchfield and
New Haven counties in Connecticut.
6. Deposit and market share data are as of June 30, 2005 (adjusted
to reflect mergers and acquisitions through December 13, 2005), and
are based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has
included thrift deposits in the market share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal Reserve
Bulletin 52 (1991).
7. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is less than 1000, moderately concentrated if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI is more than 1800. The Department of Justice ("DOJ") has informed the Board that a bank merger
or acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger
HHI is at least 1800 and the merger increases the HHI by more than
200 points. The DOJ has stated that the higher-than-normal HHI
thresholds for screening bank mergers for anticompetitive effects
implicitly recognize the competitive effects of limited-purpose lenders
and other nondepository financial entities.

centrated, as measured by the HHI, and numerous competitors would remain in the market.8
The Department of Justice also has conducted a detailed
review of the anticipated competitive effects of the proposal and has advised the Board that consummation of the
proposal would not likely have a significantly adverse
effect on competition in any relevant banking market. In
addition, the appropriate banking agencies have been
afforded an opportunity to comment and have not objected
to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the banking market where NYCB and
LIFC compete or in any other relevant banking market.
Accordingly, based on all the facts of record, the Board has
determined that competitive considerations are consistent
with approval.

Financial, Managerial, and Supervisory

Considerations

Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered these factors in light of all the facts
of record, including confidential reports of examination,
other supervisory information from the primary federal and
state supervisors of the organizations involved in the proposal, publicly reported and other financial information,
information provided by NYCB, and public comment on
the proposal.9
In evaluating financial factors in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
8. After the proposed acquisition, the HHI would remain
unchanged at 1069. NYCB operates the tenth largest depository
institution in the market, controlling deposits of approximately
$11.8 billion, which represent less than 2 percent of market deposits.
LIFC operates the 94th largest depository institution in the market,
controlling deposits of approximately $420 million, which represent
less than 1 percent of market deposits. After the proposed acquisition,
NYCB would continue to operate the tenth largest depository institution in the market, controlling deposits of approximately $12.2 billion,
which represent less than 2 percent of market deposits. Two hundred
and eighty-two depository institutions would remain in the banking
market.
9. A commenter criticized LIFC for having lending relationships
with several check-cashing businesses. As a general matter, these
types of businesses are licensed by the states where they operate and
are regulated by state law. LIFC has entered into lending or other
limited banking relationships with these companies but does not play
any role in their lending and business practices or credit-review
processes. LICB represented that it conducts a due diligence review
before commencing a banking relationship with any check casher.

Legal Developments

Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial condition of the combined organization at consummation, including its capital position, asset quality, and earnings prospects, and the impact of the proposed funding of
the transaction.
NYCB, LIFC, and their subsidiary depository institutions are well capitalized, and the resulting organization
and its subsidiary banks would remain so on consummation of the proposal. The proposed transaction is structured
as a share exchange. Based on its review of the record in
this case, the Board believes that NYCB has sufficient
financial resources to effect the proposal.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of NYCB, LIFC, and their subsidiary depository
institutions, including assessments of their management,
risk-management systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of the other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law. Moreover, the Board consulted with the
Federal Deposit Insurance Corporation ("FDIC"), the primary federal banking supervisor of NYCB's and LIFC's
subsidiary banks. The Board also has considered NYCB's
plans for implementing the proposal, including the proposed management after consummation. NYCB, LIFC, and
their subsidiary depository institutions are considered to be
well-managed.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial resources and future prospects of the organizations
involved in the proposal are consistent with approval, as
are the supervisory factors under the BHC Act.

C35

The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of the subsidiary depository institutions
of NYCB and LIFC, data reported by NYCB under the
Home Mortgage Disclosure Act ("HMDA"),12 other information provided by NYCB, confidential supervisory information, and public comment received on the proposal. A
commenter opposing the proposal asserted, based on 2004
HMDA data, that NYCB has engaged in discriminatory
treatment of minority individuals in its home mortgage
operations.13

B. HMDA Data and Fair Lending Record
Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of a proposal on the
convenience and needs of the communities to be served
and take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").10 The CRA requires the federal financial
supervisory agencies to encourage financial institutions
to help meet the credit needs of the local communities in
which they operate, consistent with their safe and sound
operation, and requires the appropriate federal financial
supervisory agency to take into account an institution's
record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, in evaluating depository institutions' expansionary
proposals.11

10. 12U.S.C. §2901 etseq.
11. 12U.S.C. §2903.

The Board has carefully considered NY Community
Bank's lending record and HMDA data in light of public
comment about its record of lending to minorities. The
commenter expressed concern, based on 2004 HMDA data,
that NY Community Bank denied or excluded the home
mortgage and refinance applications of African-American
and Hispanic borrowers more frequently than those of
12. 12U.S.C. §2801 etseq.
13. The commenter also alleged that NYCB lends to "slumlords."
NYCB represented that NY Community Bank's primary lending focus
is its multifamily loan program, which concentrates on loans for
rent-controlled and rent-stabilized residential buildings in New York
City. NYCB further stated that it engages in extensive due diligence in
its lending to residential landlords, including conducting inspections
of properties, assessing the real estate management experience of
landlord/borrowers, and requiring remediation of building code violations. In addition, NYCB represented that it conducts inspections of
the properties during the term of the mortgage loans.
14. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
15. NY Commercial Bank is a special-purpose bank not subject to
the CRA. See 12 CFR 345.11(c)(3).

C36

Federal Reserve Bulletin • 2006

nonminority applicants in the New York, New York Metropolitan Statistical Area ("MSA"); the Nassau-Suffolk, New
York MSA; and the Edison, New Jersey MSA. 16 The
Board reviewed the HMDA data for 2004 reported by NY
Community Bank in its assessment area.17
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they are insufficient by themselves to support a conclusion on whether or not NY
Community Bank is excluding any racial or ethnic group
or imposing higher credit costs on those groups on a
prohibited basis. The Board recognizes that HMDA data
alone, even with the recent addition of pricing information, provide only limited information about the covered
loans.18 HMDA data, therefore, have limitations that make
them an inadequate basis, absent other information, for
concluding that an institution has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by NY Community Bank with fair
lending laws. In the fair lending review conducted in
conjunction with the bank's CRA evaluation in 2002,
examiners noted no violations of the substantive provisions
of applicable fair lending laws. In addition, the Board has
consulted with the FDIC, the primary federal supervisor of
NY Community Bank, about the bank's record of compliance with fair lending laws and other consumer protection
laws.
The record also indicates that NYCB has taken steps
designed to ensure compliance with fair lending laws and

16. In 2004 the Nassau-Suffolk MSA was renamed the NassauSuffolk, New York Metropolitan Division by the Office of Management and Budget ("OMB"), and the New York, New York MSA
is now encompassed within the New York-White Plains-Wayne,
New York-New Jersey Metropolitan Division. The OMB also delineated the Edison, New Jersey Metropolitan Division. See OMB Bulletin No. 05-02 (2004).
17. The Board reviewed 2004 HMDA data reported by NY Community Bank in portions of the following Metropolitan Divisions that
comprise the bank's assessment area: (1) Nassau-Suffolk, New York;
(2) New York-White Plains-Wayne, New York-New Jersey; and
(3) Newark-Union, New Jersey-Pennsylvania. The Edison, New Jersey Metropolitan Division is not within the bank's assessment area.
18. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

other consumer protection laws. NYCB represented that
it has implemented fair lending policies, procedures, and
training programs at NY Community Bank and that all
lending department personnel at the bank are required to
take annual compliance training. NYCB further represented that the bank's fair lending policies and procedures
are designed to help ensure that loan officers price loans
uniformly, illegally discriminatory loan products are
avoided, and current and proposed lending activities and
customer complaints are reviewed. NY Community Bank
conducts independent audits of its lending activities, and
audit results are provided to its Audit Committee of the
Board of Directors, Compliance Department, and Legal
Department. The bank also analyzes HMDA Loan Application Register data to help assess its lending activities for
compliance with the CRA.
NYCB has represented that LICB maintains similar policies and programs designed to ensure compliance with
applicable fair lending and consumer protection laws and
that NYCB does not intend to make significant changes to
LICB's policies and programs.
The Board also has considered the HMDA data in light
of other information, including NY Community Bank's
CRA lending programs and the overall performance
records of NY Community Bank and LICB under the
CRA. These established efforts demonstrate that the institutions are active in helping to meet the credit needs of their
entire communities.
C. Conclusion on Convenience and Needs and CRA
Performance Records
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by NYCB,
comments received on the proposal, and confidential supervisory information. The Board notes that the proposal
would expand the availability and array of banking products and services to LIFC's customers, including access to
expanded branch and ATM networks. Based on a review of
the entire record, and for the reasons discussed above, the
Board concludes that considerations relating to the convenience and needs factor and the CRA performance records
of the relevant depository institutions are consistent with
approval.

Conclusion
Based on the foregoing and in light of all the facts of
record, the Board has determined that the application
should be, and hereby is, approved.19 In reaching this

19. The commenter also requested that the present proposal be
consolidated with a separate application under the BHC Act that
NYCB may file in connection with another acquisition that it recently
announced. This potential application would be considered by the
Board separately from the NYCB/LIFC proposal pursuant to standard
procedures under section 3 of the BHC Act and Regulation Y.

Legal Developments

conclusion, the Board has considered all the facts of record
in light of the factors it is required to consider under
the BHC Act and other applicable statutes.20 The Board's
approval is specifically conditioned on compliance by
NYCB with the conditions in this order and all the commitments made to the Board in connection with the proposal.
For purposes of this action, the commitments and conditions are deemed to be conditions imposed in writing by
the Board in connection with its findings and decision and,
as such, may be enforced in proceedings under applicable
law.
The proposed transaction shall not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or by the Federal Reserve Bank of New York,
acting pursuant to delegated authority.
By order of the Board of Governors, effective December 14, 2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Penn Bancshares, Inc.
Pennsville, New Jersey
Order Approving Acquisition of Shares of a Bank
Holding Company
Penn Bancshares, Inc. ("Penn"), a bank holding company
within the meaning of the Bank Holding Company Act
("BHC Act"), has requested the Board's approval under
section 3 of the BHC Act 1 to acquire up to 24.89 percent of

20. The commenter requested that the Board hold a public hearing
or meeting on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for any of the banks to be acquired
makes a timely written recommendation of denial of the application.
The Board has not received such a recommendation from any supervisory authority. Under its rules, the Board also may, in its discretion,
hold a public meeting or hearing on an application to acquire a bank if
necessary or appropriate to clarify factual issues related to the application and to provide an opportunity for testimony (12 CFR 225.16(e)).
The Board has considered carefully the commenter's request in light
of all the facts of record. In the Board's view, the commenter had
ample opportunity to submit comments on the proposal and, in fact,
submitted written comments that the Board has considered carefully
in acting on the proposal. The commenter's request fails to demonstrate why written comments do not present its views adequately or
why a meeting or hearing otherwise would be necessary or appropriate. For these reasons, and based on all the facts of record, the Board
has determined that a public hearing or meeting is not required or
warranted in this case. Accordingly, the request for a public hearing or
meeting on the proposal is denied.
1. 12U.S.C. §1842.

C37

the voting shares of Harvest Community Bank ("HCB"),
also of Pennsville.2
Notice of the proposal, affording interested persons
an opportunity to submit comments, has been published
(70 Federal Register 56,899 (2005)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in section 3 of the BHC Act.
Penn, with total consolidated assets of approximately
$164.7 million, is the 102nd largest depository organization in New Jersey, controlling deposits of approximately
$150.5 million, which represent less than 1 percent of
total deposits of insured depository institutions 3 in the state
("state deposits"). 4 HCB, with assets of approximately
$141.1 million, is the 110th largest depository organization
in New Jersey, controlling approximately $120.9 million
in deposits. If Penn were deemed to control HCB on
consummation of the proposal, Penn would become the
74th largest depository organization in New Jersey, controlling approximately $271.4 million in deposits, which
represent less than 1 percent of state deposits.
The Board received approximately 73 comments on the
proposal. Comments were submitted by HCB and government officials, private organizations, and individuals,
including HCB and Penn shareholders and customers.
Many commenters objected to the proposal on the grounds
that the investment could create uncertainty about the
future independence of HCB or result in Penn acquiring
control of HCB and potentially harming its future prospects. A number of commenters also expressed concern
that the proposal could have an adverse effect on competition and on the convenience and needs of the communities
that HCB serves. The Board has considered these comments carefully in light of the factors that the Board must
consider under section 3 of the BHC Act.
The Board previously has stated that the acquisition of
less than a controlling interest in a bank or bank holding
company is not a normal acquisition for a bank holding
company.5 The requirement in section 3(a)(3) of the BHC
Act, however, that the Board's approval be obtained before
a bank holding company acquires more than 5 percent of
the voting shares of a bank suggests that Congress contemplated the acquisition by bank holding companies of
between 5 percent and 25 percent of the voting shares of

2. Penn and its officers and directors currently own 4.98 percent of
HCB's voting shares. Penn proposes to acquire the additional voting
shares in negotiated purchases from shareholders and through open
market purchases.
3. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.
4. Asset data are as of September 30, 2005. Deposit and ranking
data are as of June 30, 2005, and reflect merger activity through
December 14, 2005.
5. See, e.g., C-B-G, Inc., 91 Federal Reserve Bulletin 421 (2005)
("C-fl-G"); S&T Bancorp Inc., 91 Federal Reserve Bulletin 74 (2005)
("S&T Bancorp"); Brookline Bancorp, MHC, 86 Federal Reserve
Bulletin 52 (2000) ("Brookline"); North Fork Bancorporation, Inc.,
81 Federal Reserve Bulletin 734 (1995); First Piedmont Corp.,
59 Federal Reserve Bulletin 456, 457 (1973).

C38

Federal Reserve Bulletin • 2006

banks.6 On this basis, the Board previously has approved
the acquisition by a bank holding company of less than a
controlling interest in a bank or bank holding company.7
Penn has stated that the acquisition is intended as a
passive investment and that it does not propose to control
or exercise a controlling influence over HCB. Penn has
agreed to abide by certain commitments previously relied
on by the Board in determining that an investing bank
holding company would not be able to exercise a controlling influence over another bank holding company or bank
for purposes of the BHC Act.8 For example, Penn has
committed not to exercise or attempt to exercise a controlling influence over the management or policies of HCB or
any of its subsidiaries; not to seek or accept representation
on the board of directors of HCB or any of its subsidiaries;
and not to have any director, officer, employee, or agent
interlocks with HCB or any of its subsidiaries. Penn also
has committed not to attempt to influence the dividend
policies, loan decisions, or operations of HCB or any of its
subsidiaries. Moreover, the BHC Act prohibits Penn from
acquiring shares of HCB in excess of the amount considered in this proposal or attempting to exercise a controlling
influence over HCB without the Board's prior approval.9
The Board has adequate supervisory authority to monitor compliance by Penn with its commitments and can take
enforcement action against Penn if it violates any of the
commitments.10 The Board also has authority to initiate a
control proceeding 11 against Penn if facts presented later
indicate that Penn or any of its subsidiaries or affiliates, in
fact, controls HCB for purposes of the BHC Act.12 Based

6. See 12U.S.C. §1842(a)(3).
7. See, e.g., C-B-G (acquisition of up to 24.35 percent of the voting
shares of a bank holding company); S&T Bancorp (acquisition of up
to 24.9 percent of the voting shares of a bank holding company);
Brookline (acquisition of up to 9.9 percent of the voting shares of a
bank holding company).
8. See, e.g., C-B-G; S&T Bancorp; Emigrant Bancorp, Inc.,
82 Federal Reserve Bulletin 555 (1996); First Community Bane
shares, Inc., 11 Federal Reserve Bulletin 50 (1991). Penn's commitments are set forth in the appendix.
9. HCB claimed that Penn and the president, a director, and an
officer of Penn, as well as an HCB shareholder who is a business
associate of Penn's president, have already acted together to acquire
more than 5 percent of the shares of HCB without prior approval of
the Board, as required under section 3 of the BHC Act. The Board has
reviewed information provided by Penn and HCB and confidential
supervisory information regarding the current ownership of both organizations, including information about the ownership of HCB's shares
by individuals associated with Penn, in light of the Board's rules
and precedent for aggregating shares held by a company and persons
associated with the company. The record does not support a finding
that Penn, its president, the director and the officer of Penn, and the
HCB shareholder have acted together to acquire more than 5 percent
of the voting shares of HCB in violation of the BHC Act.
10. See 12U.S.C. § 1818(b)(l).
11. See 12U.S.C. § 1841(a)(2)(C).
12. HCB asserted that despite Penn's commitments, Penn would
control HCB after consummation of the proposal and thereby potentially harm the future prospects of HCB. As noted, the Board believes
that the facts of record, including the commitments made in this case,
do not support this conclusion and that the Board has adequate
supervisory authority to monitor and enforce Penn's compliance with
its commitments.

on these considerations and all the other facts of record, the
Board has concluded that Penn would not acquire control
of, or have the ability to exercise a controlling influence
over, HCB through the proposed acquisition of voting
shares.

Financial, Managerial, and Supervisory

Considerations

13. HCB claimed that Penn is in violation of state law because
Penn has not yet filed an application with, and received approval from,
the New Jersey Department of Banking and Insurance ("Banking
Department") under the New Jersey banking statutes. Penn has represented that it plans to file an application with the Banking Department
after the proposal is approved by the Board. The Federal Reserve
provided notice of the application filed with the Board to the Banking Department, as required under section 3 of the BHC Act, and the
Board has consulted with the department. The Banking Department
has not filed any comments with the Board about this proposal. As in
other proposed transactions that might be subject to approval from
multiple banking supervisory agencies, an applicant must obtain all
required regulatory approvals in accordance with applicable law. The
Board's approval of this proposal is conditioned on Penn obtaining
any approval required by New Jersey law.
14. As previously noted, the current proposal provides that Penn
would acquire only up to 24.89 percent of HCB's voting shares and
would not be considered to control HCB. Under these circumstances,
the financial statements of Penn and HCB would not be consolidated.

Legal Developments

The Board also has considered the managerial resources
of the organizations involved.15 The Board has reviewed
the examination records of Penn, PNB, and HCB, including assessments of their management, risk-management
systems, and operations. In addition, the Board has considered its supervisory experiences and those of the other
relevant banking supervisory agencies with the organizations and their records of compliance with applicable banking laws. Penn, PNB, and HCB are considered to be well
managed.
Several commenters contended that Penn's investment
could cause confusion among HCB's shareholders, customers, and employees about the continued independence
of HCB and could compromise HCB's ability to retain
employees. As noted above, Penn has committed that it
will not attempt to influence HCB's operations, personnel
decisions, pricing of services, activities, or dividend, loan,
or credit policies; or to exercise a controlling influence
over HCB. The Board believes that these and the other
commitments made by Penn clarify that the company will
maintain a passive role as an investor in HCB and that
the operation of HCB will continue to be the responsibility
of HCB's management. No evidence has been presented
to show that the purchase of shares of HCB on the open
market by Penn would adversely affect the financial condition of HCB or Penn.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and the future prospects of the organizations
involved in the proposal are consistent with approval, as
are the supervisory factors under the BHC Act.

15. HCB alleged that Penn owns more than 5 percent of HCB's
voting shares and asserted that Penn is, therefore, in violation of
federal securities laws and regulations requiring Penn to file certain
reports. As previously noted, the record does not support a finding that
Penn has acquired more than 5 percent of the voting shares of HCB.
Moreover, the Federal Deposit Insurance Corporation ("FDIC"),
rather than the Board, is the appropriate agency to investigate and
adjudicate any violations of federal securities laws and regulations
pertaining to the securities of state nonmember banks such as HCB.
See 12 CFR Part 335. The Board has consulted with the FDIC, which
is investigating HCB's assertion in light of the relevant laws and
regulations. The Board believes the FDIC has adequate supervisory
authority to monitor and enforce Penn's compliance with those laws
and regulations.
16. Several commenters expressed concern that consummation of
the proposal would provide Penn with the ability to exert control over
HCB, with a resulting adverse effect on competition.

C39

proposal clearly are outweighed in the public interest by
the probable effect of the proposal in meeting the convenience and needs of the community to be served.17
The Board previously has stated that one company need
not acquire control of another company to lessen competition between them substantially.18 The Board has found
that noncontrolling interests in directly competing depository institutions may raise serious questions under the
BHC Act and has stated that the specific facts of each case
will determine whether the minority investment in a company would be anticompetitive.19
HCB contends that the relevant geographic market for
reviewing this transaction is Salem County, New Jersey,
and not the Philadelphia banking market ("Philadelphia
Market"). 20 HCB asserts that Salem County is the relevant
market because of the county's population and economic
demographics and because all of Penn's and HCB's offices
and the vast majority of their customer bases are, according
to HCB, in Salem County. In reviewing this contention, the
Board has considered a number of factors to identify the
economically integrated market that represents the appropriate local geographic banking market for purposes of
analyzing the competitive effects of this proposal.
The Board has reviewed the geographic proximity of the
Philadelphia Market's population centers and the worker
commuting data from the 2000 census, which indicated
that more than 35 percent of the labor force residing in
Salem County commuted to work elsewhere in the Philadelphia Market. In addition, several large banks without a
branch in Salem County, but with branches elsewhere in
the Philadelphia Market, advertise in the local telephone
directory and through radio, television, and newspapers
that serve the county. Moreover, small-business lending
data submitted by depository institutions in 2004 under
the Community Reinvestment Act ("CRA") regulations 21
of the federal supervisory agencies indicated that approximately 25 percent of the total number of small business
loans made to businesses in Salem County were made by
depository institutions without a branch in the county but
with branches elsewhere in the Philadelphia Market. Based
on these facts and other information, the Board reaffirms
that Salem County should be included in the Philadelphia
Market and that the Philadelphia Market is the appropriate
local geographic banking market for purposes of analyzing
the competitive effects of this proposal.

17. See 12U.S.C. § 1842(c)(l).
18. See, e.g., SunTrust Banks, Inc., 76 Federal Reserve Bulletin
542 (1990); First State Corp., 76 Federal Reserve Bulletin 376, 379
(1990); Sun Banks, Inc., 71 Federal Reserve Bulletin 243 (1985)
("Sun Banks").
19. See, e.g., BOK Financial Corp., 81 Federal Reserve Bulletin
1052, 1053-54 (1995); Mansura Bancshares, Inc., 79 Federal Reserve
Bulletin 37, 38 (1993); Sun Banks at 244.
20. The Philadelphia Market is the Philadelphia/South Jersey
banking market and is defined as Burlington, Camden, Cumberland,
Gloucester, and Salem counties, all in New Jersey; and Bucks,
Chester, Delaware, Montgomery, and Philadelphia counties, all in
Pennsylvania.
21. See, e.g., 12 CFR 228 et seq.

C40

Federal Reserve Bulletin • 2006

If PNB and HCB were viewed as a combined organization, consummation of the proposal would be consistent
with Board precedent and the Department of Justice
Merger Guidelines 22 in the Philadelphia Market. The market would remain moderately concentrated as measured by
the HHI, and numerous competitors would remain in the
market.23
The Department of Justice also has reviewed the proposal and has advised the Board that it does not believe
that the acquisition would likely have a significantly
adverse effect on competition in any relevant banking
market. The appropriate banking agencies have been
afforded an opportunity to comment and have not objected
to the proposal.
Accordingly, in light of all the facts of record, the Board
concludes that consummation of the proposal would not
have a significantly adverse effect on competition or on the
concentration of resources in any relevant banking market
and that competitive considerations are consistent with
approval of the proposal.

Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served
and take into account the records of the relevant insured
22. Under the revised Department of Justice Merger Guidelines,
49 Federal Register 26,823 (June 29, 1984), a market is considered
moderately concentrated if the post-merger HHI is between 1000 and
1800 and highly concentrated if the post-merger HHI is more than
1800. The Department of Justice has informed the Board that a bank
merger or acquisition generally will not be challenged (in the absence
of other factors indicating anticompetitive effects) unless the postmerger HHI is at least 1800 and the merger increases the HHI more
than 200 points. The Department of Justice has stated that the higherthan-normal thresholds for an increase in the HHI when screening
bank mergers and acquisitions for anticompetitive effects implicitly
recognize the competitive effects of limited-purpose and other nondepository financial entities.
23. Penn is the 53rd largest depository organization in the Philadelphia Market, controlling $150.5 million in deposits, which represents
less than 1 percent of the total deposits in depository institutions in the
market ("market deposits"). HCB is the 61st largest depository institution in the market, controlling $120.9 million in deposits. If considered a combined banking organization on consummation of the proposal, Penn and HCB would be the 39th largest depository institution
in the Philadelphia Market, controlling $271.4 million in deposits,
which would represent less than 1 percent of market deposits. The
HHI for the Philadelphia Market would remain unchanged at 1043.
One hundred and thirty-two depository institutions would remain in
the market.
Market deposit data are as of June 30, 2005, and reflect mergers and
acquisitions through December 14, 2005. Market share data are based
on calculations that include the deposits of thrift institutions at 50 percent. The Board previously has indicated that thrift institutions have
become, or have the potential to become, significant competitors of
commercial banks. See, e.g., Midwest Financial Group, 75 Federal
Reserve Bulletin 386, 387 (1989); National City Corporation, 70 Fed
eral Reserve Bulletin 743, 744 (1984). Thus, the Board regularly has
included thrift deposits in the calculation of market share on a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal
Reserve Bulletin 52, 55 (1991).

depository institutions under the CRA. 24 The CRA requires
the federal financial supervisory agencies to encourage
insured depository institutions to help meet the credit needs
of the local communities in which they operate, consistent
with their safe and sound operation, and requires the appropriate federal financial supervisory agency to take into
account an institution's record of meeting the credit needs
of its entire community, including low- and moderateincome neighborhoods, in evaluating bank expansionary
proposals. 25
The Board has considered carefully the entire record,
including Penn's commitments not to control HCB or its
operations and policies, the federal agencies' evaluations
of the CRA performance records of PNB and HCB, data
reported by PNB and HCB under the Home Mortgage
Disclosure Act ("HMDA"), 26 other information provided
by Penn, confidential supervisory information, and public
comment received on the proposal.27 Several commenters
generally criticized PNB's level of service to its community, including the bank's level of community and small
business lending. One commenter specifically criticized
PNB's record of lending to small businesses owned by
minorities.
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance
evaluation is a particularly important consideration in the
applications process, because it represents a detailed,
on-site evaluation of the institution's overall record of
performance under the CRA by its appropriate federal
supervisor.28
PNB received a "satisfactory" rating at its most recent
CRA performance evaluation by the Office of the Comptroller of the Currency, as of October 27, 2003 ("2003
Evaluation"). HCB also received a "satisfactory" rating at
its most recent CRA performance evaluation by the FDIC,
as of January 11, 2002.
In the 2003 Evaluation, examiners found that PNB
exceeded the standards for satisfactory performance for
lending in its assessment area and demonstrated a good
record of lending to small businesses. Examiners reported

24. 12U.S.C. §2901etseq.
25. 12U.S.C. §2903.
26. 12U.S.C. §2801 et seq.
27. Several commenters expressed concern about PNB's branching
policies and possible branch closures, reductions in service, and job
losses after consummation of the proposal and generally objected to
the transaction because PNB would implement its policies and procedures at HCB. As previously noted, Penn has agreed to a set of
passivity commitments that prevent it from, among other things,
attempting to influence the policies and business decisions of HCB,
including the credit decisions of HCB and the locations or operations
of HCB's branches. The effect of a proposed acquisition on employment in a community is not among the factors included in the BHC
Act. See Wells Fargo & Company, 82 Federal Reserve Bulletin 445,
457 (1996).
28. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

Legal Developments

that PNB ranked second out of 243 peer lenders in originating home mortgage loans and that the bank's commercial
loan portfolio was substantially composed of loans to small
businesses. Examiners also noted no evidence of illegal
discrimination or other illegal credit practices.
Based on a review of the entire record, and for the
reasons discussed above, the Board concludes that considerations relating to the convenience and needs factor and
the CRA performance records of the relevant depository
institutions are consistent with approval.

C41

after the effective date of this order, unless such period
is extended for good cause by the Board or by the Federal
Reserve Bank of Philadelphia, acting pursuant to delegated
authority.
By order of the Board of Governors, effective December 19, 2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board
Conclusion
Based on the foregoing and all other facts of record, the
Board has determined that the application should be,
and hereby is, approved.29 In reaching this conclusion, the
Board has considered all the facts of record in light of
the factors that it is required to consider under the BHC
Act and other applicable statutes.30 The Board's approval
is specifically conditioned on compliance by Penn with the
conditions imposed in this order and all the commitments
made to the Board in connection with the application,
including the commitments discussed in this order, and
receipt of all required regulatory approvals. The conditions
and commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law.
The acquisition of HCB's voting shares shall not be
consummated before the 15th calendar day after the
effective date of this order, or later than three months
29. HCB requested that the Board hold a public meeting or hearing
on the proposal. Section 3 of the BHC Act does not require the Board
to hold a public hearing on an application unless the appropriate
supervisory authority for the bank to be acquired makes a timely
written recommendation of denial of the application. The Board has
not received such a recommendation from the appropriate supervisory
authority. Under its regulations, the Board also may, in its discretion,
hold a public meeting or hearing on an application to acquire a bank if
necessary or appropriate to clarify factual issues related to the application and to provide an opportunity for testimony (12 CFR 225.16(e)).
The Board has considered carefully HCB's request in light of all the
facts of record. In the Board's view, HCB has had ample opportunity
to submit its views, and in fact, submitted written comments that
the Board has considered carefully in acting on the proposal. HCB's
request fails to demonstrate why written comments do not present its
views adequately or why a meeting or hearing otherwise would be
necessary or appropriate. For these reasons, and based on all the facts
of record, the Board has determined that a public meeting or hearing is
not required or warranted in this case. Accordingly, the request for a
public meeting or hearing on the proposal is denied.
30. HCB also requested that the Board delay action on the application until the Banking Department has evaluated the proposal. As
previously noted, the Board has accumulated a significant record in
this case, including reports of examination, confidential supervisory
information, public reports and information, and public comment.
Moreover, the BHC Act and Regulation Y require the Board to act
on proposals submitted under those provisions within certain time
periods. Based on a review of all the facts of record, the Board has
concluded that the record in this case is sufficient to warrant action at
this time and that further delay in considering the proposal is not
necessary.

Appendix
In connection with its application to acquire up to
24.89 percent of HCB, Penn commits that it will not,
directly or indirectly:
(1) exercise or attempt to exercise a controlling influence over the management or policies of HCB or
any of its subsidiaries;
(2) seek or accept representation on the board of directors of HCB or any of its subsidiaries;
(3) serve, have, or seek to have any representative
serve as an officer, agent, or employee of HCB or
any of its subsidiaries;
(4) take any action that would cause HCB or any of its
subsidiaries to become a subsidiary of Penn or any
of its subsidiaries;
(5) acquire or retain shares that would cause the combined interests of Penn and its subsidiaries, and
their respective officers, directors, and affiliates, to
equal or exceed 25 percent of the outstanding voting shares of HCB or any of its subsidiaries;
(6) propose a director or slate of directors in opposition to a nominee or slate of nominees proposed by
the management or board of directors of HCB or
any of its subsidiaries;
(7) solicit or participate in soliciting proxies with
respect to any matter presented to the shareholders
of HCB or any of its subsidiaries;
(8) attempt to influence the dividend policies or practices of HCB or any of its subsidiaries;
(9) attempt to influence the investment, loan, or credit
decisions or policies; pricing of services; personnel
decisions; operations activities (including the location of any offices or branches or their hours of
operation, etc.); or any similar activities or decisions of HCB or any of its subsidiaries;
(10) dispose or threaten to dispose of shares of HCB or
any of its subsidiaries in any manner as a condition
of specific action or nonaction by HCB or any of
its subsidiaries; or
(11) enter into any other banking or nonbanking transactions with HCB or any of its subsidiaries, except
that Penn may establish and maintain deposit
accounts with depository institution subsidiaries of

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Federal Reserve Bulletin • 2006

HCB, provided that the aggregate balance of all
such accounts does not exceed $500,000 and that
the accounts are maintained on substantially the
same terms as those prevailing for comparable
accounts of persons unaffiliated with HCB or any
of its subsidiaries.

Sky Financial Group, Inc.
Bowling Green, Ohio
Order Approving the Acquisition of a Bank
Sky Financial Group, Inc. ("Sky"), a bank holding company within the meaning of the Bank Holding Company
Act ("BHC Act"), has requested the Board's approval
under section 3 of the BHC Act 1 to acquire Falls Bank,
Stow, Ohio, a state-chartered savings bank.2
Notice of the proposal, affording interested persons
an opportunity to submit comments, has been published
(70 Federal Register 48,548 (2005)). The time for filing
comments has expired, and the Board has considered the
application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
Sky, with total consolidated assets of approximately
$15.2 billion, controls Sky Bank,3 Salineville, Ohio, with
branches in Ohio, Indiana, Michigan, Pennsylvania, and
West Virginia. Sky is the eighth largest depository organization in Ohio, controlling deposits of approximately
$8 billion, which represent 4 percent of the total amount
of deposits of insured depository institutions in the state
("state deposits"). 4
Falls Bank is the 189th largest insured depository institution in Ohio, controlling deposits of approximately
$53.8 million, representing less than 1 percent of state
deposits. On consummation of the proposal, Sky would
remain the eighth largest depository organization in Ohio,
controlling deposits of approximately $8.1 billion, which
represent 4 percent of state deposits.

1. 12U.S.C. §1842.
2. Sky also has requested the Board's approval under section 3 of
the BHC Act to acquire Falls Interim Savings Bank, Bowling Green,
Ohio, a subsidiary formed by Sky that will merge with Falls Bank
(with Falls Bank as the surviving entity) after receiving regulatory
approval from the Federal Deposit Insurance Corporation ("FDIC")
and the Ohio Division of Financial Institutions. In a separate application that is not subject to this order, Falls Bank has requested the
Board's approval to become a state member bank, subsequently merge
with Sky Bank (with Falls Bank as the surviving entity), and operate
Sky Bank's offices as branches of Falls Bank pursuant to section 9 of
the Federal Reserve Act and section 18(c) of the Federal Deposit
Insurance Act. Sky intends to change the name of Falls Bank to Sky
Bank and move its headquarters to Salineville, Ohio.
3. Sky also controls Sky Trust, National Association, Pepper Pike,
Ohio ("Sky Trust"), a limited-purpose bank that provides only trust
services.
4. Deposit, asset, and ranking data are as of June 30, 2005, and
reflect merger and acquisition activity as of October 27, 2005. In this
context, insured depository institutions include commercial banks,
savings banks, and savings associations.

Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would
be in furtherance of an attempt to monopolize the business
of banking in any relevant banking market. The BHC Act
also prohibits the Board from approving a bank acquisition
that would substantially lessen competition in any relevant
banking market unless the anticompetitive effects of the
proposal are clearly outweighed in the public interest by
the probable effect of the proposal in meeting the convenience and needs of the community to be served.5
Sky and Falls Bank compete directly in the Akron banking market in Ohio. 6 The Board has reviewed carefully the
competitive effects of the proposal in this banking market
in light of all the facts of record, including the number of
competitors that would remain in the market, the relative
shares of total deposits in depository institutions in the
market ("market deposits") controlled by Sky and Falls
Bank,7 the concentration level of market deposits and the
increase in this level as measured by the HerfindahlHirschman Index ("HHI") under the Department of Justice
Merger Guidelines ("DOJ Guidelines"), 8 and other characteristics of the market.
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in the Akron banking market. After consum-

5. 12U.S.C. §1842(c)(l).
6. The Akron banking market is defined as Summit County, excluding the cities of Macedonia, Twinsburg, and Hudson and the townships of Sagamore Hills, Northfield Center, Twinsburg, Richfield, and
Boston; Portage County, excluding the cities of Aurora, Streetsboro,
and Mantua and the townships of Hiram, Nelson, Shalersville, Freedom, and Windham; the townships of Sharon, Homer, Harrisville,
Westfield, Guilford, and Wadsworth in Medina County; the townships
of Lawrence and Lake in Stark County; and the townships of Milton
and Chippewa in Wayne County, all in Ohio.
7. Market deposit and share data are as of June 30, 2005, and
reflect merger acquisition activity as of October 27, 2005. The market
share data also are based on calculations in which the deposits of thrift
institutions are included at 50 percent. The Board previously has
indicated that thrift institutions have become, or have the potential
to become, significant competitors of commercial banks. See, e.g.,
Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989);
National City Corporation, 70 Federal Reserve Bulletin 743 (1984).
Because the deposits of Falls Bank are being acquired by a commercial banking organization, they are included at 100 percent in the
calculation of Sky's post-consummation share of market deposits. See
Norwest Corporation, 78 Federal Reserve Bulletin 452 (1992); First
Banks, Inc., 76 Federal Reserve Bulletin 669 (1990).
8. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly concentrated if the post-merger HHI exceeds 1800. The Department
of Justice ("DOJ") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger
HHI is at least 1800 and the merger increases the HHI by more than
200 points. The DOJ has stated that the higher-than-normal HHI
thresholds for screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limitedpurpose and other nondepository financial entities.

Legal Developments

mation, there would be no increase in the HHI, and 24
competitors would remain in the banking market.9
The Department of Justice also has reviewed the competitive effects of the proposal and advised the Board that
consummation of the proposal would not likely have a
significantly adverse effect on competition in any relevant
banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment and
have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Akron banking market or in any
other relevant banking market. Accordingly, based on all
the facts of record, the Board has determined that competitive considerations are consistent with approval.

Financial, Managerial, and Supervisory

Considerations

Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered these factors in light of all the facts
of record, including confidential reports of examination,
other supervisory information from the primary federal
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, and
information provided by the applicant.
In evaluating financial factors in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial condition of the combined organization at consummation, including its capital position, asset quality, and earnings prospects, and the impact of the proposed funding of
the transaction.
Based on its review of these factors, the Board finds that
Sky has sufficient financial resources to effect the proposal.
The proposed transaction is structured as a share exchange
and cash purchase. Sky will use existing resources to fund
the cash portion of the transaction. Sky and its subsidiary
9. Sky operates the tenth largest depository institution in the Akron
market, controlling deposits of approximately $173 million, which
represent approximately 2.1 percent of market deposits. Falls Bank is
the 21st largest depository institution in the market, controlling deposits of approximately $26.9 million, which represent less than 1 percent
of market deposits. On consummation, Sky would operate the ninth
largest depository institution in the market, controlling weighted
deposits of approximately $226.7 million, which represent approximately 2.7 percent of market deposits. The HHI would decrease
6 points, to 1348.

C43

depository institutions are well capitalized and would
remain so on consummation of the proposal.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination records of Sky and its subsidiary banks and Falls
Bank, including assessments of their management, riskmanagement systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of the other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law. Sky and its subsidiary depository institutions and Falls Bank are considered to be well managed.
The Board also has considered Sky's plans for implementing the proposal, including the proposed management after
consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial resources and future prospects of the organizations
involved in the proposal are consistent with approval, as
are the other supervisory factors under the BHC Act.

Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on
the convenience and needs of the communities to be served
and take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA"). 10 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank
expansionary proposals.11
The Board has considered carefully all the facts of
record, including the CRA performance evaluation records
of Sky Bank and Falls Bank, data reported by Sky Bank
in 2004 under the Home Mortgage Disclosure Act
("HMDA"), 12 small-business lending data reported under
the CRA, 13 other information provided by Sky, confidential
supervisory information, and public comment received on
the proposal. A commenter criticized Sky's record of small
10. 12U.S.C. §2901etseq.
11. 12U.S.C. §2903.
12. 12U.S.C. §2801 etseq.
13. Under the Board's CRA regulations, state member banks (other
than small banks) are subject to reporting requirements for loans with
original amounts of $1 million or less ("small business loans") for
each geography in which the bank originated or purchased a small
business loan. Banks must report the aggregate number and amount of
small business loans in specified origination amount categories and
the aggregate number and amount of small business loans to businesses with gross annual revenues of $1 million or less ("small
businesses") (12 CFR 228.42).

C44

Federal Reserve Bulletin • 2006

business lending, alleging that it disproportionately lent to
businesses in middle- and upper-income census tracts and
did not provide enough loans to businesses in the LMI
census tracts. The commenter also alleged, based on 2004
HMDA data, that Sky had low levels of home mortgage
lending to minority borrowers and engaged in disparate
treatment of minority individuals in its home mortgage
operations.

A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance
evaluation is a particularly important consideration in
the applications process, because it represents a detailed,
on-site evaluation of the institution's overall record of
performance under the CRA by its appropriate federal
supervisor.14
Sky Bank received a "satisfactory" rating at its most
recent CRA evaluation by the Federal Reserve Bank of
Cleveland ("Reserve Bank"), as of October 14, 2003
("2003 CRA Evaluation").15 Falls Bank also received a
"satisfactory" rating at its most recent CRA performance
evaluation by the FDIC, as of June 1, 2001.16 After consummation of the proposed series of transactions, Sky will
implement in the resulting institution the community development strategy, including products, services, outreach,
and initiatives, that is currently in place at Sky Bank.
In its 2003 CRA Evaluation, Sky Bank received a "high
satisfactory" rating under the lending test. Examiners
reported that the majority of Sky's lending was inside its
assessment areas and that Sky Bank's lending levels
reflected good responsiveness to the credit needs of its
communities.17 Furthermore, examiners noted that Sky
14. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
15. Examiners evaluated Sky Bank's CRA performance in its
17 assessment areas in Ohio, Pennsylvania, Michigan, and Indiana
and in one assessment area that included a part of the SteubenvilleWeirton Metropolitan Statistical Area ("MSA") that covers portions
of Ohio and West Virginia. The substantial majority of the bank's
deposits, loans, and branches were in Ohio. In determining Sky
Bank's overall rating, examiners gave the greatest weight to the
bank's performance in the Steubenville-Weirton MSA and the
bank's other assessment areas in Ohio, particularly the Toledo and
Youngstown-Warren MSAs. The evaluation period for home mortgage loans and small business loans was January 1, 2001, through
December 31, 2002. The evaluation period for community development loans and the investment and services tests was August 7, 2000,
through October 14, 2003. Sky Trust, a special-purpose bank, is not
subject to the CRA (12 CFR 225.11(3)).
16. The evaluation period for Falls Bank's CRA performance was
from July 1, 1999, through January 24, 2001. Falls Bank's CRA
performance was evaluated according to the FDIC's small-bank performance standards (12 CFR 345.26).
17. The commenter noted that Sky originated mortgages in various
states outside its assessment areas in 2004. HMDA data from 2004

Bank's distribution of loans showed a good penetration
among geographies and customers of different income
levels and among businesses of different revenue sizes.
In the Ohio and the Steubenville-Weirton MSA assessment areas, examiners concluded that Sky Bank's lending
activity was good, and they commended the overall geographic distribution of the bank's loans. Examiners noted
that Sky Bank's lower levels of HMDA-reportable lending
in low-income census tracts was offset by the bank's strong
lending levels in moderate-income census tracts. Examiners also took into consideration programs offered by Sky
Bank in evaluating Sky's flexible lending practices to
address the credit needs of LMI individuals and geographies. These programs included a partnership with the
Federal Home Loan Bank of Cincinnati to increase home
ownership opportunities and the supply of affordable housing, partnerships with four Metropolitan Housing Authorities to originate loans using conversions of the U.S. Department of Housing and Urban Development's section 8 rental
subsidies into mortgage payments, and partnerships with
Fannie Mae and others to develop the GoodStart Mortgage
Program, which focuses on LMI and underserved minority
borrowers. The GoodStart Mortgage Program provides
100 percent financing and a more competitive rate and fee
structure than the Federal Housing Administration loan
program.18
With respect to Sky Bank's small-business lending performance, the 2003 CRA Evaluation found that the bank
demonstrated an adequate overall record of serving the
credit needs of small businesses. Although the percentage
of small business loans19 made by the bank in LMI census
tracts in some parts of its primary assessment areas was
less than the percentage of the aggregate of all lenders
("aggregate lenders"), it exceeded that of the aggregate
lenders in other parts of its primary assessment areas.20 For
example, in Sky Bank's multistate Steubenville-Weirton
MSA assessment area, although Sky Bank's percentage of
small business lending in low-income census tracts was
less than that of the aggregate lenders, Sky Bank's percent-

indicate that the majority of Sky's HMDA-reportable loans were
generated in its assessment areas. Sky has represented that it does not
actively lend outside its five core states of Ohio, Pennsylvania, Michigan, West Virginia, and Indiana, and that the loans made outside those
states are generally for non-owner-occupied or multifamily housing
properties.
18. During the evaluation period, Sky provided more than $41 million in financing to LMI households in the GoodStart Mortgage
Program.
19. In this context, "small business loans" are loans that have
original amounts of $1 million or less and are either secured by
nonfarm nonresidential properties or are classified as commercial and
industrial loans. The commenter criticized Sky Bank's record of small
business lending in LMI census tracts outside the bank's assessment
areas in Indiana and West Virginia, as well as its lending in Illinois
and New York, both states where the bank has no assessment areas.
Sky Bank asserted that only a very small portion of the small business loans it closed in 2004 were outside the five core states in its
assessment areas.
20. The lending data of the aggregate lenders represent the cumulative lending for all financial institutions subject to reporting requirements in a particular area.

Legal Developments

age of small business loans in moderate-income census
tracts exceeded the percentage for the aggregate lenders. In
the Youngstown-Warren MSA, examiners found the geographic distribution of the bank's small business loans to
be "excellent," with its percentage of small business lending in LMI geographies exceeding the percentage for the
aggregate lenders.21
The Board has also considered additional information
about Sky Bank's small-business lending performance
since the 2003 CRA Evaluation. The 2004 CRA data
reported by Sky Bank indicated that the percentage of
the bank's total dollar amount of small business loans
to businesses in LMI census tracts in Ohio was generally
comparable to the percentage for the aggregate lenders.
Furthermore, Sky represented that Sky Bank was recognized each fiscal year by the Small Business Administration ("SBA") from 2000 to 2004 as a "top five" lender on
the basis of the number of loans made to small businesses
in the SBA's northern Ohio district. Sky also represented
that it participates in economic development programs in
Toledo and Youngstown, two cities that have a significant
concentration of LMI census tracts, and that it conducts
various outreach efforts to small businesses in LMI areas,
including advertising its small business products in media
that focus on minority-owned and emerging businesses and
holding meetings about its small business products with
small business owners in an LMI area of Cleveland.22
In the 2003 CRA Evaluation, examiners commended
Sky Bank for having an "excellent" level of community
development lending throughout its assessment areas, particularly in Ohio. During the evaluation period, Sky Bank
originated 70 community development loans totaling
$81.8 million, the majority of which supported affordable
housing initiatives.
Sky Bank received an overall "high satisfactory" rating
under the investment test in the 2003 CRA Evaluation,
reflecting what examiners reported as an "excellent" level
of qualified investments in various assessment areas. For
example, examiners found the bank's investment performance in Ohio to be "outstanding" based on the bank's
qualified investments in the state that totaled approximately $29.4 million.
Sky Bank also received an overall "high satisfactory"
rating under the service test in the 2003 CRA Evaluation.
Examiners reported that Sky Bank's retail delivery systems
were accessible to essentially all portions of its assessment
areas and that the bank's new branches improved accessibility in LMI geographies in the Youngstown-Warren and

21. Although the bank's small business lending in LMI census
tracts in its assessment area in the Toledo MSA was less than that of
the aggregate lenders, examiners noted competitive factors affecting
the bank's performance and considered it to be adequate.
22. The commenter criticized Sky Bank's level of small business
lending in LMI census tracts in its assessment areas in Indiana and
West Virginia in 2004. The 2003 CRA Evaluation indicated that
the bank's overall small business lending record was adequate. The
Reserve Bank will continue to evaluate Sky Bank's lending activities
in future CRA performance evaluations, including its small business
lending activities.

C45

Pittsburgh MSAs. Examiners also commended the bank for
providing a relatively high percentage of community development services throughout its assessment areas that promoted or facilitated affordable housing, services, and economic development in LMI areas and for LMI individuals.

B. HMD A and Fair Lending Record
The Board has considered carefully Sky's lending record
and HMDA data in light of public comment about its
record of lending to minorities. The commenter expressed
concern, based on 2004 HMDA data, that Sky disproportionately excluded or denied applications by AfricanAmerican and Hispanic applicants for HMDA-reportable
loans. The commenter also expressed concern that the
2004 HMDA data indicated that Sky made higher-cost
loans to African Americans more frequently than nonminorities in its overall business and in Ohio in particular.23
The Board reviewed the HMDA data for 2004 reported by
Sky Bank in its assessment areas on a statewide basis in
Ohio, Pennsylvania, Michigan, West Virginia, and Indiana.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they are insufficient by themselves to conclude whether or not Sky Bank is excluding
any racial or ethnic group or imposing higher credit costs
on those groups on a prohibited basis. The Board recognizes that HMDA data alone, even with the recent addition
of pricing information, provide only limited information
about the covered loans.24 HMDA data, therefore, have
limitations that make them an inadequate basis, absent
other information, for concluding that an institution has
engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by Sky Bank with fair lending laws.
23. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 percentage points
for first-lien mortgages and 5 percentage points for second-lien mortgages (12 CFR 203.4).
24. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

C46

Federal Reserve Bulletin • 2006

In the fair lending review conducted in conjunction with
the 2003 CRA Evaluation, examiners noted no substantive
violations of applicable fair lending laws by Sky Bank. As
the primary federal supervisor of Sky Bank, the Board will
continue to carefully examine the bank's compliance with
fair lending and other consumer protection laws.
The record also indicates that Sky has taken steps to
ensure compliance with fair lending laws and other consumer protection laws. Sky represented that it undertakes
significant monitoring of compliance in its mortgage lending operations using a wide variety of audit and review
mechanisms, including file reviews, statistical analyses,
and exception reviews. Furthermore, Sky Bank's mortgage
products are conventional, conforming products such as
those offered by government-sponsored enterprises that
conform to secondary-market underwriting guidelines. Sky
Bank's mortgage program offers risk-priced procedures
consistent with these guidelines, and it uses automated
software for underwriting and pricing mortgage loans. The
bank does not offer any nonprime or "Alt-A" mortgage
loan products other than those offered through programs of
government- sponsored enterprises.
The Board also notes that Sky has typically acquired
rural community banks and has only recently entered into
certain urban areas with significant minority populations.
Sky has undertaken initiatives since entering those markets
to enhance its outreach and loan distribution to minorities
in urban areas. These initiatives have included hiring community mortgage originators and community development
officers, marketing in local minority-focused media, and
developing Spanish-language marketing materials.
The Board also has considered the HMDA data in light
of other information, including the programs described
above and the overall performance records of Sky Bank
and of Falls Bank under the CRA. These established efforts
demonstrate that the institutions are active in helping to
meet the credit needs of their entire communities.
Conclusion on CRA Performance Records
The Board has carefully considered all the facts of record,
including reports of evaluation of the CRA performance
records of the institutions involved, information provided
by Sky, comments received on the proposal, and confidential supervisory information. The Board notes that the
proposal would expand the availability and array of banking products and services to the customers of Falls Bank,
including access to expanded branch and ATM networks.
Based on a review of the entire record, and for the reasons
discussed above, the Board concludes that considerations
relating to the convenience and needs factor and the CRA
performance records of the relevant depository institutions
are consistent with approval.
Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. In reaching its conclusion, the Board

has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act.25 The
Board's approval is specifically conditioned on compliance
by Sky with the conditions imposed in this order and the
commitments made to the Board in connection with the
application. For purposes of this action, the conditions and
commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision herein and, as such, may be enforced in proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Reserve Bank, acting pursuant to delegated authority.
By order of the Board of Governors, effective November 14, 2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Treetops Acquisition Group LP,
Treetops Acquisition Group Ltd.,
Treetops Acquisition Group II LP,
Treetops Acquisition Group II Ltd.
All in Grand Cayman, Cayman Islands
Edgar M. Bronfman IDB Trusts A through G
Quebec, Canada
Cam-Discount, Ltd.
Grand Cayman, Cayman Islands
Order Approving the Formation of Bank Holding
Companies and Acquisition of a Bank
25. A commenter requested that the Board hold a public hearing or
meeting on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for any of the banks to be acquired
makes a timely written recommendation of denial of the application.
The Board has not received such a recommendation from any supervisory authority. Under its rules, the Board also may, in its discretion,
hold a public meeting or hearing on an application to acquire a bank
if a meeting or hearing is necessary or appropriate to clarify factual
issues related to the application and to provide an opportunity for
testimony (12 CFR 225.16(e)). The Board has considered carefully
the commenter's requests in light of all the facts of record. In the
Board's view, the public has had ample opportunity to submit comments on the proposal and, in fact, the commenter has submitted
written comments that the Board has considered carefully in acting
on the proposal. The commenter's request fails to demonstrate why
its written comments do not present its views adequately or why a
meeting or hearing otherwise would be necessary or appropriate. For
these reasons, and based on all the facts of record, the Board has
determined that a public hearing or meeting is not required or warranted in this case. Accordingly, the request for a public hearing or
meeting on the proposal is denied.

Legal Developments

Treetops Acquisition Group LP ("Treetops LP"), Treetops
Acquisition Group Ltd. ("Treetops Ltd."), Treetops Acquisition Group II LP ("Treetops II LP"), Treetops Acquisition Group II Ltd. ("Treetops II Ltd."), Edgar M. Bronfman IDB Trusts A through G ("EMB IDB Trusts"),
and Cam-Discount, Ltd. ("Cam-Discount") (collectively,
"Applicants") have requested the Board's approval under
section 3 of the Bank Holding Company Act 1 ("BHC
Act") to become bank holding companies, acquire up to
51 percent of the voting shares of Israel Discount Bank
Ltd., Tel Aviv, Israel ("IDB"), 2 a foreign bank that is a
bank holding company within the meaning of the BHC
Act, and acquire control of Israel Discount Bank of New
York ("IDBNY"), New York, New York.3
Notice of the proposal, affording interested persons an
opportunity to comment, has been published (70 Federal
Register 20,373 (2005)). The time for filing comments has
expired, and the Board has considered the applications
and all comments received in light of the factors set forth
in section 3 of the BHC Act. IDB, with total consolidated
assets of approximately $33 billion, is the third largest
banking organization in Israel. IDBNY is the 79th largest
depository organization in the United States, with total U.S.
assets of $8.7 billion. It controls approximately $3.5 billion
in deposits, which represents less than 1 percent of the total
amount of deposits of insured depository institutions in the
United States.4
In considering the factors required to be reviewed under
the BHC Act in this case, the Board has had extensive
consultations with the New York State Banking Department ("NYSBD") and the Federal Deposit Insurance Corporation ("FDIC"), the primary supervisors of IDBNY,
about this proposal and the financial and managerial
1. 12U.S.C. §1842.
2. The state of Israel currently owns 57 percent of the voting
shares of IDB through M.I. Holdings; the remaining outstanding
shares are publicly traded on the Tel Aviv Stock Exchange. In 2004,
M.I. Holdings established a formal bidding process for privatizing a
portion of its ownership interest in IDB. Treetops LP and Treetops II
LP were the successful bidders in the privatization process and on
February 1, 2005, the state of Israel entered into an agreement with
the Applicants to sell 26 percent of the shares of IDB to the Applicants and to grant the Applicants an option to acquire an additional
25 percent of IDB's shares. Treetops LP and Treetops II LP would
own 60 percent and 40 percent, respectively, of the Applicants'
proposed total investment in IDB. Treetops Ltd. and Treetops II Ltd.
are general partners of Treetops LP and Treetops II LP, respectively.
The seven EMB IDB Trusts each owns 6.45 percent of the limited
partnership interests of Treetops LP and owns the same percentage of
the voting shares of Treetops Ltd. Cam-Discount is the only shareholder of Treetops II Ltd. As a result, on consummation of the
proposal, Treetops LP, Treetops II LP, Treetops Ltd., Treetops II Ltd.,
Cam-Discount, and the EMB IDB Trusts would all be considered to
control IDB. Each of the Applicants would be a qualifying foreign
banking organization under Regulation K. See 12 CFR 211.23.
3. IDB is a foreign bank within the meaning of the International
Bank Act ("IBA") (12 U.S.C. §3101(7). IDB indirectly holds all the
shares of IDBNY through a wholly owned subsidiary bank holding
company, Discount Bancorp, Inc., Wilmington, Delaware.
4. Worldwide asset and ranking data are as of December 31, 2004.
U.S. asset and deposit data are as of September 30, 2004, and national
ranking is as of June 30, 2004. The data and rankings are adjusted to
reflect exchange rates then in effect.

C47

resources, risk-management systems, and compliance
efforts and programs of IDBNY, including those involving
Bank Secrecy Act/anti-money-laundering ("BSA/AML")
compliance. The Board also has consulted with the Israeli
Supervisor of Banks regarding the structure, financing, and
timing of the proposal. The Board has taken account of
the fact that this proposal represents the privatization of a
foreign bank after an extensive bidding process conducted
by a foreign government. The Board has also considered
the time schedule imposed on this transaction by the privatization process in Israel and by the purchase contract
between the state of Israel and Applicants, which contemplates completion of the privatization during 2005.

Financial, Managerial, and Supervisory

Considerations

Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered carefully these factors in light of all
the facts of record, including confidential reports of examination, other supervisory information received from the
international, federal, and state banking supervisors of
the organizations involved, publicly reported and other
financial information, and information provided by the
Applicants.
In evaluating the financial factors in proposals involving
the formation of new bank holding companies, the Board
reviews the financial condition of both the applicants and
the target depository institutions. The Board also evaluates
the financial condition of the pro forma organization,
including its capital position, asset quality, and earnings
prospects, and the impact of the proposed funding of the
transaction.
IDBNY is well capitalized and would remain so on
consummation of the proposal, and the capital levels of
IDB would continue to exceed the minimum levels that
would be required under the Basel Capital Accord. Furthermore, IDB's capital levels are considered equivalent to
the capital levels that would be required of a U.S. banking
organization and would remain so after consummation of
this proposal. The proposed transaction would be funded
from cash and promissory notes, and Applicants have
sufficient resources to effect the transaction as proposed.
In addition, Applicants have represented that they were
formed solely to hold this investment in IDB and that they
will not engage in activities other than holding the shares
of IDB.
The Board also has considered the managerial resources
of IDB and IDBNY and the effect of the proposal on these
resources. In reviewing the proposal, the Board has
assembled and considered a broad and detailed record that
includes the supervisory experience of the other relevant
banking supervisory agencies with the organizations and
their records of compliance with applicable banking laws.
In particular, the Board has reviewed the assessments of

C48

Federal Reserve Bulletin • 2006

the organizations' management and risk-management systems by the FDIC and the NYSBD, the primary regulators
of IDBNY. In addition, the Board has reviewed confidential supervisory information on the anti-money-laundering
programs at IDB and IDBNY, including the assessment of
those programs by the relevant federal supervisory agencies, state banking agencies, and the Bank of Israel.5
The Board has also considered that, on December 16,
2005, IDBNY entered into consent cease and desist
orders issued by the NYSBD and the FDIC that obligate
it to remedy deficiencies in compliance, internal controls,
and risk-management practices, including deficiencies
with respect to BSA/AML compliance. The orders require
IDBNY to establish enhanced due diligence with respect to
customer accounts, institute new policies and procedures
to ensure compliance with BSA/AML requirements, undertake a detailed review of existing customer accounts to
determine whether any should be closed, and review customer account information on an annual basis. IDBNY
must also submit to the regulators a plan designed to
ensure compliance with the terms of the consent orders. In
addition, IDBNY has entered into a settlement and cooperation agreement with the New York County District
Attorney ("NYCDA") relating to these deficiencies. This
agreement obligates IDBNY to comply fully with the consent orders issued by the FDIC and the NYSBD. In connection with these actions, the various authorities have indicated that IDBNY may also be subject to money penalties
of up to $25 million.6
The Board has reviewed the proposals by IDBNY and
IDB to address these matters. The Board also has considered the plans and abilities of Applicants to address these
matters and has relied on commitments made by Applicants and IDB to cause IDBNY to correct deficiencies
identified by any state or federal regulator, and to work to
ensure that IDBNY will in the future remain in compliance
with U.S. laws and regulations. As noted, the Board also
has consulted with the NYSBD and the FDIC about the
proposed transaction, and neither agency objected to the
proposal.
Based on these and all other facts of record, the Board
has concluded that considerations relating to the financial
and managerial resources and future prospects of the organizations involved in the proposal are consistent with
approval, as are the other supervisory factors under the
BHC Act.
Section 3 of the BHC Act also provides that the Board
may not approve an application involving a foreign bank

5. The Board notes that Israel has substantially modified and
strengthened its legal framework to combat money laundering since
2001, thereby addressing deficiencies that had been noted previously
by the Financial Action Task Force, an intergovernmental body that
develops and promotes policies to combat money laundering. In 2004,
the Israeli Parliament adopted additional legislation to enhance
Israel's ability to combat terrorist financing and to cooperate with
other countries on such matters.
6. The various authorities that may assess the penalties are the
NYSBD, the FDIC, the NYCDA, and the U.S. Department of the
Treasury's Financial Crimes Enforcement Network.

unless the bank is "subject to comprehensive supervision
or regulation on a consolidated basis by the appropriate
authorities in the bank's home country." 7 The Supervisor
of Banks, who heads the Banking Supervision Unit of the
Bank of Israel, is the primary regulator of Israeli banks,
including IDB. The Board has previously determined in an
application under the BHC Act involving Bank Hapoalim
B.M., Tel Aviv, that Bank Hapoalim was subject to comprehensive consolidated supervision by the Supervisor of
Banks. 8 In this case, the Board has determined that IDB is
supervised on substantially the same terms and conditions
as Bank Hapoalim. Based on all the facts of record, the
Board has concluded that IDB is subject to comprehensive
supervision and regulation on a consolidated basis by its
home country supervisor.9
In addition, section 3 of the BHC Act requires the Board
to determine that an applicant has provided adequate assurances that it will make available to the Board such information on its operations and activities and those of its affiliates that the Board deems appropriate to determine and
enforce compliance with the BHC Act.10 The Board has
reviewed the restrictions on disclosure in the relevant jurisdictions in which the Applicants and IDB operate and has
communicated with relevant government authorities concerning access to information. In addition, the Applicants
have committed to make available to the Board such information on the operations of IDB and its affiliates that the
Board deems necessary to determine and enforce compliance with the BHC Act, the IBA, and other applicable
federal law. The Applicants also have committed to cooperate with the Board to obtain any waivers or exemptions
that may be necessary to enable IDB and its affiliates to
make such information available to the Board. In light of
the Board's review of the restrictions on disclosure and
these commitments, the Board concludes that the Applicants have provided adequate assurances of access to any
appropriate information the Board may request. Based on
these and all other facts of record, the Board has concluded
that the supervisory factors it is required to consider are
consistent with approval.

7. 12 U.S.C. § 1842(c)(3)(B). Under Regulation Y, the Board uses
the standards enumerated in Regulation K to determine whether a
foreign bank is subject to consolidated home country supervision. See
12 CFR 225.13(a)(4). Regulation K provides that a foreign bank will
be considered subject to comprehensive supervision or regulation on a
consolidated basis if the Board determines that the bank is supervised
or regulated in such a manner that its home country supervisor
receives sufficient information on the worldwide operations of the
bank, including its relationship with any affiliates, to assess the bank's
overall financial condition and its compliance with laws and regulations. See 12 CFR 211.24(c)(l).
8. See Bank Hapoalim B.M., 87 Federal Reserve Bulletin ill
(2001).
9. As a condition of approving the acquisition of IDB, Israeli law
requires Applicants to obtain prior approval for any changes in the
holding company structure and prohibits the holding companies from
conducting activities other than holding the shares of IDB.
10. See 12 U.S.C. § 1842(c)(3)(A).

Legal Developments

Convenience and Needs Considerations
In acting on this proposal, the Board also is required to
consider the effects of the transaction on the convenience
and needs of the communities to be served and to take
into account the records of the relevant insured depository institutions under the Community Reinvestment Act
("CRA"). 12 An institution's most recent CRA performance
evaluation is a particularly important consideration in the
applications process, because it represents a detailed,
on-site evaluation of the institution's overall record of
performance under the CRA by its appropriate federal
supervisor.13
The Board has considered carefully the convenience and
needs factor and the CRA performance record of IDBNY
in light of all the facts of record. As provided in the CRA,
the Board has evaluated the convenience and needs factor
in light of the evaluations by the appropriate federal supervisor of the CRA performance record of IDBNY. IDBNY
received an "outstanding" rating at its most recent CRA
performance evaluation by the FDIC, as of December 1,
2004. Applicants have indicated that after consummation
of the proposal, they expect to continue the CRA and
lending programs at IDBNY and, as appropriate, to consider expanding the lending activities and broadening the
range of deposit and other customer services of the bank to
provide additional services to the community that IDBNY
serves.
Based on these and all the facts of record, the Board
concludes that considerations relating to the convenience
11. 12U.S.C. §1842(c)(l).
12. 12U.S.C. §2901 etseq.
13. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

C49

and needs factor, including the CRA performance record of
IDBNY, are consistent with approval.

Conclusion
Based on the foregoing and all facts of record, the Board
has determined that the applications should be, and hereby
are, approved. In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the BHC Act and other
applicable statutes. The Board's approval is specifically
conditioned on compliance by the Applicants with the
conditions imposed in this order; the commitments made to
the Board in connection with the applications, including
commitments made by IDB; and receipt of all other regulatory approvals, including approvals by the NYSBD and the
Israeli Supervisor of Banks. For purposes of this action,
these conditions and commitments are deemed to be conditions imposed in writing by the Board in connection with
its findings and decision and, as such, may be enforced in
proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause
by the Board or the Federal Reserve Bank of New York,
acting pursuant to delegated authority.
By order of the Board of Governors, effective December 16, 2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Zions Bancorporation
Salt Lake City, Utah
Order Approving the Acquisition of a Bank Holding
Company
Zions Bancorporation ("Zions"), a financial holding company within the meaning of the Bank Holding Company
Act ("BHC Act"), has requested the Board's approval
under section 3 of the BHC Act 1 to acquire Amegy Bancorporation, Inc. ("Amegy") and its subsidiary bank, Amegy
Bank, National Association ("Amegy Bank"), both of
Houston, Texas.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published

1. 12U.S.C. §1842.
2. Zions also would acquire Amegy Holding Delaware, Inc.,
Wilmington, Delaware, a bank holding company through which
Amegy owns Amegy Bank. Zions intends to operate Amegy Bank as
a subsidiary bank after consummation of the proposal.

C50

Federal Reserve Bulletin • 2006

(70 Federal Register 53,361 (2005)). The time for filing
comments has expired, and the Board has considered the
application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
Zions, with total consolidated assets of approximately
$32.9 billion, is the 44th largest depository organization in
the United States, controlling deposits of approximately
$24.8 billion, which represent less than 1 percent of the
total amount of deposits of insured depository institutions
in the United States.3 Zions operates subsidiary depository
institutions in Utah, California, Washington, Arizona,
Nevada, New Mexico, and Oregon and engages in numerous nonbanking activities that are permissible under the
BHC Act.
Amegy, with total consolidated assets of approximately
$7.7 billion, is the 11th largest depository organization in
Texas, controlling deposits of approximately $5.1 billion.4
On consummation of the proposal, Zions would become
the 38th largest depository organization in the United
States, with total consolidated assets of approximately
$41.7 billion, and would control deposits of approximately
$29.8 billion, which represent less than 1 percent of the
total amount of deposits of insured depository institutions
in the United States.

Interstate Analysis
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home
state of such bank holding company if certain conditions
are met. For purposes of the BHC Act, the home state of
Zions is Utah,5 and Amegy is located in Texas.6
Based on a review of all the facts of record, including
a review of relevant state statutes, the Board finds that
all conditions for an interstate acquisition enumerated in
section 3(d) of the BHC Act are met in this case.7 In light
3. Asset, deposit, and national ranking data are as of June 30, 2005.
Asset and national ranking data are based on total assets reported by
bank holding companies on Consolidated Financial Statements for
Bank Holding Companies and by thrift institutions on Thrift Financial
Reports. Deposit data reflect the total of the deposits reported by each
organization's insured depository institutions in their Consolidated
Reports of Condition and Income or Thrift Financial Reports.
4. State ranking is based on deposits, and deposit data are as of
June 30, 2005. In this context, insured depository institutions include
commercial banks, savings banks, and savings associations.
5. A bank holding company's home state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on July 1, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).
6. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch (12 U.S.C. §§ 1841(o)(4)-(7), and 1842(d)(l)(A)
and (d)(2)(B)).
7. 12 U.S.C. §§ 1842(d)(l)(A)-(B) and 1842(d)(2)(A)-(B). Zions is
adequately capitalized and adequately managed, as defined by applicable law. Amegy Bank has been in existence and operated for the
minimum period of time required by applicable state law (five years).
On consummation of the proposal, Zions would control less than
10 percent of the total amount of deposits of insured depository

of all the facts of record, the Board is permitted to approve
the proposal under section 3(d) of the BHC Act.

Competitive

Considerations

Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would be
in furtherance of an attempt to monopolize the business of
banking in any relevant banking market. The BHC Act also
prohibits the Board from approving a proposed bank acquisition that would substantially lessen competition in any
relevant banking market unless the Board finds that the
anticompetitive effects of the proposal clearly are outweighed in the public interest by the probable effect of the
proposal in meeting the convenience and needs of the
community to be served.
Zions and Amegy do not compete directly in any relevant banking market.8 Based on all the facts of record, the
Board has concluded that consummation of the proposal
would have no significant adverse effect on competition or
on the concentration of banking resources in any relevant
banking market and that competitive factors are consistent
with approval.9
institutions in the United States and less than 30 percent of the total
amount of deposits of insured depository institutions in Texas. All
other requirements of section 3(d) of the BHC Act would be met on
consummation of the proposal.
8. 12 U.S.C. § 1842(c)(l). One commenter asserted that the competitive factors the Board must consider should weigh against approval
because consummation of the proposed transaction would not have
demonstrable procompetitive effects. The applicable standard in section 3(c)(l) of the BHC Act bars the Board from approving a proposal
that would result in or would further a monopoly and permits the
Board to approve a proposal with substantial anticompetitive effects
only if such effects are clearly outweighed by certain beneficial
effects. Contrary to commenter's claim, section 3(c)(l) of the BHC
Act does not make evidence of procompetitive effects a necessary
condition for approval. As noted, because Zions and Amegy do not
compete directly in the Houston, Texas banking market or in any other
banking market, the proposal would not result in a monopoly or have
a significant adverse effect on competition in any relevant market.
9. One commenter asserted that the Board should take into account
the likely competitive effects of the proposal on credit unions. Even if
the deposits of credit unions were expressly included in the analysis of
competitive effects of this proposal, Zions currently is not located in
the Houston, Texas banking market and, therefore, the proposal would
not increase the concentration level of market deposits. Contrary to
the assertion of the commenter, the Board does not view the initial
entry of a competitor through an acquisition as per se anticompetitive.
Moreover, the Board has expressly factored credit unions into
analyses of bank acquisition proposals only when the facts of record
with respect to the specific proposal demonstrate that credit unions
offer bank-like products to a broad segment of a geographic market.
Wells Fargo, 86 Federal Reserve Bulletin 832, 834 (2000); WestStar
Bank, 84 Federal Reserve Bulletin 294, 296 (1998). In reviewing the
competitive effects of a proposal, the Board takes into consideration,
among other factors, the concentration level of market deposits and
the increase in this level as measured by the Herfindahl-Hirschman
Index under the Department of Justice Merger Guidelines ("DOJ
Guidelines"), 49 Federal Register 26,823 (1984). The Department of
Justice has stated that the higher-than-normal thresholds it uses for
measuring market concentration for screening bank mergers for anticompetitive effects under the DOJ Guidelines implicitly recognize the
competitive effects of limited-purpose lenders, including credit unions.

Legal Developments

Financial, Managerial, and Supervisory

Considerations

Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered these factors in light of all the facts
of record, including confidential reports of examination,
other supervisory information from the primary federal
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, information provided by Zions, and public comments received on
the proposal.
In evaluating financial factors in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial condition of the combined organization at consummation, including its capital position, asset quality, and earnings prospects, and the impact of the proposed funding of
the transaction.10
Based on its review of these factors, the Board finds that
Zions has sufficient financial resources to effect the proposal. The proposed transaction is structured as a partial
share exchange and partial cash purchase. Zions will fund
the cash component of the consideration with proceeds
from the issuance of subordinated debt securities. Zions
and each of its subsidiary banks and Amegy Bank are well
capitalized and would remain so on consummation of the
proposal.11
The Board also has considered the managerial resources
of the organizations involved and the proposed combined organization. The Board has reviewed the examination records of Zions, Amegy, and their subsidiary
banks, including assessments of their management, risk-

See, e.g., J.P. Morgan Chase & Co., 90 Federal Reserve Bulletin 352,
354 n. 16 (2004).
10. Two commenters questioned whether Zions would realize its
projected cost savings from the proposal, and one of these commenters also asserted that the transaction could increase interest-rate risk
for the companies involved and would be unlikely to generate crossmarketing efficiencies. The Board has evaluated the financial effects
of this proposal under the assumption that no cost savings would be
realized. In addition, as noted, the Board has considered a wide range
of information in considering the financial resources and future prospects of the institutions involved in the proposal.
11. A commenter objected to the levels of compensation provided
by employment agreements between Zions and six executive officers
of Amegy. The Board notes that information about these agreements
was provided to Amegy shareholders before the October 11 special
meeting at which the Amegy shareholders approved the organization's acquisition by Zions. As noted, Zions and Amegy would remain
well capitalized on consummation of the proposal.

C51

management systems, and operations.12 In addition, the
Board has considered its supervisory experiences and those
of the other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law. Zions, Amegy, and their subsidiary
depository institutions are considered to be well managed.
The Board also has considered Zions's plans for implementing the proposal, including the proposed management
after consummation.
Based on all the facts of record, including a review of
the comments received, the Board concludes that considerations relating to the financial and managerial resources
and future prospects of the organizations involved in the
proposal are consistent with approval, as are the other
supervisory factors under the BHC Act.

12. A commenter criticized Zions's relationships with an unaffiliated pawnshop and other unaffiliated nontraditional providers of financial services. As a general matter, these businesses are licensed by the
states where they operate and are subject to applicable state law. Zions
stated that neither it nor Amegy focuses on marketing credit services
to such nontraditional providers except as part of broader marketing
to small businesses generally. Zions represented that neither it nor
Amegy plays any role in the lending practices or credit-review processes of such firms.
13. 12U.S.C. §2901 etseq.
14. 12U.S.C. §2903.
15. 12U.S.C. §2801 etseq.

C52

Federal Reserve Bulletin • 2006

Examiners reported that CB&T's qualified investments,
grants, and donations, which totaled more than $77 million, demonstrated excellent responsiveness to the credit
and community economic development needs of the bank's
assessment areas. In addition, they commended CB&T's
leadership role in providing community development services and noted that CB&T's service delivery systems
were accessible to all geographies, including LMI areas,
and to individuals of different income levels.
CRA Performance of Amegy. As noted above, Amegy
Bank received an overall "outstanding" rating for CRA
performance in its most recent CRA performance evaluation by the OCC.22 Amegy Bank received "outstanding"
ratings under the lending and investment tests and a "high
satisfactory" rating under the service test.
Examiners reported that Amegy Bank's overall lending
performance was excellent. They found that the distribution of the bank's loans by income level of geography was
good and that its mortgage lending demonstrated adequate
distribution to LMI borrowers. In addition, examiners
stated that Amegy Bank's distribution of loans to small
businesses was good and that its community development
lending, which totaled more than $84 million, demonstrated excellent responsiveness to the credit and community development needs of the bank's assessment area.
Examiners also commended Amegy Bank for its excellent
level of qualified investments, which totaled more than
$14 million during the evaluation period, and extensive use
of innovative and complex investments. Examiners stated
the bank made extensive use of innovative and flexible
lending practices that supported small businesses and
affordable housing.
Examiners noted that Amegy Bank's service delivery
systems were accessible to all geographies and to individuals of different income levels. They characterized the
bank's community development services as excellent and
reported that the services primarily addressed identified
needs for affordable housing, economic development, and
community services.

B. HMD A and Fair Lending Record
16. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
17. As of June 30, 2005, CB&T accounted for 32.9 percent of the
total deposits of Zions's six subsidiary insured depository institutions.
18. The appendix lists the most recent CRA ratings of Zions's
other subsidiary banks.
19. At the time of the evaluation, Amegy Bank was named Southwest Bank of Texas, National Association.
20. The evaluation period for the lending test was January 1, 2002,
through September 30, 2004, except for community development
loans. The evaluation period for community development loans and
for the investment and service tests was September 17, 2001, through
January 3, 2005. At the time of the evaluation, CB&T had six
assessment areas in California, one of which received a full-scope
review.
21. For purposes of the evaluations discussed in this order, small
businesses are businesses with gross annual revenues of $ 1 million or
less.

The Board has carefully considered the lending records
and HMDA data of Zions and Amegy in light of public
comment about their respective records of lending to
minorities. A commenter alleged, based on 2004 HMDA
data, that Zions and Amegy disproportionately denied
applications by African-American and Hispanic applicants
for HMDA-reportable loans. The commenter also asserted
that Zions made higher-cost loans to African Americans

22. The evaluation period for the lending test was January 1, 1999,
through December 31, 2002, except for community development
loans. The evaluation period for community development loans and
for the investment and service tests was May 10, 1999, through
May 5, 2003. At the time of the evaluation, the bank had one
assessment area that encompassed the greater Houston metropolitan
area.

Legal Developments

and Hispanics more frequently than Zions did to nonminorities.23 The Board reviewed the HMDA data for 2003
and 2004 reported by each subsidiary bank of Zions and by
Amegy Bank in their assessment areas. 24
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they are insufficient by themselves to conclude whether or not Zions or Amegy is
excluding any racial or ethnic group or imposing higher
credit costs on those groups on a prohibited basis. The
Board recognizes that HMDA data alone, even with the
recent addition of pricing information, provide only limited
information about the covered loans.25 HMDA data, therefore, have limitations that make them an inadequate basis,
absent other information, for concluding that an institution
has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by Zions and Amegy with fair lending
laws. In the fair lending reviews conducted in conjunction
with the most recent CRA evaluations of the subsidiary
depository institutions of Zions and Amegy, examiners
noted no substantive violations of applicable fair lending
laws.
The record also indicates that Zions has taken steps to
ensure compliance with fair lending laws and other consumer protection laws. Zions represented that it conducts
regular compliance reviews of each business unit and
that its fair lending reviews include statistical analyses of
comparable files by loan product. Zions also stated that it
maintains a second-review program for residential and
small business lending. Zions has indicated that Amegy

23. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 percentage points
for first-lien mortgages and 5 percentage points for second-lien mortgages (12 CFR 203.4).
24. One Zions subsidiary, The Commerce Bank of Washington,
National Association, Seattle, Washington, did not originate or purchase any HMDA-reportable loans in 2003 or 2004. In addition, The
Commerce Bank of Oregon, Portland, Oregon, another Zions subsidiary, is a de novo bank established on October 31, 2005.
25. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

C53

will adopt Zions's current fair lending policies and
procedures.
The Board also has considered the HMDA data in light
of other information, including the overall performance
records of the subsidiary banks of Zions and Amegy under
the CRA. These established efforts demonstrate that the
institutions are active in helping to meet the credit needs of
their entire communities.
C. Conclusion on Convenience and Needs and CRA
Performance
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by Zions, comments received on the proposal, and confidential supervisory information. In addition, Zions has represented
that the proposal would expand the availability and array
of banking products and services to the customers of
Amegy.26 Based on a review of the entire record, and for
the reasons discussed above, the Board concludes that
considerations relating to the convenience and needs factor
and the CRA performance records of the relevant depository institutions are consistent with approval.
Conclusion
Based on the foregoing and all facts of record, the Board
has determined that the application should be, and hereby
is, approved.27 In reaching its conclusion, the Board has

26. A commenter asserted that Zions did not provide sufficient
information for the Board to conclude that considerations related to
the convenience and needs of the community are consistent with
approval of the proposal. As noted, however, the Board's consideration of this factor was based on a review of a broad range of
information in addition to information provided by Zions, including
the CRA performance records of the institutions involved in the
proposal, HMDA data reported by Zions and Amegy, and confidential
supervisory information.
27. A commenter requested that the Board hold a public meeting or
hearing on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes
a timely written recommendation of denial of the application. The
Board has not received such a recommendation from the appropriate
supervisory authority. Under its regulations, the Board also may, in
its discretion, hold a public meeting or hearing on an application to
acquire a bank if a meeting or hearing is necessary or appropriate to
clarify factual issues related to the application and to provide an
opportunity for testimony (12 CFR 225.16(e)). The Board has considered carefully the commenter's request in light of all the facts of
record. In the Board's view, the commenter had ample opportunity to
submit its views, and in fact, the commenter has submitted written
comments that the Board has considered carefully in acting on the
proposal. The commenter's request fails to demonstrate why the
written comments do not present its views adequately or why a
meeting or hearing otherwise would be necessary or appropriate. For
these reasons, and based on all the facts of record, the Board has
determined that a public meeting or hearing is not required or warranted in this case. Accordingly, the request for a public meeting or
hearing on the proposal is denied.

C54

Federal Reserve Bulletin • 2006

considered all the facts of record in light of the factors that
it is required to consider under the BHC Act.28 The Board's
approval is specifically conditioned on compliance by
Zions with the conditions imposed in this order and the
commitments made to the Board in connection with the
application. For purposes of this action, the conditions and
28. The commenter also requested that the Board extend the comment period on the proposal. As previously noted, the Board has
accumulated a significant record in this case, including reports of
examination, confidential supervisory information, public reports and
information, and public comment. In the Board's view, for the reasons
discussed above, the commenter has had ample opportunity to submit
its views, and in fact, has provided written submissions that the Board
has considered carefully in acting on the proposal. Moreover, the BHC
Act and Regulation Y require the Board to act on proposals submitted
under those provisions within certain time periods. Based on a review
of all the facts of record, the Board has concluded that the record in
this case is sufficient to warrant action at this time, and that extension
of the comment period, or denial of the proposal on the basis of the
comments discussed above or on informational insufficiency, is not
warranted.

commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision herein and, as such, may be enforced in proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Federal Reserve Bank of San Francisco,
acting pursuant to delegated authority.
By order of the Board of Governors, effective November 18,2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies and Olson. Absent and not voting: Governor
Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Appendix
CRA Performance Ratings of Zions's Other Subsidiary Banks1
Bank

CRA Rating

Date

Supervisor

Zions First National Bank,
Salt Lake City, Utah
The Commerce Bank of Washington,
National Association,
Seattle, Washington
National Bank of Arizona,
Tucson, Arizona
Nevada State Bank,
Las Vegas, Nevada
Vectra Bank Colorado, National Association,
Farmington, New Mexico

Outstanding

December 2003

occ

Satisfactory

April 2004

occ

Satisfactory

October 2003

occ

Outstanding

July 2004

FDIC

Outstanding

November 2001

OCC

1. Zions's subsidiary bank, The Commerce Bank of Oregon ("CBO"),
Portland, Oregon, is a de novo bank established on October 31, 2005. CB O was
established to purchase and assume the assets and liabilities of First Consumers

National Bank, Lake Oswego, Oregon, a credit card bank that had been in
liquidation since June 2003. Accordingly, CBO does not have a CRA performance record.

Orders Issued Under Section 4 of the Bank Holding
Company Act

under section 4 of the BHC Act1 and the Board's Regulation Y 2 to engage in physical commodity trading in the
United States. Deutsche Bank currently conducts physical
commodity trading outside the United States.3
Regulation Y authorizes bank holding companies
("BHCs") to engage as principal in derivative contracts
based on financial and nonflnancial assets ("Commodity
Derivatives"). Under Regulation Y, a BHC may conduct
Commodity Derivatives activities subject to certain restrictions that are designed to limit the BHCs activity to

Deutsche BankAG
Frankfurt, Germany
Order Approving Notice to Engage in Activities
Complementary to a Financial Activity
Deutsche Bank AG ("Deutsche Bank"), a foreign bank
that is a financial holding company ("FHC") for purposes
of the Bank Holding Company Act ("BHC Act"), and
its wholly owned U.S. subsidiary Taunus Corporation
("Taunus," and collectively with Deutsche Bank, "Notificants"), also an FHC, have requested the Board's approval

1. 12U.S.C. §1843.
2. 12 CFR Part 225.
3. Deutsche Bank will enter into physical commodity trades in the
United States either directly or indirectly through Notificants' nonbanking subsidiary, DB Energy Trading, LLC, New York, New York.

Legal Developments

trading and investing in financial instruments rather than
dealing directly in physical nonfinancial commodities.4
Under these restrictions, a BHC generally is not allowed to
take or make delivery of nonfinancial commodities underlying Commodity Derivatives. In addition, BHCs generally
are not permitted to purchase or sell nonfinancial commodities in the spot market.
The BHC Act, as amended by the Gramm-Leach-Bliley
Act ("GLB Act"), permits a BHC to engage in activities
that the Board had determined were closely related to
banking, by regulation or order, prior to November 12,
1999.5 The BHC Act permits an FHC to engage in a broad
range of activities that are defined in the statute to be
financial in nature.6 Moreover, the BHC Act allows FHCs
to engage in any activity that the Board determines, in
consultation with the Secretary of the Treasury, to be
financial in nature or incidental to a financial activity.7
In addition, the BHC Act permits FHCs to engage in any
activity that the Board (in its sole discretion) determines is
complementary to a financial activity and does not pose a
substantial risk to the safety or soundness of depository
institutions or the financial system generally.8 This authority is intended to allow the Board to permit FHCs to
engage, on a limited basis, in an activity that appears to be
commercial rather than financial in nature but that is meaningfully connected to a financial activity in a manner that
complements the financial activity.9 The BHC Act provides
that any FHC seeking to engage in a complementary activity must obtain the Board's prior approval under section 4(j) of the BHC Act.10
Notificants regularly engage as principals in BHCpermissible Commodity Derivatives based on a variety of
commodities and plan to expand those activities to include
physical commodity transactions in the United States. Notificants have, therefore, requested that the Board permit
them to engage in physical commodity trading activities in
the United States involving commodities such as natural
gas, crude oil, and emissions allowances,11 and to take and

4. Commodity Derivatives permissible for BHCs under Regulation Y are hereinafter referred to as "BHC-permissible Commodity
Derivatives."
5. 12U.S.C. §1843(c)(8).
6. The Board determined by regulation before November 12, 1999,
that engaging as principal in Commodity Derivatives, subject to
certain restrictions, was closely related to banking. Accordingly,
engaging as principal in BHC-permissible Commodity Derivatives
is a financial activity for purposes of the BHC Act. See 12 U.S.C.
§1843(k)(4)(F).
7. 12 U.S.C. §1843(k)(l)(A).
8. 12 U.S.C. § 1843(k)(l)(B).
9. See 145 Cong. Rec. H11529 (daily ed. Nov. 4, 1999) (Statement
of Chairman Leach) ("It is expected that complementary activities
would not be significant relative to the overall financial activities of
the organization.").
10. 12 U.S.C. § 1843(j).
11. An emission allowance is an intangible right to emit certain
pollutants during a given year or any year thereafter that is granted
by the U.S. Environmental Protection Agency or comparable foreign
regulatory authority to an entity, such as a power plant or other
industrial concern, affected by environmental regulation aimed at
reducing emission of pollutants. An allowance can be bought, sold, or

C55

make delivery of physical commodities to settle BHCpermissible Commodity Derivatives in which they currently engage ("Commodity Trading Activities"). The
Board previously has determined that Commodity Trading
Activities involving a particular commodity complement
the financial activity of engaging regularly as principal in
BHC-permissible Commodity Derivatives based on that
commodity.12 In light of the foregoing and all other facts of
record, the Board believes that Commodity Trading Activities are complementary to the Commodity Derivatives
activities of Notificants.
To authorize Notificants to engage in Commodity Trading Activities as a complementary activity under the GLB
Act, the Board also must determine that the activities do
not pose a substantial risk to the safety or soundness of
depository institutions or the U.S. financial system generally.13 In addition, the Board must determine that the
performance of Commodity Trading Activities by Notificants "can reasonably be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible
adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or
unsound banking practices." 14
Approval of the proposal would likely benefit Notificants' customers by enhancing Notificants' ability to provide efficiently a full range of commodity-related services.
Approving Commodity Trading Activities for Notificants
also would enable them to improve their understanding of
physical commodity and commodity derivatives markets
and their ability to serve as an effective competitor in those
markets.
The Board has evaluated the financial resources of the
Notificants and their subsidiaries. Deutsche Bank's capital
levels exceed the minimum levels that would be required
under the Basel Capital Accord and are considered equivalent to the capital levels that would be required of a U.S.
banking organization.
The Board also has evaluated the managerial resources
of Notificants and their subsidiaries, including their management expertise, internal controls, and risk-management
systems. The Board notes that on October 12, 2005,
Deutsche Bank's subsidiary bank, Deutsche Bank Trust
Company Americas ("DBTCA"), New York, New York, a

exchanged by individuals, brokers, corporations, or government entities that establish an account at the relevant governmental authority.
Emissions allowances are stored and tracked on the records of the
relevant government authority. Accordingly, there are no transportation, environmental, storage, or insurance risks associated with ownership of emissions allowances.
12. JPMorgan Chase & Co., 92 Federal Reserve Bulletin C57
(2006) (Order dated November 18, 2005); Barclays Bank PLC,
90 Federal Reserve Bulletin 511 (2004); UBS AG, 90 Federal Reserve
Bulletin 215 (2004); and Citigroup Inc., 89 Federal Reserve Bulletin
508 (2003). For example, Commodity Trading Activities involving all
types of crude oil would be complementary to engaging regularly as
principal in BHC-permissible Commodity Derivatives based on Brent
crude oil.
13. 12 U.S.C. § 1843(k)(l)(B).
14. 12 U.S.C. § 1843(j)(2)(A).

C56

Federal Reserve Bulletin • 2006

state member bank, entered into a written agreement (the
"Written Agreement") with the Board and the New York
State Banking Department pursuant to section 8 of the
Federal Deposit Insurance Act 15 to address deficiencies
in its anti-money-laundering programs. 16 In reviewing this
proposal, the Board has considered the enhancements
DBTCA has already made and is currently making to its
systems and programs to ensure compliance with antimoney-laundering laws and the Written Agreement. The
Board will continue to monitor DBTCA's ongoing actions
to develop, implement, and maintain effective compliance
systems and programs and to meet the requirements of the
Written Agreement. Furthermore, the proposed Commodity Trading Activities will not be conducted by DBTCA or
its management and commencement of the proposed activities should not impede Deutsche Bank's efforts to address
the weaknesses at DBTCA.
In reviewing Notificants' managerial expertise and internal control framework with respect to the proposed Commodity Trading Activities, the Board notes that Notificants
have established and maintained policies for monitoring,
measuring, and controlling the credit, market, settlement,
reputational, legal, and operational risks involved in their
Commodity Trading Activities. These policies address key
areas, such as counterparty-credit risk, value-at-risk methodology, and internal limits with respect to commodity
trading, new business and new product approvals, and
identification of transactions that require higher levels of
internal approval. The policies also describe critical internal control elements, such as reporting lines, and the frequency and scope of internal audits of Commodity Trading
Activities. Notificants have integrated the risk management
of Commodity Trading Activities into their overall riskmanagement framework. Based on the above and all the
facts of record, the Board believes that Notificants have
the managerial expertise and internal control framework to
manage adequately the risks of taking and making delivery
of physical commodities as proposed.
As a condition of this order, to limit the potential safety
and soundness risks of Commodity Trading Activities, the
market value of commodities held by Notificants as a result
of Commodity Trading Activities must not exceed 5 percent of Deutsche Bank's consolidated tier 1 capital (as
calculated under its home country standard).17 Notificants
also must notify the Federal Reserve Bank of New York
if the market value of commodities held by Notificants as a
result of their Commodity Trading Activities exceeds
4 percent of Deutsche Bank's tier 1 capital.
In addition, Notificants may take and make delivery
only of physical commodities for which derivative con-

15. 12U.S.C. §1818.
16. See Board of Governors of the Federal Reserve System (2005),
"Deutsche Bank Trust Company Americas," press release, October 14, www.federalreserve.gov/newsevents.htm.
17. Notificants would be required to include in this 5 percent
limit the market value of any commodities they hold as a result of a
failure of reasonable efforts to avoid taking delivery under section 225.28(b)(8)(ii)(B) of Regulation Y (12 CFR 225.28(b)(8)(ii)(B)).

tracts have been authorized for trading on a U.S. futures
exchange by the Commodity Futures Trading Commission
("CFTC") (unless specifically excluded by the Board) or
that have been specifically approved by the Board.18 This
requirement is designed to prevent Notificants from becoming involved in dealing in finished goods and other items,
such as real estate, that lack the fungibility and liquidity of
exchange-traded commodities.
To minimize the exposure of Notificants to additional
risks, including storage, transportation, legal, and environmental risks, Notificants would not be authorized (i) to
own, operate, or invest in facilities for the extraction,
transportation, storage, or distribution of commodities; or
(ii) to process, refine, store, or otherwise alter commodities
in the United States. In conducting their Commodity Trading Activities, Notificants have committed to use appropriate storage and transportation facilities owned and operated
by third parties.19
Notificants and their Commodity Trading Activities also
remain subject to the general securities, commodities, and
energy laws and the rules and regulations (including the
antifraud and antimanipulation rules and regulations) of
the Securities and Exchange Commission, the CFTC, and
the Federal Energy Regulatory Commission.
Permitting Notificants to engage in the limited amount
and types of Commodity Trading Activities described
above, on the terms described in this order, would not
appear to pose a substantial risk to Notificants, depository
institutions, or the U.S. financial system generally. Through
their existing authority to engage in Commodity Derivatives, Notificants already may incur the price risk associated with commodities. Permitting Notificants to buy and
sell commodities in the spot market or physically settle
Commodity Derivatives would not appear to increase significantly their potential exposure to commodity-price risk.
For these reasons, and based on Notificants' policies and
procedures for monitoring and controlling the risks of
Commodity Trading Activities, the Board concludes that
consummation of the proposal does not pose a substantial
risk to the safety or soundness of depository institutions or
the financial system generally and can reasonably be
expected to produce benefits to the public that outweigh
any potential adverse effects.

18. The particular commodity derivative contract that Notificants
take to physical settlement need not be exchange traded, but (in the
absence of specific Board approval) futures or options on futures on
the commodity underlying the derivative contract must have been
authorized for exchange trading by the CFTC.
The CFTC publishes annually a list of the CFTC-authorized commodity contracts. See Commodity Futures Trading Commission,
FY 2004 Annual Report to Congress 109. With respect to granularity,
the Board intends this requirement to permit Commodity Trading
Activities involving all types of a listed commodity. For example,
Commodity Trading Activities involving any type of coal or coal
derivative contract would be permitted, even though the CFTC has
authorized only Central Appalachian coal.
19. Approving Commodity Trading Activities as a complementary
activity, subject to limits and conditions, would not in any way restrict
the existing authority of Notificants to deal in foreign exchange,
precious metals, or any other bank-eligible commodity.

Legal Developments

Based on all the facts of record, including the representations and commitments made to the Board by Notificants
in connection with the notice, and subject to the terms and
conditions set forth in this order, the Board has determined
that the notice should be, and hereby is, approved. The
Board's determination is subject to all the conditions set
forth in Regulation Y, including those in section 225.7, 20
and to the Board's authority to require modification or
termination of the activities of a BHC or any of its subsidiaries as the Board finds necessary to ensure compliance
with, or to prevent evasion of, the provisions and purposes
of the BHC Act and the Board's regulations and orders
issued thereunder. The Board's decision is specifically
conditioned on compliance with all the commitments made
to the Board in connection with the notice, including the
commitments and conditions discussed in this order. The
commitments and conditions relied on in reaching this
decision shall be deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law.
By order of the Board of Governors, effective December 19, 2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

JPMorgan Chase & Co.
New York, New York
Order Approving Notice to Engage in Activities
Complementary to a Financial Activity
JPMorgan Chase & Co. ("JPM Chase"), a financial holding company ("FHC") within the meaning of the Bank
Holding Company Act ("BHC Act"), has requested the
Board's approval under section 4 of the BHC Act 1 and
the Board's Regulation Y (12 CFR Part 225) to trade in
physical commodities.
Regulation Y authorizes bank holding companies
("BHCs") to engage as principal in derivative contracts
based on financial and nonfinancial assets ("Commodity
Derivatives"). Under Regulation Y, a BHC may conduct
Commodity Derivatives activities subject to certain restrictions that are designed to limit the B H C s activity to
trading and investing in financial instruments rather than
dealing directly in physical nonfinancial commodities.2
Under these restrictions, a BHC generally is not allowed to
take or make delivery of nonfinancial commodities under20. 12 CFR 225.7.
1. 12U.S.C. §1843.
2. Commodity Derivatives permissible for BHCs under Regulation Y are hereinafter referred to as "BHC-permissible Commodity
Derivatives."

C57

lying Commodity Derivatives. In addition, BHCs generally
are not permitted to purchase or sell nonfinancial commodities in the spot market.
The BHC Act, as amended by the Gramm-Leach-Bliley
Act ("GLB Act"), permits a BHC to engage in activities
that the Board had determined were closely related to
banking, by regulation or order, prior to November 12,
1999.3 The BHC Act permits an FHC to engage in a broad
range of activities that are defined in the statute to be
financial in nature.4 Moreover, the BHC Act allows FHCs
to engage in any activity that the Board determines, in
consultation with the Secretary of the Treasury, to be
financial in nature or incidental to a financial activity.5
In addition, the BHC Act permits FHCs to engage in any
activity that the Board (in its sole discretion) determines is
complementary to a financial activity and does not pose a
substantial risk to the safety or soundness of depository
institutions or the financial system generally.6 This authority is intended to allow the Board to permit FHCs to
engage, on a limited basis, in an activity that appears to be
commercial rather than financial in nature but that is meaningfully connected to a financial activity such that it
complements the financial activity.7 The BHC Act provides
that any FHC seeking to engage in a complementary activity must obtain the Board's prior approval under section 4(j) of the BHC Act.8
Through its indirect subsidiary, JPMorgan Ventures
Energy Corporation ("JPMVEC"), JPM Chase engages as
principal in BHC-permissible Commodity Derivatives and
plans to expand those activities to include physical commodity transactions, with a principal focus on energyrelated commodities. JPM Chase has, therefore, requested
that the Board permit it to engage in physical commodity
trading activities, including physical transactions in energyrelated commodities, such as natural gas, crude oil, and
emissions allowances,9 and to take and make delivery of

3. 12U.S.C. §1843(c)(8).
4. The Board determined by regulation before November 12, 1999,
that engaging as principal in Commodity Derivatives, subject to
certain restrictions, was closely related to banking. Accordingly,
engaging as principal in BHC-permissible Commodity Derivatives
is a financial activity for purposes of the BHC Act. See 12 U.S.C.
§1843(k)(4)(F).
5. 12 U.S.C. §1843(k)(l)(A).
6. 12 U.S.C. § 1843(k)(l)(B).
7. See 145 Cong. Rec. H11529 (daily ed. Nov. 4, 1999) (Statement
of Chairman Leach) ("It is expected that complementary activities
would not be significant relative to the overall financial activities of
the organization.").
8. 12 U.S.C. §1843(j).
9. An emission allowance is an intangible right to emit certain
pollutants during a given year or any year thereafter that is granted
by the U.S. Environmental Protection Agency or comparable foreign
regulatory authority to an entity, such as a power plant or other
industrial concern, affected by environmental regulation aimed at
reducing emission of pollutants. An allowance can be bought, sold, or
exchanged by individuals, brokers, corporations, or government entities that establish an account at the relevant governmental authority.
Emissions allowances are stored and tracked on the records of the
relevant government authority. Accordingly, there are no transportation, environmental, storage, or insurance risks associated with ownership of emissions allowances.

C58

Federal Reserve Bulletin • 2006

physical commodities to settle BHC-permissible Commodity Derivatives in which JPM Chase currently engages
("Commodity Trading Activities")- The Board previously
has determined that Commodity Trading Activities involving a particular commodity complement thefinancialactivity of engaging regularly as principal in BHC-permissible
Commodity Derivatives based on that commodity.10 In
light of the foregoing and all other facts of record, the
Board believes that the Commodity Trading Activities are
complementary to the Commodity Derivatives activities of
JPM Chase.
To authorize JPM Chase to engage in Commodity Trading Activities as a complementary activity under the GLB
Act, the Board also must determine that the activities do
not pose a substantial risk to the safety or soundness of
depository institutions or the U.S. financial system generally.11 In addition, the Board must determine that the
performance of Commodity Trading Activities by JPM
Chase "can reasonably be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible
adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or
unsound banking practices."12
Approval of the proposal likely would benefit JPM
Chase's customers by enhancing the company's ability to
provide efficiently a full range of commodity-related services. Approving Commodity Trading Activities for JPM
Chase also would enable the company to improve its
understanding of physical commodity and commodity
derivatives markets and its ability to serve as an effective
competitor in those markets.
JPM Chase has established and maintains policies for
monitoring, measuring, and controlling the credit, market, settlement, reputational, legal, and operational risks
involved in its Commodity Trading Activities. These policies address key areas, such as counterparty-credit risk,
value-at-risk methodology, and internal limits with respect
to commodity trading, new business and new product
approvals, and identification of transactions that require
higher levels of internal approval. The policies also
describe critical internal control elements, such as reporting lines, and the frequency and scope of internal audits of
Commodity Trading Activities. Based on the above and all
the facts of record, the Board believes that JPM Chase has
the managerial expertise and internal control framework to
manage adequately the risks of taking and making delivery
of physical commodities as proposed.
As a condition of this order, to limit the potential safety
and soundness risks of Commodity Trading Activities, the
market value of commodities held by JPM Chase as a
10. Barclays Bank, PLC, 90 Federal Reserve Bulletin 511 (2004);
UBSAG, 90 Federal Reserve Bulletin 215 (2004); and Citigroup Inc.,
89 Federal Reserve Bulletin 508 (2003). For example, Commodity
Trading Activities involving all types of crude oil would be complementary to engaging regularly as principal in BHC-permissible Commodity Derivatives based on Brent crude oil.
11. 12 U.S.C. § 1843(k)(l)(B).
12. 12 U.S.C. § 1843(j)(2)(A).

result of Commodity Trading Activities must not exceed
5 percent of JPM Chase's consolidated tier 1 capital.13
JPM Chase also must notify the Federal Reserve Bank of
New York if the market value of commodities held by JPM
Chase as a result of its Commodity Trading Activities
exceeds 4 percent of its tier 1 capital.
In addition, JPM Chase may take and make delivery
only of physical commodities for which derivative contracts have been authorized for trading on a U.S. futures
exchange by the Commodity Futures Trading Commission
("CFTC") (unless specifically excluded by the Board) or
that have been specifically approved by the Board.14 This
requirement is designed to prevent JPM Chase from
becoming involved in dealing in finished goods and other
items, such as real estate, that lack the fungibility and
liquidity of exchange-traded commodities.
To minimize the exposure of JPM Chase to additional
risks, including storage risk, transportation risk, and legal
and environmental risks, JPM Chase would not be authorized (i) to own, operate, or invest in facilities for the
extraction, transportation, storage, or distribution of commodities; or (ii) to process, refine, or otherwise alter commodities. In conducting its Commodity Trading Activities,
JPM Chase has committed to use appropriate storage and
transportation facilities owned and operated by third
parties.15
JPM Chase and its Commodity Trading Activities also
remain subject to the general securities, commodities, and
energy laws and the rules and regulations (including the
antifraud and antimanipulation rules and regulations) of
the Securities and Exchange Commission, the CFTC, and
the Federal Energy Regulatory Commission.
Permitting JPM Chase to engage in the limited amount
and types of Commodity Trading Activities described
above, on the terms described in this order, would not
appear to pose a substantial risk to JPM Chase, depository
institutions, or the U.S.financialsystem generally. Through
its existing authority to engage in Commodity Derivatives,
JPM Chase already may incur the price risk associated
with commodities. Permitting JPM Chase to buy and sell
13. JPM Chase would be required to include in this 5 percent limit
the market value of any commodities held by JPM Chase as a result
of a failure of its reasonable efforts to avoid taking delivery under
section 225.28(b)(8)(ii)(B) of Regulation Y.
14. The particular commodity derivative contract that JPM Chase
takes to physical settlement need not be exchange traded, but (in the
absence of specific Board approval) futures or options on futures on
the commodity underlying the derivative contract must have been
authorized for exchange trading by the CFTC.
The CFTC publishes annually a list of the CFTC-authorized commodity contracts. See Commodity Futures Trading Commission,
FY 2004 Annual Report to Congress 109. With respect to granularity,
the Board intends this requirement to permit Commodity Trading
Activities involving all types of a listed commodity. For example,
Commodity Trading Activities involving any type of coal or coal
derivative contract would be permitted, even though the CFTC has
authorized only Central Appalachian coal.
15. Approving Commodity Trading Activities as a complementary
activity, subject to limits and conditions, would not in any way restrict
the existing authority of JPM Chase to deal in foreign exchange,
precious metals, or any other bank-eligible commodity.

Legal Developments

commodities in the spot market or physically settle Commodity Derivatives would not appear to increase significantly the organization's potential exposure to commodityprice risk.
For these reasons, and based on JPM Chase's policies
and procedures for monitoring and controlling the risks of
Commodity Trading Activities, the Board concludes that
consummation of the proposal does not pose a substantial
risk to the safety or soundness of depository institutions
or the financial system generally and can reasonably be
expected to produce benefits to the public that outweigh
any potential adverse effects.
Based on all the facts of record, including the representations and commitments made to the Board by JPM Chase
in connection with the notice, and subject to the terms and
conditions set forth in this order, the Board has determined
that the notice should be, and hereby is, approved. The
Board's determination is subject to all the conditions set
forth in Regulation Y, including those in section 225.7
(12 CFR 225.7), and to the Board's authority to require
modification or termination of the activities of a BHC
or any of its subsidiaries as the Board finds necessary to
ensure compliance with, or to prevent evasion of, the
provisions and purposes of the BHC Act and the Board's
regulations and orders issued thereunder. The Board's decision is specifically conditioned on compliance with all the
commitments made to the Board in connection with the
notice, including the commitments and conditions discussed in this order. The commitments and conditions
relied on in reaching this decision shall be deemed to be
conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be
enforced in proceedings under applicable law.
By order of the Board of Governors, effective November 18,2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies and Olson. Absent and not voting: Governor
Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

ORDERS ISSUED UNDER INTERNATIONAL
BANKING ACT
Bank of the Federated States of Micronesia
Kolonia, Pohnpei
Federated States of Micronesia
Order Approving Establishment of a Branch
The Bank of the Federated States of Micronesia ("Bank"),
Kolonia, Pohnpei, Federated States of Micronesia ("Micronesia"), a foreign bank within the meaning of the International Banking Act ("IBA"), has applied under section 7(d) of the IBA (12 U.S.C. §3105(d)) to establish a
branch in Honolulu, Hawaii. The Foreign Bank Super-

C59

vision Enhancement Act of 1991, which amended the IBA,
provides that a foreign bank must obtain the approval of
the Board to establish a branch in the United States.
Notice of the application, affording interested persons
an opportunity to comment, has been published in a newspaper of general circulation in Honolulu, Hawaii {The
Honolulu Star-Bulletin, November 4, 2005). The time for
filing comments has expired, and all comments have been
considered.
Bank, with total assets of $78 million, is the only commercial bank incorporated in Micronesia.1 The state and
national governments or governmental agencies of Micronesia control 80 percent of Bank's shares.2 Bank provides a
variety of banking services to retail and corporate customers through branches in each of the four states comprising
Micronesia (Kosrae, Pohnpei, Chuuk, and Yap). The proposed branch would be Bank's first office outside Micronesia.3 Bank is a qualifying foreign banking organization
under Regulation K (12 CFR 211.23(b)).
The primary reason for establishing the proposed branch
is to provide Bank with access to check-clearing and
wire-transfer services in the United States that are currently
provided by the bank's U.S. correspondent bank. The
branch would also coordinate safekeeping and other services related to access to the U.S. payments system. In
addition, Bank anticipates that the branch may engage in
other permissible activities in the future.
Under the IBA and Regulation K, in acting on an application by a foreign bank to establish a branch, the Board
must consider whether the foreign bank:
(1) engages directly in the business of banking outside
of the United States;
(2) has furnished to the Board the information it needs
to assess the application adequately; and
(3) is subject to comprehensive supervision on a
consolidated basis by its home country supervisor
(12 U.S.C. §3105(d)(2); 12 CFR 211.24(c)(l)). 4 The
1. Asset data are as of September 30, 2005.
2. No other shareholder owns or controls more than 5 percent of
Bank's shares.
3. Bank also has a license for a loan production office in Saipan,
the Northern Mariana Islands; however, it does not currently have an
office in Saipan.
4. In assessing this standard, the Board considers, among other
factors, the extent to which the home country supervisors:
(i) ensure that the bank has adequate procedures for monitoring
and controlling its activities worldwide;
(ii) obtain information on the condition of the bank and its subsidiaries and offices through regular examination reports, audit
reports, or otherwise;
(iii) obtain information on the dealings with and relationship
between the bank and its affiliates, both foreign and domestic;
(iv) receive from the bank financial reports that are consolidated
on a worldwide basis or comparable information that permits
analysis of the bank's financial condition on a worldwide
consolidated basis;
(v) evaluate prudential standards, such as capital adequacy and
risk asset exposure, on a worldwide basis. These are indicia
of comprehensive, consolidated supervision. No single factor
is essential, and other elements may inform the Board's
determination.

C60

Federal Reserve Bulletin • 2006

Board also may consider additional standards set
forth in the IBA and Regulation K (12 U.S.C.
§3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3)).
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the application through submissions that address the relevant issues.
With respect to supervision by home country authorities,
Bank is subject to supervision and regulation by the Federated States of Micronesia Banking Board ("FSMBB"). In
addition, Bank is subject to all U.S. banking and bankingrelated laws by treaty and is supervised by the Federal
Deposit Insurance Corporation ("FDIC") pursuant to those
laws. On October 1, 1982, the governments of the United
States and Micronesia concluded a Compact of Free Association (the "Compact")- 5 Under section 221 of the Compact, the United States is obligated to make available to
Bank the FDIC's programs and services, and under section 231, they are provided in accordance with a Federal
Programs and Services Agreement between the governments of the United States and Micronesia (the "Agreement"), that became effective simultaneously with the
Compact.6
The Agreement provides that "[a]s an ongoing FDICinsured and FDIC-supervised bank, the Bank and its management are and shall continue to be subject to existing and
future U.S. banking and banking-related laws, rules and
regulations relating to supervision, regulatory, and resolution and receivership matters. . . ." Accordingly, Bank is
supervised by the FDIC on a consolidated basis. Bank
is subject to on-site examination by both the FSMBB and
FDIC and is audited annually in accordance with U.S.
auditing standards.7 Based on all the facts of record, and
in light of the Agreement, which designates the FDIC as
a supervisor of Bank, it has been determined that Bank
is subject to comprehensive supervision on a consolidated
basis by the appropriate authorities in its home country for
purposes of the IBA.
The additional standards set forth in section 7 of the IBA
and Regulation K (see 12 U.S.C. § 3105(d)(3)-(4); 12 CFR
211.24(c)(2)-(3)) have also been taken into account. The
FSMBB and FDIC have no objection to the establishment
of the proposed branch.
As noted, Bank is subject to all U.S. banking laws and
regulations, including those related to capital adequacy and
anti-money-laundering, and Bank's compliance with those
laws and regulations is monitored and enforced by the
FDIC. Bank is considered well capitalized, and managerial
and other financial resources of Bank are considered con-

sistent with approval. The activities of the proposed branch
would initially be limited to processing transactions for
Bank's head office and customers. Bank appears to have
the experience and capacity to support the proposed
branch. Bank has also established controls and procedures
for the proposed branch to ensure compliance with U.S.
law and for its operations in general.
With respect to access to information about Bank's
operations, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed, and
relevant government authorities have been communicated
with regarding access to information. Bank has committed
to make available to the Board such information on the
operations of Bank and any of its affiliates that the Board
deems necessary to determine and enforce compliance with
the IBA, the Bank Holding Company Act, and other applicable federal law. To the extent that the provision of such
information to the Board may be prohibited by law or
otherwise, Bank has committed to cooperate with the
Board to obtain any necessary consents or waivers that
might be required from third parties for disclosure of such
information. In addition, the FDIC is permitted to share
information on Bank's operations with other supervisors,
including the Board. In light of these commitments and
other facts of record, and subject to the condition described
below, it has been determined that Bank has provided
adequate assurances of access to any necessary information
that the Board may request.
Based on the foregoing and all the facts of record,
Bank's application to establish a branch is hereby approved
by the Director of the Division of Banking Supervision and
Regulation, with the concurrence of the General Counsel,
pursuant to authority delegated by the Board. Should any
restrictions on access to information on the operations or
activities of Bank and its affiliates subsequently interfere
with the Board's ability to obtain information to determine
and enforce compliance by Bank or its affiliates with
applicable federal statutes, the Board may require termination of any of Bank's direct or indirect activities in the
United States. Approval of the application also is specifically conditioned on compliance by Bank with the conditions imposed in this order and the commitments made to
the Board in connection with this application.8 For purposes of this action, these commitments and conditions are
deemed to be conditions imposed by the Board in writing
in connection with its findings and decision and, as such,
may be enforced in proceedings under applicable law.
By order, approved pursuant to authority delegated by
the Board, effective December 23, 2005.
JENNIFER J. JOHNSON

5. In the United States, the Compact was approved by Public
Law 99-239 of January 14, 1986, as amended (48 U.S.C. § 1901
et seq.) and became effective on November 3, 1986. See Presidential
Proclamation 5564 of November 3, 1986, 51 Federal Register 40,399
(1986).
6. Article XI of the Agreement governs the provision of FDIC
services and related programs.
7. FSMBB cooperates with the FDIC by participating in examinations and sharing information.

Secretary of the Board

8. The Board's authority to approve the establishment of the proposed branch parallels the continuing authority of the state of Hawaii
to license offices of a foreign bank. The Board's approval of this
application does not supplant the authority of the state of Hawaii to
license the proposed office of Bank in accordance with any terms or
conditions that it may impose.

Legal Developments

Deutsche Genossenschafts-Hypothekenbank AG
Hamburg, Germany
Order Approving Establishment of a Representative
Office
Deutsche Genossenschafts-Hypothekenbank AG ("Bank"),
Hamburg, Germany, a foreign bank within the meaning of
the International Banking Act ("IBA"), has applied under
section 10(a) of the IBA (12 U.S.C. §3107(a)) to establish
a representative office in New York, New York. The Foreign Bank Supervision Enhancement Act of 1991, which
amended the IBA, provides that a foreign bank must obtain
the approval of the Board to establish a representative
office in the United States.
Notice of the application, affording interested persons an
opportunity to submit comments, has been published in a
newspaper of general circulation in New York, New York
(The New York Times, July 8, 2005). The time for filing
comments has expired, and all comments have been
considered.
Bank, with total consolidated assets of approximately
$93 billion,1 is the third largest mortgage bank in Germany
and is primarily engaged in commercial real estate financing. Outside Germany, Bank operates representative
offices in Paris, London, and Amsterdam. Bank's proposed New York office would be its first office in the
United States. Bank is a subsidiary of Deutsche ZentralGenossenschaftsbank AG, Frankfurt, Germany ("DZ
Bank"), one of two regional central banks for the German
cooperative financial sector. DZ Bank engages in banking
operations in the United States through its branch in New
York, New York, and also engages in nonbanking activities in the United States through a number of subsidiaries.
DZ Bank owns 5.1 percent of Bank directly and 62.6 percent of Bank indirectly through a wholly owned subsidiary,
VR-Immobilien AG ("VR tamo").2
The proposed representative office would market Bank's
real estate loans to existing and potential customers in the
United States. Bank would also seek syndication opportunities through the proposed office.
Under the IBA and Regulation K, in acting on an application by a foreign bank to establish a representative office,
the Board shall take into account whether:
(1) the foreign bank has furnished to the Board the
information it needs to assess the application
adequately;
(2) the foreign bank and any foreign bank parent
engages directly in the business of banking outside
the United States; and
(3) the foreign bank and any foreign bank parent is
subject to comprehensive supervision on a con-

1. Unless otherwise indicated, data are as of June 30, 2005.
2. The remaining shares of DZ Bank are owned by four cooperative holding companies that own the shares in trust for VR Immo.
Local credit cooperatives hold the ownership interests in these four
companies.

C61

solidated basis by its home country supervisor
(12 U.S.C. §3107(a)(2); 12 CFR 211.24(d)(2)).3 The
Board also may take into account additional standards set forth in the IBA and Regulation K
(12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)).
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the application through submissions that address the relevant issues.
With respect to supervision by home country authorities,
the Board previously determined that DZ Bank's predecessor, Deutsche-Genossenschaftsbank AG, was subject
to comprehensive consolidated supervision in connection with the application of its foreign bank subsidiary,
Deutsche VerkehrsBank, to establish a representative office
in the United States.4 In addition, the Board has determined
in connection with applications involving other mortgage
banks in Germany that those banks were subject to supervision on a consolidated basis by their primary home country
supervisor, Germany's Federal Agency for the Supervision
of Financial Services ("BaFin"). 5 Bank is supervised by
BaFin on substantially the same terms and conditions as
those other banks. Based on all the facts of record, it has
been determined that Bank is, and DZ Bank continues to
be, subject to comprehensive supervision and regulation on
a consolidated basis by its home country supervisor.
The additional standards set forth in section 7 of the IBA
and Regulation K (see 12 U.S.C. § 3105(d)(3)-(4); 12 CFR
211.24(c)(2)) have also been taken into account. BaFin has
no objection to the establishment of the proposed representative office.
With respect to the financial and managerial resources of
Bank, consideration of Bank's record of operations in its
3. In assessing the supervision standard, the Board considers, among other factors, the extent to which the home country
supervisors:
(i) ensure that the bank has adequate procedures for monitoring
and controlling its activities worldwide;
(ii) obtain information on the condition of the bank and its subsidiaries and offices through regular examination reports, audit
reports, or otherwise;
(iii) obtain information on the dealings with and relationship
between the bank and its affiliates, both foreign and domestic;
(iv) receive from the bank financial reports that are consolidated
on a worldwide basis or comparable information that permits
analysis of the bank's financial condition on a worldwide
consolidated basis;
(v) evaluate prudential standards, such as capital adequacy and
risk asset exposure, on a worldwide basis.
These are indicia of comprehensive, consolidated supervision. No
single factor is essential, and other elements may inform the Board's
determination.
4. See Deutsche VerkehrsBank, 85 Federal Reserve Bulletin 588
(1999). That finding was affirmed in connection with DZ Bank's 2004
election to be treated as a financial holding company.
5. See, e.g., Hypothekenbank in Essen AG, 90 Federal Reserve
Bulletin 402 (2004); Allgemeine HypothekenBank Rheinboden AG,
88 Federal Reserve Bulletin 196 (2002); DePfa Bank AG, 87 Fed
eral Reserve Bulletin 710 (2001); and Deutsche Hyp Deutsche
Hypothekenbank Frankfurt-Hamburg AG, 86 Federal Reserve Bulle
tin 658 (2000)).

C62

Federal Reserve Bulletin • 2006

home country, its overall financial resources, and its standing with its home country supervisor, indicate that financial
and managerial factors are consistent with approval of
the proposed representative office. Bank appears to have
the experience and capacity to support the proposed representative office and has established controls and procedures
for the proposed representative office to ensure compliance
with U.S. law, as well as controls and procedures for its
worldwide operations generally.
Germany is a member of the Financial Action Task
Force and subscribes to its recommendations regarding
measures to combat money laundering and international
terrorism. In accordance with these recommendations,
Germany has enacted laws and created legislative and
regulatory standards to deter money laundering, terrorist
financing, and other illicit activities. Money laundering is
a criminal offense in Germany, and credit institutions are
required to establish internal policies, procedures, and systems for the detection and prevention of money laundering
throughout their worldwide operations. Bank has policies
and procedures to comply with these laws and regulations
that are monitored by governmental entities responsible for
anti-money-laundering compliance.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed, and
relevant government authorities have been communicated
with regarding access to information. Bank and its parent
companies have committed to make available to the Board
such information on the operations of Bank and any of its
affiliates that the Board deems necessary to determine and
enforce compliance with the IBA, the Bank Holding Company Act of 1956, as amended, and other applicable federal
law. To the extent that the provision of such information
to the Board may be prohibited by law or otherwise, Bank
has committed to cooperate with the Board to obtain any
necessary consents or waivers that might be required from
third parties for disclosure of such information. In addition,
subject to certain conditions, BaFin may share information
on Bank's operations with other supervisors, including the
Board. In light of these commitments and other facts of
record, and subject to the condition described below, it has
been determined that Bank has provided adequate assurances of access to any necessary information that the
Board may request.
Based on the foregoing and all the facts of record,
Bank's application to establish a representative office is
hereby approved.6 Should any restrictions on access to
information on the operations or activities of Bank or its
affiliates subsequently interfere with the Board's ability to
obtain information to determine and enforce compliance by
Bank or its affiliates with applicable federal statutes, the
Board may require or recommend termination of any of
Bank's direct or indirect activities in the United States.
Approval of this application also is specifically conditioned
6. Approved by the Director of the Division of Banking Supervision and Regulation, with the concurrence of the General Counsel,
pursuant to authority delegated by the Board.

on compliance by Bank with the conditions imposed in this
order and the commitments made to the Board in connection with this application.7 For purposes of this action,
these commitments and conditions are deemed to be conditions imposed by the Board in writing in connection with
its findings and decision and, as such, may be enforced in
proceedings under applicable law.
By order, approved pursuant to authority delegated by
the Board, effective October 25, 2005.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Lloyds TSB Offshore Limited
St. Helier, Jersey
Order Approving Establishment of a Representative
Office
Lloyds TSB Offshore Limited ("Bank"), St. Helier, Jersey,
a foreign bank within the meaning of the International
Banking Act ("IBA"), has applied under section 10(a) of
the IBA (12 U.S.C. §3107(a)) to establish a representative
office in Miami, Florida. The Foreign Bank Supervision
Enhancement Act of 1991, which amended the IBA, provides that a foreign bank must obtain the approval of the
Board to establish a representative office in the United
States.
Notice of the application, affording interested persons
an opportunity to submit comments, has been published
in a newspaper of general circulation in Miami, Florida
{The Miami Herald, March 21, 2005). The time for filing
comments has expired, and all comments have been
considered.
Bank, with total consolidated assets of approximately
$12 billion,1 is one of the largest banks in Jersey. Bank
provides a range of financial services to corporate and
retail clients and is authorized to provide such services
to residents of Jersey.2 Outside Jersey, Bank operates
branches in Guernsey and the Isle of Man and a representative office in Hong Kong. The proposed representative
office would be Bank's first office in the United States.
Bank is an indirect wholly owned subsidiary of Lloyds
TSB Bank, pic ("Lloyds UK"), London, England.3 Lloyds
UK is the principal wholly owned bank subsidiary of
7. The Board's authority to approve the establishment of the proposed representative office parallels the continuing authority of the
state of New York to license offices of a foreign bank. The Board's
approval of this application does not supplant the authority of the state
of New York to license the proposed office of Bank in accordance
with any terms or conditions that it may impose.
1. Unless otherwise indicated, data are as of June 30, 2005.
2. Bank does not operate under an "offshore banking license," as
that term is defined in section 312(a)(4)(A) of the USA PATRIOT Act
of 2001 (31 U.S.C. §5318(i)(4)(A)).
3. Lloyds UK holds its interest in Bank through two other wholly
owned subsidiaries, Lloyds TSB Offshore Holdings Limited, a Jersey
company, and Lloyds Bank Subsidiaries Limited, a U.K. company.

Legal Developments

Lloyds TSB Group pic, also of London ("Lloyds Group"),
which is Bank's ultimate parent.4 Through its offices and
subsidiaries, Lloyds UK offers banking services in a number of countries worldwide. In the United States, Lloyds
UK operates a branch in New York, New York, and an
agency in Miami, Florida, and owns several U.S. subsidiaries that engage in nonbanking activities.
The proposed representative office would act as a liaison
between Bank and its existing and potential customers in
the United States. The office's activities would include
soliciting new business, providing information to customers concerning their accounts with Bank, and maintaining
client data and records.
Under the IBA and Regulation K, in acting on an application by a foreign bank to establish a representative office,
the Board shall take into account whether (1) the foreign
bank has furnished the information the Board needs to
assess the application adequately; (2) the foreign bank and
any foreign bank parent engage directly in the business of
banking outside of the United States; and (3) the foreign
bank and any foreign bank parent are subject to comprehensive supervision on a consolidated basis by their
home country supervisors (12 U.S.C. §3107(a)(2); 12 CFR
211.24(d)(2)).5 The Board also may take into account
additional standards set forth in the IBA and Regulation K
(12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)). The
Board will consider that the supervision standard has been
met if it determines that the applicant bank is subject to a
supervisory framework that is consistent with the activities
of the proposed representative office, taking into account
the nature of such activities.6 This is a lesser standard than
the comprehensive, consolidated supervision standard
applicable to proposals to establish branch or agency
offices of a foreign bank. The Board considers the lesser
standard sufficient for approval of representative office
4. No shareholder holds more than 5 percent of Lloyds Group's
shares.
5. In assessing the supervision standard, the Board considers, among other factors, the extent to which the home country
supervisors:
(i) ensure that the bank has adequate procedures for monitoring
and controlling its activities worldwide;
(ii) obtain information on the condition of the bank and its subsidiaries and offices through regular examination reports, audit
reports, or otherwise;
(iii) obtain information on the dealings with and relationship
between the bank and its affiliates, both foreign and domestic;
(iv) receive from the bank financial reports that are consolidated
on a worldwide basis or comparable information that permits
analysis of the bank's financial condition on a worldwide
consolidated basis;
(v) evaluate prudential standards, such as capital adequacy and
risk asset exposure, on a worldwide basis. These are indicia
of comprehensive, consolidated supervision. No single factor
is essential, and other elements may inform the Board's
determination.
6. See, e.g., Jamaica National Building Society, 88 Federal Reserve
Bulletin 59 (2002); RHEINHYP Rheinische Hypothekenbank AG,
87 Federal Reserve Bulletin 558 (2001); see also Promstroybank of
Russia, 82 Federal Reserve Bulletin 599 (1996); Komercni Banka,
a.s., 82 Federal Reserve Bulletin 597 (1996); Commercial Bank
"Ion Tiriac,"S.A., 82 Federal Reserve Bulletin 592 (1996).

C63

applications, because representative offices may not engage
in banking activities (12 CFR 211.24(d)(2)). This application has been considered under the lesser standard.
As noted above, Bank and Lloyds UK engage directly
in the business of banking outside the United States. Bank
also has provided the Board with information necessary to
assess the application through submissions that address the
relevant issues.
The Jersey Financial Services Commission ("Jersey
FSC") is the primary regulatory and supervisory authority
for Jersey banks and, as such, is the home country supervisor of Bank.7 Jersey FSC policy permits only banking
groups of "international stature and reputation" that it has
determined to be subject to satisfactory consolidated supervision by the supervisory body of the group's country of
origin to establish banks in Jersey. The Jersey FSC performs on-site inspections and off-site monitoring of all
Jersey banks, including monitoring the work of external
auditors. The Jersey FSC uses on-site reviews to focus
on the adequacy of policies and procedures designed to
combat money laundering and the bank's management of
information systems and internal procedures to determine
whether the bank is adequately managing its principal
risks. The frequency of on-site reviews depends on the
bank's risk profile, but all Jersey banks, including Bank,
are inspected at least once every two years.
Off-site supervision consists primarily of the review of
periodic financial reports submitted by Bank, including
quarterly prudential returns, large exposure reports, suspicious transaction reports, and annual financial statements.
External auditors are required to confirm that returns have
been prepared in accordance with reporting instructions
issued by the Jersey FSC. In addition, Bank's internal
auditors conduct periodic risk-based audits of Bank's business activities.
Jersey law authorizes the Jersey FSC to conduct investigations, to request and receive information from any bank
and its domestic and foreign affiliates, and to impose
conditions on licensees and revoke licenses, and provides
penalties for violations of the law.
Based on all the facts of record, it has been determined
that Bank is subject to a supervisory framework that is
consistent with the activities of the proposed representative
office, taking into account the nature of such activities.
With respect to supervision of Lloyds UK by home
country authorities, the Board previously has determined,
in connection with other applications involving banks in
the United Kingdom, that those banks were subject to
home country supervision on a consolidated basis.8 Lloyds
UK is supervised by the Financial Services Authority
("FSA") on substantially the same terms and conditions as
7. The Jersey FSC is responsible for the direct oversight of Bank.
The U.K. Financial Services Authority, as the supervisor of Lloyds
UK and its subsidiaries, consults with the Jersey FSC about supervision of Bank.
8. See Barclays pic, 91 Federal Reserve Bulletin 48 (2005); HBOS
Treasury Services pic, 90 Federal Reserve Bulletin 103 (2004); The
Royal Bank of Scotland Group, 90 Federal Reserve Bulletin 87
(2004).

C64

Federal Reserve Bulletin • 2006

those other banks. Based on all the facts of record, it has
been determined that Lloyds UK is subject to comprehensive supervision and regulation on a consolidated basis by
its home country supervisor.
The additional standards set forth in section 7 of the IBA
and Regulation K (see 12 U.S.C. § 3105(d)(3)-(4); 12 CFR
211.24(c)(2)) have also been taken into account. The FSA
and the Jersey FSC have no objection to the establishment
of the proposed representative office.
With respect to the financial and managerial resources of
Bank, taking into consideration Bank's record of operations in its home country, its overall financial resources,
and its standing with its home country supervisor, financial
and managerial factors are consistent with approval of
the proposed representative office. Bank appears to have
the experience and capacity to support the proposed representative office and has established controls and procedures
for the proposed representative office to ensure compliance
with U.S. law, as well as controls and procedures for its
worldwide operations generally.
Jersey is a member of the Offshore Group of Banking
Supervisors, which is an observer organization to the
Financial Action Task Force ("FATF"), and subscribes to
the FATF's recommendations regarding measures to combat money laundering and international terrorism. In accordance with these recommendations, Jersey has enacted
laws and created legislative and regulatory standards to
deter money laundering, terrorist financing, and other illicit
activities. Money laundering is a criminal offense in Jersey,
and financial services businesses are required to establish
internal policies, procedures, and systems for the detection
and prevention of money laundering. Bank has policies and
procedures to comply with these laws and regulations, and
these policies and procedures are monitored by the Jersey
FSC.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed, and
relevant government authorities have been communicated
with regarding access to information. Bank and Lloyds
Group have committed to make available to the Board
such information on the operations of Bank and any of its
affiliates that the Board deems necessary to determine and
enforce compliance with the IBA, the Bank Holding Company Act of 1956, as amended, and other applicable federal
law. To the extent that the provision of such information

to the Board may be prohibited by law or otherwise, Bank
and Lloyds Group have committed to cooperate with the
Board to obtain any necessary consents or waivers that
might be required from third parties for disclosure of such
information. In addition, subject to certain conditions, the
Jersey FSC may share information on Bank's operations
with other supervisors, including the Board. In light of
these commitments and other facts of record, and subject to
the condition described below, it has been determined that
Bank and Lloyds Group have provided adequate assurances of access to any necessary information that the
Board may request.
Based on the foregoing and all the facts of record,
Bank's application to establish a representative office is
hereby approved.9 Should any restrictions on access to
information on the operations or activities of Bank or its
affiliates subsequently interfere with the Board's ability to
obtain information to determine and enforce compliance
by Bank or its affiliates with applicable federal statutes, the
Board may require termination of any of Bank's direct
or indirect activities in the United States. Approval of this
application also is specifically conditioned on compliance
by Bank and Lloyds Group with the conditions imposed
in this order and the commitments made to the Board in
connection with this application.10 For purposes of this
action, these commitments and conditions are deemed to
be conditions imposed by the Board in writing in connection with its findings and decision and, as such, may be
enforced in proceedings under applicable law.
By order, approved pursuant to authority delegated by
the Board, effective November 1, 2005.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

9. Approved by the Director of the Division of Banking Supervision and Regulation, with the concurrence of the General Counsel,
pursuant to authority delegated by the Board.
10. The Board's authority to approve the establishment of the
proposed representative office parallels the continuing authority of
the state of Florida to license offices of a foreign bank. The Board's
approval of this application does not supplant the authority of the state
of Florida or its agent, the Florida Department of Financial Services
("Department"), to license the proposed office of Bank in accordance
with any terms or conditions that the Department may impose.

C65

Legal Developments: First Quarter, 2006
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY A C T

Compass Bancshares, Inc.
Birmingham, Alabama
Compass Bank
Birmingham, Alabama
Order Approving the Acquisition of Bank
Holding Companies, Merger of Banks, and
Establishment of Branches
Compass Bancshares, Inc. ("Compass"), a financial holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act1 to acquire
TexasBanc Holding Co. ("TBH"), Weatherford, and its
subsidiary, TexasBank, Fort Worth, both of Texas.2 In
addition, Compass's subsidiary bank, Compass Bank, a
state member bank, has requested the Board's approval
under section 18(c) of the Federal Deposit Insurance Act
("Bank Merger Act") 3 to merge with TexasBank, with
Compass Bank as the surviving entity. Compass Bank has
also applied under section 9 of the Federal Reserve Act
("FRA") to establish and operate branches at TexasBank's
main office and branch locations.4
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (70 Federal Register 70,613 (2005)) and
in local publications in accordance with relevant statutes
and the Board's Rules of Procedure.5 As required by the
BHC Act and the Bank Merger Act, reports on the competitive effects of the mergers were requested from the United
States Attorney General and the appropriate banking agencies. The time for filing comments has expired, and the
1. 12U.S.C. §1842.
2. Compass also would acquire M&F Financial Corp., Wilmington,
Delaware, the intermediate parent holding company of TexasBank.
3. 12U.S.C. §1828(c).
4. 12 U.S.C. § 321. These branches are listed in Appendix A.
5. 12 CFR 262.3(b).

Board has considered the applications and all comments
received in light of the factors set forth in section 3 of the
BHC Act, the Bank Merger Act, and the FRA.
Compass, with total consolidated assets of approximately
$30.8 billion, is the 48th largest depository organization in
the United States, and it controls deposits of approximately
$17.9 billion, which represent less than 1 percent of the total
amount of deposits of insured depository institutions in the
United States.6 Compass operates subsidiary depository
institutions in Alabama, Arizona, Colorado, Florida, New
Mexico, and Texas and engages in numerous permissible
nonbanking activities. In Texas, Compass is the eighth
largest depository organization, controlling deposits of approximately $7 billion, which represent 2 percent of the total
amount of deposits of insured depository institutions in the
state ("state deposits").
TBH, with total consolidated assets of approximately
$1.7 billion, operates one depository institution, TexasBank, which has branches only in Texas. TexasBank is the
31st largest depository institution in Texas, controlling
deposits of approximately $1.8 billion, which represent less
than 1 percent of state deposits.
On consummation of the proposal, Compass would
become the 47th largest depository organization in the
United States, with total consolidated assets of approximately $32.5 billion. Compass would become the seventh
largest depository organization in Texas, controlling deposits of approximately $8.8 billion, which represent 2.3 percent of state deposits.
INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home state
of such bank holding company if certain conditions are
met.7 Section 44 of the Federal Deposit Insurance Act
("FDI Act") authorizes a bank to merge with another bank
under certain conditions unless, before June 1, 1997, the
home state of one of the banks involved in the transaction
6. Asset data are as of December 31, 2005, and national ranking data
are as of September 30, 2005. Deposit data and state rankings are as of
June 30, 2005, and reflect merger activity through November 15, 2005.
In this context, the term "insured depository institutions" includes
insured commercial banks, savings banks, and savings associations.
7. A bank holding company's home state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on July 1, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).

C66

Federal Reserve Bulletin • 2006

adopted a law expressly prohibiting merger transactions
involving out-of-state banks.8 For purposes of section 3(d)
of the BHC Act, the home state of Compass is Alabama,
and for purposes of section 44 of the FDI Act, the home
state of Compass Bank is Alabama.9 Compass proposes to
acquire, and Compass Bank proposes to merge with, a bank
located in Texas.
Based on a review of all the facts of record, including a
review of relevant state statutes, the Board finds that all the
conditions for an interstate acquisition and bank merger
enumerated in section 3(d) of the BHC Act and section 44
of the FDI Act are met in this case.10 In light of the facts of
record, the Board is permitted to approve the proposal
under both statutes.

COMPETITIVE CONSIDERATIONS
The BHC Act and the Bank Merger Act prohibit the Board
from approving a proposal that would result in a monopoly
or would be in furtherance of any attempt to monopolize
the business of banking in any relevant banking market.
Both acts also prohibit the Board from approving a bank
acquisition that would substantially lessen competition in
any relevant banking market, unless the anticompetitive
effects of the proposal are clearly outweighed in the public
interest by its probable effect in meeting the convenience
and needs of the community to be served.11
Compass and TBH compete directly in the Dallas and
Fort Worth banking markets in Texas.12 The Board has
carefully reviewed the competitive effects of the proposal
in each of these banking markets in light of all the facts of
record. In particular, the Board has considered the number
of competitors that would remain in the banking markets,
8. 12U.S.C. §1831u.
9. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered, or
operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7), 1842(d)(l)(A),
and 1842(d)(2)(B). Under section 44 of the FDI Act, a state member
bank's home state is the state where it is chartered (12 U.S.C.
§1831u(g)(4)).
10. See 12 U.S.C. § 1842(d)(l)(A)-(B), (d)(2)(A)-(B); 12 U.S.C.
§ 1831u. Compass and Compass Bank are adequately capitalized and
adequately managed, as defined by applicable law. TexasBank has
been in existence and operated for the minimum period of time
required by applicable law (five years). On consummation of the
proposal, Compass and Compass Bank would control less than 10
percent of the total amount of deposits of insured depository institutions in the United States and less than 20 percent of the total amount
of deposits of insured depository institutions in Texas. All other
requirements of section 3(d) of the BHC Act and section 44 of the FDI
Act also would be met on consummation of the proposal.
11. 12 U.S.C. § 1842(c)(l); 12 U.S.C. § 1828(c)(5).
12. The Dallas banking market is defined as follows: Dallas and
Rockwall counties; the southeastern quadrant (including Denton and
Lewisville) of Denton County; the southwestern quadrant (including
McKinney and Piano) of Collin County; Forney and Terrell in
Kaufman County; Midlothian, Waxahachie, and Ferris in Ellis County;
and Grapevine and Arlington in Tarrant County, all in Texas. The Fort
Worth banking market is defined as follows: Johnson and Parker
counties; Tarrant County, excluding Grapevine and Arlington; Boyd,
Newark, and Rhome in Wise County; and the southwestern quadrant
(including Roanoke and Justin) of Denton County, all in Texas.

the relative shares of total deposits in depository institutions in the markets ("market deposits") controlled by
Compass and TBH, 13 the concentration level of market
deposits and the increase in this level as measured by the
Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 14
and other characteristics of the markets.
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in each of these banking markets. After consummation of the proposal, the Dallas banking market would
remain moderately concentrated and the Fort Worth banking market would remain highly concentrated, as measured
by the HHI. 15 In each market the increase in concentration
would be small and numerous competitors would remain.
The Department of Justice has reviewed the anticipated
competitive effects of the proposal and advised the Board
that consummation of the proposal would not likely have a
significantly adverse effect on competition in any relevant
banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment and
have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Dallas or Fort Worth banking
markets, or in any other relevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
The BHC Act and the Bank Merger Act require the Board
to consider the financial and managerial resources and

13. Deposit and market share data are based on data reported by
insured depository institutions in the summary of deposits (SOD) data
as of June 30, 2005 (adjusted to reflect mergers and acquisitions
through November 15, 2005) and are based on calculations in which
the deposits of thrift institutions are included at 50 percent. The Board
previously has indicated that thrift institutions have become, or have
the potential to become, significant competitors of commercial banks.
See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386
(1989); National City Corporation, 70 Federal Reserve Bulletin 743
(1984). Thus, the Board regularly has included thrift deposits in the
market-share calculation on a 50 percent weighted basis. See, e.g.,
First Hawaiian, Inc., 11 Federal Reserve Bulletin 52 (1991).
14. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is less than 1000, moderately concentrated if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI is more than 1800. The Department of Justice has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI by more than 200
points. The Department of Justice has stated that the higher-thannormal HHI thresholds for screening bank mergers for anticompetitive
effects implicitly recognize the competitive effects of limited-purpose
lenders and other nondepository financial entities.
15. Summaries of the market data for these banking markets are
provided in Appendix B.

Legal Developments C67

future prospects of the companies and depository institutions involved in the proposal and certain other supervisory
factors. The Board has considered these factors in light of
all the facts of record, including confidential reports of
examination, other supervisory information from the primary federal and state supervisors of the organizations
involved in the proposal, publicly reported and other
financial information, information provided by Compass,
and public comment on the proposal.16
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. The Board considers a variety of measures in
this evaluation, including capital adequacy, asset quality,
and earnings performance. In assessing financial factors,
the Board consistently has considered capital adequacy to
be especially important. The Board also evaluates the
financial condition of the combined organizations at consummation, including their capital position, asset quality,
and earnings prospects, and the impact of the proposed
funding of the transaction.
Compass, TBH, and their subsidiary depository institutions are well capitalized and the resulting organizations
would remain so on consummation of the proposal. Based
on its review of the record in this case, the Board finds that
Compass has sufficient financial resources to effect the
proposal. The proposed transaction is structured as a combination share exchange and cash purchase. Compass will
use existing resources to fund the cash portion of the
transaction.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organizations.17 The Board has reviewed the examination
records of Compass, TBH, and their subsidiary depository
institutions, including assessments of their management,
risk-management systems, and operations. In addition, the
Board has considered its supervisory experiences with the
relevant organizations and the organizations' records of

compliance with applicable banking law. Compass, TBH,
and their subsidiary depository institutions are considered
to be well managed. The Board also has considered Compass's plans for implementing the proposal, including the
proposed management after consummation.
Based on all the facts of record, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of the organizations involved in the proposal are consistent with approval, as are
the other supervisory factors under the BHC Act and the
Bank Merger Act.

16. A commenter expressed concern about Compass Bank's relationships with unaffiliated retail check cashers, pawn shops, and other
alternative-financial-service providers. As a general matter, the activities of the consumer finance businesses identified by the commenter
are permissible, and the businesses are licensed by the states where
they operate. Compass has represented that Compass Bank has lending
relationships with fewer than ten alternative-financial-service providers and that these firms are subject to the bank's annual "Know Your
Customer" review related to the Bank Secrecy Act. Compass also has
represented that it does not play any role in the lending practices,
credit review, or other business practices of these firms.
17. The commenter also expressed concern about a press report
indicating that a political action committee related to Compass might
have contributed to candidates on the recommendation of another
unrelated political action committee currently under investigation for
alleged violations of Texas campaign finance laws. The Board does not
have jurisdiction to administer state campaign finance laws or to
investigate or adjudicate alleged violations of such laws. This matter is
not within the limited statutory factors the Board may consider when
reviewing an application under the BHC Act. See Western Bancshares,
Inc. v. Board of Governors, 480 F.2d 749 (10th Cir. 1973).

A. C R A Performance Evaluations

CONVENIENCE AND NEEDS AND OTHER
CONSIDERATIONS
In acting on a proposal under the BHC Act and the Bank
Merger Act, the Board also must consider its effects on
the convenience and needs of the communities to be
served and take into account the records of the relevant
insured depository institutions under the Community
Reinvestment Act ("CRA"). 18 The CRA requires the federal financial supervisory agencies to encourage insured
depository institutions to help meet the credit needs of the
local communities in which they operate, consistent with
their safe and sound operation, and requires the appropriate federal financial supervisory agency to take into
account an institution's record of meeting the credit needs
of its entire community, including low- and moderateincome neighborhoods, in evaluating bank expansionary
proposals.19
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of Compass Bank and TexasBank, data reported by
Compass Bank under the Home Mortgage Disclosure Act
("HMDA"), 20 other information provided by Compass,
confidential supervisory information, and public comment
received on the proposal. A commenter opposing the
proposal asserted, based on 2004 HMDA data, that Compass engaged in disparate treatment of minority individuals
in its home mortgage lending operations.

As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, onsite evaluation of the institution's overall record of performance under the CRA by its appropriate federal
supervisor.21
18. 12U.S.C. §2901 etseq.
19. 12U.S.C. §2903.
20. 12U.S.C. §2801 etseq.
21. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

C68 Federal Reserve Bulletin • 2006

Compass Bank received a "satisfactory" rating at its
most recent CRA performance evaluation from the Federal
Reserve Bank of Atlanta, as of March 10, 2003 ("2003
Evaluation").22 TexasBank received a "satisfactory" rating
at its most recent CRA performance evaluation by the
Federal Reserve Bank of Dallas, as of October 6, 2003.
Compass Bank's current CRA program will be implemented at the resulting bank after consummation of the
merger of Compass Bank and TexasBank.
B. HMD A Data and Fair Lending Record
The Board has carefully considered Compass's lending
record and HMD A data in light of public comment about its
record of lending to minorities. The commenter alleged,
based on 2004 HMDA data, that Compass denied home
purchase and refinance applications of African-American
and Hispanic borrowers more frequently than those of
nonminority applicants in various Metropolitan Statistical
Areas ("MSAs"). In addition, the commenter alleged that
in the Houston MSA, Compass made higher-cost loans
more frequently to African Americans than to nonminority
borrowers.23 The Board reviewed the HMDA data for 2004
that were reported by Compass Bank on a company-wide
basis and for the states and MSAs in which it principally
operates.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
Compass Bank is excluding or imposing higher credit costs
on any racial or ethnic group on a prohibited basis. The
Board recognizes that HMDA data alone, even with the
recent addition of pricing information, provide only limited
information about the covered loans.24 HMDA data, therefore, have limitations that make them an inadequate basis,
absent other information, for concluding that an institution
has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
22. Compass's other subsidiary bank, Central Bank of the South,
Anniston, Alabama, engages only in providing controlleddisbursement services, and accordingly, is not evaluated under the
CRA. See 12 CFR 345.11(c)(3).
23. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CFR 203.4).
24. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by Compass Bank.
In the fair lending review conducted in conjunction with
Compass Bank's 2003 Evaluation, examiners cited failures
to comply with the Board's Regulation B (Equal Credit
Opportunity Act) in a nonmortgage lending program but
concluded that the bank's record of complying with antidiscrimination laws generally had been sound. The Board has
considered the actions that Compass Bank took since then
to address the compliance failures, including immediate
termination of the criticized practice when advised of
examiners' concerns and revisions to its compliance policies, procedures, and training.
The Board also has considered other steps by Compass
to ensure compliance with fair lending and other consumer
protection laws. Compass has stated that Compass Bank's
corporate compliance staff handles consumer compliance
matters for the entire Compass organization. The corporate
compliance staff monitors regulatory requirements, assists
with and oversees implementation of compliance procedures and controls, and performs ongoing compliance risk
assessments and monitoring. The corporate compliance
staff also makes quarterly risk assessments available to a
risk-management committee of Compass executives and to
senior managers of Compass's business lines making home
mortgage and consumer loans. Compass Bank's fair lending analysis includes testing to detect pricing, redlining, or
underwriting issues, review of underwriting policies and
practices, comparative file analysis, and analysis of HMDA
data. Compass Bank also maintains a program to track and
respond to consumer complaints, and the corporate compliance staff administers a web-based program to provide
ongoing training to employees. Compass Bank's current
compliance program will be used at the resulting bank after
Compass Bank and TexasBank merge.
The Board also has considered the HMDA data in light
of other information, including Compass Bank's CRA
lending programs and the overall performance records of
Compass Bank and TexasBank under the CRA. These
established efforts demonstrate that the institutions are
active in helping to meet the credit needs of their entire
communities.
C. Conclusion on Convenience and Needs and
CRA Performance
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by Compass,
comments received on the proposal, and confidential supervisory information. The Board notes that the proposal
would provide customers of TexasBank with a broader
array of products and services, including expanded options
for affordable mortgage loans and ATM networks. Based

Legal Developments

on a review of the entire record, and for the reasons
discussed above, the Board concludes that considerations
relating to the convenience and needs factor and the CRA
performance records of the relevant depository institutions
are consistent with approval.
As previously noted, Compass Bank also has applied
under section 9 of the FRA to establish and operate
branches at the locations listed in Appendix B. The Board
has assessed the factors it is required to consider when
reviewing an application under section 9 of the FRA and
finds those factors to be consistent with approval.25

CONCLUSION
Based on the foregoing and all facts of record, the Board
has determined that the applications should be, and hereby
are, approved.26 In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the BHC Act, the Bank
Merger Act, and the FRA. The Board's approval is specifically conditioned on compliance by Compass and Compass
Bank with the conditions imposed in this order, the commitments made to the Board in connection with the applications, and receipt of all other regulatory approvals. For
purposes of this action, the conditions and commitments
are deemed to be conditions imposed in writing by the
Board in connection with its findings and decision herein
and, as such, may be enforced in proceedings under
applicable law.
The proposed transactions may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Federal Reserve Bank of Atlanta, acting
pursuant to delegated authority.
By order of the Board of Governors, effective March 8,
2006.

25. 12 U.S.C. § 322; 12 CFR 208.6(b).
26. The commenter requested that the Board hold a public meeting
or hearing on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes a
timely written recommendation of denial of the application. The Board
has not received such a recommendation from the appropriate supervisory authority. The Bank Merger Act and the FRA do not require the
Board to hold a public meeting or hearing.
Under its rules, the Board also may, in its discretion, hold a public
meeting or hearing on an application to acquire a bank if a meeting or
hearing is necessary or appropriate to clarify factual issues related to
the application and to provide an opportunity for testimony (12 CFR
225.16(e)). The Board has considered carefully the commenter's
request in light of all the facts of record. In the Board's view, the
commenter had ample opportunity to submit its views and, in fact,
submitted written comments that the Board has considered carefully in
acting on the proposal. The commenter's request fails to demonstrate
why the written comments do not present its views adequately or why
a meeting or hearing otherwise would be necessary or appropriate. For
these reasons, and based on all the facts of record, the Board has
determined that a public meeting or hearing is not required or
warranted in this case. Accordingly, the request for a public meeting or
hearing on the proposal is denied.

C69

Voting for this action: Chairman Bernanke and Governors Bies,
Olson, Kohn, Warsh, and Kroszner. Absent and not voting: Vice
Chairman Ferguson.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Appendix A
BRANCHES IN TEXAS TO BE ESTABLISHED
BY COMPASS BANK
Arlington
2221 E. Lamar Blvd., Suite 110
610 West Randol Mill Road
5980 S. Cooper Street
Benbrook
9200 Benbrook Blvd.
Cleburne
1671 West Henderson Street
Colleyville
4841 Colleyville Blvd.
Crowley
816 South Crowley Road
Denton
1013 W University Drive
729 Forth Worth Drive
Flower Mound
3212 Long Prairie Road
Fort Worth
2525 Ridgmar Blvd.
8875 Camp Bowie West
300 W. Seventh Street
2601 Hulen Street
1600 W Rosedale Drive
Granbury
702 West Pearl Street
Grapevine
1205 South Main Street
Hudson Oaks
2817 Fort Worth Highway
Lewisville
1101 W. Main Street
Southlake
2200 W Southlake Blvd.
Weatherford
139 College Park Drive
102 N. Main Street
1400 Santa Fe Drive

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Federal Reserve Bulletin • 2006

Willow Park
5171 E. 1-20 Service Road N.

Appendix B
MARKET DATA FOR BANKING MARKETS
IN TEXAS
Moderately Concentrated Banking Market
Dallas
On consummation, the HHI would increase 2 points, to
1426. Compass operates the fourth largest depository institution in the market, controlling deposits of approximately
$2.5 billion, which represent approximately 4 percent of
market deposits. TBH operates the 21st largest depository
institution in the market, controlling deposits of approximately $423.4 million, which represent less than 1 percent
of market deposits. After the proposed acquisition, Compass would remain the fourth largest depository institution
in the market, controlling deposits of approximately $2.9 billion, which represent approximately 5 percent of market
deposits. One hundred and twenty-five depository institutions would remain in the banking market.
Highly Concentrated Banking Market
Fort Worth
On consummation, the HHI would increase 1 point, to
4711. Compass operates the 26th largest depository institution in the market, controlling deposits of approximately
$86.8 million, which represent less than 1 percent of
market deposits. TBH operates the sixth largest depository
institution in the market, controlling deposits of approximately $908.1 million, which represent approximately
2 percent of market deposits. After the proposed acquisition, Compass would operate the fifth largest depository
institution in the market, controlling deposits of approximately $994.9 million, which represent approximately
2 percent of market deposits. Fifty-eight depository institutions would remain in the banking market.

Fulton Financial Corporation
Lancaster, Pennsylvania
Order Approving the Merger
of Bank Holding Companies
Fulton Financial Corporation ("Fulton"), a financial holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act1 to merge with
Columbia Bancorp ("Columbia") and acquire its subsidi1. 12U.S.C. §1842.

ary bank, The Columbia Bank ("Columbia Bank"), both of
Columbia, Maryland.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published (70
Federal Register 61,826 (2005)). The time for filing comments has expired, and the Board has considered the
application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
Fulton, with total consolidated assets of approximately
$12.3 billion, operates 14 subsidiary insured depository
institutions in Pennsylvania, New Jersey, Virginia, Maryland, and Delaware, as well as a nondepository trust
company in Pennsylvania. Fulton is the ninth largest
depository organization in Pennsylvania, controlling deposits of approximately $5.1 billion, which represent approximately 2.3 percent of the total amount of deposits of
insured depository institutions in the state ("state deposits"). 3 In Maryland, Fulton is the 20th largest depository
organization, controlling deposits of approximately
$481.3 million, which represent less than 1 percent of state
deposits.
Columbia, with total consolidated assets of approximately $1.3 billion, is the 12th largest depository organization in Maryland, controlling deposits of approximately
$976.5 million, which represent approximately 1 percent of
state deposits. On consummation of the proposal, Fulton
would become the 10th largest depository organization in
Maryland, controlling deposits of approximately $1.5 billion, which represent approximately 1.6 percent of state
deposits.4 Fulton would have consolidated assets of approximately $13.8 billion.

2. In addition, Fulton has requested the Board's approval to hold
and exercise a warrant to purchase up to 19.9 percent of Columbia's
common stock. The warrant would expire on consummation of the
proposal.
3. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.
4. Asset data are as of September 30, 2005. Deposit data and state
rankings are as of June 30, 2005, and are adjusted to reflect mergers
and acquisitions completed through January 6, 2006.
5. A bank holding company's home state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on July 1, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).
6. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered, or
operates a branch (12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(l)(A) and

Legal Developments

conditions for an interstate acquisition enumerated in section 3(d) are met in this case.7 Accordingly, the Board is
permitted to approve the proposal under section 3(d) of the
BHC Act.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposed bank acquisition that would result in
a monopoly or would be in furtherance of any attempt to
monopolize the business of banking in any relevant banking market. The BHC Act also prohibits the Board from
approving a proposed bank acquisition that would substantially lessen competition in any relevant banking market,
unless the Board finds that the anticompetitive effects of the
proposal clearly are outweighed in the public interest by the
probable effect of the proposal in meeting the convenience
and needs of the community to be served.8
Fulton and Columbia compete directly in the Washington, D.C./Maryland/Virginia/West Virginia banking market
("Washington, D.C. market")- 9 The Board has reviewed
carefully the competitive effects of the proposal in this
banking market in light of all the facts of record. In
particular, the Board has considered the number of competitors that would remain in the market, the relative shares of
total deposits of depository institutions in the market
("market deposits") controlled by Fulton and Columbia,10
the concentration level of market deposits and the increase
in this level as measured by the Herfindahl-Hirschman
Index ("HHI") under the Department of Justice Merger
Guidelines ("DOJ Guidelines"), 11 and other characteristics
of the market.
7. 12 U.S.C. §§1842(d)(l)(A)-(B), 1842(d)(2)(A)-(B). Fulton is
adequately capitalized and adequately managed, as defined by applicable law. Maryland does not have a minimum age requirement applicable to the proposal. On consummation of the proposal, Fulton would
control less than 10 percent of the total amount of deposits of insured
depository institutions in the United States and less than 30 percent of
the total amount of deposits of insured depository institutions in
Maryland. All other requirements of section 3(d) would be met on
consummation of the proposal.
8. 12 U.S.C. §1842(c)(l).
9. The Washington, D.C. market includes: the Washington, D.C.
Ranally Metropolitan Area ("RMA"); the non-RMA portions of
Fauquier and Loudoun counties, and the cities of Alexandria, Fairfax,
Falls Church, and Manassas, all in Virginia; the non-RMA portions of
Calvert, Charles, Frederick, and St. Mary's counties, all in Maryland;
and Jefferson County, West Virginia.
10. Deposit and market share data are as of June 30, 2005, reflect
mergers and acquisitions through January 6, 2006, and are based on
calculations in which the deposits of thrift institutions are included at
50 percent. The Board previously has indicated that thrift institutions
have become, or have the potential to become, significant competitors
of commercial banks. See, e.g., Midwest Financial Group, 75 Federal
Reserve Bulletin 386, 387 (1989); National City Corporation, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board regularly has
included thrift deposits in the calculation of market share on a
50 percent weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal
Reserve Bulletin 52, 55 (1991).
11. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI exceeds 1800. The Department of

C71

Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in the Washington, D.C. market.12 The market would remain unconcentrated as measured by the HHI, and numerous competitors
would remain in the market.
The Department of Justice has reviewed the anticipated
competitive effects of the proposal and advised the Board
that consummation of the proposal would not likely have a
significantly adverse effect on competition in any relevant
banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment and
have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Washington, D.C. market or in any
other relevant banking market. Accordingly, the Board has
determined that competitive considerations are consistent
with approval.

FINANCIAL, MANAGERIAL, AND
SUPERVISORY CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has considered these factors in light of all the facts of
record, including confidential reports of examination, other
supervisory information received from the primary federal
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, information provided by Fulton, and public comment received on
the proposal.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. The Board considers a variety of measures in
this evaluation, including capital adequacy, asset quality,
Justice ("DOJ") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI by more than
200 points. The DOJ has stated that the higher-than-normal HHI
thresholds for screening bank mergers and acquisitions for anticompetitive effects implicitly recognize the competitive effects of limitedpurpose and other nondepository financial institutions.
12. Fulton is the 35th largest depository organization in the
Washington, D.C. market, controlling deposits of approximately
$177.3 million, which represent less than 1 percent of market
deposits. Columbia Bank is the 26th largest depository institution in
the market, controlling deposits of approximately $308.6 million,
which represent less than 1 percent of market deposits. On consummation, Fulton would operate the 21st largest depository organization in the market, controlling deposits of approximately $485.9 million, which represent less than 1 percent of market deposits. The
HHI would remain unchanged at 868. Ninety-one depository institutions would remain in the banking market after consummation of the
proposal.

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Federal Reserve Bulletin • 2006

and earnings performance. In assessing financial factors,
the Board consistently has considered capital adequacy to
be especially important. The Board also evaluates the
financial condition of the combined organization at consummation, including its capital position, asset quality, and
earnings prospects, and the impact of the proposed funding
of the transaction.
Fulton, each of Fulton's subsidiary banks, and Columbia
Bank are well capitalized and would remain so on consummation of the proposal. Based on its review of the record,
the Boardfindsthat Fulton has sufficient financial resources
to effect the proposal. The transaction is structured as a
combination of cash and an exchange of shares. The cash
portion of the transaction would be funded by issuing trust
preferred securities.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of Fulton and its subsidiary banks, Columbia, and
Columbia Bank, including assessments of their management, risk-management systems, and operations. In addition, the Board has considered its supervisory experiences
and those of the other relevant banking supervisory agencies with the organizations and their records of compliance
with applicable banking law. Fulton, each of Fulton's
subsidiary banks, Columbia, and Columbia Bank are considered to be well managed. The Board also has considered
Fulton's plans for implementing the proposal, including the
proposed management after consummation.
Based on all the facts of record, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of the organizations involved in the proposal are consistent with approval, as are
the other supervisory factors under the BHC Act.
CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").13 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account an institution's
record of meeting the credit needs of its entire community,
including low- and moderate-income ("LMI") neighborhoods, in evaluating bank expansionary proposals.14
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of Fulton's subsidiary insured depository institutions and Columbia Bank, data reported by Fulton's subsid13. 12U.S.C. §2901 etseq.
14. 12U.S.C. §2903.

iary banks and Columbia Bank under the Home Mortgage
Disclosure Act ("HMDA"),15 other information provided
by Fulton, confidential supervisory information, and public
comment received on the proposal. A commenter opposed
the proposal and alleged, based on 2004 data reported
under HMDA, that Fulton engaged in discriminatory treatment of minority individuals in its home mortgage lending
operations.
A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, onsite evaluation of the institution's overall record of performance under the CRA by its appropriate federal
supervisor.16
Fulton's 14 subsidiary banks each received a rating of
"satisfactory" or "outstanding" at its most recent CRA
performance evaluation.17 Columbia Bank received a "satisfactory" rating at its most recent CRA performance
evaluation by the Federal Deposit Insurance Corporation
("FDIC"), as of August 9, 2004. Fulton represented that it
intends to maintain Columbia Bank's CRA program on
consummation of the proposal.
B. HMDA and Fair Lending Record
The Board has considered carefully Fulton's lending record
and HMDA data in light of public comment about its record
of lending to minorities. A commenter alleged, based on
2004 HMDA data, that certain Fulton subsidiary banks
made higher-cost loans18 to African Americans and Hispanics more frequently than to nonminorities in various states
and Metropolitan Statistical Areas ("MSAs"). The commenter also asserted that some Fulton subsidiary banks
disproportionately excluded or denied applications by
African-American and Hispanic applicants for HMDAreportable loans.19 The Board reviewed the HMDA data for
2004 reported by certain subsidiary banks of Fulton in their
assessment areas and in certain MSAs where portions of
the banks' assessment areas are located.
15. 12U.S.C. §2801 etseq.
16. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
17. The appendix lists the most recent CRA performance ratings of
Fulton's subsidiary banks.
18. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 percentage points
for first-lien mortgages and 5 percentage points for second-lien
mortgages (12 CFR 203.4).
19. The majority of the commenter's concerns related to 2004
HMDA data reported by Resource Bank, Virginia Beach, Virginia.
Fulton acquired Resource Bank in April 2004.

Legal Developments

Although the HMDA data may reflect certain disparities
in the rates of loan applications, originations, denials, or
pricing among members of different racial or ethnic groups
in certain local areas, the HMDA data provide an insufficient
basis by themselves on which to conclude whether or not
Fulton's subsidiary banks are excluding any racial or ethnic
group or imposing higher credit costs on these groups on a
prohibited basis. The Board recognizes that HMDA data
alone, even with the recent addition of pricing information,
provide only limited information about the covered loans.20
HMDA data, therefore, have limitations that make them an
inadequate basis, absent other information, for concluding
that an institution has engaged in illegal lending
discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully in light of other information, including
examination reports that provide on-site evaluations of
compliance by Fulton with fair lending laws. In the fair
lending reviews conducted in conjunction with the most
recent CRA evaluations of Fulton's subsidiary depository
institutions, examiners noted no substantive violations of
applicable fair lending laws.
The record also indicates that Fulton has taken steps to
ensure compliance with fair lending laws and other consumer protection laws. Fulton represented that it undertakes significant monitoring of compliance in its mortgage lending operations by using a wide variety of audit
and review programs, including loan file reviews, statistical analyses, and exception reviews. Fulton also performs
a second review of all residential mortgage loan applications scheduled for denial to verify that no factors have
been overlooked in the analysis of the application and to
determine whether the applicant qualifies for any other
available programs.
Fulton represented that it intends to maintain Columbia
Bank's fair lending policies and procedures at the bank on
consummation of the proposal, which include a qualitycontrol review performed by an outside company. The
quality-control review features statistical sampling and a
random evaluation of denied loans and third-party originations. The review also includes verification of origination
documents. Fulton represented that Columbia Bank's fair
lending policies and procedures would be subject to oversight by Fulton on consummation of the proposal.
20. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

C73

The Board also has considered the HMDA data in light
of other information, including the overall CRA performance records of each of Fulton's subsidiary banks. These
efforts demonstrate that Fulton is active in meeting the
convenience and needs of its entire community.

C. Conclusion on Convenience and Needs
and CRA Performance
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by Fulton, public comment received on the proposal, and confidential
supervisory information. The Board notes that the proposal
would provide customers of Columbia with a broader array
of products and services, including personal and corporate
trust services, new leasing products, and expanded branch
and ATM networks. Based on a review of the entire record,
and for the reasons discussed above, the Board concludes
that considerations relating to the convenience and needs
factor and the CRA performance records of the relevant
depository institutions are consistent with approval.

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved.21 In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act.22 The
Board's approval is specifically conditioned on compliance
by Fulton with the conditions imposed in this order and the
21. The commenter requested that the Board hold a public meeting
or hearing on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes a
timely written recommendation of denial of the application. The Board
has not received such a recommendation from the appropriate supervisory authority. Under its regulations, the Board also may, in its
discretion, hold a public meeting or hearing on an application to
acquire a bank if a meeting or hearing is necessary or appropriate to
clarify factual issues related to the application and to provide an
opportunity for testimony (12 CFR 225.16(e)). The Board has considered carefully the commenter's request in light of all the facts of
record. In the Board's view, the commenter had ample opportunity to
submit its views and, in fact, submitted written comments that the
Board has considered carefully in acting on the proposal. The commenter's request fails to demonstrate why its written comments do not
present its views adequately or why a meeting or hearing otherwise
would be necessary or appropriate. For these reasons, and based on all
the facts of record, the Board has determined that a public meeting or
hearing is not required or warranted in this case. Accordingly, the
request for a public meeting or hearing on the proposal is denied.
22. The commenter also requested that the Board extend the
comment period on the proposal. As previously noted, the Board has
accumulated a significant record in this case, including reports of
examination, confidential supervisory information, public reports and
information, and public comment. Moreover, the BHC Act and
Regulation Y require the Board to act on proposals submitted under
those provisions within certain time periods. Based on a review of all
the facts of record, the Board has concluded that the record in this case
is sufficient to warrant action at this time and that further delay in
considering the proposal is not necessary.

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Federal Reserve Bulletin • 2006

commitments made to the Board in connection with the
application. For purposes of this action, the conditions and
commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision herein and, as such, may be enforced in proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by

the Board or the Federal Reserve Bank of Philadelphia,
acting pursuant to delegated authority.
By order of the Board of Governors, effective January 17, 2006.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Appendix
CRA RATINGS OF FULTON'S SUBSIDIARY BANKS
Bank

CRA Rating

Date

Supervisor

FNB Bank, National Association,
Danville, Pennsylvania
Fulton Bank,
Lancaster, Pennsylvania
Lafayette Ambassador Bank,
Easton, Pennsylvania
Lebanon Valley Farmers Bank,
Lebanon, Pennsylvania
Premier Bank,
Doylestown, Pennsylvania
Swineford National Bank,
Middleburg, Pennsylvania
The Bank,
Woodbury, New Jersey
First Washington State Bank,
Windsor, New Jersey
Skylands Community Bank,
Hackettstown, New Jersey
Somerset Valley Bank,
Somerville, New Jersey
Hagerstown Trust Company,
Hagerstown, Maryland
The Peoples Bank of Elkton,
Elkton, Maryland
Resource Bank,
Virginia Beach, Virginia
Delaware National Bank,
Georgetown, Delaware

Satisfactory

June 9, 2003

Satisfactory

October 21, 2002

Office of the Comptroller of the
Currency ("OCC")
FDIC

Outstanding

December 1, 2003

Outstanding

February 22, 2005

Federal Reserve Bank of
Philadelphia ("FRB Phil.")
FRB Phil.

Satisfactory

January 5, 2004

FRB Phil.

Satisfactory

March 7, 2005

OCC

Outstanding

January 18, 2005

FDIC

Satisfactory

March 1, 2004

FDIC

Satisfactory

April 28, 2005

FDIC

Satisfactory

January 21, 2004

FDIC

Satisfactory

January 18, 2005

FDIC

Outstanding

December 30, 2002

FDIC

Satisfactory

March 15, 2004

Federal Reserve Bank of Richmond

Outstanding

January 6, 2003

OCC

Huntington Bancshares, Incorporated
Columbus, Ohio
Order Approving the Acquisition of a Bank
Holding Company
Huntington Bancshares, Incorporated ("Huntington"), a
financial holding company within the meaning of the Bank
Holding Company Act ("BHC Act"), has requested the

Board's approval under section 3 of the BHC Act1 to acquire
Unizan Financial Corp. ("Unizan") and its subsidiary bank,
Unizan Bank, National Association ("Unizan Bank"), both
of Canton, Ohio.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published

1. 12U.S.C. §1842.
2. In addition, Huntington proposes to acquire the nonbanking
subsidiaries of Unizan in accordance with section 4(k) of the BHC Act
(12U.S.C. §1843(k)).

Legal Developments

(70 Federal Register 66,435 (2005)).3 The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in section 3 of the BHC Act.
Huntington, with total consolidated assets of $32.7
billion, controls one depository institution, The Huntington
National Bank ("Huntington Bank"), also in Columbus,
with branches in Florida, Indiana, Kentucky, Michigan,
Ohio, and West Virginia. Huntington is the fifth largest
depository organization in Ohio, controlling deposits of
approximately $14.3 billion, which represent 7.1 percent of
the total amount of deposits of insured depository institutions in the state ("state deposits"). 4
Unizan, with total consolidated assets of approximately
$2.5 billion, controls one depository institution, Unizan
Bank, with branches only in Ohio. Unizan is the 14th
largest depository organization in Ohio, controlling deposits of approximately $1.9 billion, which represent less than
1 percent of state deposits. On consummation of the
proposal, Huntington would become the fourth largest
depository organization in Ohio, controlling deposits of
approximately $16.2 billion, which represent approximately 8.1 percent of state deposits.5

C75

increase in this level as measured by the HerfindahlHirschman Index ("HHI") under the Department of Justice
Merger Guidelines ("DOJ Guidelines"), 9 and other characteristics of the markets.
Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in each of these
banking markets. After consummation, each banking market would be considered moderately concentrated, the
increase in concentration would be small, and numerous
competitors would remain.10
The Department of Justice also has reviewed the anticipated competitive effects of the proposal and advised the
Board that consummation would not likely have a significantly adverse effect on competition in any relevant banking market. In addition, the appropriate banking agencies
have been afforded an opportunity to comment and have
not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration
of resources in the Akron, Columbus, or Dayton banking
markets or in any other relevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with approval.

C76

Federal Reserve Bulletin • 2006

In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. The Board considers a variety of measures in
this evaluation, including capital adequacy, asset quality,
and earnings performance. In assessing financial factors,
the Board consistently has considered capital adequacy to
be especially important. The Board also evaluates the
financial condition of the combined organization at consummation, including its capital position, asset quality, and
earnings prospects, and the impact of the proposed funding
of the transaction.
Huntington and Huntington Bank are well capitalized
and would remain so on consummation of the proposal.11
Based on its review of the record, the Board believes that
Huntington has sufficient financial resources to effect the
proposal. The proposed transaction is structured as a share
exchange.
The Board also has considered the managerial resources
of Huntington and Unizan and the effect of the proposal on
those resources. In addition, the Board has considered
Huntington's plans for implementing the proposal, including the proposed management after consummation.
In reviewing this proposal, the Board has assembled
and considered a detailed record, including substantial
confidential and public information about Huntington,
Unizan, and their subsidiaries. The Board considered its
supervisory experiences with Huntington; the supervisory
experiences and assessments of Huntington Bank's management, risk-management systems, and operations by the
OCC; and the organizations' records of compliance with
applicable banking laws. The Board also consulted with
the Securities and Exchange Commission ("SEC") about
Huntington's record of compliance with applicable federal securities laws and considered its public settlement of
an investigation initiated by the SEC related to Huntington's accounting practices. The SEC terminated its investigation on June 2, 2005, when it approved Huntington's
proposed settlement.12
In addition, the Board has considered that on February
28, 2005, Huntington entered into a formal written agreement ("Written Agreement") with the Federal Reserve
Bank of Cleveland ("Cleveland Reserve Bank") to address certain deficiencies in its corporate governance,
accounting policies and procedures, internal audit, risk

ff. As noted, Huntington also intends to merge Unizan Bank into
Huntington Bank on consummation of the proposal. Huntington Bank
would be well capitalized after consummation of the bank merger,
which the OCC recently approved.
12. The investigation resulted in the SEC charging Huntington, one
of its current officers, and two former officers with violations of
several provisions of the Securities Act of 1933, the Securities
Exchange Act of 1934, and their implementing rules. Under the
settlement, Huntington and the officers entered into a cease-and-desist
agreement, Huntington paid a civil money penalty of $7.5 million for
its actions, and the three officers paid disgorgement fees.

management, and financial and regulatory reporting.13
The Board has considered Huntington's record of compliance with the Written Agreement and the actions Huntington has already taken and is in the process of implementing rules to correct the deficiencies noted in the Written
Agreement.14
Based on all the facts of record, including the actions
Huntington has taken to address the managerial matters
discussed above, the Board concludes that considerations
relating to the financial and managerial resources and
future prospects of the organizations involved in the proposal are consistent with approval, as are the other supervisory factors under the BHC Act.

13. Huntington's Written Agreement included provisions that required Huntington to develop and submit to the Cleveland Reserve
Bank the following documents: (i) written policies and procedures in
the areas of accounting, financial and regulatory reporting, internal
audit, and corporate governance that fully address the findings and
recommendations of independent consultants approved by the Cleveland Reserve Bank; and (ii) a detailed written plan designed to
strengthen Huntington's risk management in the areas of accounting
and regulatory reporting. Huntington Bank entered into a similar
written agreement with the OCC, which was terminated on October 6,
2005.
14. A commenter expressed a general concern about Huntington's
accounting practices.
15. 12 U.S.C. §2901 et seq.; 12 U.S.C. § 1842(c)(2).
16. 12 U.S.C. §2903.
17. 12 U.S.C. §2801 etseq.

Legal Developments

A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, onsite evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisor.'8
Huntington Bank received an overall "satisfactory" rating at its most recent CRA evaluation by the OCC, as of
March 31, 2003. The OCC has not yet evaluated Unizan
Bank's CRA performance. Unizan Bank was formed in
2002 by the merger of First National Bank of Zanesville
("First National"), Zanesville, and The United National
Bank and Trust Company ("United National"), Canton,
both in Ohio. Both banks had "satisfactory" CRA performance ratings by the OCC when they were consolidated.19
Huntington has represented that, on consummation of the
proposal, it will implement Huntington Bank's current CRA
policies, procedures, and programs at the combined
organization.
B. Branch Closings
Huntington stated that it intends to close six branches and
consolidate three other branches after consummation but
that none of these branches are in LMI census tracts.
Huntington also provided the Board with Huntington
Bank's policy regarding office openings, closings, and
consolidations. That policy entails a review of a number of
factors before a branch is closed, including consideration of
any adverse impact on LMI communities. Examiners at
Huntington Bank's most recent CRA performance evaluation reported that the bank's service delivery systems were
accessible to geographies and individuals of different
income levels throughout its assessment areas.
The Board also has considered the fact that federal
banking law provides a specific mechanism for addressing
branch closings.20 Federal law requires an insured depository institution to provide notice to the public and to the
appropriate federal supervisor before closing a branch. In
addition, the Board notes that the OCC, as the appropriate
18. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
19. First National received an overall "satisfactory" CRA performance rating as of December 8, 1998, and United National received an
overall "satisfactory" CRA performance rating as of October 29,
2001.
20. Section 42 of the Federal Deposit Insurance Act (12 U.S.C.
§ 1831r-l), as implemented by the Joint Policy Statement Regarding
Branch Closings (64 Federal Register 34,844 (1999)), requires that a
bank provide the public with at least 30 days' notice and the
appropriate federal supervisory agency and customers of the branch
with at least 90 days' notice before the date of the proposed branch
closing. The bank also is required to provide reasons and other
supporting data for the closure, consistent with the institution's written
policy for branch closings.

C77

federal supervisor of Huntington Bank, will continue to
review its branch closing record in the course of conducting
CRA performance evaluations.
C. HMD A and Fair Lending Records
The Board has carefully considered the lending record and
HMD A data of Huntington Bank in light of public comment
about its record of lending to minorities. A commenter
alleged, based on 2004 HMDA data, that Huntington Bank
disproportionately denied applications for HMDAreportable loans by African-American and Hispanic applicants. The commenter also asserted that Huntington Bank
made higher-cost loans to African Americans and Hispanics
more frequently than to nonminorities.21 The Board reviewed HMDA data for 2004 reported by Huntington Bank
on a company-wide basis.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
Huntington Bank is excluding or imposing higher credit
costs on any racial or ethnic group on a prohibited basis.
The Board recognizes that HMDA data alone, even with
the recent addition of pricing information, provide only
limited information about the covered loans.22 HMDA data,
therefore, have limitations that make them an inadequate
basis, absent other information, for concluding that an
institution has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by Huntington Bank with fair lending
laws and the CRA performance record of Huntington Bank
and Unizan Bank that are detailed above. In the fair lending
reviews that were conducted in conjunction with the most
recent CRA performance evaluations of the subsidiary

21. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 percentage points
for first-lien mortgages and 5 percentage points for second-lien
mortgages (12 CFR 203.4).
22. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

C78 Federal Reserve Bulletin • 2006

depository institutions of Huntington and Unizan, examiners noted no substantive violations of applicable fair lending laws.
The record also indicates that Huntington has taken steps
to ensure compliance with fair lending and other consumer
protection laws. Huntington represented that it has a comprehensive fair lending program consisting of lending
policies, annual training and testing of lending personnel,
fair lending analyses, and oversight and monitoring. In
addition, Huntington represented that it performs fair lending analysis using regression modeling and benchmarking
and monitors adherence to credit policy using monthly
reporting and quality control reviews. Huntington also
represented that its fair lending policy includes a secondreview program for its residential lending and that its
corporate underwriting department conducts a third review
of denied applications from minority applicants or for loans
used to finance properties in LMI areas.
The Board also has considered the HMDA data in light
of other information, including Huntington's CRA lending
programs and the overall performance records of the
subsidiary banks of Huntington and Unizan under the
CRA. These established efforts demonstrate that the institutions are active in helping to meet the credit needs of their
entire communities.
D. Conclusion on Convenience and Needs Factor
The Board has carefully considered all the facts of record,
including reports of examination of the CRA performance
records of the institutions involved, information provided
by Huntington, comments received on the proposal, and
confidential supervisory information. Huntington represented that the proposal would benefit Unizan customers by
providing expanded delivery channels and access to a
broader array of investment products, including annuities
and a broader array of mutual funds, and enhanced investment management and research capabilities. Based on a
review of the entire record, and for the reasons discussed
above, the Board concludes that considerations relating to
the convenience and needs factor, including the CRA
performance records of the relevant depository institutions,
are consistent with approval.

CONCLUSION
Based on the foregoing and all the facts of record, the Board
has determined that the application should be, and hereby is,
approved. In reaching its conclusion, the Board has considered all the facts of record in light of the factors that it is
required to consider under the BHC Act.23 The Board's
23. A commenter requested that the Board hold a public meeting or
hearing on the proposal. Section 3 of the BHC Act does not require the
Board to hold a public hearing on an application unless the appropriate
supervisory authority for the bank to be acquired makes a timely
written recommendation of denial of the application. The Board has
not received such a recommendation from the appropriate supervisory
authority. Under its regulations, the Board also may, in its discretion,
hold a public meeting or hearing on an application to acquire a bank if

approval is specifically conditioned on compliance by Huntington with the conditions imposed in this order and the
commitments made in connection with the application. For
purposes of this action, the conditions and commitments are
deemed to be conditions imposed in writing by the Board in
connection with its findings and decision herein and, as
such, may be enforced in proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Cleveland Reserve Bank, acting pursuant
to delegated authority.
By order of the Board of Governors, effective January 26, 2006.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Appendix A
OHIO BANKING MARKETS IN WHICH
HUNTINGTON AND UNIZAN
COMPETE DIRECTLY
Akron
(1) Summit County, excluding (i) the cities of Hudson,
Macedonia, and Twinsburg, and (ii) the townships of
Boston, Northfield Center, Richfield, Sagamore Hills, and
Twinsburg and the villages adjoining those townships;
(2) Portage County, excluding (i) the cities of Aurora and
Streetsboro and (ii) the townships of Freedom, Hiram,
Mantua, Nelson, Shalersville, and Windham and the villages adjoining those townships;
(3) in Medina County, the city of Wadsworth, the townships
of Guilford and Sharon, and the village of Seville;
(4) in Stark County, the townships of Lake and Lawrence
and the villages of Canal Fulton and Hartville; and
(5) in Wayne County, the city of Rittman, the townships of
a meeting or hearing is necessary or appropriate to clarify factual
issues related to the application and to provide an opportunity for
testimony (12 CFR 225.16(e)). The Board has considered carefully the
commenter's request in light of all the facts of record. In the Board's
view, the commenter had ample opportunity to submit its views and, in
fact, submitted written comments that the Board has considered
carefully in acting on the proposal. The commenter's request fails to
demonstrate why the written comments do not present its views
adequately or why a meeting or hearing otherwise would be necessary
or appropriate. For these reasons, and based on all the facts of record,
the Board has determined that a public meeting or hearing is not
required or warranted in this case. Accordingly, the request for a public
meeting or hearing on the proposal is denied.

Legal Developments

Chippewa and Milton, and the villages adjoining those
townships.
Columbus
Delaware, Franklin, Fairfleld, Licking, Madison, Morrow,
Pickaway, and Union counties and Perry County, excluding
the township of Harrison.
Dayton
Greene, Miami, Montgomery, and Preble counties.

Appendix B
MARKET DATA FOR OHIO BANKING MARKETS
Akron
Huntington operates the seventh largest depository institution in the market, controlling deposits of $364.6 million,
which represent approximately 4.2 percent of market
deposits. Unizan operates the 13th largest depository institution in the market, controlling deposits of approximately
$116.6 million, which represent approximately 1.4 percent
of market deposits. After consummation of the proposal,
Huntington would remain the seventh largest depository
organization in the market, controlling deposits of approximately $481.2 million, which represent approximately
5.6 percent of market deposits. Twenty-three depository
institutions would remain in the banking market. The HHI
would increase 11 points, to 1349.
Columbus
Huntington operates the largest depository institution in the
market, controlling deposits of $8.1 billion, which represent approximately 28.6 percent of market deposits. Unizan
operates the 11th largest depository institution in the market, controlling deposits of approximately $300.8 million,
which represent approximately 1.1 percent of market
deposits. After consummation of the proposal, Huntington
would remain the largest depository organization in the
market, controlling deposits of approximately $8.4 billion,
which represent approximately 29.7 percent of market
deposits. Fifty-five depository institutions would remain in
the banking market. The HHI would increase 60 points, to
1639.
Dayton
Huntington operates the seventh largest depository institution in the market, controlling deposits of $242.9 million,
which represent approximately 2.5 percent of market
deposits. Unizan operates the eighth largest depository
institution in the market, controlling deposits of approximately $225.6 million, which represent approximately
2.3 percent of market deposits. After consummation of the
proposal, Huntington would become the sixth largest

C79

depository organization in the market, controlling deposits
of approximately $468.5 million, which represent approximately 4.9 percent of market deposits. Thirty depository
institutions would remain in the banking market. The HHI
would increase 13 points, to 1512.

Marshall & Ilsley Corporation
Milwaukee, Wisconsin
Order Approving the Merger
of Bank Holding Companies
Marshall & Ilsley Corporation ("M&I"), a financial holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act1 to acquire
Trustcorp Financial, Inc. ("Trustcorp"), St. Louis, and its
subsidiary bank, Missouri State Bank and Trust Company
("MSBTC"), Clayton, both of Missouri.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 4365 (2006)). The
time for filing comments has expired, and the Board has
considered the application and all comments received in
light of the factors set forth in section 3 of the BHC Act.
M&I, with total consolidated assets of approximately
$46.3 billion, operates four subsidiary insured depository
institutions in Arizona, Florida, Illinois, Minnesota, Missouri, Nevada, and Wisconsin. In Missouri, M&I is the
ninth largest depository organization, controlling deposits
of approximately $1.6 billion, which represent 1.7 percent
of the total amount of deposits of insured depository
institutions in the state ("state deposits")- 2
Trustcorp, with total consolidated assets of approximately $748 million, operates one depository institution,
MSBTC, which has branches only in Missouri. Trustcorp is
the 17th largest depository organization in Missouri, controlling deposits of approximately $606 million.
On consummation of this proposal, M&I would have
total consolidated assets of approximately $47 billion. In
Missouri, M&I would become the sixth largest depository
organization, controlling deposits of approximately $2.2 billion, which represent 2.4 percent of state deposits.

1. 12 U.S.C. § 1842. The Board also approved today the separate
applications and a notice by M&I to acquire Gold Bane Corporation,
Inc. ("Gold Bane") and its subsidiary bank Gold Bank, both of
Leawood, Kansas, under sections 3 and 4 of the BHC Act and the
application by M&I's subsidiary bank, M&I Marshall & Ilsley Bank
("M&I Bank"), Milwaukee, Wisconsin, a state member bank, to
merge with Gold Bank under section 18(c) of the Federal Deposit
Insurance Act, with M&I Bank as the surviving entity (collectively,
the "Gold Bane proposal"). See Marshall & Ilsley Corporation,
92 Federal Reserve Bulletin C121 (2006) ("Gold Bane Order").
2. Asset data are as of December 31, 2005. State deposit and ranking
data are as of June 30, 2005, and reflect merger and acquisition activity
as of February 24, 2006. In this context, insured depository institutions
include commercial banks, savings banks, and savings associations.

C80

Federal Reserve Bulletin • 2006

INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home state
of such bank holding company if certain conditions are
met. For purposes of the BHC Act, the home state of M&I
is Wisconsin,3 and MSBTC is located in Missouri.4
Based on a review of all the facts of record, including a
review of relevant state statutes, the Board finds that all
conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met. Accordingly, the Board is
permitted to approve the proposal under section 3(d) of the
BHC Act.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
would be in furtherance of an attempt to monopolize the
business of banking in any relevant banking market. The
BHC Act also prohibits the Board from approving a bank
acquisition that would substantially lessen competition in
any relevant banking market, unless the anticompetitive
effects of the proposal are clearly outweighed in the public
interest by the probable effect of the proposal in meeting
the convenience and needs of the community to be served.5
M&I and Trustcorp compete directly in the St. Louis,
Missouri banking market ("St. Louis market")- 6 The Board
has reviewed carefully the competitive effects of the proposal in this banking market in light of all the facts of
record. In particular, the Board has considered the number
of competitors that would remain in the market, the relative
shares of total deposits of depository institutions in the
market ("market deposits") 7 controlled by M&I and Trust3. A bank holding company's home state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on July 1, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).
4. For purposes of section 3(d) of the BHC Act, the Board considers
a bank to be located in states in which the bank is headquartered or
operates a branch. See 12U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(l)(A)5. 12 U.S.C. §1842(c)(l).
6. The St. Louis market consists of (1) the city of St. Louis;
Franklin, Jefferson, Lincoln, St. Charles, St. Louis, Warren, and
Washington counties; the eastern half of Gasconade County, including
the cities of Hermann and Owensville; Boone township in Crawford
County; Loutre township in Montgomery County, all in Missouri; and
(2) Bond, Calhoun, Clinton, Jersey, Macoupin, Madison, Monroe, and
St. Clair counties; the western part of Randolph County (bounded by
route 3 to the east and the Kaskaskia River to the south), including the
cities of Red Bud, Ruma, and Evansville; and Washington County,
excluding Ashley and DuBois townships, and the city of Centralia, all
in Illinois.
7. Deposit and market share data are as of June 30, 2005, reflect
merger and acquisition activity as of February 24, 2006, and are based
on calculations in which the deposits of thrift institutions are included
at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386, 387 (1989); National City Corpora-

corp, the concentration level of market deposits and the
increase in this level as measured by the HerfindahlHirschman Index ("HHI") under the Department of Justice
Merger Guidelines ("DOJ Guidelines"), 8 and other characteristics of the market.
Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in the St. Louis
market.9 The market would remain unconcentrated, as
measured by the HHI, and numerous competitors would
remain in the market.
The Department of Justice also has reviewed the anticipated competitive effects of the proposal and has advised
the Board that consummation of the proposal would likely
not have a significantly adverse effect on competition in
any relevant banking market. The appropriate banking
agencies also have been afforded an opportunity to comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the St. Louis market or in any other
relevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with
approval.

FINANCIAL AND MANAGERIAL RESOURCES
AND FUTURE PROSPECTS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has considered these factors in light of all the facts of
record, including confidential reports of examination, other
tion, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board
regularly has included thrift deposits in the calculation of market share
on a 50 percent weighted basis. See, e.g., First Hawaiian, Inc.,
77 Federal Reserve Bulletin 52, 55 (1991).
8. Under the DOJ Guidelines, 49 Federal Register 26,823 (June 29,
1984), a market is considered unconcentrated if the post-merger HHI
is under 1000, moderately concentrated if the post-merger HHI is
between 1000 and 1800, and highly concentrated if the post-merger
HHI exceeds 1800. The Department of Justice has informed the Board
that a bank merger or acquisition generally will not be challenged (in
the absence of other factors indicating anticompetitive effects) unless
the post-merger HHI is at least 1800 and the merger increases the HHI
more than 200 points. The Department of Justice has stated that the
higher-than-normal HHI thresholds for screening bank mergers and
acquisitions for anticompetitive effects implicitly recognize the competitive effects of limited-purpose and other nondepository financial
institutions.
9. M&I is the sixth largest depository organization in the St. Louis
market, controlling deposits of approximately $1.7 billion, which
represent 3.5 percent of market deposits. Trustcorp is the 14th largest
depository organization in the market, controlling deposits of approximately $606 million, which represent 1.3 percent of market deposits.
On consummation, M&I would become the fifth largest depository
organization in the market, controlling deposits of approximately
$2.3 billion, which represent 4.8 percent of market deposits. The HHI
would increase 9 points, to 735. One hundred and forty-two depository
institutions would remain in the banking market after consummation
of the proposal.

Legal Developments

supervisory information from the various primary federal
and state banking supervisors of the organizations involved
in the proposal, publicly reported and other financial information, and information provided by M&I.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial
condition of the combined organization at consummation,
including its capital position, asset quality, and earnings
prospects, and the impact of the proposed funding of the
transaction.
The Board has carefully considered the proposal under
the financial factors. M&I, its subsidiary depository institutions, and MSBTC are all well capitalized and would
remain so on consummation of the proposal. Based on its
review of the record, the Board finds that M&I has
sufficient financial resources to effect the proposal. The
proposed transaction is structured as a partial share exchange
and partial cash purchase, and M&I will fund the cash
portion by incurring long-term debt.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of M&I, Trustcorp, and their subsidiary depository
institutions, including assessments of their management,
risk-management systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of the other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law. M&I, Trustcorp, and their subsidiary
depository institutions are considered to be well managed.
The Board also has considered M&I's plans for implementing the proposal, including the proposed management after
consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved in the proposal are consistent with approval, as are
the other supervisory factors under the BHC Act.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on proposals under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA"). 10 The CRA requires the federal financial
supervisory agencies to encourage insured depository insti10. 12 U.S.C. §2901 et seq.; 12 U.S.C. § 1842(c)(2).

C81

tutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank expansionary proposals.11
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of the subsidiary depository institutions of M&I
and Trustcorp, data reported by the subsidiary depository
and lending institutions of M&I and Trustcorp under the
Home Mortgage Disclosure Act ("HMDA"), 12 other information provided by M&I, confidential supervisory information, and public comment received on the proposal. A
commenter opposed the proposal and repeated its allegations from the Gold Bane proposal that, based on 2004 data
reported under HMDA, M&I's subsidiary depository institution, M&I Bank FSB ("M&I FSB"), Las Vegas, Nevada,
made higher-cost loans more frequently to minority borrowers than to nonminority borrowers in certain states. The
commenter also alleged that M&I FSB's nationwide mortgage subsidiary, M&I Mortgage Corp. ("M&I Mortgage"),
and MSBTC disproportionately denied minority applicants
for certain home mortgage loans in the St. Louis Metropolitan Statistical Area ("MSA"). 13 In reviewing this proposal,
the Board incorporates its findings in the Gold Bane
proposal.
A. C R A Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, onsite evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisor.14
M&I Bank, M&I's largest subsidiary depository institution as measured by total deposits, received an overall
"outstanding" rating at its most recent CRA performance
evaluation by the Federal Reserve Bank of Chicago, as of
August 11, 2003. M&I's other subsidiary depository institutions received "satisfactory" ratings at their most recent

11. 12 U.S.C. §2903.
12. 12 U.S.C. §2801 etseq.
13. In addition, the commenter reiterated the assertions it raised in
the Gold Bane proposal about an investment made by Gold Bank in
multifamily housing revenue bonds, which is not an institution
involved in this proposal. The Board considered that issue in connection with its approval of the Gold Bane proposal. See Gold Bane
Order, at 14 n. 31.
14. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

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Federal Reserve Bulletin • 2006

CRA performance evaluations.15 MSBTC received a "satisfactory" rating at its most recent CRA performance
evaluation by the Federal Deposit Insurance Corporation
("FDIC"), as of March 1, 2005.
M&I represented that it would implement its CRA
policies, procedures, and programs throughout the combined organization. This implementation would be carried
out by local and regional CRA committees with coordinated oversight from M&F s corporate CRA committee, in
accordance with its CRA program.
B. H M D A and Fair Lending Record
The Board has carefully considered the lending record and
HMDA data of M&I and Trustcorp in light of public
comment received on the proposal. As noted, the commenter reiterated the comments it submitted in the Gold
Bane proposal that, based on 2004 HMDA data, M&I FSB
made higher-cost loans 16 more frequently to minority borrowers than nonminority borrowers statewide in Wisconsin
and Ohio. 17 As noted in the Gold Bane Order, the Board
reviewed HMDA data reported by M&I FSB in its assessment area in the Milwaukee-Waukesha Primary Metropolitan Statistical Area and in its assessment areas statewide in
Wisconsin and Ohio.
The commenter also based its allegation that M&I
Mortgage and MSBTC denied applications by minority
borrowers for conventional home-purchase loans more
frequently than nonminority applicants in the St. Louis
MSA on 2004 HMDA data. The Board analyzed 2004
HMDA data, M&I Bank, M&I FSB, M&I Mortgage, and
reported by Southwest Bank in Southwest Bank's assessment areas in the St. Louis MSA and statewide in Missouri.18 In addition, the Board analyzed 2004 HMDA data
reported by MSBTC in its assessment area in the St. Louis
MSA and in its assessment areas statewide in Missouri.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
15. Southwest Bank of St. Louis ("Southwest Bank"), a subsidiary
bank of M&I, received an overall "satisfactory" rating at its most
recent CRA performance evaluation by the Federal Reserve Bank of
St. Louis, as of August 11, 2003. M&I Bank FSB received an overall
"satisfactory" rating at its most recent CRA performance evaluation
by the Office of Thrift Supervision as of February 23, 2005. M&I Bank
of May ville, Mayville, Wisconsin, is a special-purpose bank that is not
evaluated under the CRA.
16. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CFR 203.4).
17. The commenter also repeated its allegation from the Gold Bane
proposal that, based on 2004 HMDA data, M&I FSB made higher-cost
loans more frequently to Latinos than to nonminority borrowers in
Missouri. M&I FSB has no assessment areas in Missouri.
18. M&I Bank, M&I FSB, and M&I Mortgage do not have an
assessment area in the St. Louis MSA or in Missouri.

M&I or Trustcorp is excluding or imposing higher costs on
any racial or ethnic group on a prohibited basis. The Board
recognizes that HMDA data alone, even with the recent
addition of pricing information, provide only limited information about the covered loans. 19 HMDA data, therefore,
have limitations that make them an inadequate basis, absent
other information, for concluding that an institution has
engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all lending institutions are obligated to ensure that their
lending practices are based on criteria that ensure not only
safe and sound lending but also equal access to credit by
creditworthy applicants regardless of their race. Because of
the limitations of HMDA data, the Board has considered
these data carefully and taken into account other information, including examination reports that provide on-site
evaluations of compliance by M&I and Trustcorp with fair
lending laws. The Board also consulted with the FDIC, the
primary regulator of MSBTC, and considered the compliance examination records of M&I's and Trustcorp's subsidiary depository institutions. Examiners noted no evidence
of illegal credit discrimination by their subsidiary depository institutions.
The record also indicates that M&I, Trustcorp, their
subsidiary depository institutions, and their nonbank lending subsidiaries have taken steps to ensure compliance with
fair lending and other consumer protection laws. As noted in
the Gold Bane Order, M&I represented that it has centralized programs in place to monitor and manage compliance
that feature (1) ongoing comprehensive training programs to
ensure that regulatory requirements and policies are clearly
communicated to personnel and (2) an internal audit department that periodically performs independent testing and
validation of the compliance performance of M&I's various
business units to ensure compliance with fair lending and
consumer protection laws and to measure the effectiveness
of internal controls. The Board hereby reaffirms and adopts
the facts and findings detailed in the Gold Bane Order with
respect to M&I's lending compliance and auditing programs. 20 M&I also represented that it would implement its
centralized compliance-related policies and procedures
across its combined organization, thereby ensuring that all
entities have the same compliance monitoring and independent testing processes and centralized performance of critical functions, such as underwriting for consumer and mortgage lending.
The Board also has considered the HMDA data in light of
other information, including the overall CRA performance
19. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.
20. See Gold Bane Order, at footnote 17.

Legal Developments

records of the subsidiary depository and lending institutions
of M&I and Trustcorp. These established efforts and records
demonstrate that the institutions are active in helping to meet
the credit needs of their entire communities.
C. Conclusion on the Convenience and Needs
Factor
The Board has carefully considered all the facts of record,
including reports of examination of the CR A records of the
institutions involved, information provided by M&I, the
comment received on the proposal, and confidential supervisory information. M&I represented that the proposal
would provide customers of Trustcorp with access to a
broader array of financial products and services. Based on a
review of the entire record, and for the reasons discussed
above and in the Gold Bane Order, the Board concludes
that considerations relating to the convenience and needs
factor and the CRA performance records of the relevant
depository institutions are consistent with approval.
CONCLUSION
Based on the foregoing and all facts of record, the Board
has determined that the application should be, and hereby
is, approved.21 In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the BHC Act and other
applicable statutes. The Board's approval is specifically
conditioned on compliance by M&I with the conditions
imposed in this order and the commitments made to the
Board in connection with the application. For purposes of
this action, the conditions and commitments are deemed to
be conditions imposed in writing by the Board in connection with its findings and decision herein and, as such, may
be enforced in proceedings under applicable law.
The proposal may not be consummated before the 15th
calendar day after the effective date of this order, or later
than three months after the effective date of this order,
21. The commenter requested that the Board hold a public hearing
or meeting on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for any of the banks to be acquired
makes a timely written recommendation of denial of the application.
The Board has not received such a recommendation from any supervisory authority. Under its regulations, the Board also may, in its
discretion, hold a public meeting or hearing on an application to
acquire a bank if a meeting or hearing is necessary or appropriate to
clarify factual issues related to the application and to provide an
opportunity for testimony (12 CFR 225.16(e)). The Board has considered carefully the commenter's requests in light of all the facts of
record. In the Board's view, the commenter had ample opportunity to
submit comments on the proposal and, in fact, submitted written
comments that the Board has considered carefully in acting on the
proposal. The request fails to demonstrate why its written comments
do not present its views adequately or why a meeting or hearing
otherwise would be necessary or appropriate. For these reasons, and
based on all the facts of record, the Board has determined that a public
hearing or meeting is not required or warranted in this case. Accordingly, the request for a public hearing or meeting on the proposal is
denied.

C83

unless such period is extended for good cause by the Board
or the Federal Reserve Bank of Chicago, acting pursuant to
delegated authority.
By order of the Board of Governors, effective March 13,
2006.
Voting for this action: Chairman Bernanke, Vice Chairman Ferguson, and Governors Bies, Olson, Kohn, Warsh, and Kroszner.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

National City Corporation
Cleveland, Ohio
Order Approving the Acquisition
of a Bank Holding Company
National City Corporation ("National City"), a financial
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act1 to acquire Forbes
First Financial Corporation ("Forbes"), St. Louis, and its
subsidiary bank, Pioneer Bank and Trust Company ("Pioneer Bank"), Maplewood, both in Missouri.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(71 Federal Register 933 (2006)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in section 3 of the BHC Act.
National City, with total consolidated assets of $142.4
billion, is the 15th largest depository organization in the
United States and controls deposits of $76.6 billion, which
represent approximately 1.3 percent of total deposits in
insured depository institutions in the United States.2
National City operates subsidiary insured depository institutions in Illinois, Indiana, Kentucky, Michigan, Missouri,
Ohio, and Pennsylvania. In Missouri, National City is the
tenth largest depository organization, controlling deposits
of $1.46 billion, which represent approximately 1.6 percent
of total deposits of insured depository institutions in the
state ("state deposits").
Forbes, with total consolidated assets of approximately
$529.5 million, operates one depository institution, Pioneer
Bank, which has branches only in Missouri. Pioneer Bank
is the 32nd largest depository institution in Missouri,
controlling deposits of $397 million, which represent less
than 1 percent of state deposits.
On consummation of this proposal, National City would
remain the 15th largest depository organization in the
United States, with total consolidated assets of $142.9
1. 12U.S.C. §1842.
2. Asset and nationwide deposit and ranking data are as of December 31, 2005. Statewide deposit and ranking data are as of June 30,
2005, and reflect merger activity through February 7, 2006. In this
context, insured depository institutions include commercial banks,
savings banks, and savings associations.

C84

Federal Reserve Bulletin • 2006

billion. National City would become the seventh largest
depository organization in Missouri, controlling deposits of
approximately $1.9 billion, which represent approximately
2 percent of state deposits.

INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home state
of such bank holding company if certain conditions are
met. For purposes of the BHC Act, the home state of
National City is Ohio, 3 and Pioneer Bank is located in
Missouri.4
Based on a review of all the facts of record, including
relevant state statutes, the Board finds that all the conditions for an interstate acquisition enumerated in section
3(d) are met in this case.5 In light of all the facts of record,
the Board is permitted to approve the proposal under
section 3(d) of the BHC Act.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
would be in furtherance of any attempt to monopolize the
business of banking in any relevant banking market. The
BHC Act also prohibits the Board from approving a
proposed bank acquisition that would substantially lessen
competition in any relevant banking market, unless the
Board finds that the anticompetitive effects of the proposal
clearly are outweighed in the public interest by the probable effect of the proposal in meeting the convenience and
needs of the community to be served.6
National City and Forbes compete directly in the
St. Louis, Missouri banking market ("St. Louis market")- 7 The Board has reviewed carefully the competitive
3. A bank holding company's home state is the state in which the
total deposits of all subsidiary banks of the company were largest on
July 1, 1966, or the date on which the company became a bank holding
company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).
4. For purposes of section 3(d) of the BHC Act, the Board considers
a bank to be located in the states in which the bank is chartered,
headquartered, or operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7)
and 1842(d)(l)(A)-(D)(2)(B).
5. See 12 U.S.C. §§ 1842(d)(l)(A) and (B), 1842(d)(2)(A) and (B).
National City is adequately capitalized and adequately managed, as
defined by applicable law. Pioneer Bank has been in existence and
operated for the minimum period of time required by applicable state
law (five years). See Mo. Rev. Stat. § 362.077. On consummation of
the proposal, National City would control less than 10 percent of the
total amount of deposits of insured depository institutions ("total
deposits") in the United States. National City also would comply with
the applicable state deposit cap in Missouri by controlling less than
13 percent of state deposits. See Mo. Rev. Stat. §362.915. All other
requirements under section 3(d) of the BHC Act also would be met on
consummation of the proposal.
6. 12 U.S.C. §1842(c)(l).
7. The St. Louis market consists of (1) the city of St. Louis;
Franklin, Jefferson, Lincoln, St. Charles, St. Louis, Warren, and
Washington counties; the eastern half of Gasconade County, including
the cities of Hermann and Owensville; Boone township in Crawford

effects of the proposal in this banking market in light of
all the facts of record. In particular, the Board has considered the number of competitors that would remain in the
market, the relative shares of total deposits in depository
institutions in the market ("market deposits") controlled
by National City and Forbes,8 the concentration level of
market deposits and the increase in this level as measured
by the Herfindahl-Hirschman Index ("HHI") under the
Department of Justice Merger Guidelines ("DOJ Guidelines"), 9 and other characteristics of the market.
Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in the St. Louis
market.10 After consummation of the proposal, the St. Louis
market would remain unconcentrated, as measured by the
HHI, and numerous competitors would remain in the market.
The Department of Justice also has reviewed the anticipated competitive effects of the proposal and has advised
the Board that consummation would not likely have a
significantly adverse effect on competition in the St. Louis
market or in any other relevant banking market. In addition,
the appropriate banking agencies have been afforded an
opportunity to comment and have not objected to the
proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration
of resources in the St. Louis market or in any other relevant
County; Loutre township in Montgomery County, all in Missouri; and
(2) Bond, Calhoun, Clinton, Jersey, Macoupin, Madison, Monroe and
St. Clair counties, the western part of Randolph County (bounded by
Route 3 to the east and the Kaskaskia River to the south), including the
cities of Red Bud, Ruma, and Evansville; and Washington County,
excluding Ashley and DuBois townships, and the city of Centralia, all
in Illinois.
8. Market share data are as of June 30, 2005, and are based on
calculations in which the deposits of thrift institutions are included
at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly
has included thrift deposits in the market share calculation on a 50
percent weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal
Reserve Bulletin 52 (1991).
9. Under the DOJ Guidelines, 49 Federal Register 26,823 (1984), a
market is considered unconcentrated if the post-merger HHI is below
1000. The Department of Justice has informed the Board that a bank
merger or acquisition generally will not be challenged (in the absence
of other factors indicating anticompetitive effects) unless the postmerger HHI is at least 1800 and the merger increases the HHI more
than 200 points. The Department of Justice has stated that the
higher-than-normal HHI thresholds for screening bank mergers for
anticompetitive effects implicitly recognize the competitive effects of
limited-purpose lenders and other nondepository financial institutions.
10. National City is the seventh largest depository organization in the
St. Louis market, controlling deposits of $ 1.5 billion, which represent
3.1 percent of market deposits. Forbes operates the 18th largest
depository institution in the market, controlling deposits of $397.2
million, which represent less than 1 percent of market deposits. After
consummation of the proposal, National City would become the sixth
largest depository organization in the market, controlling deposits of
$1.8 billion, which represent approximately 3.8 percent of market
deposits. The HHI would increase 5 points, to 731. One hundred and
thirty-nine bank and thrift competitors would remain in the market.

Legal Developments

banking market and that competitive considerations are
consistent with approval.

FINANCIAL, MANAGERIAL, AND
SUPERVISORY CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and banks involved in the proposal and
certain other supervisory factors. The Board has carefully
considered these factors in light of all the facts of record,
including confidential reports of examination and other
supervisory information received from the federal and state
supervisors of the organizations involved, publicly reported
and other financial information, information provided by
National City, and public comments received on the
proposal.11
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. The Board considers a variety of measures in
this evaluation, including capital adequacy, asset quality,
and earnings performance.12 In assessing financial factors,
the Board consistently has considered capital adequacy to
be especially important. The Board also evaluates the
financial condition of the combined organization at consummation, including its capital position, asset quality, and
earnings prospects, and the impact of the proposed funding
of the transaction.
The Board has carefully considered the financial factors. National City, all its subsidiary banks, and Pioneer
Bank are well capitalized and would remain so on consummation of the proposal. Based on its review of the
record, the Board finds that National City has sufficient
financial resources to effect the proposal. The proposed
transaction is structured as a cash purchase, and National
City will use available resources to fund the transaction.
11. A commenter expressed concern about National City's relationships with unaffiliated retail check cashers, pawn shops, and other
alternative financial services providers. As a general matter, the
activities of the consumer finance businesses identified by the commenter are permissible, and the businesses are licensed by the states
where they operate. National City has represented that it does not play
any role in the lending practices, credit review, or other business
practices of these firms.
12. The commenter also expressed concern about a press report
asserting that nontraditional mortgage loans, such as interest-only
mortgages, could raise asset-quality issues for institutions holding
them. The press report indicated that First Franklin Financial Corporation, San Jose, California, a subsidiary of National City Bank of
Indiana ("National City Indiana"), Indianapolis, Indiana, originates
many interest-only mortgages. The Board and the Office of the
Comptroller of the Currency ("OCC"), the primary regulator of
National City Indiana, carefully scrutinize institutions' lending programs, including the policies and procedures and risk-management
processes that they have in place for nontraditional lending products.
The Board has consulted with the OCC about the risk-management
processes for nontraditional lending activities at National City Indiana
and its mortgage subsidiaries.

C85

The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of National City, Forbes, and their subsidiary
depository institutions, including assessments of their management, risk-management systems, and operations. In
addition, the Board has considered its supervisory experiences and those of the other relevant banking supervisory
agencies with the organizations and their records of compliance with applicable banking law. National City, Forbes,
and their subsidiary depository institutions are considered
to be well managed. The Board also has considered
National City's plans for implementing the proposal,
including the proposed management after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved in the proposal are consistent with approval, as are
the other supervisory factors under the BHC Act.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board is required to consider the effects of the proposal on
the convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA"). 13 The CRA requires the federal financial
supervisory agencies to encourage financial institutions to
help meet the credit needs of the local communities in
which they operate, consistent with their safe and sound
operation, and requires the appropriate federal financial
supervisory agency to take into account an institution's
record of meeting the credit needs of its entire community,
including low- and moderate-income ("LMI") neighborhoods, in evaluating bank expansionary proposals.14
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of National City's subsidiary banks and Pioneer
Bank, data reported by National City under the Home
Mortgage Disclosure Act ("HMDA"), 15 other information
provided by National City, confidential supervisory information, and public comment received on the proposal. A
commenter opposed the proposal and alleged, based on
2004 HMDA data, that National City engaged in discriminatory treatment of minority individuals in its home mortgage lending operations.
A. C R A Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by

13. 12U.S.C. §2901 etseq.
14. 12U.S.C. §2903.
15. 12U.S.C. §2801 etseq.

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Federal Reserve Bulletin • 2006

the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, onsite evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisor.'6
National City's largest subsidiary bank, as measured by
total deposits, is its Cleveland subsidiary, National City
Bank ("National City Cleveland").17 The bank received an
"outstanding" rating by the OCC, as of February 22, 2000.
National City's remaining subsidiary banks all received
either "outstanding" or "satisfactory" ratings at their most
recent CRA evaluations.18 Pioneer Bank received a "satisfactory" rating at its most recent CRA performance evaluation by the Federal Deposit Insurance Corporation, as of
June 12, 2003. National City has indicated that its CRA and
consumer compliance programs would be implemented at
Pioneer Bank on consummation of the proposal.
B. HMDA Data, Subprime Lending, and Fair
Lending Record
The Board has carefully considered the lending record and
HMDA data of National City in light of public comment
about its record of lending to minorities. A commenter
alleged, based on 2004 HMDA data, that National City
disproportionately denied applications for HMDAreportable loans by African-American and Latino applicants
in certain Metropolitan Statistical Areas ("MSAs"). The
commenter also asserted that National City made highercost loans to African Americans and Latinos more frequently than to nonminorities.19 The Board reviewed HMDA
data reported by all of National City's subsidiary banks, and
National City's nonbank lending subsidiary, National City
Mortgage Services, Kalamazoo, Michigan, (collectively,
"National City Lenders"), in the MSAs identified by the
commenter and focused its analysis on the MSAs that
comprise the assessment areas of the National City Lenders
in Illinois, Indiana, Kentucky, Michigan, and Ohio.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
National City is excluding or imposing higher credit costs
on any racial or ethnic group on a prohibited basis. The
16. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
17. As of December 31, 2005, National City Cleveland accounted
for more than 42 percent of the total domestic deposits of National
City's six subsidiary banks.
18. The appendix lists the most recent CRA ratings of National
City's other subsidiary banks.
19. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CFR 203.4).

Board recognizes that HMDA data alone, even with the
recent addition of pricing information, provide only limited
information about the covered loans.20 HMDA data, therefore, have limitations that make them an inadequate basis,
absent other information, for concluding that an institution
has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by National City with fair lending
laws. In the fair lending reviews that were conducted in
conjunction with the most recent CRA performance evaluations of National City's subsidiary banks, examiners noted
no substantive violations of applicable fair lending laws.
The Board has also consulted with the OCC about the fair
lending compliance records of those institutions.
National City has represented that it has a comprehensive fair lending program consisting of lending policies,
annual training and testing of lending personnel, fair lending analyses, and oversight and monitoring. In addition,
National City represented that it performs fair lending
analysis using regression modeling and benchmarking and
monitors adherence to credit policy using monthly reporting and quality control reviews. National City also represented that its fair lending policy includes a second-review
program for its residential lending and that its corporate
underwriting department conducts a third review of denied
applications from minority applicants or for loans used to
finance properties in LMI areas. National City has indicated that its consumer compliance program will be implemented at Pioneer Bank after consummation of the
proposal.21
The Board also has considered the HMDA data in light
of other information, including the CRA performance
records of each of National City's subsidiary banks. These
established efforts and records demonstrate that National
City is active in helping to meet the credit needs of its
entire community.

20. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.
21. A commenter expressed concern about a press report that
National City had imposed a prepayment penalty on a customer who
used insurance proceeds to pay off a mortgage on her home, which was
damaged by Hurricane Katrina. The Board has referred this individual
complaint to National City and to the OCC for their review and has
considered National City's response.

Legal Developments C87

C. Conclusion on Convenience and Needs Factor
The Board has carefully considered all the facts of record,
including reports of examination of the CR A records of the
institutions involved, information provided by National
City, comments received on the proposal, and confidential
supervisory information. National City represented that the
proposal would provide customers of Forbes with access to
a broader array of financial products, including trust,
foreign exchange, and brokerage services. Based on a
review of the entire record, and for the reasons discussed
above, the Board concludes that considerations relating to
the convenience and needs factor, including the CRA
performance records of the relevant depository institutions,
are consistent with approval.

Board's approval is specifically conditioned on compliance
by National City with the conditions imposed in this order
and the commitments made to the Board in connection with
the application. For purposes of this action, the conditions
and commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decisions herein and, as such, may be enforced in proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order unless such period is extended for good cause by
the Board or the Federal Reserve Bank of Cleveland, acting
pursuant to delegated authority.
By order of the Board of Governors, effective March 23,
2006.

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act.22 The
22. A commenter requested that the Board hold a public meeting or
hearing on the proposal. Section 3 of the BHC Act does not require the
Board to hold a public hearing on an application unless the appropriate
supervisory authority for the bank to be acquired makes a timely
written recommendation of denial of the application. The Board has
not received such a recommendation from the appropriate supervisory
authority. Under its regulations, the Board also may, in its discretion,
hold a public meeting or hearing on an application to acquire a bank if
a meeting or hearing is necessary or appropriate to clarify factual
issues related to the application and to provide an opportunity for
testimony (12 CFR 225.16(e)). The Board has considered carefully the

Voting for this action: Chairman Bernanke and Governors Bies,
Olson, Kohn, Warsh, and Kroszner. Absent and not voting: Vice
Chairman Ferguson.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

commenter's request in light of all the facts of record. In the Board's
view, the commenter had ample opportunity to submit its views and, in
fact, submitted written comments that the Board has considered
carefully in acting on the proposal. The commenter's request fails to
demonstrate why the written comments do not present its views
adequately or why a meeting or hearing otherwise would be necessary
or appropriate. For these reasons, and based on all the facts of record,
the Board has determined that a public meeting or hearing is not
required or warranted in this case. Accordingly, the request for a public
meeting or hearing on the proposal is denied.

Appendix
CRA PERFORMANCE EVALUATIONS OF NATIONAL CITY'S BANKS
Bank

CRA Rating

Date

Supervisor

National City Bank of Indiana,
Indianapolis, Indiana
National City Bank of Kentucky,
Louisville, Kentucky
National City Bank of the Midwest,
Bannockburn, Illinois
National City Bank of Pennsylvania,
Pittsburgh, Pennsylvania
National City Bank of Southern Indiana,
New Albany, Indiana

Satisfactory

February 2000

OCC

Satisfactory

February 2000

OCC

Outstanding

February 2000

OCC

Outstanding

February 2000

OCC

Satisfactory

February 2000

OCC

C88 Federal Reserve Bulletin • 2006

New York Community Bancorp, Inc.
Westbury, New York
New York Community Newco, Inc.
Westbury, New York
Order Approving the Acquisition of a Bank
New York Community Bancorp, Inc. ("NYCB"), a bank
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), and New York Community
Newco, Inc. ("Newco"), have requested the Board's approval pursuant to section 3 of the BHC Act1 to acquire
Atlantic Bank of New York ("Atlantic Bank"), New York,
New York.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in
the Federal Register (71 Federal Register 119 (2006)).
The time for filing comments has expired, and the Board
has considered the applications and all comments received in light of the factors set forth in section 3 of the
BHC Act.3
NYCB, with total consolidated assets of approximately
$26.3 billion, operates two depository institutions, New York
Community Bank ("NY Community Bank"), Flushing,
New York, with branches in New Jersey and New York, and
NY Commercial Bank, 4 with branches in New York.5
NYCB is the eighth largest depository organization in New
York, controlling deposits of approximately $11.7 billion,
which represent approximately 2 percent of the total
amount of deposits of insured depository institutions in the
state ("state deposits").
Atlantic Bank, with total consolidated assets of approxi1. 12U.S.C. §1842.
2. NYCB would acquire Atlantic Bank from National Bank of
Greece, S.A., Athens, Greece. NYCB has also requested the Board's
approval pursuant to section 3 for its subsidiary bank, New York
Commercial Bank ("NY Commercial Bank"), Islandia, New York,
to purchase all the assets and assume all the liabilities of Atlantic
Bank in exchange for the subsidiary bank's stock, which Atlantic
Bank would immediately dividend back to NYCB. The proposed
purchase-and-assumption transaction also is subject to the approval
of the Federal Deposit Insurance Corporation ("FDIC") and the
state of New York.
3. Twenty commenters expressed concerns on various aspects of the
proposal.
4. On December 31, 2005, NYCB acquired Long Island Financial
Corporation ("LIFC") and thereby acquired its subsidiary bank, Long
Island Commercial Bank ("LICB"), both of Islandia, New York. See
New York Community Bancorp, Inc., 92 Federal Reserve Bulletin C33
(2006) ("NYCB/LIFC Order"). In connection with the acquisition,
NYCB (1) changed the name of New York Commercial Bank, a
limited-purpose bank wholly owned by NY Community Bank, to New
York Municipal Bank ("NYMB"), Flushing, New York, and (2) renamed LICB as NY Commercial Bank. NYCB has represented that it
intends to dissolve NYMB.
5. Asset data are as of December 31, 2005, and statewide deposit
and ranking data are as of June 30, 2005. Data reflect subsequent
merger activity through March 6, 2006. In this context, insured
depository institutions include commercial banks, savings banks, and
savings associations.

mately $2.7 billion, has branches only in New York.
Atlantic Bank is the 30th largest insured depository institution in New York, controlling deposits of approximately
$1.8 billion.
On consummation of the proposal, NYCB would have
consolidated assets of approximately $29 billion. NYCB
would remain the eighth largest depository organization in
New York, controlling deposits of approximately $13.5 billion, which represent approximately 2 percent of state
deposits.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposed bank acquisition that would result in
a monopoly or would be in furtherance of any attempt to
monopolize the business of banking in any relevant banking market. In addition, section 3 prohibits the Board from
approving a proposed bank acquisition that would substantially lessen competition in any relevant banking market,
unless the anticompetitive effects of the proposal are
clearly outweighed in the public interest by its probable
effect in meeting the convenience and needs of the community to be served.6
NYCB and Atlantic Bank compete directly in the Metro
New York banking market ("New York banking market"). 7
The Board has carefully reviewed the competitive effects
of the proposal in this banking market in light of all the
facts of record. In particular, the Board has considered the
number of competitors that would remain in the banking
market, the relative shares of total deposits in depository
institutions in the market ("market deposits") controlled
by NYCB and Atlantic Bank,8 the concentration level of
market deposits and the increase in this level as measured
by the Herfindahl-Hirschman Index ("HHI") under the
Department of Justice Merger Guidelines ("DOJ Guidelines"), 9 and other characteristics of the market.
6. 12 U.S.C. § 1842(c)(l).
7. The New York banking market includes Bronx, Dutchess, Kings,
Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland,
Suffolk, Sullivan, Ulster, and Westchester counties in New York;
Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris,
Ocean, Passaic, Somerset, Sussex, Union, and Warren counties and
portions of Mercer County in New Jersey; Pike County in Pennsylvania; and Fairfield County and portions of Litchfield and New Haven
counties in Connecticut.
8. Deposit and market share data are as of June 30, 2005 (adjusted to
reflect mergers and acquisitions through March 6, 2006), and are based
on calculations in which the deposits of thrift institutions are included
at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has
included thrift deposits in the market share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve
Bulletin 52 (1991).
9. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is less than 1000, moderately concentrated if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI is more than 1800. The Department of Justice ("DOJ") has informed the Board that a bank merger

Legal Developments

Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in the New York
banking market. After consummation of the proposal, the
market would remain moderately concentrated, as measured by the HHI, and numerous competitors would
remain.10
The DOJ also has conducted a detailed review of the
anticipated competitive effects of the proposal and has
advised the Board that consummation of the proposal
would not likely have a significantly adverse effect on
competition in any relevant banking market. In addition,
the appropriate banking agencies have been afforded an
opportunity to comment and have not objected to the
proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the New York banking market or in any
other relevant banking market. Accordingly, based on all
the facts of record, the Board has determined that competitive considerations are consistent with approval.

C89

of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial
condition of the combined organization at consummation,
including its capital position, asset quality, and earnings
prospects, and the impact of the proposed funding of the
transaction.
The Board carefully considered the proposals under the
financial factors. NYCB, Newco, their subsidiary depository institutions, and Atlantic Bank are well capitalized
and would remain so on consummation of the proposal.
The proposed transaction is structured as a cash purchase.
Based on its review of the record in this case, the Board
believes that NYCB, Newco, and Atlantic Bank have
sufficient financial resources to effect the proposal.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of NYCB and its subsidiary depository institutions
and Atlantic Bank, including assessments of their management, risk-management systems, and operations. In addition, the Board has considered its supervisory experiences
and those of the other relevant banking supervisory agencies with the organizations and their records of compliance
with applicable banking law. Moreover, the Board has
consulted with the FDIC, the primary federal banking
supervisor of NYCB's subsidiary banks and Atlantic
Bank.11 The Board also has considered NYCB's plans for
implementing the proposal, including the proposed management after consummation. NYCB, Newco, and their
subsidiary depository institutions and Atlantic Bank are
considered to be well managed.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
11. Commenters alleged that NY Community Bank holds mortgages on a significant number of deteriorated multifamily buildings
in New York City and that it has failed to conduct adequate due
diligence on the buildings before extending credit to the owners of
these buildings. A commenter alleged that many of NY Community
Bank's multifamily borrowers are overleveraged, thereby preventing
them from maintaining their buildings in good condition. NYCB
stated that it conducts inspections before closing mortgage transactions on multifamily residential properties and periodically reinspects the properties during the term of the loan. In its reinspection
program for residential buildings, NYCB represented that its inspectors notify borrowers in writing of any deferred maintenance found
during routine reinspections and that, when appropriate, follow-up
actions are taken by NYCB. NYCB further represented that NY
Community Bank has never incurred a loss on a multifamily loan in
more than 25 years. The Board consulted with the FDIC, the
primary federal regulator of NY Community Bank and NY Commercial Bank, about the adequacy of NY Community Bank's management of its multifamily loan programs. The Board notes that the
supervisory guidance proposed by the banking agencies for institutions with concentrations in commercial real estate lending, including lending activities involving multifamily residential buildings,
urges lenders to remain informed about any credit deterioration or
value impairment affecting the collateral. See proposed Concentrations in Commercial Real Estate Lending, Sound Risk Management
Practices, www.federalreserve.gov/boarddocs/press/bcreg/2006/
20060110/.

C90

Federal Reserve Bulletin • 2006

resources and future prospects of the organizations involved in the proposal are consistent with approval, as are
the other supervisory factors under the BHC Act.
CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of a proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").12 The CRA requires the federal financial
supervisory agencies to encourage financial institutions to
help meet the credit needs of the local communities in
which they operate, consistent with their safe and sound
operation, and requires the appropriate federal financial
supervisory agency to take into account an institution's
record of meeting the credit needs of its entire community,
including low- and moderate-income ("LMI") neighborhoods, in evaluating depository institutions' expansionary
proposals.13
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of NYCB's subsidiary depository institutions and Atlantic Bank, data reported by NYCB under the
Home Mortgage Disclosure Act ("HMDA"),14 other information provided by NYCB, confidential supervisory information, and public comments received on the proposal.15
A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the insured depository institutions of both
organizations. An institution's most recent CRA performance evaluation is a particularly important consideration
12. 12U.S.C. §2901 etseq.
13. 12U.S.C. §2903.
14. 12U.S.C. §2801 etseq.
15. As discussed above in footnote 11, a number of commenters
alleged that some of NY Community Bank's multifamily loan borrowers do not maintain their properties appropriately, and some commenters identified specific landlords and buildings with alleged housing
code violations. Most commenters asserted that NY Community
Bank's alleged failure to ensure good property maintenance by its
mortgagor/residential landlords is a disservice to the tenants and the
communities where the bank lends. They argued that the Board should
deny the proposal or approve it only on the condition that NYCB
address property maintenance concerns. NYCB represented that NY
Community Bank contributes positively to the communities it serves
by providing approximately $14 billion in loans to building and
apartment owners in the New York City area in the last five years. As
noted above, NYCB has provided information about its preclosinginspection and postclosing-reinspection programs for its multifamily
loans, and the Board has consulted with the FDIC about the adequacy
of NY Community Bank's management of its multifamily lending
program. The Board has also considered the weight given to those
loans by the FDIC in its evaluation of the CRA performance record of
NY Community Bank. In addition, the Board has previously considered these allegations in the context of NYCB's application to acquire
LIFC. See NYCB/LIFC Order.

in the applications process because it represents a detailed,
on-site evaluation of the institution's overall record of
performance under the CRA by its appropriate federal
supervisor.16
NY Community Bank received a "satisfactory" rating at
its most recent CRA performance evaluation by the FDIC,
as of March 25, 2002.17 NY Commercial Bank, formerly
LICB, received a "satisfactory" rating at its most recent
CRA performance evaluation by the FDIC, as of March 15,
2004. Atlantic Bank received a "satisfactory" rating at its
most recent CRA performance evaluation by the FDIC, as
of March 7, 2005. NYCB has represented that it intends to
implement Atlantic Bank's CRA program at NY Commercial Bank.
B. HMDA Data and Fair Lending Record
The Board has carefully considered NY Community Bank's
lending record and HMDA data in light of public comment
about the bank's record of lending to minorities. Two
commenters expressed concern, based on 2004 HMDA
data in certain Metropolitan Statistical Areas ("MSAs") in
New York and New Jersey, that NY Community Bank has
(1) denied or excluded the home mortgage and refinance
applications of African-American and Latino borrowers
more frequently than those of nonminority applicants and
(2) lagged its competitors in conventional home mortgage
lending in minority geographies.18 In its consideration of
NYCB's proposal to acquire LIFC, the Board reviewed
essentially these same allegations in light of the HMDA
data for 2004 reported by NY Community Bank in its
assessment area.19
16. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620, 36,640 (2001).
17. A commenter alleged that NY Community Bank maintains few
full-service branches in low-income, minority neighborhoods. FDIC
examiners reported in the most recent CRA performance evaluation of
NY Community Bank that the bank had a limited branch presence in
the low- income census tracts of its assessment area. Examiners noted,
however, that new branch openings and relocations during the evaluation period improved the accessibility of its delivery systems, particularly in LMI geographies and to LMI individuals. Overall, NY
Community Bank's performance was rated "low satisfactory" for the
service test. Atlantic Bank and LICB each received a "high satisfactory" rating for the service test at its most recent CRA performance
evaluation, and examiners noted that the retail banking services of
each bank were reasonably available to all segments of its assessment
area, including LMI geographies.
18. One commenter complained that NYCB provided the 2004
HMDA data of NY Community Bank on paper rather than electronically in the CD-ROM format requested by the commenter. The Board
notes that neither HMDA nor the CRA require financial institutions to
provide HMDA data in an electronic format on written request. See
12 CFR 203.5. Another commenter expressed concern that NY
Community Bank did not consistently report the ethnicity, race, and
gender of denied applicants. The Board has consulted with the FDIC
about the bank's compliance with HMDA reporting requirements. The
Board and the other banking agencies make HMDA data available to
the public through the Federal Financial Institutions Examination
Council, which provides HMDA data through its web site and in
CD-ROM format on request.
19. The Board reviewed 2004 HMDA data reported by NY Community Bank in portions of the following metropolitan divisions that

Legal Developments

Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they are insufficient by
themselves to support a conclusion on whether or not NY
Community Bank is excluding any racial or ethnic group or
imposing higher credit costs on those groups on a prohibited basis. The Board recognizes that HMDA data alone,
even with the recent addition of pricing information, provide only limited information about the covered loans.20
HMDA data, therefore, have limitations that make them an
inadequate basis, absent other information, for concluding
that an institution has engaged in illegal lending
discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by NY Community Bank with fair
lending laws. In the fair lending review conducted in
conjunction with the bank's CRA evaluation in 2002,
examiners noted no violations of the substantive provisions
of applicable fair lending laws. In addition, the Board has
consulted with the FDIC, the primary federal supervisor of
NY Community Bank, about the bank's record of compliance with fair lending laws and other consumer protection
laws.
As noted in the NYCB/LIFC Order, the record also
indicates that NYCB has taken steps designed to ensure
compliance with fair lending laws and other consumer
protection laws. NYCB represented that it has implemented
fair lending policies, procedures, and training programs at
NY Community Bank and that all lending department
personnel at the bank are required to take annual compliance
training. NYCB further represented that the bank's fair
lending policies and procedures are designed to help ensure
that loan officers price loans uniformly, illegally discriminatory loan products are avoided, and current and proposed
lending activities and customer complaints are reviewed.
NY Community Bank conducts independent audits of its
lending activities, and audit results are provided to its Audit

comprise the bank's assessment area: (1) Nassau-Suffolk, New York;
(2) New York-White Plains-Wayne, New York-New Jersey ("New
York City MD"); and (3) Newark-Union, New Jersey-Pennsylvania.
See NYCB/LIFC Order.
20. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

C91

Committee of the Board of Directors, Compliance Department, and Legal Department. The bank also analyzes HMDA
Loan Application Register data to help assess its lending
activities for compliance with the CRA.
NYCB has represented that NY Commercial Bank maintains similar policies and programs designed to ensure
compliance with applicable fair lending and consumer
protection laws. NYCB intends to combine the compliance
programs of NY Commercial Bank and NY Community
Bank into one comprehensive compliance program managed through NYCB.
The Board also has considered the HMDA data in light
of other information, including NY Community Bank's
CRA lending programs and the overall performance records
of NY Community Bank and Atlantic Bank under the
CRA.21 These established efforts demonstrate that the
institutions are active in helping to meet the credit needs of
their entire communities.
C. Conclusion on Convenience and Needs
and CRA Performance Records
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by NYCB,
comments received on the proposal, and confidential supervisory information.22 The Board notes that the proposal
would expand the availability and array of banking products and services to Atlantic Bank's customers, including
access to expanded branch and ATM networks. Based on a
review of the entire record, and for the reasons discussed
above, the Board concludes that considerations relating to
the convenience and needs factor and the CRA performance records of the relevant depository institutions are
consistent with approval.

21. A commenter also expressed concern, based on 2004 HMDA
data, that the percentage of NY Community Bank's total number of
conventional home mortgage loans and refinancings in LMI census
tracts in the New York City MD lagged the percentages for the
aggregate of lenders ("aggregate lenders"). The Board notes that the
percentage of NY Community Bank's total HMDA-reportable loans in
LMI census tracts and to LMI individuals in the New York City MD
exceeded the percentages for the aggregate lenders.
22. A commenter expressed concern about planned branch closures
at NY Community Bank. NYCB has represented that it does not plan
to close any branches in connection with this proposal or the planned
merger of Atlantic Bank into NY Commercial Bank. The Board notes
that federal law will require NYCB or its subsidiary banks to provide
notice before the date of any proposed branch closing, including a
30-day advance notice to the public and a 90-day advance notice to the
FDIC and customers of the branch (12 U.S.C. § 1831r-l, as implemented by Joint Policy Statement Regarding Branch Closings, 64 Federal Register, 34,844 (1999)). The bank also must provide reasons and
other supporting data for the proposed closure, consistent with the
institution's written policy for branch closings. The Board notes that
the FDIC, as the appropriate federal supervisor of NY Community
Bank and NY Commercial Bank, will continue to review each
depository institution's branch closing record during CRA performance evaluations.

C92

Federal Reserve Bulletin • 2006

CONCLUSION
Based on the foregoing and in light of all the facts of
record, the Board has determined that the applications
should be, and hereby are, approved. In reaching this
conclusion, the Board has considered all the facts of record
in light of the factors it is required to consider under the
BHC Act and other applicable statutes.23 The Board's
approval is specifically conditioned on compliance by
NYCB with the conditions in this order and all the commitments made to the Board in connection with the proposal.
For purposes of this action, the commitments and conditions are deemed to be conditions imposed in writing by the
Board in connection with its findings and decision and, as
such, may be enforced in proceedings under applicable law.
The proposed transaction shall not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or by the Federal Reserve Bank of New York,
acting pursuant to delegated authority.
By order of the Board of Governors, effective March 30,
2006.
Voting for this action: Chairman Bernanke and Governors Olson,
Kohn, Warsh, and Kroszner. Absent and not voting: Vice Chairman
Ferguson and Governor Bies.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Sky Financial Group, Inc.
Bowling Green, Ohio
Order Approving Acquisition of Shares
of a Bank Holding Company
Sky Financial Group, Inc. ("Sky"), a financial holding
company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval
23. Several commenters requested that the Board hold a public
hearing or meeting on the proposal. Section 3 of the BHC Act does not
require the Board to hold a public hearing or meeting on an application
unless the appropriate supervisory authority for any of the banks to be
acquired makes a timely written recommendation of denial of the
application. The Board has not received such a recommendation from
any supervisory authority. Under its rules, the Board also may, in its
discretion, hold a public meeting or hearing on an application to
acquire a bank if necessary or appropriate to clarify factual issues
related to the application and to provide an opportunity for testimony
(12 CFR225.16(e)). The Board has considered carefully the commenters' requests in light of all the facts of record. In the Board's view, the
commenters had ample opportunity to submit comments on the
proposal and, in fact, submitted written comments that the Board has
considered carefully in acting on the proposal. The commenters'
requests fail to demonstrate why written comments do not present their
views adequately or why a hearing or meeting otherwise would be
necessary or appropriate. For these reasons, and based on all the facts
of record, the Board has determined that a public hearing or meeting is
not required or warranted in this case. Accordingly, the requests for a
public hearing or meeting on the proposal are denied.

under section 3 of the BHC Act1 to acquire through its
subsidiary, Sky Holdings, Inc., Wilmington, Delaware, up
to 9.99 percent of the voting shares of LNB Bancorp, Inc.
("LNB") and thereby indirectly acquire an interest in
LNB's subsidiary bank, The Lorain National Bank ("Lorain National"), both of Lorain, Ohio.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 76,850 (2005)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in section 3 of the BHC Act.
Sky, with total consolidated assets of approximately
$15.7 billion, controls Sky Bank, 3 Salineville, Ohio, with
branches in Ohio, Indiana, Michigan, Pennsylvania, and
West Virginia. Sky is the eighth largest depository organization in Ohio, controlling deposits of approximately
$8.1 billion, which represent 4 percent of the total amount
of deposits of insured depository institutions in the state
("state deposits"). 4 LNB, with consolidated assets of approximately $801.1 million, is the 25th largest depository
organization in Ohio, controlling approximately $642.8
million in deposits. If Sky were deemed to control LNB on
consummation of the proposal, Sky would become the
seventh largest depository organization in Ohio, controlling
approximately $8.7 billion in deposits, which represent
4.3 percent of state deposits.
The Board received a comment from LNB objecting to
the proposal on the grounds that the investment could
create uncertainty about the future independence of LNB or
result in Sky controlling and potentially harming LNB. 5
LNB asserted that the commitments that Sky has provided
to prevent the exercise of a controlling influence over LNB
are insufficient, and LNB requested that the Board impose
additional commitments to ensure that Sky cannot exercise
control over LNB. The Board has considered these comments carefully in light of the factors that the Board must
consider under section 3 of the BHC Act.
The Board previously has stated that the acquisition of
less than a controlling interest in a bank or bank holding
company is not a normal acquisition for a bank holding
1. 12U.S.C. §1842.
2. Sky currently owns 4.73 percent of LNB's voting shares and
proposes to acquire the additional voting shares through open-market
purchases.
3. Sky also controls Sky Trust, National Association ("Sky Trust"),
Pepper Pike, Ohio, a limited-purpose bank that provides only trust
services.
4. Asset data are as of December 31, 2005. State deposit and ranking
data are as of June 30, 2005, and reflect merger and acquisition activity
as of February 6, 2006. In this context, insured depository institutions
include commercial banks, savings banks, and savings associations.
5. LNB also expressed concern that investor uncertainty over the
future of LNB due to Sky's investment could result in the sale of LNB
shares by long-term investors and undermine LNB's business plan.
The Board is limited under the BHC Act to consideration of the factors
specified in the act. See Western Bancshares, Inc. v. Board of
Governors of the Federal Reserve System, 480 F.2d 749 (10th Cir.
1973). The potential effect of a proposal on the behavior of other
investors in the market is not among the factors the Board is charged
with considering under the BHC Act or other applicable statutes.

Legal Developments

company.6 The requirement in section 3(a)(3) of the BHC
Act, however, that the Board's approval be obtained before
a bank holding company acquires more than 5 percent of
the voting shares of a bank suggests that Congress contemplated the acquisition by bank holding companies of
between 5 percent and 25 percent of the voting shares of
banks.7 On this basis, the Board previously has approved
the acquisition by a bank holding company of less than a
controlling interest in a bank or bank holding company.8
Sky has stated that the acquisition is intended as a
passive investment and that it does not propose to control
or exercise a controlling influence over LNB. Sky has
agreed to abide by certain commitments on which the
Board previously has relied in determining that an investing bank holding company would not be able to exercise
a controlling influence over another bank holding company or bank for purposes of the BHC Act.9 For example,
Sky has committed not to exercise or attempt to exercise
a controlling influence over the management or policies
of LNB or any of its subsidiaries; not to seek or accept
representation on the board of directors of LNB or any of
its subsidiaries; and not to have any director, officer,
employee, or agent interlocks with LNB or any of its
subsidiaries. Sky also has committed not to attempt to
influence the dividend policies, loan decisions, or operations of LNB or any of its subsidiaries. The Board
concludes that additional commitments are unnecessary to
ensure that Sky does not acquire control of, or have the
ability to exercise a controlling influence over, LNB
through the proposed acquisition of voting shares. Moreover, the BHC Act prohibits Sky from acquiring shares of
LNB in excess of the amount considered in this proposal
or attempting to exercise a controlling influence over
LNB without the Board's prior approval.
The Board has adequate supervisory authority to monitor Sky's compliance with its commitments and can take
enforcement action against Sky if it violates any of the
commitments.10 The Board also has authority to initiate a
control proceeding11 against Sky if facts presented later
indicate that Sky or any of its subsidiaries or affiliates, in
fact, controls LNB for purposes of the BHC Act. Based
6. See, e.g., Penn Bancshares, Inc., 92 Federal Reserve Bulletin C37
(2006) ("Penn Bancshares"); C-B-G, Inc., 91 Federal Reserve Bulletin 421 (2005) ("C-B-G"); S&T Bancorp Inc., 91 Federal Reserve
Bulletin 74 (2005) ("S&T Bancorp"); Brookline Bancorp, MHC,
86 Federal Reserve Bulletin 52 (2000) ("Brookline"); North Fork
Bancorporation, Inc., 81 Federal Reserve Bulletin 734 (1995); First
Piedmont Corp., 59 Federal Reserve Bulletin 456, 457 (1973).
7. See 12 U.S.C. § 1842(a)(3).
8. See, e.g., Penn Bancshares (acquisition of up to 24.89 percent of
the voting shares of a bank holding company); C-B-G (acquisition of
up to 24.35 percent of the voting shares of a bank holding company);
S&T Bancorp (acquisition of up to 24.9 percent of the voting shares of
a bank holding company); Brookline (acquisition of up to 9.9 percent
of the voting shares of a bank holding company).
9. See, e.g., Penn Bancshares, C-B-G; S&T Bancorp; Emigrant
Bancorp, Inc., 82 Federal Reserve Bulletin 555 (1996); First Community Bancshares, Inc., 11 Federal Reserve Bulletin 50 (1991). Sky's
commitments are set forth in the appendix.
10. See 12 U.S.C. § 1818(b)(l).
11. See 12 U.S.C. § 1841(a)(2)(C).

C93

on these considerations and all the other facts of record,
the Board has concluded that Sky would not acquire
control of, or have the ability to exercise a controlling
influence over, LNB through the proposed acquisition of
voting shares.12

FINANCIAL AND MANAGERIAL
CONSIDERATIONS AND FUTURE PROSPECTS
Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects of the companies and depository institutions involved in the proposal and certain other supervisory
factors. The Board has considered these factors in light of
all the facts of record, including confidential reports of
examination, other supervisory information from the primary federal supervisors of the organizations involved in
the proposal, publicly reported and other financial information, information provided by the applicant, and public
comments received.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. When applicable, the Board also
evaluates the financial condition of the combined organization on consummation, including its capital position, asset
quality, earnings prospects, and the impact of the proposed
funding of the transaction.13
The Board has carefully considered the financial factors.
Sky and Sky Bank are well capitalized and would remain
12. LNB asserted that Sky did not fully investigate or disclose
whether it and any associated persons had already acquired more than
5 percent of the shares of LNB without prior approval of the Board, or
whether Sky and any such persons constitute a "group acting in
concert" under the Change in Bank Control Act ("CIBC Act")
(12 U.S.C. section 1817(j)) and are required to file a CIBC Act Notice.
Sky surveyed its management officials with major policymaking
functions about their ownership of LNB shares and reported those
findings as part of this proposal. In addition, Sky has represented and
committed to the Board that it does not and will not have any agreement,
understanding, or arrangement with any person regarding voting or
transferring LNB shares and that it has not provided financing for the
purchase of LNB shares. The Board has reviewed information provided
by Sky and LNB and confidential supervisory information about the
current ownership of both organizations, including information about
the ownership of LNB's shares by individuals associated with Sky, in
light of the Board's rules and precedent for aggregating shares held by
a company and persons associated with the company. The record does
not support a finding that Sky has acted together with any of its
directors, officers, or employees or together with any other person to
acquire voting shares of LNB in violation of the BHC Act or the CIBC
Act.
13. As previously noted, the current proposal provides that Sky
would acquire only up to 9.99 percent of LNB's voting shares and
would not be considered to control LNB. Under these circumstances,
the financial statements of Sky and LNB would not be consolidated.

C94

Federal Reserve Bulletin • 2006

so on consummation of the proposal. Based on its review of
the record, the Board believes that Sky has sufficient
financial resources to effect the proposal. The proposed
transaction would be funded from Sky's general corporate
resources.
The Board also has considered the managerial resources
of the organizations involved. The Board has reviewed the
examination records of Sky, Sky Bank, Sky Trust, LNB, and
Lorain National, including assessments of their management, risk-management systems, and operations. In addition, the Board has considered its supervisory experiences
and those of the other relevant banking supervisory agencies
with the organizations and their records of compliance with
applicable banking laws. Sky, Sky Bank, Sky Trust, LNB,
and Lorain National are considered to be well managed.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved in the proposal are consistent with approval, as are
the supervisory factors under the BHC Act.

Board has considered the number of competitors that would
remain in the market, the relative shares of total deposits of
depository institutions in the market ("market deposits")
controlled by Sky and LNB, 18 the concentration level of
market deposits and the increase in this level as measured by
the Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 19
and other characteristics of the market. If Sky and LNB were
viewed as a combined organization, consummation of the
proposal would be consistent with Board precedent and the
DOJ Guidelines in the Cleveland market.20 Although the
market would remain highly concentrated, the increase in
market concentration as measured by the HHI would be
small, and numerous competitors would remain in the
market.21
The Department of Justice also has reviewed the proposal and has advised the Board that it does not believe
that the acquisition would likely have a significantly
adverse effect on competition in any relevant banking
market. The appropriate banking agencies have been afforded an opportunity to comment and have not objected
to the proposal.
villages adjoining these townships in Summit County; and part of the
city of Vermilion in Erie County, all in Ohio.
18. Deposit and market share data are as of June 30, 2005, reflect
mergers and acquisitions through January 4, 2006, and are based on
calculations in which the deposits of thrift institutions are included at
50 percent. The Board previously has indicated that thrift institutions
have become, or have the potential to become, significant competitors
of commercial banks. See, e.g., Midwest Financial Group, 75 Federal
Reserve Bulletin 386, 387 (1989); National City Corporation, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board regularly has
included thrift deposits in the calculation of market share on a
50 percent weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal
Reserve Bulletin 52, 55 (1991).
19. Under the DOJ Guidelines, 49 Federal Register 26,823 (June
29, 1984), a market is considered unconcentrated if the post-merger
HHI is under 1000, moderately concentrated if the post- merger HHI is
between 1000 and 1800, and highly concentrated if the post-merger
HHI exceeds 1800. The Department of Justice ("DOJ") has informed
the Board that a bank merger or acquisition generally will not be
challenged (in the absence of other factors indicating anticompetitive
effects) unless the post-merger HHI is at least 1800 and the merger
increases the HHI more than 200 points. The DOJ has stated that the
higher-than-normal HHI thresholds for screening bank mergers and
acquisitions for anticompetitive effects implicitly recognize the competitive effects of limited-purpose and other nondepository financial
institutions.
20. LNB expressed concern that Sky is expanding its operations in
the Cleveland market by acquiring banks instead of internal growth.
Bank holding companies may expand in any geographic market by
acquisition, as long as the acquisition is consistent with the competitive requirements and other factors of the BHC Act.
21. Sky is the 11th largest depository organization in the Cleveland market, controlling $1.1 billion in deposits, which represent
1.9 percent of the total deposits in depository institutions in the
market ("market deposits"). LNB is the 13th largest depository
organization in the market, controlling $642.8 million in deposits. If
considered a combined banking organization on consummation of
the proposal, Sky and LNB would be the ninth largest depository
organization in the Cleveland market, controlling approximately
$1.8 billion in deposits, which would represent 2.9 percent of market
deposits. The HHI for the Cleveland market would increase 4 points,
to 1883. Forty-three depository institutions would remain in the
market.

Legal Developments

Accordingly, in light of all the facts of record, the Board
concludes that consummation of the proposal would not
have a significantly adverse effect on competition or on the
concentration of resources in any relevant banking market
and that competitive considerations are consistent with
approval of the proposal.

CONCLUSION
Based on the foregoing and all other facts of record, the
Board has determined that the application should be, and
hereby is, approved. In reaching this conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act and other
applicable statutes.24 The Board's approval is specifically
conditioned on compliance by Sky with the conditions
22. 12 U.S.C. §2901 et seq.
23. 12U.S.C. §2903.
24. LNB expressed concern that public disclosure of Sky's proposal
was inadequate because it did not accompany disclosure in public
reports filed with the Securities and Exchange Commission ("SEC").
All public notices required by the Board's regulations in connection
with the application have been made, including publishing notice of
the transaction in local newspapers in the communities where Sky and
LNB are headquartered (12 CFR 262.3(b)(l)(ii)(E)). Furthermore, Sky
has represented that it was not legally required to disclose the
proposed transaction in filings with the SEC, because the proposed
investment would not qualify as a material investment for Sky and
therefore would not trigger an SEC filing requirement. The SEC has

C95

imposed in this order and all the commitments made to the
Board in connection with the application, including the
commitments discussed in this order, and receipt of all
required regulatory approvals.25 The conditions and commitments are deemed to be conditions imposed in writing
by the Board in connection with its findings and decision
and, as such, may be enforced in proceedings under
applicable law.
The acquisition of LNB's voting shares shall not be
consummated before the 15th calendar day after the effective date of this order, or later than three months after the
effective date of this order, unless such period is extended
for good cause by the Board or by the Federal Reserve
Bank of Cleveland, acting pursuant to delegated authority.
By order of the Board of Governors, effective February 24, 2006.
Voting for this action: Chairman Bernanke, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Appendix
In connection with its application to acquire up to 9.99
percent of LNB, Sky commits that it will not, directly or
indirectly, without the Federal Reserve System's prior
approval:
(1) exercise or attempt to exercise a controlling influence
over the management or policies of LNB or any of its
subsidiaries;
(2) seek or accept representation on the board of directors
of LNB or any of its subsidiaries;
(3) serve, have, or seek to have any representative serve
as an officer, agent, or employee of LNB or any of its
subsidiaries;
(4) take any action that would cause LNB or any of its
subsidiaries to become a subsidiary of Sky or any of
its subsidiaries;
(5) acquire or retain shares that would cause the combined interests of Sky and its subsidiaries, and their
respective officers, directors, and affiliates, to equal or
exceed 25 percent of the outstanding voting shares of
LNB or any of its subsidiaries;
(6) propose a director or slate of directors in opposition to
a nominee or slate of nominees proposed by the
management or board of directors of LNB or any of
its subsidiaries;
(7) solicit or participate in soliciting proxies with respect
to any matter presented to the shareholders of LNB or
any of its subsidiaries;
jurisdiction to determine whether Sky has violated any federal securities laws or violations.
25. LNB questioned when the passivity commitments that Sky
provided would become effective. The commitments are effective
when Sky owns, controls, or holds the power to vote at least 5 percent
of LNB's voting shares.

C96

Federal Reserve Bulletin • 2006

(8) attempt to influence the dividend policies or practices
of LNB or any of its subsidiaries;
(9) attempt to influence the investment, loan, or credit
decisions or policies; pricing of services; personnel
decisions; operations activities (including the location
of any offices or branches or their hours of operation,
etc.); or any similar activities or decisions of LNB or
any of its subsidiaries;
(10) dispose or threaten to dispose of shares of LNB or any
of its subsidiaries in any manner as a condition of
specific action or nonaction by LNB or any of its
subsidiaries; or
(11) enter into any other banking or nonbanking transactions with LNB or any of its subsidiaries, except that
Sky may establish and maintain deposit accounts with
depository institution subsidiaries of LNB, provided
that the aggregate balance of all such accounts does
not exceed $500,000 and that the accounts are maintained on substantially the same terms as those prevailing for comparable accounts of persons unaffiliated with LNB or any of its subsidiaries.

Synovus Financial Corp.
Columbus, Georgia
Order Approving the Merger
of Bank Holding Companies
Synovus Financial Corp. ("Synovus"), a financial holding
company within the meaning of the Bank Holding Company
Act ("BHC Act"), has requested the Board's approval under
section 3 of the BHC Act1 to acquire Riverside Bancshares,
Inc. ("Riverside") and its subsidiary bank, Riverside Bank
("Riverside Bank"), both of Marietta, Georgia.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 54,747 (2005)). The time for filing
comments has expired, and the Board has considered the
application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
Synovus, with total consolidated assets of approximately
$27.1 billion, is the 46th largest depository organization in
the United States.2 Synovus operates 39 subsidiary insured
depository institutions in Alabama, Florida, Georgia, South
Carolina, and Tennessee, as well as a nondepository trust
company in Georgia. Synovus is the fourth largest depository organization in Georgia, and its subsidiary depository
institutions control approximately $10.6 billion in combined deposits, which represent 7.1 percent of the total
amount of deposits of insured depository institutions in the
state ("state deposits"). 3
1. 12U.S.C. §1842.
2. National asset and ranking data are as of September 30, 2005.
3. State deposit and ranking data are as of June 30, 2005, and reflect
merger activity through November 25, 2005. In this context, insured
depository institutions include commercial banks, savings banks, and
savings associations.

Riverside, with total consolidated assets of approximately $668.6 million, operates one depository institution,
Riverside Bank, which has branches only in Georgia.
Riverside Bank is the 30th largest insured depository
institution in Georgia, controlling deposits of approximately $459.5 million.
On consummation of the proposal, Synovus would have
consolidated assets of $27.8 billion. In Georgia, Synovus
would remain the fourth largest depository organization,
controlling deposits of $11.1 billion, which represent
7.4 percent of state deposits.4

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or would be
in furtherance of an attempt to monopolize the business of
banking in any relevant banking market. The BHC Act also
prohibits the Board from approving a bank acquisition that
would substantially lessen competition in any relevant
banking market unless the anticompetitive effects of the
proposal are clearly outweighed in the public interest by the
probable effect of the proposal in meeting the convenience
and needs of the community to be served.5
Seven Synovus banks 6 compete directly with Riverside
Bank in the Atlanta Area Banking Market ("Atlanta
Market"). 7 The Board has carefully reviewed the competitive effects of the proposal in this banking market in light
of all the facts of record, including the number of competitors that would remain in the market, the relative
shares of total deposits in depository institutions in the
market ("market deposits") controlled by Synovus's Atlanta Area banks and Riverside Bank,8 the concentration
level of market deposits and the increase in this level as
measured by the Herfindahl-Hirschman Index ("HHI")
4. Synovus represented that it plans to file an application with the
Federal Deposit Insurance Corporation ("FDIC") for approval under
the Bank Merger Act (12 U.S.C. § 1828(c)) to merge Riverside Bank
into Bank of North Georgia ("BNG"), Alpharetta, Georgia, a Synovus
subsidiary bank, after consummation of the proposal.
5. 12 U.S.C. § 1842(c)(l).
6. These institutions include: Athens First Bank & Trust Company,
Athens; Bank of Coweta, Newnan; BNG; Citizens & Merchants State
Bank, Douglasville; First Nation Bank, Covington; The National Bank
of Walton County, Monroe; and Peachtree National Bank, Peachtree
City, all of Georgia (collectively, "Synovus's Atlanta Area banks").
7. The Atlanta Market is defined as: Bartow, Cherokee, Clayton,
Cobb, Coweta, DeKalb, Douglas, Fayette, Forsyth, Fulton, Gwinnett,
Henry, Newton, Paulding, Rockdale, and Walton counties; Hall County
excluding the town of Clermont; the towns of Auburn and Winder in
Barrow County; and the town of Luthersville in Meriwether County,
all in Georgia.
8. Deposit and market share data are as of June 30, 2005, and are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has
included thrift deposits in the market share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal Reserve
Bulletin 52 (1991).

Legal Developments

under the Department of Justice Merger Guidelines ("DOJ
Guidelines"), 9 and other characteristics of the markets.
Consummation of the proposal would be consistent with
Board precedent and within the relevant thresholds in the
DOJ Guidelines in the Atlanta Market. After consummation, the Atlanta Market would remain unconcentrated, as
measured by the HHI. In addition, the increase in concentration would be small, and numerous competitors would
remain in this market.10
The Department of Justice also has reviewed the anticipated competitive effects of the proposal and advised the
Board that consummation of the proposal likely would not
have a significant adverse effect on competition in any
relevant banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment
and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Atlanta Market or in any other
relevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with
approval.

9. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI exceeds 1800. The Department of
Justice ("DOJ") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI more than 200
points. The DOJ has stated that the higher-than-normal HHI thresholds
for screening bank mergers and acquisitions for anticompetitive effects
implicitly recognize the competitive effects of limited-purpose and
other nondepository financial entities.
10. On consummation of the proposal, the HHI would increase
4 points, to 1601 in the Atlanta Market. Synovus operates the fourth
largest depository organization in the market, controlling deposits of
$3.4 billion, which represent 3.9 percent of market deposits. Riverside
operates the 19th largest depository institution in the market, controlling deposits of approximately $459.5 million, which represent less
than 1 percent of market deposits. After the proposed acquisition,
Synovus would continue to operate the fourth largest depository
organization in the market, controlling deposits of approximately
$3.9 billion, which represent 4.4 percent of market deposits. One
hundred eight depository institutions would remain in the banking
market.

C97

mation, information provided by Synovus, and public
comment on the proposal.11
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial
condition of the combined organization at consummation,
including its capital position, asset quality, and earnings
prospects, and the impact of the proposed funding of the
transaction.
Synovus and all its subsidiary depository institutions are
well capitalized and would remain so on consummation of
the proposal. Based on its review of the record, the Board
finds that Synovus has sufficient financial resources to
effect the proposal. The proposed transaction is structured
as a share exchange.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination

11. A commenter criticized the relationship between Synovus's lead
subsidiary bank, Columbus Bank and Trust ("CB&T"), Columbus,
Georgia, and an unaffiliated lender, CompuCredit Corporation ("CompuCredit"), Atlanta, Georgia. The Board previously reviewed CB&T's
relationship with CompuCredit in its decision approving Synovus's
acquisition of a de novo institution. See Synovus Financial Corp.,
91 Federal Reserve Bulletin 273, 275 n.15 (2005) ("Board's February
2005 Decision"). The Board noted that CompuCredit is an unaffiliated
organization that engages in subprime credit card and payday lending
activities. CB&T and CompuCredit offer a co-branded credit card
program ("credit card affinity program") under a contractual arrangement. Under the contract, CB&T reviews, modifies, and approves the
credit terms and underwriting criteria proposed by CompuCredit for
the credit card affinity program and issues the credit cards, and
CompuCredit buys the credit card receivables and provides certain
marketing and other services for the issued cards. Synovus represented
that, since the Board's February 2005 Decision, CB&T has engaged in
the following additional activities to ensure regulatory compliance of
its CompuCredit relationship with applicable fair lending and consumer protection laws: (1) reviewing the application of the credit and
underwriting criteria to the credit card accounts and the scoring used to
adjust credit lines under the credit card affinity program; (2) reviewing
the process for approving statement inserts and strengthening controls
over the process; (3) participating in CompuCredit's internal compliance audits; (4) developing a system to allow the CB&T compliance
officer to engage in remote, anonymous monitoring of customer
service and collection calls handled by CompuCredit and its service
providers; and (5) requiring CB&T's compliance officer to perform
monthly reviews of the CompuCredit relationship and to provide
reports to CB&T's Credit Risk Committee concerning those reviews.
In addition, Synovus represented that it is not involved in any other
business conducted by CompuCredit and does not own or control
CompuCredit within the meaning of the BHC Act. The Board also
consulted with the FDIC and reviewed supervisory and other confidential information about the credit card affinity program and CB&T's
relationship with CompuCredit.

C98 Federal Reserve Bulletin • 2006

records of Synovus, Riverside, and their subsidiary depository institutions, including assessments of their management, risk-management systems, and operations. In addition, the Board has considered its supervisory experiences
and those of the other relevant banking supervisory agencies with the organizations and their records of compliance with applicable banking law. Synovus, Riverside,
and their subsidiary depository institutions are considered
to be well managed. The Board also has considered
Synovus's plans for implementing the proposal, including
the proposed management after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved in the proposal are consistent with approval, as are
the other supervisory factors under the BHC Act.
CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").12 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank expansionary proposals.13
The Board has considered carefully all the facts of
record, including reports of examination of the CRA
performance records of the subsidiary depository institutions of Synovus and Riverside, data reported by Synovus
under the Home Mortgage Disclosure Act ("HMDA"),14
other information provided by Synovus, confidential supervisory information, and public comment received on
the proposal. Based primarily on 2004 HMDA data, a
commenter alleged that Synovus, through its primary
mortgage lender, Synovus Mortgage Company ("SMC"),
Birmingham, Alabama,15 engaged in discriminatory treatment of minority individuals in its home mortgage lending operations.
A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the CRA perfor12. 12 U.S.C. §2901 et seq.; 12 U.S.C. § 1842(c)(2).
13. 12 U.S.C. §2903.
14. 12 U.S.C. §2801 etseq.
15. SMC is a subsidiary of First Commercial Bank, also of
Birmingham.

mance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, onsite evaluation of the institution's overall record of performance under the CRA by its appropriate federal
supervisor.16
All Synovus subsidiary depository institutions that have
been examined under the CRA received "outstanding" or
"satisfactory" ratings at their most recent performance
evaluations. CB&T, Synovus's lead bank, received an
overall "satisfactory" rating at its most recent CRA performance evaluation by the FDIC, as of April 18, 2005.
Riverside Bank also received a "satisfactory" rating at its
most recent CRA performance evaluation by the FDIC, as
of November 17, 2003. Synovus has represented that it will
institute BNG's CRA policies, procedures, and programs at
Riverside Bank after its merger with and into BNG. As
noted above, Synovus plans to merge Riverside Bank with
BNG, and Synovus will operate Riverside Bank's branches
as branches of BNG after consummation of the proposed
transaction.17
B. HMDA and Fair Lending Record
The Board has carefully considered the lending record and
HMDA data of SMC in light of public comment received
on the proposal. The commenter alleged, based primarily
on 2004 HMDA data, that SMC denied the home mortgage
and refinance applications of African Americans more
frequently than those of nonminority applicants in several
Metropolitan Statistical Areas ("MSAs") in Alabama and
Georgia where it operates. The commenter also alleged that
SMC made higher-cost loans more frequently to AfricanAmerican borrowers than to nonminority borrowers on a
company-wide basis, on a statewide basis in Alabama, and
in MSAs in Alabama, Florida, and Georgia.18 The Board
has analyzed the 2004 HMDA data reported by SMC on a
company-wide basis and for its lending in Alabama,
Florida, and Georgia.19
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
SMC is excluding or imposing higher costs on any racial or
16. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
17. BNG received a "satisfactory" rating at its most recent CRA
performance evaluation by the FDIC, as of June 10, 2004.
18. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 percentage points
for first-lien mortgages and 5 percentage points for second-lien
mortgages (12 CFR 203.4).
19. Specifically, the Board examined the HMDA data for SMC
company-wide, in Alabama statewide, and in certain MSAs in Alabama, Florida, and Georgia that constitute significant markets for
SMC.

Legal Developments

ethnic group on a prohibited basis. The Board recognizes
that HMDA data alone, even with the recent addition of
pricing information, provide only limited information about
the covered loans.20 HMDA data, therefore, have limitations that make them an inadequate basis, absent other
information, for concluding that an institution has engaged
in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all lending institutions are obligated to ensure that their
lending practices are based on criteria that ensure not only
safe and sound lending but also equal access to credit by
creditworthy applicants regardless of their race. Because of
the limitations of HMDA data, the Board has considered
these data carefully and taken into account other information, including examination reports that provide on-site
evaluations of compliance by Synovus and Riverside with
fair lending laws. The Board also consulted with the FDIC,
the primary regulator of First Commercial Bank, SMC, and
CB&T, and considered examination records of compliance
with fair lending laws of these and other Synovus subsidiary depository institutions. Examiners noted no evidence of
illegal credit discrimination by First Commercial Bank,
SMC, CB&T, or any other Synovus subsidiary depository
institution.
The record also indicates that Synovus and SMC have
taken steps to ensure compliance with fair lending and
other consumer protection laws. Synovus represented that
it has programs in place to monitor and manage compliance
that include periodic reviews of all consumer lending
programs, systemic tracking of applicable laws and regulations, ongoing risk analyses, the development of programs
to train personnel involved in consumer lending, and
oversight of the drafting and use of consumer lending
forms for its depository and lending institutions to verify
compliance with applicable consumer and fair lending
laws. Synovus also represented that it is enhancing its
system for corporate-wide reporting of compliance information. Synovus represented that its internal audit function
examines SMC annually, and that SMC has engaged an
independent third-party firm to review monthly a random
sample of all closed loans from the application stage to the
loan closing for any evidence of illegal discrimination.
The Board also has considered the HMDA data in light
of other information, including Synovus's CRA lending
programs and the overall CRA performance records of the
subsidiary depository and lending institutions of Synovus
and Riverside. These established efforts and records demonstrate that the institutions are active in helping to meet
the credit needs of their entire communities.
20. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

C99

C. Conclusion on CRA Performance Records
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by the applicant, comments received on the proposal, and confidential
supervisory information. Synovus represented that the proposal would provide customers in Riverside Bank's assessment area with access to a broader array of financial
products and services. Based on a review of the entire
record, and for the reasons discussed above, the Board
concludes that considerations relating to the convenience
and needs factor and the CRA performance records of the
relevant depository institutions are consistent with approval.

CONCLUSION
Based on the foregoing and all facts of record, the Board
has determined that the application should be, and hereby
is, approved.21 In reaching its conclusion, the Board has
considered all the facts of record in light of the factors
that it is required to consider under the BHC Act and
other applicable statutes.22 The Board's approval is specifically conditioned on compliance by Synovus with the
conditions imposed in this order and the commitments
made to the Board in connection with the application. For
purposes of this action, the conditions and commitments
are deemed to be conditions imposed in writing by the
Board in connection with its findings and decision herein

21. A commenter requested that the Board hold a public hearing or
meeting on the proposal. Section 3 of the BHC Act does not require the
Board to hold a public hearing on an application unless the appropriate
supervisory authority for any of the banks to be acquired makes a
timely written recommendation of denial of the application. The Board
has not received such a recommendation from any supervisory authority. Under its rules, the Board also may, in its discretion, hold a public
meeting or hearing on an application to acquire a bank if a meeting or
hearing is necessary or appropriate to clarify factual issues related to
the application and to provide an opportunity for testimony (12 CFR
225.16(e)). The Board has considered carefully the commenter's
requests in light of all the facts of record. In the Board's view, the
commenter had ample opportunity to submit comments on the proposal and, in fact, submitted written comments that the Board has
considered carefully in acting on the proposal. The commenter's
request fails to demonstrate why its written comments do not present
its views adequately or why a meeting or hearing otherwise would be
necessary or appropriate. For these reasons, and based on all the facts
of record, the Board has determined that a public hearing or meeting is
not required or warranted in this case. Accordingly, the request for a
public hearing or meeting on the proposal is denied.
22. The commenter also requested that the Board extend the
comment period on the proposal. As previously noted, the Board has
accumulated a significant record in this case, including reports of
examination, confidential supervisory information, public reports and
information, and public comment. As noted, the commenter had ample
opportunity to submit its views and has provided multiple written
submissions that the Board has considered carefully in acting on the
proposal. Moreover, the BHC Act and Regulation Y require the Board
to act on proposals submitted under those provisions within certain
time periods. Based on a review of all the facts of record, the Board
has concluded that the record in this case is sufficient to warrant action
at this time and that neither an extension of the comment period nor
further delay in considering the proposal is necessary.

C100

Federal Reserve Bulletin • 2006

and, as such, may be enforced in proceedings under
applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Federal Reserve Bank of Atlanta, acting
pursuant to delegated authority.
By order of the Board of Governors, effective January 19, 2006.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Bies, Olson, and Kohn.

also operates a branch in New York City and an agency in
Houston.
Hudson United Bancorp, with total consolidated assets
of approximately $9.1 billion, is the 74th largest depository
organization in the United States, controlling deposits of
$6.6 billion, which represent less than 1 percent of total
deposits of insured depository institutions in the United
States. On consummation of this proposal, TD would
become the 34th largest depository organization in the
United States, controlling deposits of approximately
$35.8 billion, which represent less than 1 percent of total
deposits of insured depository institutions in the United
States.

ROBERT DEV. FRIERSON

Deputy Secretary of the Board

The Toronto-Dominion Bank
Toronto, Canada
TD Banknorth Inc.
Portland, Maine
Order Approving the Acquisition
of a Bank Holding Company
The Toronto-Dominion Bank ("TD") and its subsidiary,
TD Banknorth Inc. ("TD Banknorth") (collectively "Applicants"), both financial holding companies within the meaning of the Bank Holding Company Act ("BHC Act"), have
requested the Board's approval under section 3 of the BHC
Act1 to acquire Hudson United Bancorp and its wholly
owned subsidiary, Hudson United Bank, both of Mahwah,
New Jersey.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 56,166 and 57,876 (2005)). The time
for filing comments has expired, and the Board has considered the proposal and all comments received in light of the
factors set forth in section 3 of the BHC Act.
TD, with total consolidated assets of approximately
$310 billion, is the second largest banking organization in
Canada.3 TD is the 39th largest depository organization in
the United States, controlling $29.2 billion in deposits
through its U.S. subsidiary insured depository institutions,
TD Waterhouse Bank, National Association ("TDW
Bank"), Jersey City, New Jersey, and TD Banknorth,
National Association ("TDB Bank"), Portland, Maine. TD
1. 12U.S.C. §1842.
2. Applicants propose to acquire the nonbanking subsidiaries of
Hudson United Bank in accordance with section 4(k) of the BHC Act
and the post-transaction notice procedures in section 225.87 of
Regulation Y (12 U.S.C. § 1843(k); 12 CFR 225.87).
3. Canadian asset data are as of October 31, 2005, and rankings are
as of July 31, 2005. Both are based on the exchange rate then in effect.
Domestic assets are as of September 30, 2005, and deposit data and
rankings are as of June 30, 2005.

INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home state
of the bank holding company if certain conditions are met.4
For purposes of the BHC Act, the home state of TD is New
York, and Hudson United Bank is located in Connecticut,
Pennsylvania, New Jersey, and New York.5
Based on a review of the facts of record, including a
review of relevant state statutes, the Board finds that all
conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met in this case.6 In light of all
the facts of record, the Board is permitted to approve the
proposal under section 3(d) of the BHC Act.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
would be in furtherance of any attempt to monopolize the
business of banking in any relevant banking market. The
BHC Act also prohibits the Board from approving a
4. Under section 3(d), a bank holding company's home state is the
state in which the total deposits of all subsidiary banks of the company
were the largest on July 1, 1966, or the date on which the company
became a bank holding company, whichever is later (12 U.S.C.
§ 1841(o)(4)(C)). New York is the home state of TD for purposes of
the International Banking Act and Regulation K (12 U.S.C. §3103;
12 CFR 211.22).
5. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch (12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(l)(A) and
6. 12 U.S.C. §1842(d)(l)(A)-(B), 1842(d)(2)(A)-(B). TD is adequately capitalized and adequately managed, as defined by applicable
law. Hudson United Bank has been in existence and operated for the
minimum period of time required by applicable state law. See Conn.
Gen. Stats. Ann. Ch. 666 § 36a^411 (five years). Pennsylvania and
New Jersey do not have minimum age requirements applicable to the
proposal. On consummation of the proposal, TD would control less
than 10 percent of the total amount of deposits of insured depository
institutions ("total deposits") in the United States. TD would also
control less than 30 percent of total deposits in Connecticut and New
Jersey, consistent with state law. See Conn. Gen. Stats. Ann. Ch. 666
§36a-411 and N.J. Stat. Ann. 17.9A-^13(2003). All other requirements under section 3(d) of the BHC Act also would be met on
consummation of the proposal.

Legal Developments

proposed bank acquisition that would substantially lessen
competition in any relevant banking market unless the
anticompetitive effects of the proposal clearly are outweighed in the public interest by its probable effect in
meeting the convenience and needs of the community to be
served.7
TD and Hudson United Bancorp compete directly in
the Metro New York and the Hartford and New Haven,
Connecticut banking markets.8 The Board has reviewed
carefully the competitive effects of the proposal in these
banking markets in light of all the facts of record. In
particular, the Board has considered the number of competitors that would remain in the markets, the relative
shares of total deposits in depository institutions in the
markets ("market deposits") controlled by TD and Hudson United Bancorp, 9 the concentration level of market
deposits and the increase in this level as measured by the
Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 10
and other characteristics of the markets.
Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in these banking
markets.11 After consummation, the Metro New York and
New Haven banking markets would remain moderately
concentrated, and the Hartford banking market would
remain highly concentrated, as measured by the HHI. In
each market, the increase in concentration would be small,
and numerous competitors would remain.
The Department of Justice has reviewed the anticipated
competitive effects of the proposal and has advised the
Board that consummation of the proposal would not have a
significantly adverse effect on competition in any of these
markets or in any other relevant banking market. In addition, the appropriate banking agencies have been afforded
an opportunity to comment and have not objected to the
proposal.
7. 12U.S.C. §1842(c)(l).
8. These banking markets are described in Appendix A.
9. Deposit and market share data are based on Summary of Deposits
reports filed as of June 30, 2005, and on calculations in which the
deposits of thrift institutions are included at 50 percent. The Board
previously has indicated that thrift institutions have become, or have
the potential to become, significant competitors of commercial banks.
See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386
(1989); National City Corporation, 70 Federal Reserve Bulletin 743
(1984). Thus, the Board regularly has included thrift deposits in the
market share calculation on a 50 percent weighted basis. See, e.g.,
First Hawaiian, Inc., 11 Federal Reserve Bulletin 52 (1991).
10. Under the DOJ Guidelines, 49 Federal Register 26,823 (1984),
a market is considered unconcentrated if the post-merger HHI is under
1000, moderately concentrated if the post-merger HHI is between
1000 and 1800, and highly concentrated if the post-merger HHI
exceeds 1800. The Department of Justice has informed the Board that
a bank merger or acquisition generally will not be challenged (in the
absence of other factors indicating anticompetitive effects) unless the
post-merger HHI is at least 1800 and the merger increases the HHI
more than 200 points. The Department of Justice has stated that the
higher-than-normal HHI thresholds for screening bank mergers for
anticompetitive effects implicitly recognize the competitive effects of
limited-purpose lenders and other nondepository financial institutions.
11. Market data for these banking markets are provided in Appendix B.

C101

Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of banking resources in any relevant banking market
and that competitive considerations are consistent with
approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and banks involved in the proposal and
certain other supervisory factors. The Board has carefully
considered these factors in light of all the facts of record,
including confidential supervisory and examination information from the various U.S. banking supervisors of the
institutions involved, publicly reported and other financial
information, information provided by the Applicants, and
public comment on the proposal.12 The Board also has
consulted with the Office of the Superintendent of Financial
Institutions ("OSFI"), which is responsible for the supervision and regulation of Canadian banks.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of subsidiary depository institutions and significant
nonbanking operations. In this evaluation, the Board considers a variety of areas, including capital adequacy, asset
quality, and earnings performance. In assessing financial
factors, the Board consistently has considered capital adequacy to be especially important. The Board also evaluates the financial condition of the combined organization
on consummation, including its capital position, asset
quality, and earnings prospects, and the impact of the
proposed funding of the transaction.
The capital levels of TD would continue to exceed the
minimum levels that would be required under the Basel
Capital Accord, and its capital levels are considered
equivalent to the capital levels that would be required of
a U.S. banking organization. In addition, the U.S. subsidiary depository institutions of Applicants and Hudson
United Bancorp are well capitalized and would remain so
on consummation of the proposal. Based on its review of
the record, the Board finds that Applicants have sufficient
financial resources to effect the proposal. The proposed
transaction is structured as a combination share exchange
and cash purchase. TD will use existing resources to
enable TD Banknorth to fund the cash portion of the
12. A commenter expressed concerns about press reports of a
lawsuit recently filed against TD by options traders at the Chicago
Board of Options Exchange. The lawsuit involves allegations about
the price paid by TD in its earlier acquisition of the traders' limited
liability company. This matter is not within the Board's jurisdiction to
adjudicate or within the limited statutory factors that the Board is
authorized to consider when reviewing an application under the BHC
Act. See, e.g., Western Bancshares, Inc. v. Board of Governors, 480
F.2d749 (10th Cir. 1973).

C102

Federal Reserve Bulletin • 2006

consideration to be received by Hudson United Bancorp
shareholders.
The Board also has evaluated the managerial resources
of the organizations involved, including the proposed combined organization. The Board has reviewed the examination records of TD's U.S. operations, Hudson United
Bancorp, and Hudson United Bank, including assessments
of their management, risk-management systems, and operations. In addition, the Board has considered its supervisory
experience and that of the other relevant banking supervisory agencies with the organizations and their records of
compliance with applicable banking laws. 13 TD, Hudson
United Bancorp, and their U.S. subsidiary banks are considered well managed. The Board has also considered
Applicants' plans for implementing the proposal, including
the proposed management after consummation.
Based on these and all other facts of record, the Board
concludes that the financial and managerial resources and
future prospects of the organizations involved in the proposal are consistent with approval.14
Section 3 of the BHC Act also provides that the Board
may not approve an application involving a foreign bank
unless the bank is subject to comprehensive supervision or
regulation on a consolidated basis by the appropriate
authorities in the bank's home country.15 As noted, the
home country supervisor of TD is the OSFI.
13. A commenter also expressed concern about TDB Bank's
relationships with unaffiliated retail check cashers, pawn shops, and
other nontraditional providers of financial services. As a general
matter, the activities of the consumer finance businesses identified by
the commenter are permissible, and the businesses are licensed by the
states where they operate. Applicants have indicated that they regularly review TDB Bank's relationships with these types of businesses
and have opted to continue relationships with those firms willing to
meet certain conditions. These conditions include providing representations and warranties in each loan agreement with TDB Bank that the
firm will comply with all applicable laws, including all applicable fair
lending and consumer protections laws, and will follow the bank's
requirements to ensure compliance with anti-money-laundering laws
and regulations. Applicants have represented that neither TDB Bank
nor any of its affiliates play any role in the lending practices, credit
review, or other business practices of these firms, nor does the bank or
any of its affiliates purchase any loans originated by these firms.
14. A commenter reiterated its concerns about allegations in press
reports that TD assisted Enron in preparing false financial statements.
The commenter had submitted substantially similar comments in
connection with TD's proposal to acquire Banknorth Group, Inc.,
Portland, Maine. As noted in the Board's order approving that
proposal, the Securities and Exchange Commission ("SEC") has the
authority to investigate and adjudicate whether any violations of
federal securities laws have occurred. The Toronto-Dominion Bank, 91
Federal Reserve Bulletin 277, fn. 15, (2005) ("ID Banknorth Order").
The Board has consulted with the SEC about this matter.
15. 12 U.S.C. § 1842(c)(3)(B). Under Regulation Y, the Board uses
the standards enumerated in Regulation K to determine whether a
foreign bank is subject to consolidated home country supervision. See
12 CFR 225.13(a)(4). Regulation K provides that a foreign bank will
be considered subject to comprehensive supervision or regulation on a
consolidated basis if the Board determines that the bank is supervised
or regulated in such a manner that its home country supervisor
receives sufficient information on the worldwide operations of the
bank, including its relationship to any affiliates, to assess the bank's
overall financial condition and its compliance with laws and regulations. See 12 CFR211.24(c)(l).

In approving applications under the BHC Act and the
International Banking Act ("IBA"), 16 the Board previously
has determined that TD was subject to home country
supervision on a consolidated basis by the OSFI.17 Based
on this finding and all the facts of record, the Board has
concluded that TD continues to be subject to comprehensive supervision on a consolidated basis by its home
country supervisor.
In addition, section 3 of the BHC Act requires the Board
to determine that an applicant has provided adequate
assurances that it will make available to the Board such
information on its operations and activities and those of its
affiliates that the Board deems appropriate to determine and
enforce compliance with the BHC Act.18 The Board has
reviewed the restrictions on disclosure in relevant jurisdictions in which TD operates and has communicated with
relevant government authorities concerning access to information. In addition, TD previously has committed to make
available to the Board such information on the operations
of it and its affiliates that the Board deems necessary to
determine and enforce compliance with the BHC Act, the
IBA, and other applicable federal laws. TD also previously
has committed to cooperate with the Board to obtain any
waivers or exemptions that may be necessary to enable TD
and its affiliates to make such information available to the
Board. In light of these commitments, the Board concludes
that TD has provided adequate assurances of access to any
appropriate information the Board may request. Based on
these and all other facts of record, the Board has concluded
that the supervisory factors it is required to consider are
consistent with approval.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on this proposal, the Board also must consider
the effects of the proposal on the convenience and needs
of the communities to be served and take into account the
records of the relevant insured depository institutions
under the Community Reinvestment Act ("CRA"). 19 The
CRA requires the federal financial supervisory agencies to
encourage financial institutions to help meet the credit
needs of local communities in which they operate, consistent with their safe and sound operation, and requires the
appropriate federal financial supervisory agency to take
into account an institution's record of meeting the credit
needs of its entire community, including low- and
moderate-income ("LMI") neighborhoods, in evaluating
bank expansionary proposals.20
The Board has considered carefully all the facts of
record, including reports of examination on the CRA
performance records of TD's subsidiary insured depository
institutions and Hudson United Bank, data reported by
Applicants under the Home Mortgage Disclosure Act
16. 12 U.S.C. §3101 et seq.
17. TD Banknorth Order.
18. See 12 U.S.C. § 1842(c)(3)(A).
19. 12 U.S.C. § 1842(c)(2); 12 U.S.C. §2901 et seq.
20. 12 U.S.C. §2903.

Legal Developments

("HMDA"),21 other information provided by Applicants,
and public comments on the proposal. Two commenters
opposed the proposal and expressed concern about the
community reinvestment or home mortgage lending records
of TDB Bank and Hudson United Bank. One commenter
expressed concern about possible branch closures after
consummation of the proposal. Commenters also alleged,
based on 2004 HMDA data, that TDB Bank and Hudson
United Bank provided a low level of home mortgage
lending to LMI borrowers or in LMI communities and that
Applicants engaged in disparate treatment of minority
individuals in home mortgage lending.
A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, onsite evaluation of the institution's overall record of performance under the CRA by its appropriate federal
supervisor.22
TDW Bank received a "satisfactory" rating at its most
recent CRA performance evaluation by the Office of the
Comptroller of the Currency ("OCC"), as of March 10,
2003.23 The OCC has not yet evaluated TDB Bank's CRA
performance. After acquiring Banknorth Group, Inc. in
2005, TD formed TDB Bank by renaming Banknorth,
National Association ("Banknorth Bank"), Portland, Maine.
Banknorth Bank was formed in 2002 by the consolidation of
seven subsidiary banks of Banknorth Group, Inc.24 All those
subsidiary banks had "satisfactory" or "outstanding" CRA
performance ratings when they were consolidated.25
Hudson United Bank received an overall rating of
"satisfactory" at its most recent CRA performance evaluation by the Federal Deposit Insurance Corporation
("FDIC"), as of February 10, 2005.26

21. 12U.S.C. §2801 et seq.
22. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
23. TD dissolved its other U.S. subsidiary insured depository
institution, TD Bank USA, FSB, Jersey City, New Jersey, as of
December 31, 2004.
24. Peoples Heritage Bank, N.A. ("Peoples Heritage"), also of
Portland, was the surviving institution of that consolidation and was
renamed Banknorth Bank.
25. Peoples Heritage received an "outstanding" CRA performance
rating by the OCC as of July 2001. First Massachusetts Bank, N.A.
("First Massachusetts"), Worcester, Massachusetts, Banknorth Group,
Inc.'s largest subsidiary bank before consolidation, received a "satisfactory" CRA performance rating by the OCC as of April 2001. The
CRA performance ratings of the remaining consolidated subsidiary
banks are listed in Appendix A of the TD Banknorth Order.
26. The evaluation period for the lending test was January 1, 2002,
through December 31, 2004. The evaluation period for the investment
and service tests was April 25, 2002, through February 25, 2005.

C103

On consummation of the proposal, Applicants propose to
merge Hudson United Bank into TDB Bank.27 Applicants
stated that TDB Bank will implement its CRA organization
and programs in Hudson United Bank's markets immediately after consummation of the acquisition.28 In addition,
Applicants represented that TDB Bank will hire a community development manager, who will be responsible for
coordinating the CRA plan in Hudson United Bank's markets, and will appoint a CRA committee composed of senior
managers from both banks to oversee the development and
implementation of this plan.
B. CRA Performance of TDW Bank and TDB Bank
The Board considered the March 2003 CRA evaluation of
TDW Bank and the July 2001 evaluation of TDB Bank in
the TD Banknorth Order. Based on a review of the record
in this case, the Board hereby reaffirms and adopts the facts
and findings detailed in the TD Banknorth Order concerning TDW Bank's and TDB Bank's CRA performance
records. Applicants provided the Board additional information about both banks' CRA performance since the latest
evaluations. The Board also consulted with the OCC about
the CRA performance of TDW Bank and TDB Bank and
with the FDIC about the CRA performance of Hudson
United Bank since the banks' most recent CRA evaluations.
1. CRA Performance of TDW Bank
As noted, TDW Bank received a "satisfactory" CRA
performance rating in its March 2003 evaluation.29 Examiners reported that the bank originated or purchased almost
$16.8 million in community development loans during the
evaluation period and had met its annual goals for community development lending each year. These loans funded
affordable housing for LMI individuals in the bank's
assessment areas in New Jersey and New York.
The bank's community development investments totaled
almost $77 million at the end of the evaluation period and
included investments in community development financial
institutions, low-income housing tax credit projects, and
affordable housing bonds issued by the New Jersey and
27. Applicants have filed an application under the Bank Merger Act
(12 U.S.C. § 1828(c)) with the OCC to merge Hudson United Bank
into TDB Bank, with TDB Bank as the surviving entity.
28. One commenter expressed concern that TDB Bank had not
provided a detailed plan for how it will meet the needs of the
communities served by Hudson United Bank after consummation of
the proposal. The OCC will evaluate TDB Bank's CRA performance
after consummation in future CRA evaluations of the bank.
29. TDW Bank has elected to be evaluated for CRA performance
under a strategic plan. Under this alternative, a bank submits a plan,
subject to the OCC's approval, specifying measurable goals for
meeting the lending, investment, and service needs of the bank's
assessment area, and the OCC evaluates the bank on its success in
achieving the goals in the approved plan. See 12 CFR 25.27. The
evaluation period for the March 2003 evaluation was January 1, 2000,
through December 31, 2002, and reviewed the bank's CRA performance under strategic plans approved by the OCC in March 1998 (for
2000) and November 2000 (for 2001 and 2002). In February 2004, the
OCC approved the bank's strategic plan for 2004 through 2006.

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Federal Reserve Bulletin • 2006

New York housing authorities. Examiners reported that the
bank met its goals for community development investments
in 2000 and 2002 and substantially met its goal in 2001.
Examiners also reported that TDW Bank made $1.04
million in qualified community development grants during
the evaluation period and met its annual goals for grants in
all three years. In addition, the bank met its annual goals for
membership in community development organizations,
including organizations involved in providing affordable
LMI housing and supporting community development
corporations.

As noted, TDB Bank is the successor to Banknorth Bank,
which was formed in 2002 through the consolidation of the
subsidiary banks of Banknorth Group, Inc. The OCC began
a CRA evaluation of TDB Bank during the fourth quarter of
2004, but the results are not yet available. The Board has
consulted with the OCC, however, about the preliminary
results of this exam. The OCC also has not evaluated TDB
Bank's predecessor, Banknorth Bank. Banknorth Bank's
principal predecessor banks included Peoples Heritage and
First Massachusetts, which, as noted, received "outstanding" and "satisfactory" ratings, respectively, at their most
recent CRA evaluations by the OCC in 2001.
Peoples Heritage. Peoples Heritage received a rating
of "outstanding" under the lending test in its July 2001
CRA performance evaluation.30 Examiners stated that the
bank's overall distribution of home mortgage loans to
LMI geographies and borrowers was good during the
evaluation period. They also noted that Peoples Heritage
participated in mortgage programs sponsored by the state
of Maine that offered flexible underwriting and documentation standards, below-market interest rates, and lowdown-payment requirements.
Examiners reported that Peoples Heritage's record of
making small loans to businesses in LMI census tracts
was excellent.31 The bank also made more than $16
million in community development loans during the evaluation period, including $11 million in loans to help create
more than 160 units of housing for LMI individuals and
families.
Peoples Heritage received ratings of "high satisfactory"
and "outstanding" on the investment and service tests,
respectively, in the July 2001 evaluation. During the evaluation period, Peoples Heritage made 80 qualified investments totaling $3.6 million, a level that examiners described as good. Examiners noted that the percentage of the
bank's branches in LMI census tracts generally equaled or
exceeded the percentage of the population living in LMI

census tracts in the bank's assessment areas. They also
reported that Peoples Heritage provided an excellent level
of community development services.
First Massachusetts. First Massachusetts received a
rating of "high satisfactory" under the lending test in its
April 2001 CRA performance evaluation.32 Examiners
stated that the bank's distribution of home mortgage loans
to LMI geographies and borrowers was adequate or better
in each of the bank's assessment areas. They also noted that
the bank participated in a number of state and federal
affordable housing programs with flexible underwriting
criteria and other features designed to promote home
ownership among LMI individuals.
Examiners reported that First Massachusetts's record of
making small loans to businesses in LMI census tracts was
adequate or better in each of the bank's assessment areas.
The bank also made more than $23 million in community
development loans during the evaluation period, including
loans to the Massachusetts Housing Partnership Fund,
which promotes affordable housing and neighborhood development throughout the state.
First Massachusetts received ratings of "low satisfactory" and "high satisfactory" on the investment and
service tests, respectively, in the April 2001 evaluation.
During the evaluation period, the bank made approximately $11.3 million in qualified investments, a level that
examiners described as adequate. Examiners characterized
First Massachusetts's distribution of branches as good or
excellent in its assessment areas and stated that the bank
provided an adequate level of community development
services.
Recent CRA Activities of TDB Bank. During 2004, TDB
Bank originated or purchased more than 14,000 HMDAreportable loans totaling approximately $1.7 billion throughout its combined assessment areas in Connecticut, Maine,
Massachusetts, New Hampshire, New York, and Vermont.
In each of those states, TDB Bank made higher percentages
of its HMDA-reportable loans to LMI borrowers than the
percentages for lenders in the aggregate ("aggregate lenders") in 2004. 33
To assist first-time and LMI homebuyers, TDB Bank
also offers loans insured by the Federal Housing Authority
and loans guaranteed by the Department of Veterans Affairs
and participates in state housing finance agency programs
that offer below-market interest rates and lower-downpayment requirements. Applicants represented that the bank
originated more than 2,900 loans totaling more than $275
million through these programs between January 2002 and
June 2005.
From January 1, 2004, to December 31, 2004, TDB
Bank's percentages of small loans to businesses in LMI and

30. The evaluation period for the lending test was July 1, 1998,
through December 31, 2000. The evaluation period for the service and
investment tests was September 1, 1998, through July 9, 2001.
31. In this context, "small loans to businesses" refers to loans with
original amounts of $1 million or less that are either secured by
nonfarm or residential real estate or are classified as commercial and
industrial loans.

32. The evaluation period was July 1, 1997, through December 31,
2000, except for community development lending, investments, and
services, which were evaluated from August 1, 1997, through April 20,
2001.
33. The lending data of the aggregate lenders represent the cumulative lending for all financial institutions that reported HMDA data in a
given market.

2. CRA Performance of TDB Bank

Legal Developments

predominantly minority census tracts were higher than or
comparable to the percentages for the aggregate lenders in
its combined assessment areas. 34 In all its assessment areas
across six states, the bank continues to participate in Small
Business Administration ("SBA") and state programs focused on lending to small businesses unable to secure
conventional financing. Applicants represented that TDB
Bank was ranked the largest SBA lender in Maine and
Vermont, the second largest SBA lender in New Hampshire, the third largest SBA lender in Massachusetts, and
the fifth largest SBA lender in both New York and Connecticut for the twelve-month period ending September
2004. From January 1, 2003, through December 31, 2004,
TDB Bank made more than 24,128 small loans to businesses totaling $3.1 billion.
Applicants also represented that TDB Bank made 211
community development loans totaling more than $307 million from January 2002 through June 2005. Applicants
stated that this community development lending included
loan commitments of $7 million to finance the construction
of 108 units of affordable housing in Massachusetts and
two $3.6 million loans to a nonprofit affordable housing
organization to create and preserve affordable housing in
New Hampshire. They noted that the bank made loan
commitments totaling almost $4.8 million during this same
period to renovate public schools in Maine.
In addition, Applicants represented that TDB Bank's
community development investments totaled approximately $100 million from January 2002 through June 2005.
Applicants noted that these investments included commitments of more than $72 million to fund low-income
housing tax credit projects in Maine, Massachusetts, New
Hampshire, and Connecticut. They also indicated that the
bank made community development grants totaling more
than $7.6 million during the same period to a wide range of
community organizations throughout the bank's assessment areas.
C. Hudson United Bank
As noted, Hudson United Bank received an overall "satisfactory" rating in its February 2005 CRA evaluation. The
institution received a "high satisfactory" rating under the
lending, investment, and service tests. Examiners noted
that Hudson United Bank's geographic distribution of loans
reflected excellent penetration among retail customers of
different income levels and business customers of different
sizes.35 In particular, examiners commended the bank's use
of flexible lending programs to enable customers to receive
credit when they otherwise would not qualify.

34. For purposes of this HMDA analysis, a predominantly minority
census tract means a census tract with a minority population of
80 percent or more.
35. A commenter expressed concern that Hudson United Bank had
scaled back its home mortgage lending in several cities to avoid
reinvestment obligations under the CRA. As noted, Applicants have
indicated that TDB Bank will establish goals to improve performance
under the CRA in Hudson United Bank's assessment areas.

C105

Examiners also praised Hudson United Bank for increasing its portfolio of qualified investments more than 186 percent above its investment levels in the previous evaluation
period. During the evaluation period, the bank's qualified
investments in its assessment areas totaled $61.5 million.
Examiners commended Hudson United Bank for purchasing a significant volume of loans in response to the
affordable housing and small business needs of individuals
and businesses in the bank's assessment areas.
In addition, examiners noted that Hudson United Bank's
retail banking services, including its branches, ATMs, and
telephone and online banking, provided customers with
very good access to the institution. Examiners also reported
that Hudson United Bank provided a relatively high level
of community development services to organizations
throughout its assessment areas.
D. Branch Closures
One commenter expressed concern about the proposal's
possible effect on branch closings.36 Applicants have stated
that they plan to close or consolidate four branches as a
result of this proposal but that these actions would not leave
any markets without service. In addition, Applicants represented that only one of the branches they plan to close or
consolidate as a result of this proposal, TDB Bank's branch
in Wallingford, Connecticut, is in an LMI census tract.
Applicants stated that the Wallingford branch will combine
with a Hudson United Bank branch, located within 700
yards, that offers better service capacity. Applicants also
advised that TDB Bank expects to open a de novo branch in
an LMI neighborhood in both the Hartford, Connecticut
and Boston, Massachusetts Metropolitan Statistical Areas
("MSAs") by early 2007.
Applicants stated that TDB Bank will apply its branch
closing policy across the institution after consummation of
the acquisition. That policy requires senior and retail management to assess the impact of a closing on employees,
customers, corporate clients, and the community at large.
The Board also has considered the fact that federal
banking law provides a specific mechanism for addressing
branch closings. Federal law requires an insured depository
institution to provide notice to the public and to the
appropriate federal supervisory agency before closing a
branch.37 In addition, the Board notes that the OCC, as the
36. The commenter also expressed concern about possible job losses
resulting from this proposal. The effect of a proposed acquisition on
employment in a community is not among the limited factors the
Board is authorized to consider under the BHC Act, and the convenience and needs factor has been interpreted consistently by the
federal banking agencies, the courts, and the Congress to relate to the
effect of a proposal on the availability and quality of banking services
in the community. See, e.g., Wells Fargo & Company, 82 Federal
Reserve Bulletin 445, 457 (1996).
37. Section 42 of the Federal Deposit Insurance Act (12 U.S.C.
§ 1831r-l), as implemented by the Joint Policy Statement Regarding
Branch Closings (64 Federal Register 34,844 (1999)), requires that a
bank provide the public with at least a 30-day notice and the
appropriate federal supervisory agency and customers of the branch
with at least a 90-day notice before the date of the proposed branch

C106

Federal Reserve Bulletin • 2006

appropriate federal supervisor of TDB Bank, will continue
to review the bank's branch closing records in the course of
conducting CRA performance evaluations.
E. H M D A and Fair Lending Record
The Board has carefully considered the lending records and
HMDA data of Applicants and Hudson United Bancorp in
light of public comment received on the proposal. The
commenters alleged, based on 2004 HMDA data, that TD
Banknorth denied the home mortgage and refinance applications of African-American and Hispanic borrowers more
frequently than those of nonminority applicants in various
MSAs in the New England region.38 In addition, a commenter alleged that Hudson United Bank made higher-cost
loans more frequently to African-American borrowers than
to nonminority borrowers. 39 The Board reviewed the
HMDA data for 2004 that were reported as follows: (1) by
TDB Bank in the six states in its assessment areas, (2) by
Hudson United Bank in the four states in its assessment
areas, (3) in the MSAs identified by the commenters, and
(4) in certain other MSAs. 40
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
Hudson United Bank or TDB Bank is excluding or imposing higher credit costs on any racial or ethnic group
on a prohibited basis. The Board recognizes that HMDA
data alone, even with the recent addition of pricing information, provide only limited information about the covered loans.41 HMDA data, therefore, have limitations that
make them an inadequate basis, absent other information,
for concluding that an institution has engaged in illegal
lending discrimination.
The Board is nevertheless concerned when HMDA data
closing. The bank also is required to provide reasons and other
supporting data for the closure, consistent with the institution's written
policy for branch closings.
38. A commenter expressed concern that TDB Bank failed to
adequately reinvest in minority communities and that the bank lagged
its competitors in home mortgage lending to minority individuals and
in minority census tracts throughout its assessment areas.
39. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 percentage points
for first-lien mortgages and 5 percentage points for second-lien
mortgages (12 CFR 203.4).
40. The Board also reviewed the data for the Portland, Maine MSA,
which is TDB Bank's home market, and for the Hartford and New
Haven, Connecticut MSAs, which are served by Hudson United Bank.
41. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance with fair lending laws by the subsidiary
depository institutions of Applicants and Hudson United
Bank. In the fair lending reviews conducted in conjunction
with the CRA evaluations discussed above, examiners
noted no substantive violations of applicable fair lending
laws by TDB Bank or Hudson United Bank. In addition,
the Board has consulted with the OCC, the primary federal
supervisor of TDB Bank, and the FDIC, the primary federal
supervisor of Hudson United Bank.
The record also indicates that Applicants have taken
steps to ensure compliance with fair lending laws and other
consumer protection laws. Applicants have indicated that
TDB Bank's corporate compliance program includes regulatory monitoring, issue and implementation management,
complaint tracking, computer-based compliance training,
and frequent reports to business-line managers and the
Board Risk Committee of TDB Bank's board of directors.
To ensure compliance with fair lending laws, TDB Bank
has developed a comprehensive review program overseen
by a fair lending manager, who has responsibility for
reviewing all marketing materials, lending policies and
procedures, and for conducting fair lending file reviews
annually. Applicants also reported that TDB Bank's fair
lending file review includes comparative file analysis of
underwriting, pricing, overrides, and exceptions for targeted products. This review includes an annual analysis of
TDB Bank's HMDA data to identify any fair lending
issues. Such issues are entered into a corporate-compliance
database for tracking, resolution, and follow-up. Applicants
have stated that every component of TDB Bank's existing
compliance programs would be carried over into Hudson
United Bank's operations and that additional compliance
staff would be hired to help ensure their implementation.
The Board also has considered the HMDA data in light
of other information, including the Applicants' CRA lending programs and the overall performance records of the
subsidiary banks of Applicants and Hudson United Bancorp under the CRA. These established efforts demonstrate
that the institutions are active in helping to meet the credit
needs of their entire communities.
F. Conclusion on Convenience and Needs Factor
The Board has carefully considered all the facts of record,42
42. One commenter requested that the Board condition its approval of the proposal on TD's making certain community reinvestment and other commitments. As the Board previously has explained, an applicant must demonstrate a satisfactory record of
performance under the CRA without reliance on plans or commitments for future actions. The Board has consistently stated that

Legal Developments

including reports of examination of the CR A records of the
institutions involved, information provided by the Applicants, public comments on the proposal, and confidential
supervisory information. The Board notes that the proposal
would offer the customers of Hudson United Bancorp a
wider array of banking products and services, including
access to TDB Bank's more extensive branch network.
Based on a review of the entire record, and for the reasons
discussed above, the Board concludes that considerations
relating to the convenience and needs factor, including the
CRA performance records of the relevant depository institutions, are consistent with approval.

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved.43 In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act and other
applicable statutes.44 The Board's approval is specifically

C107

conditioned on compliance by Applicants with the conditions imposed in this order, the commitments made to the
Board in connection with the application, and the prior
commitments to the Board referenced in this order. For
purposes of this transaction, these commitments and conditions are deemed to be conditions imposed in writing by the
Board in connection with its findings and decision and, as
such, may be enforced in proceedings under applicable law.
The proposal may not be consummated before the 15th
calendar day after the effective date of this order, or later
than three months after the effective date of this order,
unless such period is extended for good cause by the Board
or the Federal Reserve Bank of New York, acting pursuant
to delegated authority.
By order of the Board of Governors, effective January 13, 2006.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Olson and Kohn. Absent and not voting: Governor
Bies.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board
neither the CRA nor the federal banking agencies' CRA regulations
require depository institutions to make pledges or enter into commitments or agreements with any organization. See, e.g., J'.P.Morgan
Chase & Co., 90 Federal Reserve Bulletin 352 (2004); Wachovia
Corporation, 91 Federal Reserve Bulletin 11 (2005). In this case, as
in past cases, the Board instead has focused on the demonstrated
CRA performance record of the Applicants and the programs that
they have in place to serve the credit needs of their CRA assessment
areas when the Board reviews the proposal under the convenience
and needs factor. In reviewing future applications by TD under this
factor, the Board similarly will review TD's actual CRA performance record and the programs it has in place to meet the credit
needs of its communities at that time.
43. Commenters requested that the Board hold a public meeting or
hearing on the proposal. Section 3 of the BHC Act does not require the
Board to hold a public hearing on an application unless the appropriate
supervisory authority for the bank to be acquired makes a timely
written recommendation of denial of the application. The Board has
not received such a recommendation from the appropriate supervisory
authorities. Under its rules, the Board also may, in its discretion, hold a
public meeting or hearing on an application to acquire a bank if a
meeting or hearing is necessary or appropriate to clarify factual issues
related to the application and to provide an opportunity for testimony
(12 CFR 225.16(e)). The Board has considered carefully the commenters' requests in light of all the facts of record. In the Board's view, the
commenters had ample opportunity to submit their views, and in fact,
submitted written comments that the Board has considered carefully in
acting on the proposal. The commenters' requests fail to demonstrate
why the written comments do not present their views adequately or
why a meeting or hearing otherwise would be necessary or appropriate. For these reasons, and based on all the facts of record, the Board
has determined that a public meeting or hearing is not required or
warranted in this case. Accordingly, the requests for a public meeting
or hearing on the proposal are denied.
44. One commenter also requested that the Board extend the
comment period and delay action on the proposal. As previously
noted, the Board has accumulated a significant record in this case,
including reports of examination, confidential supervisory information, public reports and information, and public comment. As also
noted, the commenter has had ample opportunity to submit its views
and has provided multiple written submissions that the Board has
considered carefully in acting on the proposal. Moreover, the BHC Act
and Regulation Y require the Board to act on proposals submitted
under those provisions within certain time periods. Based on a review

Appendix A
BANKING MARKETS IN WHICH APPLICANTS
AND HUDSON UNITED BANCORP COMPETE
DIRECTLY
Metro New York
Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, Sullivan, Ulster, and Westchester counties in New York; Bergen, Essex,
Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean,
Passaic, Somerset, Sussex, Union, and Warren counties and
portions of Mercer County in New Jersey; Pike County in
Pennsylvania; and Fairfield County and portions of Litchfield and New Haven counties in Connecticut.
Hartford, Connecticut
This definition is based on the Hartford Ranally Metro Area.
It includes Andover, Ashford, Avon, Barkhamsled, Berlin,
Bloomfield, Bolton, Bristol City, Broad Brook, Burlington,
Canton, Centerbrook, Chaplin, Chester, Colchester, Colebrook, Collinsville, Columbia, Coventry, Cromwell, Deep
River, Durham, East Granby, East Haddam, East Hampton,
East Hartford, East Windsor, Eastford, Ellington, Enfield,
Essex, Farmington, Forestville, Glastonbury, Granby, Haddam, Hampton, Hartford City, Hartland, Hebron, Higganum, Kensington, Lebanon, Manchester, Mansfield, Marlborough, Middlefield, Middletown City, Moodus, New
of all the facts of record, the Board has concluded that the record in
this case is sufficient to warrant action at this time and that neither an
extension of the comment period nor further delay in considering the
proposal is warranted.

C108 Federal Reserve Bulletin • 2006

Britain City, New Hartford, Newington, North Windham,
Old Saybrook, Plain ville, Plantsville, Plymouth, Poquonock,
Portland, Rockville City, Rocky Hill, Scotland, Simsbury,
Somers, South Glastonbury, South Windsor, Southington,
Southingtonboro, Stafford, Stafford Springs, Storrs, Storrs
Mansfield, Suffield, Terryville, Thompsonville, Tolland,
Union, Unionville, Vernon, Vernon-Rockville, Warehouse
Point, Weatogue, West Hartford, West Suffield, West Willington, Wethersfield, Willimantic City, Willington, Winchester, Windham, Windsor, Windsor Locks, and Winsted City.

Bancorp operates the seventh largest depository institution
in the market, controlling deposits of approximately $769
million, which represent 8 percent of market deposits. After
the proposed acquisition, TD would become the seventh
largest depository institution in the market, controlling
deposits of approximately $849 million, which represent
approximately 9 percent of market deposits. Seventeen
depository institutions would remain in the banking market. The HHI would increase 12 points, to 1351.

New Haven, Connecticut

Whitney Holding Corporation
New Orleans, Louisiana

The New Haven Ranally Metro Area and the town of
Westbrook.

Appendix B
MARKET DATA FOR BANKING MARKETS
Highly Concentrated Banking Markets
Hartford, Connecticut
TD operates the fourth largest depository institution in the
market, controlling deposits of $1.8 billion, which represent 7 percent of market deposits. Hudson United Bancorp
operates the 20th largest depository institution in the market, controlling deposits of approximately $145 million,
which represent less than 1 percent of market deposits.
After the proposed acquisition, TD would continue to
operate the fourth largest depository institution in the
market, controlling deposits of approximately $1.9 billion,
which represent approximately 8 percent of market deposits. Thirty-two depository institutions would remain in the
banking market. The HHI would increase 8 points, to 2468.
Moderately Concentrated Banking Markets
Metro New York
TD operates the eighth largest depository institution in the
market, controlling deposits of $24.2 billion, which represent 3 percent of market deposits. Hudson United Bancorp
operates the 24th largest depository institution in the market, controlling deposits of approximately $4.4 billion,
which represent less than 1 percent of market deposits.
After the proposed acquisition, TD would remain the eighth
largest depository institution in the market, controlling
deposits of approximately $28.6 billion, which represent
4 percent of market deposits. Two hundred fifty-four
depository institutions would remain in the banking market. The HHI would increase 3 points, to 1040.
New Haven, Connecticut
TD operates the 12th largest depository institution in the
market, controlling deposits of $80 million, which represent less than 1 percent of market deposits. Hudson United

Order Approving the Acquisition of a Bank
Holding Company
Whitney Holding Corporation ("Whitney"), a bank holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act1 to acquire First
National Bancshares, Inc. ("Bancshares") and its subsidiary bank, 1st National Bank & Trust ("1st Bank"), both of
Bradenton, Florida.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 600 (2006)). The
time for filing comments has expired, and the Board has
considered the proposal and all comments received in light
of the factors set forth in section 3 of the BHC Act.
Whitney, with total consolidated assets of $10.1 billion,
controls Whitney National Bank ("Whitney Bank"), also
of New Orleans, with branches in Alabama, Florida, Louisiana, Mississippi, and Texas. Whitney is the third largest
depository organization in Louisiana, controlling deposits
of approximately $4.8 billion, which represent approximately 8.4 percent of the total amount of deposits of
insured depository institutions in the state ("state deposits"). 2 In Florida, Whitney is the 43rd largest depository
organization, controlling deposits of approximately $860.3
million, which represent less than 1 percent of state
deposits.
Bancshares, with total consolidated assets of approximately $378.7 million, operates one subsidiary bank, 1st
Bank, with branches only in Florida. Bancshares is the 93rd
largest depository organization in Florida, controlling
deposits of approximately $292.4 million, which represent
less than 1 percent of state deposits. On consummation of
the proposal, Whitney would become the 35th largest
depository organization in Florida, controlling deposits of
approximately $1.2 billion, which represent less than 1 percent of state deposits.

1. 12U.S.C. §1842.
2. Asset data are as of December 31, 2005. State deposit and ranking
data are as of June 30, 2005, and reflect merger activity through
February 23, 2006. In this context, insured depository institutions
include commercial banks, savings banks, and savings associations.

Legal Developments

INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home state
of the bank holding company if certain conditions are met.
For purposes of the BHC Act, the home state of Whitney is
Louisiana,3 and 1st Bank is located in Florida.4
Based on a review of all the facts of record, including a
review of relevant state statutes, the Board finds that all
conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met in this case.5 In light of all
the facts of record, the Board is permitted to approve the
proposal under section 3(d) of the BHC Act.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
3. 12 U.S.C. § 1842(d). Under section 3(d) of the BHC Act, a bank
holding company's home state is the state in which the total deposits
of all banking subsidiaries of such company were the largest on July 1,
1966, or the date on which the company became a bank holding
company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).
4. For purposes of section 3(d), the Board considers a bank to be
located in states in which the bank is chartered or headquartered or
operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(l)(A)
and (d)(2)(B).
5. 12 U.S.C. § 1842(d)(l)(A) and (B), 1842(d)(2)(A) and (B).
Whitney is well capitalized and well managed, as defined by applicable law. 1st Bank has been in existence and operated for the minimum
period of time required by Florida law. On consummation of the
proposal, Whitney would control less than 10 percent of the total
amount of deposits of insured depository institutions in the United
States and less than 30 percent of the total amount of deposits of
insured depository institutions in Florida. See Fla. Stat. Ch.
658.295(8)(b) (2004). All other requirements under section 3(d) of the
BHC Act would be met on consummation of the proposal.
6. 12 U.S.C. §1842(c)(l).

C109

the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has considered these factors in light of all the facts of
record, including confidential reports of examination and
other supervisory information received from the primary
federal supervisors of the organizations involved, publicly
reported and other financial information, information provided by Whitney, and public comment received on the
proposal. The Board also has considered these factors in
light of the effect that Hurricane Katrina had on the Gulf
Coast region and its impact on Whitney's resources and
future prospects.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. The Board considers a variety of measures in
this evaluation, including capital adequacy, asset quality,
and earnings performance. In assessing financial factors,
the Board consistently has considered capital adequacy to
be especially important. The Board also evaluates the
financial condition of the combined organization at consummation, including its capital position, asset quality, and
earnings prospects, and the impact of the proposed funding
of the transaction.
The Board has carefully considered the financial factors.
Whitney, Bancshares, and their subsidiary depository institutions are well capitalized and would remain so on consummation of the proposal. Based on its review of the
record, the Board believes that Whitney has sufficient
financial resources to effect the proposal. The proposed
transaction is structured as a combination cash purchase
and share exchange. The cash portion of the transaction
would be funded from Whitney's general corporate
resources.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of Whitney, Bancshares, and their subsidiary
depository institutions, including assessments of their management, risk-management systems, and operations. In
addition, the Board has considered its supervisory experiences and those of the other relevant banking supervisory
agencies with the organizations and their records of compliance with applicable banking law.7 Whitney, Bancshares, and their subsidiary depository institutions are

7. A commenter who opposed the proposal expressed concern about
Whitney Bank's relationship with a rent-to-own company, which is an
unaffiliated, nontraditional provider of financial services. As a general
matter, the activities of this type of business are permissible, and such
businesses are licensed by the states where they operate. Whitney
Bank has implemented a policy for its commercial credit facilities to
finance companies or other consumer lenders to fund consumer loans.
This policy provides for an evaluation of the practices of such
borrowers to identify any potentially predatory lending practices and
for ongoing monitoring and management of relationships with such
borrowers.

C110

Federal Reserve Bulletin • 2006

considered to be well managed. The Board also has considered Whitney's plans for implementing the proposal,
including the proposed management after consummation.
Based on all the facts of record, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of the organizations involved in the proposal are consistent with approval, as are
the other supervisory factors under the BHC Act.

January 6, 2003. 1st Bank received an overall "satisfactory" rating at its most recent CRA performance evaluation
by the OCC, as of March 4, 2002. Whitney has represented
that, on consummation of the proposal, it will implement
policies and procedures consistent with Whitney Bank's
current CRA policies, procedures, and programs at 1st
Bank.
B. HMDA and Fair Lending Records

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").8 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account an institution's
record of meeting the credit needs of its entire community,
including low- and moderate-income neighborhoods, in
evaluating bank expansionary proposals.9
The Board has considered carefully all the facts of
record, including the CRA performance evaluation records
of the subsidiary depository institutions of Whitney and
Bancshares, data reported by Whitney Bank and 1st Bank
under the Home Mortgage Disclosure Act ("HMDA"),10
other information provided by Whitney, confidential supervisory information, and public comment received on the
proposal. The Board also has consulted with the Office of
the Comptroller of the Currency ("OCC") regarding Whitney's efforts to revitalize and stabilize the communities it
serves that were affected by Hurricane Katrina. A commenter alleged, based on 2004 HMDA data, that Whitney
Bank and 1st Bank engaged in discriminatory treatment of
minority individuals in home mortgage lending.
A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, onsite evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisor.''
Whitney Bank received an overall "outstanding" rating
at its most recent CRA evaluation by the OCC, as of
8. 12 U.S.C. §2901 et seq.; 12 U.S.C. § 1842(c)(2).
9. 12 U.S.C. §2903.
10. 12 U.S.C. §2801 etseq.
11. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

The Board has carefully considered the lending record and
HMDA data of Whitney Bank and 1st Bank in light of
public comment about their respective records of lending to
minorities. A commenter alleged, based on 2004 HMDA
data, that Whitney Bank and 1st Bank disproportionately
denied applications for HMDA-reportable loans by minority applicants in several Metropolitan Statistical Areas
("MSAs"). The Board reviewed HMDA data for 2004
reported by Whitney Bank in MSAs in Alabama, Florida,
Louisiana, Mississippi, and Texas and for 1st Bank in the
MSA in Florida that includes its assessment area.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
Whitney Bank or 1st Bank is excluding or imposing
higher credit costs on any racial or ethnic group on a
prohibited basis. The Board recognizes that HMDA data
alone, even with the recent addition of pricing information, provide only limited information about the covered
loans.12 HMDA data, therefore, have limitations that make
them an inadequate basis, absent other information, for
concluding that an institution has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that reflect on-site evaluations of compliance by Whitney Bank and 1st Bank with
fair lending laws and the CRA performance records of
Whitney Bank and 1st Bank. In the fair lending reviews
that were conducted in conjunction with the banks' most
recent CRA performance evaluations, examiners noted no
substantive violations of applicable fair lending laws.
12. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

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C111

The record also indicates that Whitney has taken steps to
ensure compliance with fair lending and other consumer
protection laws. Whitney represented that it has a comprehensive fair lending program consisting of lending policies,
annual training and testing of lending personnel, fair lending analyses, and oversight and monitoring. In addition,
Whitney represented that it performs a review of all denials
of HMDA-reportable purchase money loans and a twolevel review of all other HMDA-reportable denials of
loans. Whitney also represented that its fair lending policy
includes a comparative file review of all HMDA-reportable
loan denials for minorities. Whitney has represented that,
on consummation of the proposal, it will implement policies and procedures consistent with Whitney Bank's current fair lending policies, procedures, and programs at 1st
Bank.
The Board also has considered the HMDA data in light
of other information, including the CRA lending programs
of Whitney and Bancshares and the overall performance
records of the subsidiary banks of Whitney and Bancshares
under the CRA. These established efforts demonstrate that
the institutions are active in helping to meet the credit
needs of their entire communities.

Board's approval is specifically conditioned on compliance
by Whitney with the conditions imposed in this order and
the commitments made in connection with the application.
For purposes of this action, the conditions and commitments are deemed to be conditions imposed in writing by
the Board in connection with its findings and decision
herein and, as such, may be enforced in proceedings under
applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Federal Reserve Bank of Atlanta, acting
pursuant to delegated authority.
By order of the Board of Governors, effective March 7,
2006.

C. Conclusion on Convenience and Needs Factor

ORDERS ISSUED UNDER SECTION 4 OF
THE BANK HOLDING COMPANY ACT

The Board has carefully considered all the facts of record,
including reports of examination of the CRA performance
records of the institutions involved, information provided
by Whitney, comments received on the proposal, and
confidential supervisory information. Whitney represented
that the proposal would benefit Bancshares customers by
providing access to an expanded ATM network and a
broader array of products and services, including additional
mortgage services, loan and checking account programs for
low-income consumers, and international banking and cash
management services. Based on a review of the entire
record, and for the reasons discussed above, the Board
concludes that considerations relating to the convenience
and needs factor, including the CRA performance records
of the relevant depository institutions, are consistent with
approval.
CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act.13 The
13. The commenter requested that the Board hold a public meeting
or hearing on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes a
timely written recommendation of denial of the application. The Board
has not received such a recommendation from the appropriate supervisory authority. Under its regulations, the Board also may, in its
discretion, hold a public meeting or hearing on an application to
acquire a bank if a meeting or hearing is necessary or appropriate to

Voting for this action: Chairman Bernanke and Governors Bies,
Olson, Kohn, Warsh, and Kroszner. Absent and not voting: Vice
Chairman Ferguson.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Bank Hapoalim, B.M.
Tel Aviv, Israel
Arison Holdings (1998) Ltd.
Tel Aviv, Israel
Israel Salt Industries Ltd.
Atlit, Israel
Order Approving Notice to Engage in a
Nonbanking Activity
Bank Hapoalim, B.M. ("Bank Hapoalim"), Arison Holdings (1998) Ltd. ("Arison"), and Israel Salt Industries
Ltd. ("Israel Salt") (collectively, "Notificants"),1 foreign
clarify factual issues related to the application and to provide an
opportunity for testimony (12 CFR 225.16(e)). The Board has considered carefully the commenter's request in light of all the facts of
record. In the Board's view, the commenter had ample opportunity to
submit its views and, in fact, submitted written comments that the
Board has considered carefully in acting on the proposal. The commenter's request fails to demonstrate why the written comments do not
present its views adequately or why a meeting or hearing otherwise
would be necessary or appropriate. For these reasons, and based on all
the facts of record, the Board has determined that a public meeting or
hearing is not required or warranted in this case. Accordingly, the
request for a public meeting or hearing on the proposal is denied.
1. Arison and Israel Salt own 16.5 percent and 7 percent, respectively,
of Bank Hapoalim and are parties to a shareholder agreement among

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Federal Reserve Bulletin • 2006

banking organizations subject to the provisions of the
Bank Holding Company Act ("BHC Act"), 2 have requested the Board's approval under sections 4(c)(8) and
4(j) of the BHC Act3 and section 225.24 of the Board's
Regulation Y 4 to acquire all the voting shares of Investec
(US) Incorporated ("Investec"), New York, New York.
Investec would be acquired through Notificants' wholly
owned subsidiaries, Zohar Hashemesh Le'Hashkaot Ltd.,
also of Tel Aviv, and Hapoalim U.S.A. Holding Company,
Inc., also of New York. As a result, Notificants and their
subsidiaries would engage in the United States in the
following activities:
(1) providing financial and investment advisory services,
in accordance with section 225.28(b)(6) of Regulation Y;5
(2) providing securities brokerage, riskless principal, private placement, futures commission merchant, and
other agency transactional services, in accordance with
section 225.28(b)(7) of Regulation Y;6 and
(3) underwriting and dealing in government obligations
and money market instruments that state member banks
may underwrite or deal in under 12 U.S.C. §§ 24 and
335 and engaging as principal in investing and trading
activities, in accordance with section 225.28(b)(8) of
Regulation Y 7
Notice of the proposal, affording interested persons an
opportunity to comment, has been published in the Federal
Register (70 Federal Register 71,304 (2005)). The time for
filing comments has expired, and the Board has considered
the notice and all comments received in light of the factors
set forth in section 4 of the BHC Act.
Bank Hapoalim, with consolidated assets of more than
$60 billion, is the largest banking organization headquartered in Israel. In the United States, Bank Hapoalim
maintains branches in New York, Chicago, and Miami and
a representative office in Miami. Investec is a securities
broker-dealer and a member of the New York Stock
Exchange, Inc. and NASD.
The Board has determined by regulation that acting as a
financial or investment advisor, providing agency transactional services for customer investments, and engaging in
investment transactions as principal are activities closely
related to banking for purposes of section 4(c)(8) of the

the owners of 29 percent of the voting shares of Bank Hapoalim.
Under the agreement, Arison and Israel Salt each have the power under
certain circumstances to control the voting of all the shares held by the
parties to the agreement. As a result, Arison and Israel Salt each is
considered to control Bank Hapoalim, and each institution has joined
in the filing of the notice.
2. As a foreign bank operating branches in the United States, Bank
Hapoalim, and any company that controls Bank Hapoalim, is subject
to the BHC Act by operation of section 8(a) of the International
Banking Act of 1978 (12 U.S.C. § 3106(a)).
3. 12 U.S.C. §§ 1843(c)(8) and 1843(j).
4. 12 CFR 225.24.
5. 12 CFR 225.28(b)(6).
6. 12 CFR 225.28(b)(7).
7. 12 CFR 225.28(b)(8).

BHC Act. Notificants have committed to conduct these
activities in accordance with the limitations set forth in
Regulation Y and the Board's orders governing these
activities. To approve the notice, the Board also must
determine that the acquisition of Investec by Notificants
can reasonably be expected to produce benefits to the
public that outweigh possible adverse effects, such as
undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking
practices.8
As part of its evaluation of these factors, the Board
considers the financial and managerial resources of the
companies involved and the effect of the proposal on those
resources.9 The Board has considered, among other things,
information provided by Bank Hapoalim, public comment,10 confidential reports of examination, other confidential supervisory information, and publicly reported financial and other information in assessing the financial and
managerial strength of Bank Hapoalim.
In evaluating the financial factors of this proposal, the
Board has considered a number of factors, including capital
adequacy and earnings performance. Bank Hapoalim's
capital ratios exceed the minimum levels that would be
required by the Basel Capital Accord and are considered
equivalent to the capital that would be required of a U.S.
banking organization. Moreover, consummation of this
proposal would not have a significant impact on the
financial condition of Bank Hapoalim. Based on its review,
the Board finds that Notificants have sufficient financial
resources to effect the proposal.
In addition, the Board has carefully considered the
managerial resources of Bank Hapoalim, the supervisory
experiences of the relevant banking supervisory agencies
with Bank Hapoalim, and Bank Hapoalim's record of
compliance with applicable U.S. banking laws.11 The Board

8. 12 U.S.C. § 1843(j)(2)(A).
9. 12 CFR 225.26.
10. A commenter expressed concern about Israel's anti-moneylaundering policies and procedures based on (1) a report dated June 22,
2000, by the Financial Action Task Force ("FATF"), an intergovernmental body that develops and promotes policies to combat money
laundering, and (2) an advisory issued by the U.S. Department of the
Treasury's Financial Crimes Enforcement Network ("FinCEN").
These matters were cited in the Board's order approving Notificants'
application to become bank holding companies. See 87 Federal
Reserve Bulletin 327 n.ll (2001). In June 2002, the FATF recognized
that Israel had addressed the deficiencies identified in its 2000 report.
FinCEN withdrew its advisory in July 2002, noting that Israel "now
has in place a counter-money-laundering system that generally meets
international standards." FinCEN Advisory Withdrawal Issue 17A.
11. The commenter criticized Bank Hapoalim's record under the
Community Reinvestment Act ("CRA") (12 U.S.C. §2901 et seq.)
based on a CRA evaluation as of June 30, 1997, and a news report
from 1993 on the CRA records of foreign banks generally, including
Bank Hapoalim. The CRA does not provide for consideration of a
notificant's CRA performance record in the evaluation of a notice
under section 4 of the BHC Act. The Board notes that Bank
Hapoalim's insured New York branch received an overall "satisfactory" rating at its most recent CRA performance evaluation by the
Federal Deposit Insurance Corporation, as of June 9, 2003.

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C113

has also consulted with home country authorities responsible for supervising Bank Hapoalim concerning the proposal and the managerial resources of Notificants12 and
reviewed reports of examination from the appropriate
federal and state supervisors of the U.S. operations of Bank
Hapoalim that assessed its managerial resources. Based on
all the facts of record, the Board has concluded that
considerations relating to the financial and managerial
resources of Notificants are consistent with approval.
The Board has also considered carefully the competitive
effects of the proposal in light of all the facts of record.
Because Bank Hapoalim does not currently engage in the
proposed activities in the United States, the proposal would
result in no loss of competition. Moreover, there are
numerous existing and potential competitors in the industry. In addition, the market for the proposed services is
regional or national in scope. Based on all the facts of
record, the Board concludes that Bank Hapoalim's proposed activities would have a de minimis effect on competition for the relevant nonbanking activities.
The Board expects that the proposed activities would
result in benefits to the public by enhancing Bank
Hapoalim's ability to serve its customers. These customers
will also benefit from the convenience and efficiency of
being able to use the services of a broker-dealer affiliated
with Bank Hapoalim.
The Board concludes that the conduct of the proposed
nonbanking activities within the framework of Regulation Y and Board precedent is not likely to result in adverse
effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interests, or unsound
banking practices, that would outweigh the public benefits
of the proposal discussed above. Accordingly, based on all
the facts of record, the Board has determined that the
balance of the public-benefits factor that it must consider
under section 4(j) of the BHC Act is consistent with
approval of the proposal.
Based on the foregoing, the Board has determined that
the notice should be, and hereby is, approved.13 In reaching

its conclusion, the Board has considered all the facts of
record in light of the factors that it is required to consider
under the BHC Act. The Board's approval is specifically
conditioned on compliance by Notificants with the conditions imposed in this order and the commitments made to
the Board in connection with the notice. The Board's
approval is also subject to all the conditions set forth in
Regulation Y, including those in sections 225.7 and
225.25(c),14 and to the Board's authority to require such
modification or termination of the activities of the Notificants or any of their subsidiaries as the Board finds
necessary to ensure compliance with, and to prevent evasion of, the provisions of the BHC Act and the Board's
regulations and orders issued thereunder. For purposes of
these actions, the conditions and commitments are deemed
to be conditions imposed in writing by the Board in
connection with its findings and decision and, as such, may
be enforced in proceedings under applicable law.

12. The commenter also expressed concern about the proposal based
on news reports of investigations by Israeli authorities into allegations
of money laundering at Bank Hapoalim. As a matter of practice and
policy, the Board generally has not tied consideration of a proposal to
the scheduling or completion of an investigation if, as in this case, the
applicant or notificant has an overall satisfactory record of performance and the issues being reviewed can be resolved in the examination and supervisory process. See 62 Federal Register 9290 (1997)
(Preamble to the Board's Regulation Y). The Board has consulted with
the Bank of Israel, Bank Hapoalim's home country supervisor, about
the measures that Bank Hapoalim has taken to strengthen controls to
prevent the bank from being used for money laundering or other illicit
activities.
13. The commenter requested that the Board hold a public meeting
or hearing on the proposal. Section 4 of the BHC Act and the Board's
rules thereunder provide for a hearing on a notice to acquire nonbanking companies if there are disputed issues of material fact that cannot
be resolved in some other manner (12 CFR 225.25(a)(2)). Under its
rules, the Board also may, in its discretion, hold a public meeting if
appropriate to allow interested persons an opportunity to provide
relevant testimony when written comments would not adequately
present their views. The Board has considered carefully the comment-

Societe Generale, a foreign bank that is treated as a
financial holding company ("FHC") for purposes of the
Bank Holding Company Act ("BHC Act"), 1 has requested
the Board's approval under section 4 of the BHC Act and
the Board's Regulation Y to engage in physical commodity

This transaction shall not be consummated later than
three months after the effective date of this order unless
such period is extended for good cause by the Board or the
Federal Reserve Bank of New York, acting pursuant to
delegated authority.
By order of the Board of Governors, effective March 10,
2006.
Voting for this action: Chairman Bernanke and Governors Bies,
Olson, Kohn, Warsh, and Kroszner. Absent and not voting: Vice
Chairman Ferguson.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Societe Generale
Paris, France
Order Approving Notice to Engage in
Activities Complementary to a Financial
Activity

er's request in light of all the facts of record. In the Board's view, the
commenter had ample opportunity to submit its views, and, in fact,
submitted written comments that the Board has considered carefully in
acting on the proposal. The commenter's request fails to demonstrate
why the written comments do not present its views adequately and
fails to identify disputed issues of fact that are material to the Board's
decision that would be clarified by a public meeting or hearing. For
these reasons, and based on all the facts of record, the Board has
determined that a public meeting or hearing is not required or
warranted in this case. Accordingly, the request for a public meeting or
hearing on the proposal is denied.
14. 12 CFR 225.7 and 225.25(c).
1. 12U.S.C. §3106.

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Federal Reserve Bulletin • 2006

trading in the United States.2 Societe Generale currently
conducts physical commodity trading and related activities
outside the United States.3
Regulation Y authorizes a bank holding company
("BHC") to engage as principal in derivative contracts
based on financial and nonfinancial assets ("Commodity
Derivatives"). Under Regulation Y, a BHC may engage in
such activities involving Commodity Derivatives subject to
certain restrictions that are designed to limit the BHC's
activity to trading and investing in financial instruments
rather than dealing directly in physical nonfinancial commodities ("Permissible Commodity Derivatives Activities"). Under these restrictions, a BHC generally is not
allowed to take or make delivery of nonfinancial commodities underlying Commodity Derivatives. In addition, BHCs
generally are not permitted to purchase or sell nonfinancial
commodities in the spot market.
The BHC Act, as amended by the Gramm-Leach-Bliley
Act ("GLB Act"), permits a BHC to engage in activities
that the Board had determined were closely related to
banking, by regulation or order, prior to November 12,
1999.4 The BHC Act permits an FHC to engage in a broad
range of activities that are defined in the statute to be
financial in nature.5 Moreover, the BHC Act allows FHCs
to engage in any activity that the Board determines, in
consultation with the Secretary of the Treasury, to be
financial in nature or incidental to a financial activity.6
In addition, the BHC Act permits FHCs to engage in any
activity that the Board (in its sole discretion) determines is
complementary to a financial activity and does not pose a
substantial risk to the safety or soundness of depository
institutions or the financial system generally.7 This authority is intended to allow the Board to permit FHCs to
engage, on a limited basis, in an activity that appears to be
commercial rather than financial in nature but that is
meaningfully connected to a financial activity in a manner
that complements the financial activity.8 The BHC Act
provides that any FHC seeking to engage in a complementary activity must obtain the Board's prior approval under

2. 12 U.S.C. § 1843; 12 CFR Part 225.
3. Societe Generale will enter into physical commodity trades in the
United States through its indirect, wholly owned nonbanking subsidiary, Societe Generale Energie (USA) Corp. ("SGE"), New York, New
York. SGE currently engages in some physical commodities activities
in the United States, pursuant to authority under Regulation K, that are
related to the foreign physical commodities activities of its parent
company, Societe Generale Energie (S.A.). See 12 CFR211.23(f)(5).
4. 12 U.S.C. §1843(c)(8).
5. The Board determined by regulation before November 12, 1999,
that engaging as principal in Commodity Derivatives Activities,
subject to certain restrictions, was closely related to banking. Accordingly, engaging as principal in Permissible Commodity Derivatives
Activities is a financial activity for purposes of the BHC Act. See
12 U.S.C. § 1843(k)(4)(F).
6. 12 U.S.C. §1843(k)(l)(A).
7. 12 U.S.C. §1843(k)(l)(B).
8. See 145 Cong. Rec. H11529 (daily ed. Nov. 4, 1999) (Statement
of Chairman Leach) ("It is expected that complementary activities
would not be significant relative to the overall financial activities of
the organization.").

section 4(j) of the BHC Act.9
Societe Generale regularly engages in Permissible Commodity Derivatives Activities based on a variety of commodities and physical commodity transactions outside the
United States and, through SGE, engages in limited physical commodities activities in the United States pursuant to
authority under Regulation K.10 Societe Generale plans to
expand its physical commodity transactions operations in
the United States and, therefore, has requested that the
Board permit it to engage in physical commodity trading
activities in the United States involving commodities such
as natural gas, crude oil, and electricity and to take and
make delivery of physical commodities to settle Commodity Derivatives ("Commodity Trading Activities"). 11 The
Board previously has determined that Commodity Trading
Activities involving a particular commodity complement
the financial activity of engaging regularly as principal in
Commodity Derivatives based on that commodity.12 In
light of the foregoing and all other facts of record, the
Board believes that Commodity Trading Activities are
complementary to the Permissible Commodity Derivatives
Activities of Societe Generale.
To authorize Societe Generale to engage in Commodity
Trading Activities as a complementary activity under the
GLB Act, the Board also must determine that the activities
do not pose a substantial risk to the safety or soundness of
depository institutions or the U.S. financial system generally.13 In addition, the Board must determine that the
performance of Commodity Trading Activities by Societe
Generale "can reasonably be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible
adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or
unsound banking practices." 14
Approval of the proposal would likely benefit Societe
Generale's customers by enhancing Societe Generale's
ability to provide efficiently a full range of commodityrelated services. Approving Commodity Trading Activities
for Societe Generale also would enable it to improve its
understanding of physical commodity and commodity derivatives markets and its ability to serve as an effective
competitor in those markets.

9. 12 U.S.C. §1843(j).
10. 12CFR211.23(f)(5).
11. Societe Generale has committed that on receiving approval from
the Board to conduct Commodity Trading Activities in the United
States as an activity complementary to a financial activity, it will
conduct such activities pursuant to section 4 authority only, consistent
with the limitations placed by the Board on such activities.
12. Deutsche Bank AG, 92 Federal Reserve Bulletin C54 (2006);
JPMorgan Chase & Co., 92 Federal Reserve Bulletin C57 (2006);
Barclays Bank PLC, 90 Federal Reserve Bulletin 511 (2004); UBSAG,
90 Federal Reserve Bulletin 215 (2004); and Citigroup Inc., 89 Federal Reserve Bulletin 508 (2003). For example, Commodity Trading
Activities involving all types of crude oil would be complementary to
engaging regularly as principal in Commodity Derivatives based on
Brent crude oil.
13. 12 U.S.C. § 1843(k)(l)(B).
14. 12 U.S.C. §1843(j)(2)(A).

Legal Developments

The Board has evaluated the financial resources of
Societe Generale and its subsidiaries. Societe Generale's
capital levels exceed the minimum levels that would be
required under the Basel Capital Accord and are considered
equivalent to the capital levels that would be required of a
U.S. banking organization.
Based on all the facts of record, the Board believes
that Societe Generale has the managerial expertise and
internal control framework to manage adequately the
risks of taking and making delivery of physical commodities as proposed. The Board notes that Societe Generale
has established and maintained policies for monitoring,
measuring, and controlling the credit, market, settlement,
reputational, legal, and operational risks involved in its
Commodity Trading Activities. These policies address
key areas, such as counterparty-credit risk, value-at-risk
methodology, and internal limits with respect to commodity trading, new business and new product approvals, and
identification of transactions that require higher levels of
internal approval. The policies also describe critical internal control elements, such as reporting lines, and the
frequency and scope of internal audits of Commodity
Trading Activities. Societe Generale has integrated the
risk management of Commodity Trading Activities into
its overall risk-management framework.
As a condition of this order, to limit the potential safety
and soundness risks of Commodity Trading Activities, the
market value of commodities held by Societe Generale as a
result of Commodity Trading Activities must not exceed
5 percent of Societe Generale's consolidated tier 1 capital
(as calculated under its home country standard).15 Societe
Generale also must notify the Federal Reserve Bank of
New York if the market value of commodities held by
Societe Generale as a result of its Commodity Trading
Activities exceeds 4 percent of its tier 1 capital.
In addition, Societe Generale may take and make delivery only of physical commodities for which derivative
contracts have been authorized for trading on a U.S. futures
exchange by the Commodity Futures Trading Commission
("CFTC") (unless specifically excluded by the Board) or
that have been specifically approved by the Board. 16 This
requirement is designed to prevent Societe Generale from
becoming involved in dealing in finished goods and other

15. Societe Generale would be required to include in this 5 percent limit the market value of any commodities it holds as a result of
a failure of reasonable efforts to avoid taking delivery under section 225.28(b)(8)(ii)(B) of Regulation Y (12 CFR 225.28(b)(8)(ii)(B)).
16. The particular commodity derivative contract that Societe
Generale takes to physical settlement need not be exchange traded, but
(in the absence of specific Board approval) futures or options on
futures on the commodity underlying the derivative contract must have
been authorized for exchange trading by the CFTC.
The CFTC publishes annually a list of CFTC-authorized commodity contracts. See Commodity Futures Trading Commission, FY 2004
Annual Report to Congress 109. With respect to granularity, the Board
intends this requirement to permit Commodity Trading Activities
involving all types of a listed commodity. For example, Commodity
Trading Activities involving any type of coal or coal derivative
contract would be permitted, even though the CFTC has authorized
only Central Appalachian coal.

C115

items, such as real estate, that lack the fungibility and
liquidity of exchange-traded commodities.
To minimize the exposure of Societe Generale to additional risks, including storage, transportation, legal, and
environmental risks, Societe Generale would not be authorized (i) to own, operate, or invest in facilities for the
extraction, transportation, storage, or distribution of commodities; or (ii) to process, refine, store, or otherwise alter
commodities in the United States. In conducting its Commodity Trading Activities, Societe Generale has committed
to use appropriate storage and transportation facilities
owned and operated by third parties.17
Societe Generale and its Commodity Trading Activities
also remain subject to the general securities, commodities,
and energy laws and the rules and regulations (including
the antifraud and antimanipulation rules and regulations) of
the Securities and Exchange Commission, the CFTC, and
the Federal Energy Regulatory Commission.
Permitting Societe Generale to engage in the limited
amount and types of Commodity Trading Activities described above, on the terms described in this order, would
not appear to pose a substantial risk to Societe Generale,
depository institutions, or the U.S. financial system generally. Through its existing authority to engage in Permissible
Commodity Derivatives Activities, Societe Generale already may incur the price risk associated with commodities. Permitting Societe Generale to buy and sell commodities in the spot market or physically settle Commodity
Derivatives would not appear to increase significantly its
potential exposure to commodity-price risk.
For these reasons, and based on Societe Generale's
policies and procedures for monitoring and controlling the
risks of Commodity Trading Activities, the Board concludes that consummation of the proposal would not pose a
substantial risk to the safety or soundness of depository
institutions or the financial system generally and can
reasonably be expected to produce benefits to the public
that would outweigh any potential adverse effects.
Based on all the facts of record, including the representations and commitments made to the Board by Societe
Generale in connection with the notice, and subject to the
terms and conditions set forth in this order, the Board has
determined that the notice should be, and hereby is, approved. The Board's determination is subject to all the
conditions set forth in Regulation Y, including those in
section 225.7, ls and to the Board's authority to require
modification or termination of the activities of a BHC or
any of its subsidiaries as the Board finds necessary to
ensure compliance with, or to prevent evasion of, the
provisions and purposes of the BHC Act and the Board's
regulations and orders issued thereunder. The Board's
decision is specifically conditioned on compliance with all
the commitments made to the Board in connection with the

17. Approving Commodity Trading Activities as a complementary
activity, subject to limits and conditions, would not in any way restrict
the existing authority of Societe Generale to deal in foreign exchange,
precious metals, or any other bank-eligible commodity.
18. 12 CFR 225.7.

C116 Federal Reserve Bulletin • 2006

notice, including the commitments and conditions discussed in this order. The commitments and conditions
relied on in reaching this decision shall be deemed to be
conditions imposed in writing by the Board in connection
with its findings and decision and, as such, may be enforced
in proceedings under applicable law.
By order of the Board of Governors, effective March 15,
2006.
Voting for this action: Chairman Bernanke and Governors Bies,
Olson, Kohn, Warsh, and Kroszner. Absent and not voting: Vice
Chairman Ferguson.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

ORDERS ISSUED UNDER SECTIONS 3 AND
4 OF THE BANK HOLDING COMPANY ACT

BB&T Corporation
Winston-Salem, North Carolina
Order Approving the Merger of Bank
Holding Companies
BB&T Corporation ("BB&T"), a financial holding company within the meaning of the Bank Holding Company
Act ("BHC Act"), has requested the Board's approval
under section 3 of the BHC Act1 to acquire Main Street
Banks, Inc. ("Main Street"), Atlanta, and its subsidiary
bank, Main Street Bank, Covington, both of Georgia.
BB&T also has requested the Board's approval under
sections 4(c)(8) and 4(j) of the BHC Act 2 and section 225.28(b)(14) of the Board's Regulation Y 3 to acquire
Main Street's subsidiary, MSB Payroll Solutions, LLC
("MSB Data"), Alpharetta, Georgia, and thereby engage in
permissible data-processing activities.4
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 3094 (2006)). The
time for filing comments has expired, and the Board has
considered the application and notice and all comments
received in light of the factors set forth in sections 3 and 4
of the BHC Act.
BB&T, with total consolidated assets of approximately
$109.2 billion, is the 17th largest depository organization in
the United States.5 BB&T operates subsidiary insured
1. 12U.S.C. §1842.
2. 12 U.S.C. §§ 1843(c)(8) and 1843(j).
3. 12 CFR 225.28(b)(14).
4. In addition, BB&T proposes to acquire Main Street's nonbanking
insurance agency and underwriting subsidiary in accordance with
section 4(k) of the BHC Act (12 U.S.C. § 1843(k)).
5. Asset and nationwide ranking data are as of December 31, 2005.
Statewide deposit and ranking data are as of June 30, 2005, and reflect
merger activity through February 24, 2006. In this context, insured
depository institutions include commercial banks, savings banks, and
savings associations.

depository institutions in Alabama, Florida, Georgia, Indiana, Kentucky, Maryland, North Carolina, Tennessee, West
Virginia, and the District of Columbia. In Georgia, BB&T
is the sixth largest depository organization, controlling
deposits of $4.7 billion, which represent 3.2 percent of the
total amount of deposits of insured depository institutions
in the state ("state deposits").
Main Street, with total consolidated assets of approximately $2.4 billion, operates one depository institution,
Main Street Bank, which has branches only in Georgia.
Main Street Bank is the ninth largest insured depository
institution in Georgia, controlling deposits of $1.7 billion,
which represent approximately 1.2 percent of state
deposits.
On consummation of this proposal, BB&T would remain
the 17th largest insured depository organization in the
United States, with total consolidated assets of approximately $111.9 billion. BB&T would become the fifth
largest depository organization in Georgia, controlling
deposits of approximately $6.3 billion, which represent
approximately 4.3 percent of state deposits.6

INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the bank
holding company's home state if certain conditions are
met. For purposes of the BHC Act, the home state of BB&T
is North Carolina,7 and Main Street Bank is located in
Georgia.8
Based on a review of all the facts of record, including
relevant state statutes, the Board finds that all conditions
for an interstate acquisition enumerated in section 3(d) of
the BHC Act are met in this case.9 In light of all the facts of
record, the Board is permitted to approve the proposal
under this provision.
6. Branch Banking and Trust Company ("BB&T Bank"), WinstonSalem, North Carolina, a subsidiary bank of BB&T, has received
approval from the Federal Deposit Insurance Corporation ("FDIC") to
merge with Main Street Bank, with BB&T Bank as the survivor.
BB&T has indicated that it anticipates consummating that merger
approximately four months after acquiring Main Street.
7. A bank holding company's home state is the state in which the
total deposits of all banking subsidiaries of such company were the
largest on July 1, 1966, or the date on which the company became a
bank holding company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).
8. For purposes of section 3(d) of the BHC Act, the Board considers
a bank to be located in the states in which the bank is chartered,
headquartered, or operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7)
and 1842(d)(l)(A) and (d)(2)(B).
9. See 12 U.S.C. § 1842(d)(l)(A) and (B) and 1842(d)(2)(A) and
(B). BB&T is adequately capitalized and adequately managed, as
defined by applicable law. Main Street Bank has been in existence and
operated for the minimum period of time required by applicable state
law (three years). See Ga. Code Ann. §7-l-608(a)(2). On consummation of the proposal, BB&T would control less than 10 percent of the
total amount of deposits of insured depository institutions ("total
deposits") in the United States. BB&T would also control less than
30 percent of total deposits in Georgia. All other requirements of
section 3(d) would be met on consummation of the proposal.

Legal Developments

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
would be in furtherance of an attempt to monopolize the
business of banking in any relevant banking market. The
BHC Act also prohibits the Board from approving a bank
acquisition that would substantially lessen competition in
any relevant banking market, unless the anticompetitive
effects of the proposal are clearly outweighed in the public
interest by the probable effect of the proposal in meeting
the convenience and needs of the community to be served.10
BB&T and Main Street compete directly in the Atlanta
Area and the Athens Area banking markets in Georgia.11
The Board has reviewed carefully the competitive effects of
the proposal in both banking markets in light of all the facts
of record. In particular, the Board has considered the
number of competitors that would remain in the markets,
the relative shares of total deposits in depository institutions in the markets ("market deposits") controlled by
BB&T and Main Street,12 the concentration level of market
deposits and the increase in this level as measured by the
Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 13
and other characteristics of the markets.
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in both banking markets. After consummation,
each market would remain unconcentrated, as measured by
the HHI. In addition, the increase in concentration would
be small, and numerous competitors would remain in each
market.14
The DOJ also has reviewed the anticipated competitive
effects of the proposal and has advised the Board that
consummation of the transaction likely would not have a
significantly adverse effect on competition in any relevant
10. 12 U.S.C. §1842(c)(l).
11. These banking markets are described in Appendix A.
12. Deposit and market share data are as of June 30, 2005, and are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386, 387 (1989); National City Corporation, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board
regularly has included thrift deposits in the market share calculation on
a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal
Reserve Bulletin 52, 55 (1991).
13. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI exceeds 1800. The Department of
Justice ("DOJ") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI more than 200
points. The DOJ has stated that the higher-than-normal HHI thresholds
for screening bank mergers and acquisitions for anticompetitive effects
implicitly recognize the competitive effects of limited-purpose and
other nondepository financial entities.
14. The effect of the proposal on the concentration of banking
resources in each market is described in Appendix B.

C117

banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment and
have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Atlanta Area or Athens Area
banking markets or in any other relevant banking market.
Accordingly, the Board has determined that competitive
considerations are consistent with approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has considered these factors in light of all the facts of
record, including confidential reports of examination and
other supervisory information received from the federal
and state supervisors of the organizations involved, publicly reported and other financial information, information
provided by BB&T, and public comments received on the
proposal.15
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. The Board considers a variety of factors in this
evaluation, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial
condition of the combined organization at consummation,
including its capital position, asset quality, and earnings
prospects, and the impact of the proposed funding of the
transaction.
The Board has carefully considered the proposal under
the financial factors. BB&T, all its subsidiary banks, and
Main Street Bank are well capitalized and would remain so
on consummation of the proposal. Based on its review of
the record, the Board finds that BB&T has sufficient
financial resources to effect the proposal. The proposed
transaction is structured as a share exchange.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
15. A commenter expressed concern about BB&T's relationships
with unaffiliated pawn shops and other nontraditional providers of
financial services. As a general matter, the activities of the consumer
finance businesses identified by the commenter are permissible, and
the businesses are licensed by the states where they operate. BB&T
has stated that it does not focus on marketing credit services to such
nontraditional providers and that it makes loans to those firms under
the same terms, circumstances, and due diligence procedures applicable to BB&T's other small business borrowers. BB&T has also
represented that it does not play any role in the lending practices,
credit review, or other business practices of those firms.

C118 Federal Reserve Bulletin • 2006

organization. The Board has reviewed the examination
records of BB&T, Main Street, and their subsidiary banks,
including assessments of their management, riskmanagement systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of the other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law. BB&T, Main Street, and their subsidiary
depository institutions are considered to be well managed.
The Board also has considered BB&T's plans for implementing the proposal, including the proposed management
after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved in the proposal are consistent with approval, as are
the other supervisory factors under the BHC Act.

site evaluation of the institution's overall record of performance under the CRA by its appropriate federal
supervisor.19
BB&T's largest subsidiary bank, as measured by total
deposits, is BB&T Bank.20 The bank received an "outstanding" rating by the FDIC, at its most recent CRA performance evaluation, as of December 20, 2004. BB&T's
remaining subsidiary banks all received "satisfactory"
ratings at their most recent CRA evaluations.21 Main Street
Bank received a "satisfactory" rating at its most recent
CRA performance evaluation by the FDIC, as of December 14, 2004. BB&T has represented that its CRA and
consumer compliance programs would be implemented at
the operations acquired from Main Street after the merger
of BB&T Bank and Main Street Bank.

CONVENIENCE AND NEEDS CONSIDERATIONS

The Board has carefully considered the lending record and
HMDA data of BB&T in light of public comment about its
record of lending to minorities. A commenter alleged,
based primarily on 2004 HMDA data, that BB&T had
disproportionately denied applications for HMDAreportable loans by African-American and Latino applicants. The commenter also asserted that BB&T made
higher-cost loans22 more frequently to African Americans
and Latinos than to nonminorities.23 The Board has analyzed the 2004 HMDA data reported by BB&T's subsidiary
banks in the Metropolitan Statistical Areas ("MSAs") of
Atlanta-Sandy Springs-Marietta, Charlotte-GastoniaConcord, Durham, Raleigh-Cary, Washington-ArlingtonAlexandria, and Winston-Salem; and in their assessment
areas statewide in Georgia, Kentucky, Maryland, and North
Carolina.24
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic

In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").16 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank expansionary proposals.17
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of BB&T's subsidiary banks and Main Street Bank,
data reported by BB&T under the Home Mortgage Disclosure Act ("HMDA"),18 other information provided by
BB&T, confidential supervisory information, and public
comment received on the proposal. A commenter opposed
the proposal and alleged, based on 2004 HMDA data, that
BB&T engaged in discriminatory treatment of minority
individuals in its home mortgage lending.
A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, on16. 12 U.S.C. §2901 et seq.; 12 U.S.C. § 1842(c)(2).
17. 12 U.S.C. §2903.
18. 12 U.S.C. §2801 etseq.

B. HMDA and Fair Lending Record

19. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620, 36,640 (2001).
20. As of December 31, 2005, BB&T Bank accounted for approximately 67.2 percent of the total domestic deposits of BB&T's four
subsidiary banks.
21. Appendix C lists the most recent CRA ratings of BB&T's other
subsidiary banks.
22. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CFR 203.4).
23. The commenter also expressed concern about referrals of loan
applicants to Lendmark Financial Services ("LFS"), a nonbank
subsidiary of BB&T that makes subprime loans. BB&T has represented that it might refer to LFS applications denied by a BB&T
subsidiary bank that do not meet the bank's underwriting guidelines.
Before making a referral, however, these applications undergo an
internal second-review procedure. In addition, BB&T notes that LFS
has a policy to refer applicants who meet the Freddie Mac underwriting guidelines to BB&T's subsidiary banks.
24. In addition, the Board analyzed 2004 HMDA data reported by
LFS in the Charlotte-Gastonia-Concord MSA and statewide in North
Carolina.

Legal Developments

groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
BB&T or its subsidiaries are excluding or imposing higher
costs on any racial or ethnic group on a prohibited basis.
The Board recognizes that HMDA data alone, even with
the recent addition of pricing information, provide only
limited information about the covered loans.25 HMDA data,
therefore, have limitations that make them an inadequate
basis, absent other information, for concluding that an
institution has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all lending institutions are obligated to ensure that their
lending practices are based on criteria that ensure not only
safe and sound lending but also equal access to credit by
creditworthy applicants regardless of their race. Because of
the limitations of HMDA data, the Board has considered
these data carefully and taken into account other information, including examination reports that provide on-site
evaluations of compliance by BB&T's subsidiary banks
with fair lending laws. In the fair lending reviews that were
conducted in conjunction with the most recent CRA performance evaluations of those banks, examiners noted no
substantive violations of applicable fair lending laws.
The record also indicates that BB&T has taken steps to
ensure compliance with fair lending and other consumer
protection laws. BB&T employs an internal second-review
process for home loan applications that would otherwise be
denied and analyzes its HMDA data periodically. Furthermore, BB&T monitors its compliance with fair lending
laws by analyzing disparities in its rates of lending for
select products and markets, and by conducting a more
extensive internal comparative file review when merited.
Finally, BB&T provides fair lending training to its lending
personnel, including training to help ensure that loan
originators consistently disseminate credit-assistance information to applicants.
The Board also has considered the HMDA data in light
of other information, including the CRA performance
records of each of BB&T's subsidiary banks. Their established efforts and records demonstrate that BB&T is
active in helping to meet the credit needs of its entire
communities.
C. Conclusion on CRA Performance Records
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by BB&T, comments received on the proposal, and confidential supervi25. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

C119

sory information. BB&T represented that the proposed
transaction would provide Main Street customers with
expanded products and services. Based on a review of the
entire record, and for the reasons discussed above, the
Board concludes that considerations relating to the convenience and needs factor and the CRA performance records
of the relevant depository institutions are consistent with
approval.

NONBANKING ACTIVITIES
As noted, BB&T also has filed a notice under sections 4(c)(8) and 4(j) of the BHC Act to engage in
data-processing activities through the acquisition of MSB
Data, which provides payroll services to small businesses.
The Board has determined by regulation that financial and
banking data-processing activities are permissible for a
bank holding company under Regulation Y,26 and BB&T
has committed to conduct these activities in accordance
with the limitations set forth in Regulation Y and the
Board's orders governing these activities.
To approve this notice, the Board must also determine
that the performance of the proposed activities by BB&T
"can reasonably be expected to produce benefits to the
public . . . that outweigh possible adverse effects, such as
undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking
practices." 27 As part of its evaluation of these factors, the
Board has considered the financial and managerial resources
of BB&T and Main Street and their subsidiaries, and the
effect of the proposed transaction on their resources. For
the reasons noted above, and based on all the facts of
record, the Board has concluded that financial and managerial considerations are consistent with approval of the
notice.
The Board also has carefully considered the competitive
effects of BB&T's proposed acquisition of MSB Data in
light of all the facts of record. BB&T and Main Street both
engage in activities related to data processing. The market
for the activity is regional or national in scope and unconcentrated. The record in this case also indicates that there
are numerous providers of these services. Accordingly, the
Board concludes that BB&T's acquisition of MSB Data
would not have a significantly adverse effect on competition in any relevant market.
The acquisition of MSB Data by BB&T would benefit
the public by allowing BB&T to offer expanded payroll
products and services to customers in the Atlanta area.
After consummation, BB&T intends to merge MSB Data
with and into BB&T's data-processing subsidiary, BB&T
Payroll Services, Inc. BB&T represented that this merger
would provide customers of MSB Data with access to
BB&T's more advanced technology and software systems
on which to run their payroll systems and expanded support
for the payroll services that are offered. Customers also
26. 12 CFR 225.28(b)(14).
27. See 12 U.S.C. § 1843(j)(2)(A).

C120

Federal Reserve Bulletin • 2006

would have access to additional payroll products and
services, such as payroll cards and a secure online payroll
service.
The Board concludes that the conduct of the proposed
nonbanking activities within the framework of Regulation Y and Board precedent can reasonably be expected to
produce public benefits that would outweigh any likely
adverse effects. Accordingly, based on all the facts of
record, the Board has determined that the balance of the
public benefits factor under section 4(j)(2) of the BHC Act
is consistent with approval.28

CONCLUSION
Based on the foregoing and all facts of record, the Board
has determined that the application and notice should be,
and hereby are, approved.29 In reaching its conclusion, the
Board has considered all the facts of record in light of the
factors that it is required to consider under the BHC Act.
The Board's approval is specifically conditioned on compliance by BB&T with the conditions imposed in this order
and the commitments made to the Board in connection with
the application and notice. The Board's approval of the
nonbanking aspects of the proposal is also subject to all the
conditions set forth in Regulation Y, including those in
sections 225.7 and 225.25(c),30 and to the Board's authority

to require such modification or termination of the activities
of the bank holding company or any of its subsidiaries as
the Board finds necessary to ensure compliance with, and
to prevent evasion of, the provisions of the BHC Act and
the Board's regulations and orders issued thereunder. For
purposes of this action, the conditions and commitments
are deemed to be conditions imposed in writing by the
Board in connection with its findings and decision herein
and, as such, may be enforced in proceedings under
applicable law.
The proposed banking acquisitions may not be consummated before the 15th calendar day after the effective date
of this order, and no part of the proposal may be consummated later than three months after the effective date of this
order, unless such period is extended for good cause by the
Board or the Federal Reserve Bank of Richmond, acting
pursuant to delegated authority.
By order of the Board of Governors, effective March 27,
2006.
Voting for this action: Chairman Bernanke and Governors Bies,
Olson, Kohn, Warsh, and Kroszner. Absent and not voting: Vice
Chairman Ferguson.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Appendix A
28. A commenter asserted that the Board should, in the context of
the current proposal, review BB&T's recently announced plans to
acquire the assets of FSB Financial Ltd. ("FSB"), Arlington, Texas, a
nonbanking company that purchases automobile-loan portfolios. The
FSB acquisition is not related to the current proposal. Moreover, if the
FSB acquisition is consummated under authority of section 4(k) of the
BHC Act, the acquisition would not require prior approval of the
Federal Reserve System. BB&T would require prior Federal Reserve
System approval if the acquisition were proposed under sections 4(c)(8) and 4(j) of the BHC Act, and the transaction would be
reviewed in light of the requirements and standards discussed above.
29. A commenter requested that the Board hold a public hearing or
meeting on the proposal. Section 3 of the BHC Act does not require the
Board to hold a public hearing on an application unless the appropriate
supervisory authority for any of the banks to be acquired makes a
timely written recommendation of denial of the application. The Board
has not received such a recommendation from any supervisory authority. The Board's regulations provide for a hearing under section 4 of
the BHC Act if there are disputed issues of material fact that cannot be
resolved in some other manner (12 CFR 225.25(a)(2)). Under its rales,
the Board also may, in its discretion, hold a public meeting or hearing
on an application to acquire a bank if a meeting or hearing is necessary
or appropriate to clarify factual issues related to the application and to
provide an opportunity for testimony (12 CFR 225.16(e)). The Board
has considered carefully the commenter's request in light of all the
facts of record. In the Board's view, the commenter had ample
opportunity to submit comments on the proposal and, in fact, submitted written comments that the Board has considered carefully in acting
on the proposal. The request fails to identify disputed issues of fact
that are material to the Board's decision that would be clarified by a
public meeting or hearing. Moreover, the commenter's request fails to
demonstrate why its written comments do not present its views
adequately or why a meeting or hearing otherwise would be necessary
or appropriate. For these reasons, and based on all the facts of record,
the Board has determined that a public hearing or meeting is not
required or warranted in this case. Accordingly, the request for a public
hearing or meeting on the proposal is denied.
30. 12 CFR 225.7 and 225.25(c).

GEORGIA BANKING MARKETS IN WHICH BB&T
AND MAIN STREET COMPETE DIRECTLY
Athens Area
Clarke, Jackson, Madison, Oconee, and Oglethorpe counties; and Barrow County, excluding the cities of Auburn
and Winder.
Atlanta Area
Bartow, Cherokee, Clayton, Cobb, Coweta, DeKalb, Douglas, Fayette, Forsyth, Fulton, Gwinnett, Henry, Newton,
Paulding, Rockdale, and Walton counties; Hall County,
excluding the town of Clermont; the towns of Auburn and
Winder in Barrow County; and the town of Luthersville in
Meriwether County.

Appendix B
MARKET DATA FOR GEORGIA BANKING
MARKETS
Athens Area
BB&T operates the 17th largest depository institution in
the Athens Area banking market, controlling deposits of
$47.4 million, which represent 1.5 percent of market
deposits. Main Street operates the 11th largest depository

Legal Developments

institution in the market, controlling deposits of approximately $106.9 million, which represent 3.3 percent of
market deposits. After consummation of the proposal,
BB&T would become the eighth largest depository organization in the market, controlling deposits of approximately
$154.3 million, which represent approximately 4.8 percent
of market deposits. The HHI would increase 10 points, to
888. Twenty-two bank and thrift competitors would remain
in the banking market.
Atlanta Area
BB&T operates the sixth largest depository institution in

C121

the Atlanta Area banking market, controlling deposits of
$2.1 billion, which represent 2.4 percent of market deposits. Main Street operates the seventh largest depository
institution in the market, controlling deposits of approximately $1.6 billion, which represent 1.8 percent of market
deposits. After consummation of the proposal, BB&T
would become the fifth largest depository organization in
the market, controlling deposits of approximately $3.7 billion, which represent approximately 4.1 percent of market
deposits. The HHI would increase 8 points, to 1557. One
hundred and eight bank and thrift competitors would
remain in the banking market.

Appendix C
CRA PERFORMANCE EVALUATIONS OF BB&T'S

BANKS

Bank

CRA Rating

Date

Supervisor

Branch Banking and Trust Company,
Winston-Salem, North Carolina
Branch Banking and Trust Company of South Carolina,
Greenville, South Carolina
Branch Banking and Trust Company of Virginia,
Richmond, Virginia
BB&T Bankcard Corporation,
Columbus, Georgia

Outstanding

December 2004

FDIC

Satisfactory

December 2004

FDIC

Satisfactory

December 2004

FDIC

Satisfactory

May 2005

FDIC

Marshall & Ilsley Corporation
Milwaukee, Wisconsin

tion 18(c) of the Federal Deposit Insurance Act ("Bank
Merger Act") 5 to merge with Gold Bank, with M&I Bank
as the surviving entity. M&I Bank has also applied under
section 9 of the Federal Reserve Act ("FRA") to establish
and operate branches at Gold Bank's main office and
branch locations.6
Notice of the proposals, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (70 Federal Register 72,433 (2005)) and
in local newspapers in accordance with relevant statutes
and the Board's Rules of Procedure.7 As required by the
BHC Act and the Bank Merger Act, reports on the competitive effects of the mergers were requested from the United
States Attorney General and the appropriate banking agencies. The time for filing comments has expired, and the
Board has considered the applications and notice and all
comments received in light of the factors set forth in
sections 3 and 4 of the BHC Act, the Bank Merger Act, and
the FRA.
M&I, with total consolidated assets of approximately
$46.3 billion, operates four subsidiary insured depository
institutions in Arizona, Florida, Illinois, Minnesota, Missouri, Nevada, and Wisconsin. In Wisconsin, M&I is the
largest depository organization, controlling deposits of
approximately $18.3 billion, which represent 18.1 percent

Order Approving the Merger of Bank
Holding Companies
Marshall & Ilsley Corporation ("M&I"), a financial holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act1 to acquire Gold
Bane Corporation, Inc. ("Gold Bane") and its subsidiary
bank, Gold Bank, both of Leawood, Kansas.2 M&I also has
requested the Board's approval under sections 4(c)(8) and
4(j) of the BHC Act3 and sections 225.28(b)(5), (b)(6),
(b)(7), and (b)(8) of the Board's Regulation Y 4 to acquire
the nonbanking subsidiaries of Gold Bane and thereby
engage in permissible investment advisory, securities brokerage, underwriting, and trust activities. In addition,
M&I's subsidiary bank, M&I Marshall & Ilsley Bank
("M&I Bank"), Milwaukee, Wisconsin, a state member
bank, has requested the Board's approval under sec-

1. 12U.S.C. §1842.
2. The Board also approved today a separate application by M&I to
acquire Trustcorp Financial, Inc., St. Louis, and its subsidiary bank,
Missouri State Bank and Trust Company, Clayton, both of Missouri,
under section 3 of the BHC Act. See Marshall & Ilsley Corporation,
92 Federal Reserve Bulletin C79 (2006).
3. 12 U.S.C. §§4(c)(8) and 4(j).
4. 12 CFR 225.28 (b)(5)-(b)(8).

5. 12 U.S.C. §1828(c).
6. 12 U.S.C. §§321 and 1831u. These branches are listed in the
appendix.
7. 12 CFR 262.3(b).

C122

Federal Reserve Bulletin • 2006

of the total amount of deposits of insured depository
institutions in the state ("state deposits")- 8 In Florida, M&I
is the 287th largest depository organization, controlling
deposits of approximately $37 million, which represent less
than 1 percent of state deposits. In Missouri, M&I is the
ninth largest depository organization, controlling deposits
of approximately $1.6 billion, which represent 1.7 percent
of state deposits.
Gold Bane, with total consolidated assets of approximately $4.2 billion, operates one depository institution,
Gold Bank, which has branches in Florida, Kansas, Missouri, and Oklahoma. Gold Bane is the fifth largest depository organization in Kansas, controlling deposits of approximately $1.5 billion, which represent 3.1 percent of
state deposits. In Florida, Gold Bane is the 44th largest
depository organization, controlling deposits of approximately $829 million. In Missouri, Gold Bane is the 36th
largest depository organization, controlling deposits of
approximately $394.4 million.
On consummation of the proposals, M&I would have
consolidated assets of $50.5 billion. In Florida, M&I would
become the 42nd largest depository organization, controlling deposits of $866 million, which represent less than
1 percent of state deposits. In Missouri, M&I would
become the seventh largest depository organization, controlling deposits of $2 billion, which represent 2.2 percent
of state deposits.

INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home state
of such bank holding company if certain conditions are
met.9 For purposes of the BHC Act, the home state of M&I
is Wisconsin,10 and Gold Bank is located in Florida,
Kansas, Missouri, and Oklahoma.11
Section 44 of the Federal Deposit Insurance Act ("FDI
Act") authorizes banks with different home states to merge
under certain conditions unless, before June 1, 1997, the
home state of one of the banks involved in the transaction
adopted a law expressly prohibiting merger transactions
involving out-of-state banks. 12 For purposes of section 44
of the FDI Act, the home state of M&I Bank is Wisconsin,

8. Asset data are as of December 31, 2005. State deposit and ranking
data are as of June 30, 2005, and reflect merger activity through
January 23, 2006. In this context, insured depository institutions
include commercial banks, savings banks, and savings associations.
9. 12U.S.C. §1842(d).
10. Under section 3(d) of the BHC Act, a bank holding company's
home state is the state in which the total deposits of all subsidiary
banks of the company were the largest on July 1, 1966, or the date on
which the company became a bank holding company, whichever is
later (12 U.S.C. § 1841(o)(4)(C)).
11. For purposes of section 3(d) of the BHC Act, the Board
considers a bank to be located in states in which the bank is
headquartered or operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7)
and 1842(d)(l)(A)-(d)(2)(B).
12. 12 U.S.C. §1831u.

and the home state of Gold Bank is Kansas. 13 Neither
Wisconsin nor Kansas has a law prohibiting merger transactions involving out-of-state banks applicable to the
proposals.14
Based on a review of all the facts of record, including a
review of relevant state statutes, the Board finds that all
conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act and section 44 of the FDI Act are
met in this case.15 In light of all the facts of record, the Board
is permitted to approve the proposals under both statutes.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act and the Bank Merger Act prohibit
the Board from approving a proposal that would result in a
monopoly or would be in furtherance of an attempt to
monopolize the business of banking in any relevant banking market. These acts also prohibit the Board from approving a bank acquisition that would substantially lessen
competition in any relevant banking market, unless the
anticompetitive effects of the proposals are clearly outweighed in the public interest by the probable effect of the
proposals in meeting the convenience and needs of the
community to be served.16
M&I and Gold Bane do not compete in any relevant
banking market. Based on all the facts of record, the Board
concludes that consummation of the proposals would not
have a significantly adverse effect on competition or on the
concentration of resources in any relevant banking market.
Accordingly, based on all the facts of record, the Board has
determined that competitive considerations are consistent
with approval.

FINANCIAL AND MANAGERIAL RESOURCES
AND FUTURE PROSPECTS
Section 3 of the BHC Act and the Bank Merger Act require
the Board to consider the financial and managerial resources
and future prospects of the companies and depository
13. Under section 44 of the FDI Act, a state member bank's home
state is the state where it is chartered (12 U.S.C. § 1831u(g)(4)).
14. In 1997, the Kansas State bank commissioner issued an order
specifically authorizing Kansas banks to engage in interstate merger
transactions. See State of Kan. State Bank Comm'r, Special Order
1997-2, (May 30, 1997).
15. 12 U.S.C. §§ 1842(d)(l)(A)-(B), 1842(d)(2)(A)-(B); 12 U.S.C.
§ 1831u(a)-(b). M&I and M&I Bank are adequately capitalized and
adequately managed, as defined by applicable law. Gold Bank has
been in existence and operated for the minimum period of time
required by applicable state law. See Fla. Stat. § 628.295 (three years);
Kan. Stat. Ann. §9-541 (five years); and Mo. Rev. Statutes §362.077
(five years). Oklahoma does not have a minimum age requirement
applicable to the proposals. On consummation of the proposals, M&I
and M&I Bank would control less than 10 percent of the total amount
of deposits of insured depository institutions in the United States. M&I
and M&I Bank also would control less than 30 percent of the total
amount of deposits of insured depository institutions in each relevant
state. See Fla. Stat. §628.295(8); Mo. Rev. Statutes §362.915. All
other requirements of sections 3(d) and 44 would be met on consummation of the proposals.
16. 12 U.S.C. § 1842(c)(l); 12 U.S.C. § 1828(c)(5).

Legal Developments

institutions involved in the proposals and certain other
supervisory factors. The Board has considered these factors
in light of all the facts of record, including confidential
reports of examination, other supervisory information from
the primary federal and state banking supervisors of the
organizations involved in the proposals, publicly reported
and other financial information, information provided by
M&I, and public comment on the proposals.17
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial
condition of the combined organization at consummation,
including its capital position, asset quality, and earnings
prospects, and the impact of the proposed funding of the
transaction.
The Board carefully considered the proposals under the
financial factors. M&I and each of its subsidiary depository
institutions are well capitalized and would remain so on
consummation of the proposals. Based on its review of the
record, the Board finds that M&I has sufficient financial
resources to effect the proposals. The proposal to acquire
Gold Bane is structured as a partial share exchange and
partial cash purchase, and M&I will fund the cash portion
by incurring long-term debt.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of M&I, Gold Bane, and their subsidiary depository
institutions, including assessments of their management,
risk-management systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of the other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law. M&I, Gold Bane, and their subsidiary
depository institutions are considered to be well managed.
The Board also has considered M&I's plans for implementing the proposals, including the proposed management
after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial

17. A commenter expressed concern about relationships of M&I,
Gold Bane, and their subsidiaries with unaffiliated alternative-financialservice providers. As a general matter, the activities of the consumer
finance businesses identified by the commenter are permissible, and
the businesses are licensed by the states where they operate. M&I
stated that one of the relationships referenced by the commenter no
longer exists and that any current relationships with such providers of
nontraditional financial services are limited to extensions of credit to
those businesses. M&I also stated that loans to those businesses
represent less than 1 percent of the loan portfolios of M&I and Gold
Bane and would not have a material impact on the financial or
managerial resources of the organization.

C123

resources and future prospects of the organizations involved in the proposals are consistent with approval, as are
the other supervisory factors under the BHC Act.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on proposals under section 3 of the BHC Act and
the Bank Merger Act, the Board also must consider the
effects of the proposals on the convenience and needs of the
communities to be served and take into account the records
of the relevant insured depository institutions under the
Community Reinvestment Act ("CRA")- 18 The CRA requires the federal financial supervisory agencies to encourage insured depository institutions to help meet the credit
needs of the local communities in which they operate,
consistent with their safe and sound operation, and requires
the appropriate federal financial supervisory agency to take
into account a relevant depository institution's record of
meeting the credit needs of its entire community, including
low- and moderate-income ("LMI") neighborhoods, in
evaluating bank expansionary proposals.19
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of the subsidiary depository institutions of
M&I and Gold Bane, data reported by M&I and Gold Bane
under the Home Mortgage Disclosure Act ("HMDA"), 20
other information provided by M&I and Gold Bane, confidential supervisory information, and public comment received on the proposals. The Board received two comments
on the proposals. One commenter alleged, based primarily
on 2004 HMDA data, that M&I, through its subsidiary
depository institutions and nonbank lending subsidiary, and
Gold Bank engaged in discriminatory treatment of minority
individuals in their home mortgage lending. The other
commenter contended that M&I Bank provided a low
number of home mortgage loans to African Americans in
the Milwaukee-Waukesha Primary Metropolitan Statistical
Area ("PMSA") and that Gold Bank's amount of home
mortgage lending to LMI borrowers in Kansas City was
insufficient.21 This commenter also expressed concern that
M&I Bank's investments in LMI communities have been
limited in nature and should be expanded.22

18. 12 U.S.C. §2901 et seq.; 12 U.S.C. §1842(c)(2); 12 U.S.C.
§1828(c)(5).
19. 12 U.S.C. §2903.
20. 12 U.S.C. §2801 etseq.
21. The commenter also criticized M&I Bank's home mortgage
lending to LMI borrowers in Kansas City. The Board notes that no
portion of the Kansas City Metropolitan Statistical Area ("MSA") has
been a part of M&I Bank's assessment area.
22. The commenter stated that some homeowner counselors had
advised that M&I Bank's policies include a "skip pay" feature for
delinquent borrowers but that the bank rarely allowed that feature to be
exercised. M&I responded that this "skip pay" feature is not an option
in collecting a debt from a delinquent borrower. Rather, it is a
promotional program for certain M&I Bank loans that allows delinquent borrowers to miss a payment. M&I stated, however, that the
bank offers delinquent installment loan borrowers the option to defer a
payment if necessary, with a corresponding extension of the loan term
to account for the missed payment.

C124

Federal Reserve Bulletin • 2006

A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, onsite evaluation of the institution's overall record of performance under the CRA by its appropriate federal
supervisor.23
M&I Bank, M&I's largest subsidiary depository institution as measured by total deposits, received an overall
"outstanding" rating at its most recent CRA performance
evaluation by the Federal Reserve Bank of Chicago, as of
August 11, 2003 ("2003 CRA Evaluation"). All M&I's
other subsidiary depository institutions received "satisfactory" ratings at their most recent CRA performance evaluations.24 Gold Bank received a "satisfactory" rating at its
most recent CRA performance evaluation by the Federal
Reserve Bank of Kansas City, as of January 24, 2005
("2005 Gold Bank CRA Evaluation").
M&I represented that it will implement its CRA policies,
procedures, and programs throughout the combined organization. This implementation will be carried out by local and
regional CRA committees with coordinated oversight from
M&I's corporate CRA committee, which is the current
model for M&I's CRA program.25
B. CRA Performance of M&I Bank
As noted, M&I Bank received an "outstanding" overall
CRA performance rating in the 2003 CRA Evaluation.26
23. See Interagency Questions and Answers Regarding Community
Reinvestment, 71 Federal Register 12,424 and 36,639 (2001).
24. Southwest Bank of St. Louis received an overall "satisfactory"
rating at its most recent CRA performance evaluation by the Federal
Reserve Bank of St. Louis, as of August 11, 2003. M&I Bank FSB
("M&I FSB"), Las Vegas, Nevada, received an overall "satisfactory"
rating at its most recent CRA performance evaluation by the Office of
Thrift Supervision ("OTS"), as of February 23, 2005. M&I Bank of
Mayville, Mayville, Wisconsin, is a special-purpose bank that is not
evaluated under the CRA.
25. M&I has stated that it will retain Gold Bane's Community
Development Officer to maintain connections in the communities that
Gold Bane currently serves.
26. In the 2003 CRA Evaluation, examiners included the lending of
M&I Mortgage Corp. ("M&I Mortgage"), M&I FSB's nationwide
mortgage subsidiary, in its evaluation of M&I Bank's performance
under the CRA lending test. Examiners also included the lending of
M&I Community Development Corporation ("M&I CDC"), a subsidiary of M&I, in the evaluation of M&I Bank's community development lending activity under the CRA lending test. In addition, the
investments of M&I CDC and Marshall & Ilsley Foundation ("M&I
Foundation"), another subsidiary of M&I, were included in the
evaluation of M&I Bank's performance under the investment test.
M&I Bank, M&I CDC, and M&I Foundation are collectively referred
to as "M&I Bank." The evaluation period for HMDA-reportable,
small business, and small farm loans was January 1, 2001, through
December 31, 2002. The evaluation period for community development lending was August 1, 2001, through July 31, 2003. The
evaluation period for the investment and services tests was August 1,

Under the lending test, M&I Bank received an overall
rating of "high satisfactory," and examiners commended
M&I Bank for having a generally strong distribution of
loans among borrowers of different income levels and a
high level of community development lending in both
Wisconsin and Minnesota. Examiners also commended the
bank's extensive use of innovative or flexible lending
practices in meeting the credit needs of its assessment
areas. In M&I Bank's Wisconsin assessment area, the bank
also received a "high satisfactory" rating for the lending
test, and examiners commended the bank's strong responsiveness to community credit needs, particularly for its
distribution of loans to borrowers of different income levels
and to business and farms of different sizes.
In the Milwaukee-Waukesha PMSA, examiners considered the geographic distribution of M&I Bank's HMDAreportable, small business, and small farm lending to be
adequate. Examiners noted that the percentage of the
bank's total number of home improvement loans in LMI
geographies exceeded the percentages for lenders in the
aggregate ("aggregate lenders") during the evaluation
period.27 Although the percentages of the bank's total
number of home purchase and home refinance loans in LMI
census tracts in the Milwaukee-Waukesha PMSA fell below the percentages for the aggregate lenders, examiners
noted that the bank's geographic distribution of such loans
had significantly improved since 2001. They concluded
that the bank's lending levels in the Milwaukee-Waukesha
PMSA were not unreasonable, because owner-occupied
housing units in such census tracts represented only
14.9 percent of total housing units, and the bank faced
strong competition from other lenders.28
In the 2003 CRA Evaluation, M&I Bank received "outstanding" ratings under the investment test overall and for
its assessment areas in Wisconsin. Examiners reported that
the bank made qualified investments totaling $7.9 million
and charitable donations totaling more than $1.2 million
during the evaluation period. Examiners commended the
bank for focusing its investment efforts on areas that
demonstrated the greatest need, such as the bank's assessment areas in the Milwaukee-Waukesha PMSA and the
Madison MSA.
M&I represented that, from August 2003 to July 2005,
M&I Bank made approximately $15.7 million in qualified
investments and grants in the bank's assessment areas,
including investments of approximately $5.3 million in
the Milwaukee area, which represented a significant
increase since the 2003 CRA Evaluation. In addition, as
noted by a commenter, M&I CDC received the "Vision
Award" from the Milwaukee Awards for Neighborhood

2001, through July 31, 2003.
27. The lending data of the aggregate lenders represent the cumulative lending for all financial institutions that reported HMDA data in a
given market.
28. A commenter commended M&I Bank's small-business lending
in the Milwaukee area in 2004, noting that the bank exceeded the
performance of its peers in making small-business loans and lending to
small businesses in LMI census tracts.

Legal Developments

Development Innovation and the Local Initiatives Support
Corporation in 2004 for its investments in affordable
housing.
In the 2003 CRA Evaluation, M&I Bank also received
an "outstanding" rating for the service test, based on its
distribution of branches and ATMs, accessibility of delivery systems, record of opening and closing branch offices,
and innovativeness of products and services. Examiners
noted that approximately 12 percent of M&I Bank's
branches and 16 percent of its ATMs were in LMI census
tracts.29 Examiners commended the bank for having an
"excellent" level of community development services and
for providing support to various organizations within its
combined assessment area, including providing seminars
and consulting services for first-time homebuyers, facilitating affordable housing, and supporting organizations that
assist LMI families, small businesses, and small farm
owners.
C. CRA Performance of Gold Bank
As noted previously, Gold Bank received an overall "satisfactory" rating in the 2005 Gold Bank CRA Evaluation.30
Under the lending test, examiners gave Gold Bank a "high
satisfactory" rating and commended the bank's geographic
loan distribution, noting that the overall geographic distribution of HMDA-reportable and small business loans reflected a favorable penetration in LMI census tracts across
the bank's assessment areas. They also found that the bank's
overall distribution of loans among borrowers of different
income levels was good and consistently exceeded the
performance of the aggregate lenders in the majority of the
bank's assessment areas. Examiners also found that Gold
Bank's community-development lending performance was
adequate and generally responsive to assessment-area credit
needs.
In the Kansas City MSA, Gold Bank received an
"outstanding" rating on the lending test. Examiners commended the bank's "excellent" responsiveness to assessment area credit needs, geographic distribution of loans,
and distribution of loans among individuals of different
income levels. Examiners reported that the percentage of
the bank's home purchase loans in LMI census tracts in
2003 significantly exceeded the percentage for the aggregate lenders.
Gold Bank received a "high satisfactory" rating on the
investment test in the 2005 Gold Bank CRA Evaluation,
29. A commenter expressed appreciation for M&I Bank's active
presence in some of Milwaukee's lowest-income communities and its
participation in economic development organizations.
30. The evaluation period for HMDA-reportable, small business,
and small farm loans was from January 1, 2003, through September 30, 2004. The evaluation period for community development loans
and the service and investment tests was from October 28, 2002,
through January 24, 2005. Gold Bank's performance in its Kansas City
multistate MSA assessment area ("Kansas City MSA") received
significantly greater weight from examiners, because a majority of the
bank's total deposits and loans were concentrated in that assessment
area.

C125

with examiners particularly commending the bank's performance in the Kansas City MSA. Examiners concluded that
the bank exhibited adequate responsiveness to community
development needs in the Kansas City MSA through its
donation and grant activity. During the review period, the
bank provided 39 qualified investments totaling $8.1 million, including 34 grants and donations.31
Gold Bank received a "low satisfactory" rating on the
service test. Examiners reported that the bank's offices
were generally accessible to all portions of its assessment
areas, including LMI geographies, although branches and
ATMs were predominantly located in middle- and upperincome areas.
D. HMD A and Fair Lending Record
The Board has carefully considered the lending record and
HMDA data of M&I and Gold Bane in light of public
comment received on the proposals. A commenter alleged,
based primarily on 2004 HMDA data, that M&I Bank,
M&I Mortgage, and M&I FSB denied the home mortgage
and refinance applications of minority applicants more
frequently than those of nonminority applicants and made
higher-cost loans more frequently to minority borrowers
than nonminority borrowers nationwide in the Milwaukee
and St. Louis MSAs, and statewide in Missouri, Ohio, and
Wisconsin.32 The same commenter also alleged that Gold
Bank denied home mortgage applications of AfricanAmerican and Latino borrowers more frequently than
nonminority applicants in the Kansas City MSA. Another
commenter expressed concern that the amount of mortgage
lending by M&I Bank to African Americans in the Milwaukee MSA area lagged behind the performance of the
aggregate lenders.
The Board has analyzed 2004 HMDA data reported by
M&I Bank, M&I Mortgage, M&I FSB, and their affiliates
nationwide and in their primary assessment areas, including their assessment areas in the Milwaukee-Waukesha
PMSA; the MSAs of Appleton, Oshkosh-Neenah, Lake
County-Kenosha County, Madison, and St. Louis; and
statewide in Arizona, Illinois, Minnesota, Missouri, Nevada, Ohio, and Wisconsin. In addition, the Board has
31. A commenter criticized Gold Bank's investment-performance
record and investment rating because of credit Gold Bank received in
its 2005 CRA Evaluation from the Kansas City Reserve Bank for
making an investment in multifamily housing revenue bonds that were
ultimately intended to benefit LMI residents. The Board has consulted
with the Kansas City Reserve Bank on this matter. Through no fault of
Gold Bank, the bonds were called and no multifamily housing was
constructed. Gold Bane made various, timely public disclosures
regarding the impairment of the bonds and also timely notified the
Kansas City Reserve Bank. The Board notes that M&I represented that
it would implement its CRA policies, procedures, and programs,
including its CRA investment programs, throughout the areas served
by Gold Bank after consummation of the proposals.
32. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CFR 203.4).

C126

Federal Reserve Bulletin • 2006

analyzed 2004 HMDA data reported by Gold Bank in its
assessment areas in the Kansas City MSA and statewide in
Kansas, Missouri, and Oklahoma.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
M&I or Gold Bane is excluding or imposing higher costs
on any racial or ethnic group on a prohibited basis. The
Board recognizes that HMDA data alone, even with the
recent addition of pricing information, provide only limited information about the covered loans. 33 HMDA data,
therefore, have limitations that make them an inadequate
basis, absent other information, for concluding that an
institution has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA
data for an institution indicate disparities in lending and
believes that all lending institutions are obligated to ensure that their lending practices are based on criteria that
ensure not only safe and sound lending but also equal
access to credit by creditworthy applicants regardless of
their race. Because of the limitations of HMDA data, the
Board has considered these data carefully and taken into
account other information, including examination reports
that provide on-site evaluations of compliance by M&I
and Gold Bane with fair lending laws. The Board also
consulted with the OTS, the primary regulator of M&I
FSB, and considered the compliance examination records
of M&I's and Gold Bane's subsidiary depository institutions. Examiners noted no evidence of illegal credit discrimination by any of M&I's or Gold Bane's subsidiary
depository institutions.
The record also indicates that M&I, Gold Bane, their
subsidiary depository institutions, and their nonbank lending subsidiaries have taken steps to ensure compliance
with fair lending and other consumer protection laws.
M&I represented that it has centralized programs in place
to monitor and manage compliance that feature periodic
reviews of all consumer lending programs, the tracking of
applicable laws and regulations, ongoing compliance-risk
analyses, the development of programs to train personnel
involved in consumer lending, and oversight of the creation and use of consumer lending forms for its depository and lending institutions. M&I also represented that it
has ongoing, comprehensive training programs to ensure
that regulatory requirements and policies are updated to
reflect changes in law and internal policies or procedures
and are clearly communicated to personnel. In addition,
M&I represented that its internal audit department peri33. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

odically performs independent testing and validation of
the compliance performance of M&I's various business
units to ensure compliance with fair lending and other
consumer protection laws and to measure the effectiveness of internal controls. After consummation of the
proposed transaction, M&I stated that it would implement
its centralized compliance-related policies and procedures
across the combined organization, thereby ensuring that
all areas have the same compliance monitoring and independent testing processes. In addition, critical functions,
such as underwriting of consumer and mortgage loans,
also would be performed centrally to provide consistent
application of policies and procedures across the
organization.
The Board also has considered the HMDA data in light
of other information, including the CRA lending programs
of M&I and Gold Bane and the overall CRA performance
records of their subsidiary depository and lending institutions. These established efforts and records demonstrate
that the institutions are active in helping to meet the credit
needs of their entire communities.

E. Conclusion on CRA Performance Records
The Board has carefully considered all the facts of record,34
including reports of examination of the CRA records of the
institutions involved, information provided by M&I and
Gold Bane, comments received on the proposals, and
confidential supervisory information. M&I represented that
the proposals would provide customers of Gold Bank with
access to a broader array of financial products and services.
Based on a review of the entire record, and for the reasons
discussed above, the Board concludes that considerations
relating to the convenience and needs factor and the CRA
performance records of the relevant depository institutions
are consistent with approval.

NONBANKING ACTIVITIES
M&I also has filed a notice under sections 4(c)(8) and 4(j)
of the BHC Act to acquire Gold Bane's nonbanking
34. One commenter requested that the Board condition its approval
of the proposals on certain community reinvestment and other commitments by M&I. As the Board previously has explained, an applicant
must demonstrate a satisfactory record of performance under the CRA
without reliance on plans or commitments for future actions. The
Board has consistently stated that neither the CRA nor the federal
banking agencies' CRA regulations require depository institutions to
make pledges or enter into commitments or agreements with any
organization. See, e.g., JPMorgan Chase & Co., 90 Federal Reserve
Bulletin 352 (2004); Wachovia Corporation, 91 Federal Reserve
Bulletin 11 (2005); The Toronto-Dominion Bank, 92 Federal Reserve
Bulletin C100 (2006). In this case, as in past cases, the Board has
focused instead on the demonstrated CRA performance records of
M&I's subsidiaries and the programs that they have in place to serve
the credit needs of their assessment areas when the Board reviewed the
proposals under the convenience and needs factor. In reviewing future
applications by M&I under this factor, the Board similarly will review
the actual CRA performance records of M&I's subsidiaries and the
programs they have in place to meet the credit needs of their
communities at that time.

Legal Developments

subsidiaries, Gold Capital Management, Inc. ("Gold Capital") and Gold Trust Company ("Gold Trust"). 35 Gold
Capital engages in investment advisory, securities brokerage, and government securities underwriting activities.
Gold Trust is a nondepository trust company engaged in
trust services.
The Board has determined by regulation that financial
and investment advisory services, securities brokerage
services, underwriting government obligations, and trust
company services are permissible for bank holding companies under Regulation Y.36 M&I has committed to
conduct these activities in accordance with the Board's
regulations and orders for bank holding companies engaged in these activities.
To approve this notice, the Board must determine that
M&I's acquisition of Gold Capital and Gold Trust and the
performance of the proposed activities "can reasonably be
expected to produce benefits to the public . . . that outweigh
possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of
interests, or unsound banking practices." 37 As part of its
evaluation of these factors, the Board has considered the
financial and managerial resources of M&I, its subsidiaries,
and the companies to be acquired, and the effect of the
proposed transaction on those resources. For the reasons
noted above, and based on all the facts of record, the Board
concludes that the financial and managerial considerations
are consistent with approval of the notice.
The Board has considered the competitive effects of
M&I's proposed acquisition of Gold Capital and Gold
Trust in light of all the facts of record. Gold Capital
engages in nonbanking activities through its offices in
Kansas and Gold Bank's retail branches in Florida, Kansas,
Missouri, and Oklahoma. M&I engages in similar nonbanking activities through the offices of its nonbanking subsidiary companies38 and at the branches of its banking subsidiaries in Arizona, Florida, Illinois, Minnesota, Missouri,
Nevada, and Wisconsin. Gold Trust also provides its trust
services at Gold Bank's branches, and M&I provides trust
services through Marshall & Ilsley Trust Company National
Association at its offices in Indianapolis, Indiana, and at the
branches and offices of M&I's subsidiary banks. The
record indicates that the markets for these activities, which
include investment advisory, securities brokerage, government securities underwriting, and trust services, are regional or national in scope and that the markets are
unconcentrated with numerous competitors. Accordingly,

35. M&I also would acquire Gold Bane's remaining nonbanking
activities and businesses, such as Gold Capital's insurance agency
services, broker-dealer activities, and distribution and management
services for open-end investment companies, and Gold Merchant
Bane, Inc., a subsidiary of Gold Bane that engages in merchant
banking activities, under section 4(k) of the BHC Act and the
post-transaction notice procedures of section 225.87 of Regulation Y
12 U.S.C. § 1843(k)(4)(H); 12 CFR 225.87; 12 CFR Subpart J.
36. See 12 CFR 225.28(b)(5)-(b)(8).
37. See 12 U.S.C. § 1843(j)(2)(A).
38. M&I Brokerage Services, Inc., which provides securities brokerage and investment advisory services, has an office in Milwaukee.

C127

the Board concludes that M&I's acquisition of Gold Capital and Gold Trust would have a de minimis effect on
competition for these nonbanking activities in any relevant
market.
In addition, the Board has reviewed carefully the public benefits of the proposed acquisition of Gold Bane. The
proposals would allow M&I to provide an expanded
range of trust and investment products and services to
Gold Bane's customers, including trust and administrative
services for retirement plans, secured working-capital lending, leasing, and data-processing services. In addition, the
proposals would enable M&I to offer an expanded physical presence to its own customers through Gold Bane's
network.
Based on all of the facts of record, the Board has
determined that consummation of the nonbanking proposal
can reasonably be expected to produce public benefits that
would outweigh possible adverse effects under the standard
of review in section 4(j)(2) of the BHC Act.

BRANCHES
As previously noted, M&I Bank has also applied under
section 9 of the FRA to establish branches at the locations
listed in the appendix. The Board has assessed the factors it
is required to consider when reviewing an application
under section 9 of the FRA and the Board's Regulation H
and finds those factors to be consistent with approval.39

CONCLUSION
Based on the foregoing and all facts of record, the Board
has determined that the applications and notice should be,
and hereby are, approved.40 In reaching its conclusion, the
39. 12 U.S.C. § 322; 12 CFR 208.6(b).
40. A commenter requested that the Board hold a public hearing
or meeting on the proposals. Section 3 of the BHC Act does not
require the Board to hold a public hearing on an application unless
the appropriate supervisory authority for any of the banks to be
acquired makes a timely written recommendation of denial of the
application. The Board has not received such a recommendation
from any supervisory authority. The Board's regulations provide for
a hearing under section 4 of the BHC Act if there are disputed issues
of material fact that cannot be resolved in some other manner
(12 CFR 225.25(a)(2)). The Bank Merger Act and the FRA do not
require the Board to hold a public hearing or meeting. Under its
rules, the Board also may, in its discretion, hold a public meeting or
hearing on an application to acquire a bank if a meeting or hearing
is necessary or appropriate to clarify factual issues related to the
application and to provide an opportunity for testimony (12 CFR
225.16(e)). The Board has considered carefully the commenter's
request in light of all the facts of record. In the Board's view, the
commenter had ample opportunity to submit comments on the
proposals and, in fact, submitted written comments that the Board
has considered carefully in acting on the proposals. The request fails
to identify disputed issues of fact that are material to the Board's
decision and would be clarified by a public meeting or hearing.
Moreover, the commenter's request fails to demonstrate why its
written comments do not present its views adequately or why a
meeting or hearing otherwise would be necessary or appropriate. For
these reasons, and based on all the facts of record, the Board has
determined that a public hearing or meeting is not required or

C128 Federal Reserve Bulletin • 2006

Board has considered all the facts of record in light of the
factors that it is required to consider under the BHC Act,
the Bank Merger Act, and other applicable statutes. The
Board's approval is specifically conditioned on compliance
by M&I with the conditions imposed in this order and the
commitments made to the Board in connection with the
applications and notice. The Board's approval of the nonbanking aspects of the proposals also is subject to all the
conditions set forth in Regulation Y, including those in
sections 225.7 and 225.25(c),41 and to the Board's authority
to require such modification or termination of the activities
of a bank holding company or any of its subsidiaries as the
Board finds necessary to ensure compliance with and to
prevent evasion of the provisions of the BHC Act and the
Board's regulations and orders issued thereunder. For
purposes of this action, the conditions and commitments
are deemed to be conditions imposed in writing by the
Board in connection with its findings and decision herein
and, as such, may be enforced in proceedings under
applicable law.
The proposed banking acquisitions may not be consummated before the 15th calendar day after the effective date
of this order, and no part of the proposal may be consummated later than three months after the effective date of this
order, unless such period is extended for good cause by the
Board or the Federal Reserve Bank of Chicago, acting
pursuant to delegated authority.
By order of the Board of Governors, effective March 13,
2006.
Voting for this action: Chairman Bernanke, Vice Chairman Ferguson, and Governors Bies, Olson, Kohn, Warsh, and Kroszner.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Appendix
MAIN OFFICE AND BRANCHES TO BE
ACQUIRED BY M&I
Florida
Charlotte County
1777 Tamiami Trail, Murdock
Hillsborough County
301 North Tamiami Trail, Ruskin
601 North Ashley Drive, Tampa
Manatee County
2525 Manatee Avenue, West Bradenton
5503 Manatee Avenue, West Bradenton
4502 Cortez Road, West Bradenton
4115 U.S. Highway 301 East, Ellen ton
warranted in this case. Accordingly, the request for a public hearing
or meeting on the proposals is denied.
41. 12 CFR 225.7 and 225.25(c).

1301 8th Avenue West, Palmetto
6821 15th Street East, Sarasota
Sarasota County
1201 South Beneva Road, Sarasota
240 South Pineapple Avenue, Sarasota
Kansas
Crawford County
411 North Broadway, Pittsburg
Fourth and Walnut Streets, Pittsburg
Johnson County
8840 State Line, Leawood
11301 Nail, Leawood
1511 West 101st Terrace, Lenexa
15203 West 119th Street, Olathe
9529 Antioch Road, Overland Park
12080 Blue Valley Parkway, Overland Park
6333 Long, Shawnee
7225 Renner Road, Shawnee
21900 Shawnee Mission Parkway, Shawnee

Missouri
Buchanan County
2211 North Belt Highway, Saint Joseph
4305 Frederick Boulevard, Saint Joseph
Clay County
105 North Stewart Court, Suite 100, Liberty
Jackson County
18800 East Highway 40, Independence
800 West 47th Street, Kansas City
1201 North West Briarcliff Parkway, Kansas City
Oklahoma
Tulsa County
2500 West Edison Street, Tulsa
11032 South Memorial, Tulsa
5120 South Garnett, Tulsa

ORDERS ISSUED UNDER
INTERNATIONAL BANKING ACT
Banco Latinoamericano de Exportaciones
S.A.
Panama City, Republic of Panama
Order Approving Establishment of a
Representative Office
Banco Latinoamericano de Exportaciones S.A. ("Bank"),
Panama City, Republic of Panama, a foreign bank within

Legal Developments

the meaning of the International Banking Act ("IBA"), has
applied under section 10(a) of theIBA(12U.S.C. §3107(a))
to establish a representative office in Miami, Florida. The
Foreign Bank Supervision Enhancement Act of 1991,
which amended the IBA, provides that a foreign bank must
obtain the approval of the Board to establish a representative office in the United States.
Notice of the application, affording interested persons an
opportunity to submit comments, has been published in a
newspaper of general circulation in Miami (The Miami
Herald, April 15, 2005). The time for filing comments has
expired, and all comments received have been considered.
Bank, with total consolidated assets of approximately
$3.2 billion,1 is the third largest bank in Panama and
focuses on the provision of trade finance services.2 Bank
operates representative offices in Argentina, Brazil, and
Mexico. In the United States, Bank operates an agency in
New York, New York.
The proposed representative office would act as a liaison
between Bank's head office in Panama and its existing and
prospective customers in the United States. The office
would engage in representative functions in connection
with the products and services offered by Bank, solicit new
business, provide information to U.S.-based companies
about conducting business in Latin America, and perform
preliminary and servicing steps in connection with lending.
The IBA and Regulation K require that the Board, in
acting on an application by a foreign bank to establish a
representative office, take into account whether (1) the
foreign bank has furnished the information the Board needs
to assess the application adequately; (2) the foreign bank
and any foreign bank parent engage directly in the business
of banking outside of the United States; and (3) the foreign
bank and any foreign bank parent are subject to comprehensive supervision on a consolidated basis by their home
country supervisors (12 U.S.C. §§3107 and 3105(d)(2);
12 CFR 211.24(d)(2)).3 The Board also may take into
account additional standards set forth in the IBA and
Regulation K (12 U.S.C. §3105(d)(3)-(4); 12 CFR

1. Data are as of December 31, 2005.
2. Bank was established by central banks in the region to finance
trade throughout Latin America. Bank has three classes of shares. The
ownership of the first class of shares is restricted to central banks or
state-owned financial institutions in Latin America. Other financial
institutions may hold the second class of shares. The third class of
shares is publicly traded on the New York Stock Exchange.
3. In assessing the supervision standard, the Board considers,
among other factors, the extent to which the home country supervisors: (i) ensure that the bank has adequate procedures for monitoring
and controlling its activities worldwide; (ii) obtain information on
the condition of the bank and its subsidiaries and offices through
regular examination reports, audit reports, or otherwise; (iii) obtain
information on the dealings with and relationship between the bank
and its affiliates, both foreign and domestic; (iv) receive from the
bank financial reports that are consolidated on a worldwide basis or
comparable information that permits analysis of the bank's financial
condition on a worldwide consolidated basis; and (v) evaluate prudential standards, such as capital adequacy and risk asset exposure,
on a worldwide basis. These are indicia of comprehensive, consolidated supervision. No single factor is essential, and other elements
may inform the Board's determination.

C129

211.24(c)(2)). The Board will consider that the supervision
standard has been met where it determines that the applicant bank is subject to a supervisory framework that is
consistent with the activities of the proposed representative
office, taking into account the nature of such activities.4
This is a lesser standard than the comprehensive, consolidated supervision standard applicable to applications to
establish branch or agency offices of a foreign bank. The
Board considers the lesser standard sufficient for approval
of representative office applications, because representative
offices may not engage in banking activities (12 CFR
211.24(d)(2)).
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the application through submissions that address the relevant issues.
Bank has provided the following information regarding
home country supervision. Bank is supervised by the
Superintendency of Banks of the Republic of Panama
("Superintendency"). The Superintendency is responsible
for the regulation, supervision, and examination of financial institutions operating in Panama. The Superintendency implements legislation concerning capital adequacy, liquidity, asset classification, and large credit and
foreign-currency exposures. The Superintendency has the
authority to impose remedial measures, including civil
money penalties, against banks that violate Panamanian
banking laws and regulations.
The Superintendency supervises and regulates Bank
through a combination of on-site examinations and off-site
monitoring. On-site examinations are conducted annually
and cover the Bank's overall financial condition, capital
adequacy, asset quality, corporate governance, and compliance with the law. Off-site monitoring of Bank is conducted
by the Superintendency through the review of required
weekly, monthly, quarterly, and annual reports. Bank is also
subject to quarterly external audits.5 These audits cover
internal controls, risk management, asset quality, and the
preparation of financial statements.
Based on all the facts of record, including the information above, it has been determined that Bank is subject to a
supervisory framework that is consistent with the activities
of the proposed representative office, taking into account
the nature of such activities.
The additional standards set forth in section 7 of the IBA
and Regulation K (see 12 U.S.C. § 3105(d)(3)-(4); 12 CFR
211.24(c)(2)) have also been taken into account. The
Superintendency has no objection to the establishment of
the proposed representative office.
4. See, e.g., Banco Financiera Comercial Hondurena, S.A., 91 Federal Reserve Bulletin 444 (2005); Jamaica National Building Society,
88 Federal Reserve Bulletin 59 (2002); and RHEINHYP Rheinische
HypothekenbankAG, 87 Federal Reserve Bulletin 558 (2001); see also
Promstroybank of Russia, 82 Federal Reserve Bulletin 599 (1996);
Komercni Banka, a.s., 82 Federal Reserve Bulletin 597 (1996); and
Commercial Bank Ion Tiriac, S.A., 82 Federal Reserve Bulletin 592
(1996).
5. External auditors are subject to standards established by the
Superintendency.

C130

Federal Reserve Bulletin • 2006

With respect to the financial and managerial resources of
Bank, taking into consideration its record of operations in
its home country, its overall financial resources, and its
standing with its home country supervisor, financial and
managerial factors are consistent with approval of the
proposed representative office. Bank has capital that exceeds
the Basel minimums. Bank appears to have the experience
and capacity to support the proposed representative office
and has established controls and procedures for it to ensure
compliance with U.S. law.
Panama has enacted laws based on the general recommendations of the Financial Action Task Force. Panama is a
member of the Caribbean Financial Action Task Force and
participates in other international fora that address the
prevention of money laundering.6 Money laundering is a
criminal offense in Panama, and banks are required to
establish internal policies and procedures for the detection
and prevention of money laundering. The Superintendency
requires banks to adopt know-your-customer policies, report suspicious transactions to Panama's Financial Intelligence Unit, and maintain records. Bank states that it has
established anti-money-laundering policies and procedures,
which include the implementation of know-your-customer
policies, suspicious-activity-reporting procedures, and related training programs and manuals. These policies and
procedures are reviewed by the Superintendency and by
Bank's internal and external auditors.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions
in which Bank operates have been reviewed, and relevant
government authorities have been communicated with regarding access to information. Bank has committed to
make available to the Board such information on the
operations of Bank and any of its affiliates as the Board
deems necessary to determine and enforce compliance with
the IB A, the Bank Holding Company Act of 1956, as
amended, and other applicable federal law. To the extent
that the provision of such information to the Board may be
prohibited by law or otherwise, Bank has committed to
cooperate with the Board to obtain any necessary consents
or waivers that might be required from third parties for
disclosure of such information. In addition, subject to
certain conditions, the Superintendency may share information on Bank's operations with other supervisors, including
the Board. In light of these commitments and other facts of
record, and subject to the condition described below, it has
been determined that Bank has provided adequate assurances of access to any necessary information that the Board
may request.
Based on the foregoing and all the facts of record, and
subject to the commitments made by Bank and the terms
and conditions set forth in this order, Bank's application to

6. Panama is a party to the f 988 UN Convention Against the Illicit
Traffic of Narcotics and Psychotropic Substances, the UN International Convention Against Transnational Organized Crime, and the
UN International Convention for the Suppression of the Financing of
Terrorism. Panama is also a member of the Organization of American
States Inter-American Drug Abuse Control Commission.

establish the representative office is hereby approved.7
Should any restrictions on access to information on the
operations or activities of Bank or any of its affiliates
subsequently interfere with the Board's ability to obtain
information to determine and enforce compliance by Bank
or its affiliates with applicable federal statutes, the Board
may require or recommend termination of any of Bank's
direct and indirect activities in the United States. Approval
of the application also is specifically conditioned on compliance by Bank with the conditions imposed in this order
and the commitments made to the Board in connection with
this application.8 For purposes of this action, these commitments and conditions are deemed to be conditions imposed
in writing by the Board in connection with its finding and
decision and, as such, may be enforced in proceedings
under applicable law.
By order, approved pursuant to authority delegated by
the Board, effective March 27, 2006.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Banco Popular Espahol, S.A.
Madrid, Spain
Order Approving Establishment
of a Representative Office
Banco Popular Espanol, S.A. ("Bank"), Madrid, Spain, a
foreign bank within the meaning of the International Banking Act ("IBA"), has applied under section 10(a) of the
IBA (12 U.S.C. §3107(a)) to establish a representative
office in Miami, Florida. The Foreign Bank Supervision
Enhancement Act of 1991, which amended the IBA, provides that a foreign bank must obtain the approval of the
Board to establish a representative office in the United
States.
Notice of the application, affording interested persons an
opportunity to submit comments, has been published in a
newspaper of general circulation in Miami (The Miami
Herald, July 29, 2005). The time for filing comments has
expired, and all comments received have been considered.
Bank, with total consolidated assets of approximately
$88.3 billion,1 is the lead bank of the third largest commercial banking group in Spain and provides wholesale and
retail banking services through a network of branches in
7. Approved by the director of the Division of Banking Supervision
and Regulation, with the concurrence of the General Counsel, pursuant
to authority delegated by the Board. See 12 CFR 265.7(d)(12).
8. The Board's authority to approve the establishment of the
proposed representative office parallels the continuing authority of the
state of Florida to license offices of a foreign bank. The Board's
approval of this application does not supplant the authority of the state
of Florida or its agent, the Florida Office of Financial Regulation, to
license the proposed office of Bank in accordance with any terms or
conditions that it may impose.
1. Unless otherwise indicated, data are as of December 31, 2004.

Legal Developments

Spain, Portugal, and France.2 Bank also has representative
offices in Asia, Latin America, Canada, and elsewhere in
Europe.
The proposed representative office would serve as a
liaison between Bank's existing and prospective customers
in Spain and the United States. The office would also
promote the Bank's services to potential customers in the
United States and Latin America, provide information to
customers concerning their accounts, inform U.S.- and
Spanish-owned businesses of business opportunities existing in Spain, and receive applications for extensions of
credit and other banking services on behalf of Bank.
The IBA and Regulation K require that the Board, in
acting on an application by a foreign bank to establish a
representative office, take into account whether (1) the
foreign bank has furnished the information the Board needs
to assess the application adequately; (2) the foreign bank
and any foreign bank parent engage directly in the business
of banking outside of the United States; and (3) the foreign
bank and any foreign bank parent are subject to comprehensive supervision on a consolidated basis by their home
country supervisors (12 U.S.C. §3105(d)(2); 12 CFR
211.24(d)(2)).3 The Board also may take into account
additional standards set forth in the IBA and Regulation K
(12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)).
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the application through submissions that address the relevant issues.
With respect to supervision by home country authorities,
the Board previously has determined, in connection with
applications involving other banks in Spain, that those
banks were subject to home country supervision on a
consolidated basis.4 Bank is supervised by the Bank of
Spain on substantially the same terms and conditions as
2. Bank also owns controlling interests in ten bank subsidiaries and
owns nonbank subsidiaries that engage in activities related to securities and mutual funds, asset management, insurance, leasing, factoring, and venture capital.
3. In assessing the supervision standard, the Board considers,
among other of comprehensive, consolidated supervision, the extent to
which the home country supervisors: (i) ensure that the bank has
adequate procedures for monitoring and controlling its activities
worldwide; (ii) obtain information on the condition of the bank and its
subsidiaries and offices through regular examination reports, audit
reports, or otherwise; (iii) obtain information on the dealings with and
relationship between the bank and its affiliates, both foreign and
domestic; (iv) receive from the bank financial reports that are consolidated on a worldwide basis or comparable information that permits
analysis of the bank's financial condition on a worldwide consolidated
basis; and (v) evaluate prudential standards, such as capital adequacy
and risk asset exposure, on a worldwide basis. These are indicia of
comprehensive, consolidated supervision. No single factor is essential,
and other elements may inform the Board's determination.
4. See Banco Bilbao Vizcaya Argentaria, S.A., 91 Federal Reserve
Bulletin 258 (2005); Banco Pastor, S.A., 87 Federal Reserve Bulletin
555 (2001); Caja de Ahorros de Valencia, Castelldn y Alicante,
84 Federal Reserve Bulletin 231 (1998); Banco Exterior de Espana
S.A., 81 Federal Reserve Bulletin 616 (1995); Corporacion Bancdria
de Espana, 81 Federal Reserve Bulletin 598 (1995); Banco Santander
S.A., 79 Federal Reserve Bulletin 622 (1993); Banco de Sabadell S.A.,
79 Federal Reserve Bulletin 366 (1993).

C131

those other banks. Based on all the facts of record, including the above information, it has been determined that
Bank is subject to comprehensive supervision on a consolidated basis by its home country supervisor.
The additional standards set forth in section 7 of the IBA
and Regulation K (see 12 U.S.C. § 3105(d)(3)-(4); 12 CFR.
211.24(c)(2)) have also been taken into account. The Bank
of Spain has no objection to the establishment of the
proposed representative office.
With respect to the financial and managerial resources of
Bank, taking into consideration its record of operations in
its home country, its overall financial resources, and its
standing with its home country supervisor, financial and
managerial factors are consistent with approval of the
proposed representative office. Bank appears to have the
experience and capacity to support the proposed representative office and has established controls and procedures for
the proposed representative office to ensure compliance
with U.S. law, as well as controls and procedures for its
worldwide operations generally.
Spain is a member of the Financial Action Task Force
and subscribes to its recommendations regarding measures
to combat money laundering and international terrorism. In
accordance with these recommendations, Spain has enacted
laws and created legislative and regulatory standards to
deter money laundering, terrorist financing, and other illicit
activities. Money laundering is a criminal offense in Spain,
and credit institutions are required to establish internal
policies, procedures, and systems for the detection and
prevention of money laundering throughout their worldwide operations. Bank has policies and procedures to
comply with these laws and regulations that are monitored
by governmental entities responsible for anti-moneylaundering compliance.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions
in which Bank operates have been reviewed, and relevant
government authorities have been communicated with regarding access to information. Bank has committed to
make available to the Board such information on the
operations of Bank and any of its affiliates as the Board
deems necessary to determine and enforce compliance with
the IBA, the Bank Holding Company Act of 1956, as
amended, and other applicable federal law. To the extent
that the provision of such information to the Board may be
prohibited by law or otherwise, Bank has committed to
cooperate with the Board to obtain any necessary consents
or waivers that might be required from third parties for
disclosure of such information. In addition, subject to
certain conditions, the Bank of Spain may share information on Bank's operations with other supervisors, including
the Board. In light of these commitments and other facts of
record, and subject to the condition described below, it has
been determined that Bank has provided adequate assurances of access to any necessary information that the Board
may request.
Based on the foregoing and all the facts of record, and
subject to the commitments made by Bank and the terms

C132

Federal Reserve Bulletin • 2006

and conditions set forth in this order, Bank's application to
establish the representative office is hereby approved.5
Should any restrictions on access to information on the
operations or activities of Bank or any of its affiliates
subsequently interfere with the Board's ability to obtain
information to determine and enforce compliance by Bank
or its affiliates with applicable federal statutes, the Board
may require or recommend termination of any of Bank's
direct and indirect activities in the United States. Approval
of the application also is specifically conditioned on compliance by Bank with the conditions imposed in this order
and the commitments made to the Board in connection with
this application.6 For purposes of this action, these commitments and conditions are deemed to be conditions imposed
in writing by the Board in connection with its finding and
decision and, as such, may be enforced in proceedings
under applicable law.
By order, approved pursuant to authority delegated by
the Board, effective February 8, 2006.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Caja de Ahorros de Galicia, Caixa Galicia
A Coruha, Spain
Order Approving Establishment
of an Agency
Caja de Ahorros de Galicia, Caixa Galicia ("Bank"), A
Coruna, Spain, a foreign bank within the meaning of the
International Banking Act ("IBA"), has applied under
section 7(d) of the IBA (12 U.S.C. §3105(d)) to establish
an agency in Miami, Florida. The Foreign Bank Supervision Enhancement Act of 1991, which amended the IBA,
provides that a foreign bank must obtain the approval of
the Board to establish an agency in the United States.
Notice of the application, affording interested persons
an opportunity to comment, has been published in a
newspaper of general circulation in Miami {Miami Daily
Business Review, July 28, 2005). The time for filing
comments has expired, and all comments received have
been considered.

5. Approved by the director of the Division of Banking Supervision
and Regulation, with the concurrence of the General Counsel, pursuant
to authority delegated by the Board. See 12 CFR 265.7(d)(12).
6. The Board's authority to approve the establishment of the
proposed representative office parallels the continuing authority of the
state of Florida to license offices of a foreign bank. The Board's
approval of this application does not supplant the authority of the state
of Florida or its agent, the Florida Office of Financial Regulation, to
license the proposed office of Bank in accordance with any terms or
conditions that it may impose.

Bank, a savings bank with total assets of approximately
$42 billion,1 is the 11th largest bank in Spain.2 Bank
provides wholesale and retail banking services through
more than 700 branches throughout Spain. Bank also engages through its subsidiaries in real estate, insurance,
venture capital, information technology, transportation, and
utilities services, as well as manufacturing and energyrelated activities. Outside Spain, Bank operates branches in
Portugal and Switzerland and representative offices in
France, England, Switzerland, Mexico, Argentina, and Venezuela. Bank currently does not have any operations in the
United States.
The proposed agency would offer deposit and investment management services, largely for Latin American
customers. The agency would also provide corporate banking and foreign trade services to companies.
Under the IBA and Regulation K, in acting on an
application by a foreign bank to establish a branch, the
Board must consider whether the foreign bank (1) engages directly in the business of banking outside the
United States; (2) has furnished to the Board the information it needs to assess the application adequately; and
(3) is subject to comprehensive supervision or regulation
on a consolidated basis by its home country supervisor
(12 U.S.C. §3105(d)(2); 12 CFR 211.24).3 The Board
also considers additional standards set forth in the IBA
and Regulation K (12 U.S.C. §3105(d)(3)-(4); 12 CFR
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the application through submissions that address the relevant issues.
With respect to supervision by home country authorities,
the Federal Reserve previously has determined, in connection with applications involving other banks in Spain, that
those banks were subject to home country supervision on a

1. Asset data are as of June 30, 2005.
2. Spanish savings banks are generally organized as mutual entities
and do not have shareholders. Bank's operations are controlled and
governed by a general assembly and a board of directors. The
160-member general assembly includes representatives of the municipalities in which Bank operates (25 percent); Bank's depositors
(40 percent); representatives designated by 34 regional civic organizations (25 percent); and Bank's employees (10 percent). Bank's board
of directors is composed of 21 board members, proportionally representing the entities comprising the general assembly.
3. In assessing this standard, the Board considers, among other
factors, the extent to which the home country supervisors: (i) ensure
that the bank has adequate procedures for monitoring and controlling
its activities worldwide; (ii) obtain information on the condition of the
bank and its subsidiaries and offices through regular examination
reports, audit reports, or otherwise; (iii) obtain information on the
dealings with and relationship between the bank and its affiliates, both
foreign and domestic; (iv) receive from the bank financial reports that
are consolidated on a worldwide basis or comparable information that
permits analysis of the bank's financial condition on a worldwide
consolidated basis; and (v) evaluate prudential standards, such as
capital adequacy and risk asset exposure, on a worldwide basis. These
are indicia of comprehensive, consolidated supervision. No single
factor is essential, and other elements may inform the Board's
determination.

Legal Developments

consolidated basis.4 Bank is supervised by the Bank of
Spain on substantially the same terms and conditions as
those other banks. Based on all the facts of record, it has
been determined that Bank is subject to comprehensive
supervision on a consolidated basis by its home country
supervisor.
The Board has also taken into account the additional
standards set forth in section 7 of the IB A and Regulation K
{see 12U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3)).
The Bank of Spain has no objection to the establishment of
the proposed agency.
Spain's risk-based capital standards are consistent with
those established by the Basel Capital Accord. Bank's
capital is in excess of the minimum levels that would be
required by the Basel Capital Accord and is considered
equivalent to capital that would be required of a U.S.
banking organization. Managerial and other financial
resources of Bank also are considered consistent with
approval, and Bank appears to have the experience and
capacity to support the proposed agency. In addition, Bank
has established controls and procedures for the proposed
agency to ensure compliance with U.S. law, as well as
controls and procedures for its worldwide operations
generally.
Spain is a member of the Financial Action Task Force
and subscribes to its recommendations on measures to
combat money laundering. In accordance with those recommendations, Spain has enacted laws and created legislative and regulatory standards to deter money laundering.
Money laundering is a criminal offense in Spain, and
financial institutions are required to establish internal
policies, procedures, and systems for the detection and
prevention of money laundering throughout their worldwide operations. Bank has policies and procedures to
comply with these laws and regulations that are monitored by governmental entities responsible for anti-moneylaundering compliance.
With respect to access to information about Bank's
operations, the Board has reviewed the restrictions on
disclosure in relevant jurisdictions in which Bank operates
and has communicated with relevant government authorities regarding access to information. Bank has committed
to make available to the Board such information on the
operations of Bank and any of its affiliates that the Board
deems necessary to determine and enforce compliance with
the IBA, the Bank Holding Company Act, and other
applicable federal law. To the extent that the provision of
such information to the Board may be prohibited by law or
otherwise, Bank has committed to cooperate with the
Board to obtain any necessary consents or waivers that
might be required from third parties for disclosure of such
information. In light of these commitments and other facts
of record, and subject to the condition described below, it
has been determined that Bank has provided adequate
4. See Banco Bilbao Vizcaya Argentaria, S.A., 91 Federal Reserve
Bulletin 258 (2005); Caixa de Aforros de Vigo, 88 Federal Reserve
Bulletin 132 (2002).

C133

assurances of access to any necessary information that the
Board may request.
On the basis of all the facts of record, and subject to the
commitments made by Bank, as well as the terms and
conditions set forth in this order, Bank's application to
establish an agency in Miami, Florida, is hereby approved.5
Should any restrictions on access to information on the
operations or activities of Bank and its affiliates subsequently interfere with the Board's ability to obtain information to determine and enforce compliance by Bank or its
affiliates with applicable federal statutes, the Board may
require termination of any of Bank's direct or indirect
activities in the United States. Approval of this application
also is specifically conditioned on compliance by Bank with
the commitments made in connection with this application
and with the conditions in this order.6 The commitments and
conditions referred to above are conditions imposed in
writing by the Board in connection with this decision and
may be enforced in proceedings under 12 U.S.C. §1818
against Bank and its affiliates.
By order, approved pursuant to authority delegated by
the Board, effective March 20, 2006.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Caja de Ahorros del Mediterrdneo
Alicante, Spain
Order Approving Establishment of an
Agency
Caja de Ahorros del Mediterraneo ("Bank"), a foreign
bank within the meaning of the International Banking Act
("IBA"), has applied under section 7(d) of the IBA
(12 U.S.C. §3105(d)) to establish an agency in Miami,
Florida. The Foreign Bank Supervision Enhancement Act
of 1991, which amended the IBA, provides that a foreign
bank must obtain the approval of the Board to establish an
agency in the United States.
Notice of the application, affording interested persons an
opportunity to comment, has been published in a newspaper of general circulation in Miami {The Miami Herald,
October 21, 2005). The time for filing comments has
expired, and all comments received have been considered.
Bank, with total assets of approximately $54 billion,1 is
5. Approved by the director of the Division of Banking Supervision
and Regulation, with the concurrence of the General Counsel, pursuant
to authority delegated by the Board.
6. The Board's authority to approve the establishment of the
proposed agency parallels the continuing authority of the state of
Florida to license offices of a foreign bank. The Board's approval of
this application does not supplant the authority of the state of Florida
Department of Financial Services to license the proposed agency of
Bank in accordance with any terms or conditions that it may impose.
1. Asset and ranking data are as of September 30, 2005.

C134

Federal Reserve Bulletin • 2006

the fifth largest savings bank in Spain.2 Bank is the top-tier
company of CAM, which is the ninth largest banking
organization in Spain. CAM provides a broad range of
banking, financial, and other services primarily in Spain.
Bank maintains representative offices in seven countries
and operates several nonbank subsidiaries in the Cayman
Islands that issue bonds. Bank does not have any operations
in the United States and would be a qualifying foreign
banking organization under Regulation K.
The Miami agency would offer commercial banking,
private banking, and correspondent banking services targeted primarily at Spanish customers. The agency also
would coordinate CAM's access to U.S. capital markets.
Under the IBA and Regulation K, in acting on an
application by a foreign bank to establish a branch, the
Board must consider whether the foreign bank (1) engages directly in the business of banking outside the
United States; (2) has furnished to the Board the information it needs to assess the application adequately; and
(3) is subject to comprehensive supervision or regulation
on a consolidated basis by its home country supervisor
(12 U.S.C. §3105(d)(2); 12 CFR 211.24).3 The Board
also considers additional standards as set forth in the IBA
and Regulation K (12 U.S.C. §3105(d)(3)-(4); 12 CFR
211.24(c)(2)-(3)).
As noted above, Bank engages directly in the business
of banking outside the United States. Bank also has
provided the Board with information necessary to assess
the application through submissions that address the relevant issues. With respect to supervision by home country
authorities, the Federal Reserve previously has determined, in connection with applications involving other
banks in Spain, that those banks were subject to home

2. Spanish savings banks are generally organized as mutual entities
and do not have shareholders. Bank's operations are controlled and
governed by a general assembly, a board of directors, and a control
commission. The 180-member general assembly includes representatives of the municipalities in which Bank operates (24 percent);
Bank's depositors (36 percent); representatives designated by the
parliament of the community of Valencia and other communities in
which the founding entities of Caja de Ahorros del Mediterraneo
("CAM") are located (27 percent); and Bank's employees (13 percent). Bank's board of directors is composed of 20 board members,
proportionally representing the entities comprising the general assembly. Bank's ten-member control commission overseas the board of
directors and is the administrator of elections.
3. In assessing this standard, the Board considers, among other
indicia of comprehensive, consolidated supervision, the extent to
which the home country supervisors: (i) ensure that the bank has
adequate procedures for monitoring and controlling its activities
worldwide; (ii) obtain information on the condition of the bank and its
subsidiaries and offices through regular examination reports, audit
reports, or otherwise; (iii) obtain information on the dealings with and
relationship between the bank and its affiliates, both foreign and
domestic; (iv) receive from the bank financial reports that are consolidated on a worldwide basis or comparable information that permits
analysis of the bank's financial condition on a worldwide consolidated
basis; and (v) evaluate prudential standards, such as capital adequacy
and risk asset exposure, on a worldwide basis. No single factor is
essential, and other elements may inform the Board's determination.

country supervision on a consolidated basis.4 Bank is
supervised by the Bank of Spain on substantially the
same terms and conditions as those other banks. Based on
all the facts of record, it has been determined that Bank is
subject to comprehensive supervision on a consolidated
basis by its home country supervisor.
The Board has also taken into account the additional
standards set forth in section 7 of the IBA and Regulation K
(see 12 U.S.C. §3105(d)(3)-(4); 12 CFR211.24(c)(2)-(3)).
The Bank of Spain has no objection to the establishment of
the proposed agency.
Spain's risk-based capital standards are consistent with
those established by the Basel Capital Accord. Bank's
capital is in excess of the minimum levels that would be
required by the Basel Capital Accord and is considered
equivalent to capital that would be required of a U.S.
banking organization. Managerial and other financial
resources of Bank are consistent with approval, and Bank
appears to have the experience and capacity to support the
proposed agency. In addition, Bank has established controls
and procedures for the proposed agency to ensure compliance with U.S. law, as well as controls and procedures for
its worldwide operations generally.
Spain is a member of the Financial Action Task Force
and subscribes to its recommendations on measures to
combat money laundering. In accordance with these recommendations, Spain has enacted laws and created legislative
and regulatory standards to deter money laundering. Money
laundering is a criminal offense in Spain, and financial
institutions are required to establish internal policies, procedures, and systems for the detection and prevention of
money laundering throughout their worldwide operations.
Bank has policies and procedures to comply with these
laws and regulations that are monitored by governmental
entities responsible for anti-money-laundering compliance.
With respect to access to information about Bank's
operations, the Board has reviewed the restrictions on
disclosure in relevant jurisdictions in which Bank operates and has communicated with relevant government
authorities regarding access to information. Bank and its
top-tier parent have committed to make available to the
Board such information on the operations of Bank and
any of its affiliates that the Board deems necessary to
determine and enforce compliance with the IBA, the
Bank Holding Company Act, and other applicable federal
law. To the extent that the provision of such information
to the Board may be prohibited by law or otherwise,
Bank and its top-tier parent have committed to cooperate

4. See Caja de Ahorros de Galicia, Caixa Galic, 92 Federal Reserve
Bulletin C132 (2006); Banco Popular Espanol, S.A., 92 Federal
Reserve Bulletin C130 (2006); Banco Bilbao Vizcaya Argentaria, S.A.,
91 Federal Reserve Bulletin 258 (2005); Banco Pastor, S.A., 87 Federal Reserve Bulletin 555 (2001); Caja de Ahorros de Valencia,
Castelldn y Alicante, 84 Federal Reserve Bulletin 231 (1998); Banco
Exterior de Espaiia S.A., 81 Federal Reserve Bulletin 616 (1995);
Corporacidn Bancdria de Espaiia, 81 Federal Reserve Bulletin 598
(1995); Banco Santander S.A., 79 Federal Reserve Bulletin 622
(1993); and Banco de Sabadell S.A., 79 Federal Reserve Bulletin 366
(1993).

Legal Developments

with the Board to obtain any necessary consents or waivers that might be required from third parties for disclosure of such information. In light of these commitments
and other facts of record, and subject to the condition
described below, it has been determined that Bank has
provided adequate assurances of access to any necessary
information that the Board may request.
On the basis of all the facts of record, and subject to the
commitments made by Bank, as well as the terms and
conditions set forth in this order, Bank's application to
establish an agency in Miami, Florida, is hereby approved.5
Should any restrictions on access to information on the
operations or activities of Bank and its affiliates subsequently interfere with the Board's ability to obtain information to determine and enforce compliance by Bank or its
affiliates with applicable federal statutes, the Board may
require termination of any of Bank's direct or indirect
activities in the United States. Approval of this application
also is specifically conditioned on compliance by Bank
with the commitments made in connection with this application and with the conditions in this order.6 The commitments and conditions referred to above are conditions
imposed in writing by the Board in connection with this
decision and may be enforced in proceedings under
12 U.S.C. § 1818 against Bank and its affiliates.
By order, approved pursuant to authority delegated by
the Board, effective March 30, 2006.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Kreditanstalt fur Wiederaufbau
Frankfurt, Germany
Order Approving Establishment of a
Representative Office
Kreditanstalt fur Wiederaufbau, ("Bank"), Frankfurt, Germany, a foreign bank within the meaning of the International Banking Act ("IBA"), has applied under section 10(a) of the IBA (12 U.S.C. §3107(a)) to establish a
representative office in New York, New York. The Foreign
Bank Supervision Enhancement Act of 1991, which
amended the IBA, provides that a foreign bank must obtain
the approval of the Board to establish a representative
office in the United States.
Notice of the application, affording interested persons an
opportunity to submit comments, has been published in a

5. Approved by the director of the Division of Banking Supervision
and Regulation, with the concurrence of the General Counsel, pursuant
to authority delegated by the Board.
6. The Board's authority to approve the establishment of the
proposed agency parallels the continuing authority of the state of
Florida to license offices of a foreign bank. The Board's approval of
this application does not supplant the authority of the Florida Office of
Financial Regulation to license the proposed agency of Bank in
accordance with any terms or conditions that it may impose.

C135

newspaper of general circulation in New York (The New
York Times, July 27, 2005), and the time for filing comments has expired.
Bank, with total consolidated assets of approximately
$445 billion, is the seventh largest bank in Germany.' As a
government-owned development bank,2 Bank engages primarily in lending and financing activities in furtherance of
public sector initiatives, such as providing loans for housing, small businesses, and municipal infrastructure, and
provides various other services, such as disbursing German
government loans and grants to developing countries and
providing advisory services in connection with privatizations. Bank also engages in export and project finance
through a division of the Bank known as IPEX-Bank.3 It
has representative offices in Brazil, China, Thailand, and
Turkey that primarily serve its IPEX-Bank division. In the
United States, Bank operates KfW International Finance,
Inc., Wilmington, Delaware, a funding vehicle established
to access U.S. capital markets.
The proposed representative office primarily would act
as a liaison with existing and potential customers and
conduct market research for the IPEX-Bank division of
Bank. Additionally, the proposed representative office
would support Bank's activities with developing countries
by acting as a liaison with multinational organizations
located in the United States, such as the United Nations, the
World Bank, and the International Monetary Fund.
Under the IBA and Regulation K, in acting on an
application by a foreign bank to establish a representative
office, the Board shall take into account whether (1) the
foreign bank has furnished the information the Board needs
to assess the application adequately; (2) the foreign bank
and any foreign bank parent engage directly in the business
of banking outside of the United States; and (3) the foreign
bank and any foreign bank parent are subject to comprehensive supervision on a consolidated basis by their home
country supervisors (12 U.S.C. §3107(a)(2); 12 CFR
211.24(d)(2)). The Board also may take into account
additional standards set forth in the IBA and Regulation K
(12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)).4 The
1. Asset data are as of December 31, 2004.
2. The federal government of Germany owns 80 percent of the
shares of Bank. The remaining 20 percent of Bank's shares is owned
by various state governments in Germany.
3. Bank intends to divest the IPEX-Bank division by 2008. The
European Commissioner for Competition determined that the IPEXBank division engages in activities that are inconsistent with Bank's
status as a government-owned development bank.
4. In assessing the supervision standard, the Board considers,
among other factors, the extent to which the home country supervisors:
(i) ensure that the bank has adequate procedures for monitoring and
controlling its activities worldwide; (ii) obtain information on the
condition of the bank and its subsidiaries and offices through regular
examination reports, audit reports, or otherwise; (iii) obtain information on the dealings with and relationship between the bank and its
affiliates, both foreign and domestic; (iv) receive from the bank
financial reports that are consolidated on a worldwide basis or
comparable information that permits analysis of the bank's financial
condition on a worldwide consolidated basis; and (v) evaluate prudential standards, such as capital adequacy and risk asset exposure, on a
worldwide basis. These are indicia of comprehensive, consolidated

C136

Federal Reserve Bulletin • 2006

Board will consider that the supervision standard has been
met where it determines that the applicant bank is subject to
a supervisory framework that is consistent with the activities of the proposed representative office, taking into
account the nature of such activities.5 This is a lesser
standard than the comprehensive, consolidated supervision
standard applicable to applications to establish branch or
agency offices of a foreign bank. The Board considers the
lesser standard sufficient for approval of representative
office applications, because representative offices may not
engage in banking activities (12 C.F.R. 211.24(d)(2)).
As noted above, Bank engages directly in the business
of banking outside the United States. Bank also has
provided the Board with information necessary to assess
the application through submissions that address the relevant issues.
With respect to supervision by home country authorities,
the Board has considered the following information. The
Bundesanstalt fur Finanzdiestleistungsaufsicht ("BaFin")
is the primary regulator of commercial banks in Germany,
and the Board has previously considered the supervisory
regime in Germany for commercial banks.6 Bank is not
considered a commercial bank under German law. Rather,
it is a development bank established pursuant to a special
statute, and its primary regulator is the Federal Ministry of
Finance ("MoF"). Although it is exempt from many of the
legal provisions that govern commercial banks, Bank has
voluntarily subjected itself to the guidelines that BaFin has
established for commercial banks with respect to lending
and trading activities, and internal audit, and as noted
below, compliance with these guidelines is subject to
annual audit. Bank is required by law to maintain minimum
capital of €3.75 billion, and is prohibited from distributing
profits. The MoF has authority to adopt all measures
necessary to ensure that Bank's business conforms with all
applicable laws.
The MoF exercises its supervision in consultation with
the Federal Ministry of Economics and Labor. The Ministers of Finance and of Economics and Labor alternate as
chairmen and deputy chairmen of Bank's supervisory
board. The MoF may at any time request on-site examinations by third parties or conduct examinations itself, and
such examinations can encompass all business areas,
including subsidiaries and foreign offices. MoF officials
meet with Bank officials at least biweekly, including, on
occasion, at Bank's foreign offices, to discuss Bank's

supervision. No single factor is essential, and other elements may
inform the Board's determination.
5. See, e.g., Banco Financiera Comercial Hondurena, S.A., 91 Federal Reserve Bulletin 444 (2005); Nacional Financiera, S.N.C.,
91 Federal Reserve Bulletin 295 (2005); Jamaica National Building
Society, 88 Federal Reserve Bulletin 59 (2002); RHEINHYP Rheinische Hypothekenbank AG, 87 Federal Reserve Bulletin 558 (2001);
see also Promstroybank of Russia, 82 Federal Reserve Bulletin 599
(1996); Komercni Banka, a.s., 82 Federal Reserve Bulletin 597
(1996); Commercial Bank Ion Tiriac, S.A., 82 Federal Reserve Bulletin 592 (1996).
6. See, e.g., Deutsche Genossenschafts-HypothekenbankAG, 92 Federal Reserve Bulletin C61 (2006).

strategy, new fields of activity, new products, and related
issues.
The MoF also monitors Bank's condition through a
review of required regulatory reports. These include quarterly financial reports and risk reports, annual audited
consolidated financial statements that are filed with a report
from the external auditor, results of internal audit reviews,
and regular reports regarding risk analysis and measures
taken to prevent money laundering.
Bank is subject to an annual external audit by auditors
appointed by the MoF. The scope of the external audit
includes the bank's consolidated financial statements, internal controls, including controls to prevent money laundering, and compliance with BaFin's guidelines for lending,
trading activities, and internal audit. Inasmuch as Bank is a
government-owned entity, the Federal Court of Auditors
also has the discretion to audit Bank's financial statements.
The results of such audits are reported to the upper and
lower houses of parliament and to the MoF.
Based on all the facts of record, it has been determined
that Bank is subject to a supervisory framework that is
consistent with the activities of the proposed representative office, taking into account the nature of such activities.
The additional standards set forth in section 7 of the
IBA and Regulation K (see 12 U.S.C. §3105(d)(3)-(4);
12 CFR 211.24(c)(2)) have also been taken into account.
The MoF has authorized Bank to establish the proposed
office.
With respect to the financial and managerial resources of
Bank, taking into consideration Bank's record of operations in its home country, its overall financial resources,
and its standing with its home country supervisors, financial and managerial factors are consistent with approval of
the proposed representative office. Bank appears to have
the experience and capacity to support the proposed representative office and has established controls and procedures
for the proposed representative office to ensure compliance
with U.S. law, as well as controls and procedures for its
worldwide operations generally.
Germany is a member of the Financial Action Task
Force and subscribes to its recommendations regarding
measures to combat money laundering and international
terrorism. In accordance with these recommendations, Germany has enacted laws and created legislative and regulatory standards to deter money laundering, terrorist financing, or other illicit activities. Money laundering is a
criminal offense in Germany, and Bank is subject to laws
that require it to establish internal policies, procedures, and
systems for the detection and prevention of money laundering throughout its worldwide operations. Bank has policies
and procedures to comply with these laws and regulations,
which include reporting suspicious transactions promptly
to the German Financial Intelligence Unit and other appropriate law enforcement authorities.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions
in which Bank operates have been reviewed, and relevant

Legal Developments

government authorities have been communicated with regarding access to information. Bank has committed to
make available to the Board such information on the
operations of Bank and any of its affiliates that the Board
deems necessary to determine and enforce compliance with
the IB A, the Bank Holding Company Act of 1956, as
amended, and other applicable federal law. To the extent
that the provision of such information to the Board may be
prohibited by law or otherwise, Bank has committed to
cooperate with the Board to obtain any necessary consents
or waivers that might be required from third parties for
disclosure of such information. In addition, subject to
certain conditions, the MoF may share information on
Bank's operations with other supervisors, including the
Board. In light of these commitments and other facts of
record, and subject to the condition described below, it has
been determined that Bank has provided adequate assurances of access to any necessary information that the Board
may request.
On the basis of all the facts of record, and subject to the
commitments made by Bank and the terms and conditions
set forth in this order, Bank's application to establish the
representative office is hereby approved.7 Should any restrictions on access to information on the operations or
activities of Bank or any of its affiliates subsequently
interfere with the Board's ability to obtain information to
determine and enforce compliance by Bank or its affiliates
with applicable federal statutes, the Board may require or
recommend termination of any of Bank's direct and indirect activities in the United States. Approval of this application also is specifically conditioned on compliance by
Bank with the commitments made in connection with this
application and with the conditions in this order.8 The
commitments and conditions referred to above are conditions imposed in writing by the Board in connection with
its decision and may be enforced in proceedings against
Bank and its affiliates under 12 U.S.C. § 1818.
By order, approved pursuant to authority delegated by
the Board, effective January 3, 2006.

C137

FINAL ENFORCEMENT DECISIONS
ISSUED BY THE BOARD
IN THE MATTER OF A NOTICE TO
PROHIBIT FURTHER PARTICIPATION
AGAINST

Oyeacholem Moseri,
Former Employee,
First North American National Bank,
Kennesaw, Georgia (Closed)
Docket No. OCC-AA-EC-05-72
FINAL DECISION
This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ("the FDI Act") in which the
Office of the Comptroller of the Currency of the United
States of America ("OCC") seeks to prohibit the Respondent, Oyeacholem Moseri ("Respondent"), from further
participation in the affairs of any financial institution based
on actions he took while employed at First North American
National Bank, Kennesaw, Georgia (the "Bank"). Under
the FDI Act, the OCC may initiate a prohibition proceeding
against a former employee of a national bank, but the Board
must make the final determination whether to issue an order
of prohibition.
Upon review of the administrative record, the Board
issues this Final Decision adopting the Recommended
Decision ("Recommended Decision") of Administrative
Law Judge Ann Z. Cook (the "ALJ"), and orders the
issuance of the attached Order of Prohibition.
I. Statement of the Case

JENNIFER J. JOHNSON

Secretary of the Board

7. Approved by the director of the Division of Banking Supervision
and Regulation, with the concurrence of the General Counsel, pursuant
to authority delegated by the Board.
8. The Board's authority to approve the establishment of the
proposed representative office parallels the continuing authority of the
state of New York to license offices of a foreign bank. The Board's
approval of this application does not supplant the authority of the state
of New York or its agent, the New York State Banking Department
("Department"), to license the proposed office of Bank in accordance
with any terms or conditions that the Department may impose.

A. Statutory and Regulatory Framework
Under the FDI Act and the Board's regulations, the ALJ is
responsible for conducting proceedings on a notice of
charges (12 U.S.C. § 1818(e)(4)). The ALJ issues a recommended decision that is referred to the deciding agency
together with any exceptions to those recommendations
filed by the parties. The Board makes the final findings of
fact, conclusions of law, and determination whether to issue
an order of prohibition in the case of prohibition orders
sought by the OCC. Id.; 12 CFR 263.40.
The FDI Act sets forth the substantive basis upon which
a federal banking agency may issue against a bank official
or employee an order of prohibition from further participation in banking. To issue such an order, the Board must
make each of three findings: (1) that the respondent engaged in identified misconduct, including a violation of law
or regulation, an unsafe or unsound practice, or a breach of

C13 8 Federal Reserve Bulletin • 2006

fiduciary duty; (2) that the conduct had a specified effect,
including financial loss to the institution or gain to the
respondent; and (3) that the respondent's conduct involved
either personal dishonesty or a willful or continuing disregard for the safety or soundness of the institution (12 U.S.C.
An enforcement proceeding is initiated by filing and
serving on the respondent a notice of intent to prohibit.
Under the OCC's and the Board's regulations, the respondent must file an answer within 20 days of service of the
notice (12 CFR 19.19(a) and 263.19(a)). Failure to file an
answer constitutes a waiver of the respondent's right to
contest the allegations in the notice, and a final order may
be entered unless good cause is shown for failure to file a
timely answer (12 CFR 19.19(c)(l) and 263.19(c)(l)).
B. Procedural History
On August 31, 2005, the OCC served upon Respondent a
Notice of Intention to Prohibit Further Participation and
Notice of Assessment of a Civil Money Penalty ("Notice")
that sought, inter alia, an order of prohibition against
Respondent based on his conduct while employed at the
Bank. The Notice directed Respondent to file a written
answer within 20 days of the date of service of the Notice
in accordance with 12 CFR 19.19(a) and (b), and warned
that failure to do so would constitute a waiver of his right to
appear and contest the allegations. The Notice was served
in accordance with the OCC rules by overnight delivery,
and was signed for by an individual named "Moseri." In
addition, on September 22, 2005, the OCC served the
notice upon Respondent's relative and co-resident, Jane
Moseri, at Respondent's personal residence. Nonetheless,
Respondent failed to file an answer within the 20-day
period or thereafter.
On November 23, 2005, Enforcement Counsel filed a
Motion for Entry of an Order of Default against Respondent. On November 29, 2005, the ALJ issued an Order to
Show Cause, providing Respondent until December 19,
2005, to file an answer to the Notice and to show good
cause for having failed to do so previously. To date,
Respondent has not filed any reply to the Order to Show
Cause or answered the Notice.
C. Respondent's Actions
The Notice alleges that Respondent was employed as a
collections officer for Bank. His sole responsibility was to
help Bank collect funds from delinquent credit card account
holders by telephoning customers whose accounts were on
a Bank-generated list of delinquent accounts. Respondent
had no responsibility over nondelinquent accounts, nor did
he have permission to view or alter any information
contained in the records of nondelinquent account holders.
Nonetheless, Respondent improperly viewed the personal
account records of more than 600 customers whose accounts
were nondelinquent. Further, during the period AugustSeptember 2000, Respondent improperly viewed and altered the personal account records of at least 11 additional

customers whose accounts were also nondelinquent. These
alterations, detailed in the ALJ's Recommended Decision,
included changing the address and telephone number of
nondelinquent accounts to Respondent's personal residence and other addresses, the issuance and activation of
new cards to some of those accounts, and illegitimate
charges to two of those cards totaling $1,359.74.

II. Discussion
The OCC's Rules of Practice and Procedure set forth the
requirements of an answer and the consequences of a
failure to file an answer to a Notice. Under the Rules,
failure to file a timely answer "constitutes a waiver of [a
respondent's] right to appear and contest the allegations in
the notice" (12 CFR 19.19(c)). If the ALJ finds that no
good cause has been shown for the failure to file, the judge
"shall file . . . a recommended decision containing the
findings and the relief sought in the notice." Id. An order
based on a failure to file a timely answer is deemed to be
issued by consent. Id.
In this case, Respondent failed to file an answer to the
Notice despite notice to him of the consequences of such
failure, and also failed to respond to the ALJ's Order to
Show Cause. Respondent's failure to file an answer constitutes a default.
Respondent's default requires the Board to consider the
allegations in the Notice as uncontested. The allegations in
the Notice, described above, meet all the criteria for entry
of an order of prohibition under 12 U.S.C. § 1818(e). It was
a breach of fiduciary duty, unsafe and unsound practice,
and violation of law or regulation, for Respondent to view
nondelinquent credit card account holder information; alter
account addresses and telephone numbers in such accounts;
and request (or cause to be requested) new or replacement
credit cards to be issued to some of the altered accounts.
Respondent's actions resulted in loss to the Bank and
financial gain to the Respondent, in that he incurred (or
caused to be incurred) illegitimate charges totaling at least
$1,359.74 on two of the altered accounts. Finally, such
actions also exhibit personal dishonesty and willful disregard for the safety and soundness of the Bank.
Accordingly, the requirements for an order of prohibition have been met and the Board hereby issues such an
order.

CONCLUSION
For these reasons, the Board orders the issuance of the
attached Order of Prohibition.
By Order of the Board of Governors, this 23rd day of
March, 2006.

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Legal Developments

C139

IN THE MATTER OF A NOTICE TO
PROHIBIT FURTHER PARTICIPATION
AGAINST

3. This Order, and each and every provision hereof, is and
shall remain fully effective and enforceable until expressly stayed, modified, terminated, or suspended in
writing by the Board.

Oyeacholem Moseri,
Former Employee,

This Order shall become effective at the expiration of
30 days after service is made.
By Order of the Board of Governors, this 23rd day of
March, 2006.

First North American National Bank,
Kennesaw, Georgia (Closed)

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM

Docket No. OCC-AA-EC-05-72
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

ORDER OF PROHIBITION
WHEREAS, pursuant to section 8(e) of the Federal Deposit
Insurance Act, as amended, (the "FDI Act") (12 U.S.C.
§ 1818(e)), the Board of Governors of the Federal Reserve
System ("the Board") is of the opinion, for the reasons set
forth in the accompanying Final Decision, that a final Order
of Prohibition should issue against OYEACHOLEM
MOSERI ("Moseri"), a former employee and institutionaffiliated party, as defined in Section 3(u) of the FDI Act
(12 U.S.C. §1813(u)), of First North American National
Bank, Kennesaw, Georgia.
NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the FDI Act, 12 U.S.C. § 1818(e),
that:
1. In the absence of prior written approval by the Board,
and by any other federal financial institution regulatory
agency where necessary pursuant to section 8(e)(7)(B)
of the FDI Act (12 U.S.C. § 1818(e)(7)(B)), Moseri is
hereby prohibited:
(a) from participating in any manner in the conduct of
the affairs of any institution or agency specified in
section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A)), including, but not limited to, any
insured depository institution, any insured depository institution holding company or any U.S. branch
or agency of a foreign banking organization;
(b) from soliciting, procuring, transferring, attempting
to transfer, voting or attempting to vote any proxy,
consent, or authorization with respect to any voting
rights in any institution described in subsection 8(e)(7)(A) of the FDI Act (12 U.S.C.
§1818(e)(7)(A));
(c) from violating any voting agreement previously
approved by any federal banking agency; or
(d) from voting for a director, or from serving or acting
as an institution-affiliated party as defined in section 3(u) of the FDI Act (12 U.S.C. §1813(u)), such
as an officer, director, or employee in any institution
described in section 8(e)(7)(A) of the FDI Act
(12 U.S.C. §1818(e)(7)(A)).
2. Any violation of this Order shall separately subject
Moseri to appropriate civil or criminal penalties or both
under section 8 of the FDI Act (12 U.S.C. § 1818).

IN THE MATTER OF

Jean Peyrelevade,
A former institution-affiliated party of
CREDIT LYONNAIS, S.A.,
Paris, France
Docket Nos. 03-041-CMP-I, 03-041-B-I, 03041-E-I
ORDER TO CEASE AND DESIST ISSUED UPON

CONSENT
WHEREAS, pursuant to Section 8(b) of the Federal Deposit Insurance Act, as amended (the "FDI Act") (12 U.S.C.
section 1818(b)), the Board of Governors of the Federal
Reserve System (the "Board of Governors") issues this
consent Order to Cease and Desist (the "Order") against
Jean Peyrelevade ("Peyrelevade"), a former institutionaffiliated party, as defined in Sections 3(u) and 8(b)(4) of
the FDI Act (12 U.S.C. sections 1813(u) and 1818(b)(4)),
of Credit Lyonnais, S.A., Paris, France ("Credit Lyonnais"), a foreign bank;
WHEREAS, the Board of Governors, on December 18,
2003, issued a combined Notice of Charges and of Hearing,
Notice of Assessment of Civil Money Penalties, and Notice
of Intent to Prohibit (the "December 18, 2003, Notice")
against Peyrelevade. The December 18, 2003, Notice alleges that Peyrelevade participated in violations of law and
regulation and engaged in unsafe and unsound practices
with respect to alleged violations by Credit Lyonnais in
connection with its alleged acquisition and retention of
indirect control of voting shares of the successor to the
Executive Life Insurance Company of California. Peyrelevade has denied the allegations;
WHEREAS, Peyrelevade and the United States Attorney
for the Central District of California have entered into a
plea agreement in accordance with the principles of North
Carolina v. Alford, 400 U.S. 25 (1970) and United States v.

C140

Federal Reserve Bulletin • 2006

Alber, 56 F.3d 1106 (9th Cir. 1995) related to certain
matters set forth in the December 18, 2003, Notice which,
if accepted by the United States District Court for the
Central District of California, will result in Peyrelevade
being precluded from participating in the conduct of the
affairs of an insured depository institution in the United
States pursuant to 12 U.S.C. section 1829 and paying a fine
of $500,000;
WHEREAS, pursuant to the provisions of this Order,
Peyrelevade has agreed to certain limitations and restrictions regarding his participation in the conduct of the affairs
of foreign banks in the United States;
WHEREAS, this Order resolves the proceedings initiated by the December 18, 2003, Notice; and
WHEREAS, by affixing his signature hereunder, Peyrelevade has consented to the issuance of this Order by
the Board of Governors, has agreed to comply with each
and every provision of this Order, and has waived any
and all rights he might otherwise have pursuant to
12 U.S.C. section 1818 or 12 C.F.R. Part 263, or otherwise (a) to a hearing for the purpose of taking evidence
with respect to any matter implied or set forth in the
December 18, 2003 Notice or herein; (b) to obtain judicial review of this Order or any provision hereof; and (c)
to challenge or contest in any manner the basis, issuance,
validity, effectiveness, or enforceability of this Order or
any provisions hereof.
NOW, THEREFORE, before the introduction of any
testimony or adjudication of, or finding on, any issue of fact
or law implied herein, and without this Order constituting
an admission by Peyrelevade of any allegation made or
implied by the Board of Governors in connection with this
proceeding, and solely for the purpose of settlement of this
proceeding and to avoid protracted or extended proceedings:
IT IS HEREBY ORDERED, pursuant to section 8(b) of
the FDI Act that:
1. Peyrelevade shall not, directly or indirectly, violate the
Bank Holding Company Act 12 U.S.C. section 1841
et seq., as amended (the "BHC Act") or any rules or
regulations issued pursuant thereto.
2. Without the prior written approval of the Board of
Governors and the appropriate federal banking agency,
Peyrelevade shall not serve or function as an officer,
director, employee, or agent of any United States
branch or agency, United States commercial lending
company, or other United States subsidiary of a foreign
bank that is subject to the provisions of 12 U.S.C.
section 3106(a).
3. Without the prior approval of the Board of Governors
and the appropriate federal banking agency, while
serving as an officer, director, or employee outside of
the United States of a foreign bank that is subject to
12 U.S.C. section 3106(a), or any subsidiary of a
foreign bank that is subject to 12 U.S.C. section 3106(a) (collectively, a "Foreign Banking Organization"), Peyrelevade shall not:
(a) assume direct reporting responsibility for the management of any United States branch, agency, or

United States commercial lending company or
other United States subsidiary of a Foreign Banking Organization;
(b) participate, directly or indirectly, in any audit of
any United States branch, agency, or United States
commercial lending company or other United
States subsidiary of a Foreign Banking Organization, or participate in any review of or response to
such an audit, provided that, Peyrelevade may
provide information to persons conducting such
audits upon the request of such persons; and
(c) participate in any manner in any decision by a
Foreign Banking Organization with respect to the
acquisition or retention by the Foreign Banking
Organization of 5 percent or more of the voting
shares of any United States company, unless he:
(i) consults experienced outside counsel to advise him on the implications of the acquisition
or retention under the BHC Act, and makes
full disclosure to such counsel on all material
aspects of the transaction that may affect its
treatment under the BHC Act;
(ii) notifies the Board of Governors in writing of
his involvement in the transaction before it is
completed, separate from any other notification or application requirements applicable to
the Foreign Banking Organization; and
(iii) promptly thereafter produces to the Board of
Governors, upon request, all documentation
describing the terms of the proposed transaction and his role in it.
Within ten days of this Order, Peyrelevade shall designate an agent in the United States acceptable to the
Board of Governors with respect to the service of
process in connection with the enforcement of this
Order.
Peyrelevade irrevocably consents to the jurisdiction of
the Board of Governors with respect to any aspect of
this Order or any violation thereof.
The provisions of this Order shall not bar, estop, or
otherwise prevent the Board of Governors or any other
U.S. federal or state agency or department from taking
any other action affecting Peyrelevade; provided, however, the Board of Governors shall take no further
action against Peyrelevade based on or with respect to:
(i) any matters set forth in the December 18, 2003
Notice; (ii) any of the "Specified Acts or Omissions,"
attached as Exhibit B to the Plea Agreement; or (iii)
any facts encompassed in the allegations recited in the
Order to Cease and Desist and Order of Assessment of
Civil Money Penalty issued by the Board of Governors
against Credit Lyonnais, dated December 18, 2003.
This Order shall become effective upon the acceptance
of the Plea Agreement by the United States District
Court for the Central District of California. In the event
that the Plea Agreement is rejected by the United
States District Court for the Central District of California, this Order shall be null and void and shall not be

Legal Developments

construed as an admission of guilt, liability, or any
alleged factual matter referenced herein nor as a waiver
of any potential defense that otherwise might be available to Peyrelevade. In the event that this Order
becomes effective, each provision of this Order shall
remain effective and enforceable until stayed, modified, terminated or suspended by the Board of Governors. Peyrelevade may apply to the Board of Governors to have this Order terminated, modified, or
amended.
8. No amendment to the provisions of this Order shall be
effective unless made in writing by the Board of
Governors and Peyrelevade.
9. No representations, either oral or written, except those
provisions as set forth herein, were made to induce any
of the parties to agree to the provisions as set forth
herein.
10. All communications regarding this Order shall be
addressed to:
(a) Richard M. Ashton
Deputy General Counsel
Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, DC 20551

C141

(b) Mr. Robert A. O'Sullivan
Senior Vice President
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
(c) Mr. Jean Peyrelevade
c/o John L. Douglas and
John E. Stephenson, Jr.
Alston & Bird LLP
1201 W. Peachtree Street
Atlanta, GA 30309-3424
By Order of the Board of Governors of the Federal
Reserve System, effective this 19th day of January 2006.

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
JENNIFER J. JOHNSON

Secretary of the Board
(signed)
Jean Peyrelevade

C143

Legal Developments: Second Quarter, 2006
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY A C T

BB&T Corporation
Winston-Salem, North Carolina
Order Approving the Merger of Bank
Holding Companies
BB&T Corporation ("BB&T"), a financial holding company within the meaning of the Bank Holding Company
Act ("BHC Act"), has requested the Board's approval
under section 3 of the BHC Act1 to merge with First
Citizens Bancorp ("First Citizens"), Cleveland, and acquire its subsidiary banks: The Bank/First Citizens Bank,
Cleveland ("First Citizens Bank"); The Home Bank of
Tennessee, Maryville ("Home Bank-Maryville"); and The
Home Bank, Ducktown ("Home Bank-Ducktown"), all of
Tennessee.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 20,401 (2006)). The
time for filing comments has expired, and the Board has
considered the application and all comments received in
light of the factors set forth in section 3 of the BHC Act.
BB&T, with total consolidated assets of approximately
$110 billion, is the 17th largest depository organization in
the United States.2 BB&T operates subsidiary-insured
depository institutions in Alabama, Florida, Georgia, Indiana, Kentucky, Maryland, North Carolina, South Carolina,
Tennessee, Virginia, West Virginia, and the District of
Columbia. In Tennessee, BB&T is the eighth largest depository organization, controlling deposits of approximately
$1.3 billion. BB&T is the third largest depository organization in North Carolina, controlling deposits of approximately $23.7 billion, and the fifth largest depository orga1. 12U.S.C. §1842.
2. Asset and nationwide ranking data are as of March 31, 2006.
Statewide deposit and ranking data are as of June 30, 2005, and reflect
merger activity through May 11, 2006. In this context, insured
depository institutions include commercial banks, savings banks, and
savings associations.

nization in Georgia, controlling deposits of approximately
$6.3 billion.
First Citizens, with total consolidated assets of approximately $719.8 million, operates subsidiary-insured depository institutions in Tennessee, North Carolina, and Georgia.
In Tennessee, First Citizens is the 22nd largest depository
organization, controlling deposits of approximately
$518.1 million. First Citizens is the 95th largest depository
organization in North Carolina, controlling deposits of
approximately $25.1 million, and the 70th largest depository organization in Georgia, controlling deposits of approximately $240.1 million.
On consummation of this proposal, and after accounting
for the proposed divestiture, BB&T would remain the 17th
largest insured depository organization in the United States,
with total consolidated assets of approximately $110.7 billion. In Tennessee, BB&T would become the seventh
largest depository organization, controlling deposits of
approximately $1.8 billion, which represent approximately
1.9 percent of the total amount of deposits of insured
depository institutions in the state ("state deposits").
BB&T would remain the third largest depository organization in North Carolina, controlling deposits of approximately $23.7 billion, which represent approximately
12.9 percent of state deposits. In Georgia, BB&T would
remain the fifth largest depository organization, controlling
deposits of approximately $6.6 billion, which represent
approximately 4.5 percent of state deposits.
INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home state
of such bank holding company if certain conditions are
met. For purposes of the BHC Act, the home state of BB&T
is North Carolina,3 and First Citizens is located in Tennessee, North Carolina, and Georgia.4
Based on a review of all the facts of record, including a
review of relevant state statutes, the Board finds that the
3. A bank holding company's home state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on July 1, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.C. § 1841(o)(4)(C)).
4. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch (12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(l)(A) and

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Federal Reserve Bulletin • 2006

conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met in this case.5 In light of all
the facts of record, the Board is permitted to approve the
proposal under section 3(d) of the BHC Act.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
would be in furtherance of an attempt to monopolize the
business of banking in any relevant banking market. The
BHC Act also prohibits the Board from approving a bank
acquisition that would substantially lessen competition in
any relevant banking market, unless the anticompetitive
effects of the proposal are clearly outweighed in the public
interest by the probable effect of the proposal in meeting
the convenience and needs of the community to be served.6
BB&T and First Citizens compete directly in six banking markets in Tennessee, North Carolina, and Georgia.7
The Board has reviewed carefully the competitive effects of
the proposal in each of these banking markets in light of all
the facts of record. In particular, the Board has considered
the number of competitors that would remain in the markets, the relative shares of total deposits in depository
institutions in the markets ("market deposits") controlled
by BB&T and First Citizens,8 the concentration level of
market deposits and the increase in this level as measured
by the Herfindahl-Hirschman Index ("HHI") under the
Department of Justice Merger Guidelines ("DOJ Guidelines"), 9 other characteristics of the markets, and commitments made by BB&T to divest a branch.
5. 12 U.S.C. §§ 1842(d)(l)(A)-(B) and 1842(d)(2)(A)-(B). BB&T
is adequately capitalized and adequately managed, as defined by
applicable law. First Citizens Bank, Home Bank-Maryville, and Home
Bank-Ducktown have been in existence and operated for the minimum
period of time required by applicable state laws (three years). On
consummation of the proposal, BB&T would control less than 10 percent of the total amount of deposits of insured depository institutions
in the United States and less than 30 percent of the total amount of
deposits of insured depository institutions in Tennessee, North Carolina, and Georgia respectively. All other requirements of section 3(d)
of the BHC Act would be met on consummation of the proposal.
6. 12 U.S.C. §1842(c)(l).
7. These banking markets are described in Appendix A.
8. Deposit and market share data are as of June 30, 2005, and are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386, 387 (1989); National City Corporation, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board
regularly has included thrift deposits in the market share calculation on
a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal
Reserve Bulletin 52, 55 (1991).
9. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI exceeds 1800. The Department of
Justice ("DOJ") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other

A. Banking Market With Divestiture
In the Blue Ridge area, Georgia-Tennessee banking market
("Blue Ridge Market"), BB&T is the second largest
depository organization, controlling deposits of $103.7 million, which represent 22.1 percent of market deposits. First
Citizens is the third largest depository organization in the
market, with four branches that control deposits of
$63.7 million, which represent 13.6 percent of market
deposits. To reduce the potential adverse effects on competition in the Blue Ridge Market, BB&T has committed to
divest one branch with at least $29 million in deposits to an
out-of-market banking organization.10 On consummation
of the proposed merger and after accounting for the proposed divestiture, BB&T would remain the second largest
depository institution in the market, controlling deposits of
approximately $138.3 million, representing 29.5 percent of
market deposits. The HHI would increase 235 points to
3297.
In reviewing the competitive effects of the proposal in
the Blue Ridge Market, the Board also has considered
carefully whether other factors mitigate the competitive
effects of the proposal. The number and strength of factors
necessary to mitigate the competitive effects of a proposal
depend on the size of the increase in, and resulting level of,
concentration in the market.11
Several factors indicate that the proposal is not likely to
have a significantly adverse competitive effect in the Blue
Ridge Market. After consummation of the proposal and the
proposed divestiture to an out-of-market competitor, seven
insured depository institutions would continue to operate in
the market.12 In addition, the Blue Ridge Market has been
attractive for entry, as indicated by the de novo entry of
three commercial banking organizations in the past four
years, and appears likely to remain attractive for entry. For
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI by more than 200
points. The DOJ has stated that the higher-than-normal HHI thresholds
for screening bank mergers and acquisitions for anticompetitive effects
implicitly recognize the competitive effects of limited-purpose and
other nondepository financial entities.
10. BB&T has committed that it will execute, before consummation
of the proposed merger, a sales agreement with an out-of-market
banking organization. BB&T also has committed to complete the
divestiture within 180 days after consummation of the proposed
merger. In addition, BB&T has committed that, if it is unsuccessful in
completing the proposed divestiture within such time period, it will
transfer the unsold branch to an independent trustee who will be
instructed to sell the branch to an alternate purchaser or purchasers in
accordance with the terms of this order and without regard to price.
Both the trustee and any alternate purchaser must be deemed acceptable by the Board. See BankAmerica Corporation, 78 Federal Reserve
Bulletin 338 (1992); United New Mexico Financial Corporation,
11 Federal Reserve Bulletin 484 (1991).
11. See NationsBank Corporation, 84 Federal Reserve Bulletin 129
(1998).
12. The market also has one credit union that operates two
street-level branches, and its membership is open to all residents in the
market.

Legal Developments

example, Fannin County, Georgia, has more than twice the
amount of deposits compared to the median nonmetropolitan county in the state.13 The rate of population growth of
Fannin County, moreover, is twice the rate for similar
nonmetropolitan counties in Georgia.
B. Banking Markets Without Divestitures
Consummation of the proposal without divestitures would
be consistent with Board precedent and within the thresholds of the DOJ Guidelines in the other five banking
markets where BB&T and First Citizens' subsidiary banks
compete directly.14 After consummation, four of the banking markets would remain moderately concentrated15 and
one banking market would remain highly concentrated,16 as
measured by the HHI. In each of the five banking markets,
the increase in market concentration would be small, and
numerous competitors would remain.
C. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOJ also has conducted a detailed review of the
potential competitive effects of the proposal and has
advised the Board that, in light of the proposed divestiture,
consummation of the proposal would not likely have a
significantly adverse effect on competition in any relevant
banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment and
have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the six banking markets where BB&T
and First Citizens compete directly or in any other relevant
banking market. Accordingly, the Board has determined
that competitive considerations are consistent with approval.

C145

and state supervisors of the organizations involved, publicly reported and other financial information, information
provided by BB&T, and public comments received on the
proposal.17
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. The Board considers a variety of factors in this
evaluation, including capital adequacy, asset quality, and
earnings performance. In assessing financial factors, the
Board consistently has considered capital adequacy to be
especially important. The Board also evaluates the financial
condition of the combined organization at consummation,
including its capital position, asset quality, and earnings
prospects, and the impact of the proposed funding of the
transaction.
The Board has considered carefully the proposal under
the financial factors. BB&T, all its subsidiary banks, and all
the subsidiary banks of First Citizens are well capitalized
and would remain so on consummation of the proposal.
Based on its review of these factors, the Board finds that
BB&T has sufficient financial resources to effect the proposal. The proposed transaction is structured as a partial
share exchange and partial cash purchase.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of BB&T, First Citizens, and their subsidiary
banks, including assessments of their management, riskmanagement systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of the other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law, including anti-money-laundering laws.
BB&T, First Citizens, and their subsidiary depository institutions are considered to be well managed. The Board also
has considered BB&T's plans for implementing the proposal, including the proposed management after consummation.
Based on all the facts of record, the Board has concluded that considerations relating to the financial and
managerial resources and future prospects of the organizations involved in the proposal are consistent with
17. A commenter reiterated the concern it expressed in BB&T's
proposal to acquire Main Street Banks, Inc. ("Main Street Proposal")
about BB&T's relationships with unaffiliated pawn shops and other
nontraditional providers of financial services, without presenting any
new material facts or alleging any violations of law. In approving the
Main Street Proposal, the Board considered the commenter's concern
and recently reviewed BB&T's relationships with nontraditional providers of financial services. BB&T Corporation, 92 Federal Reserve
Bulletin C116, n.15 (2006). As noted in the Main Street Order, the
activities of the consumer finance businesses identified by the commenter are permissible, and the businesses are licensed by the states
where they operate.

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Federal Reserve Bulletin • 2006

approval, as are the other supervisory factors under the
BHC Act.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA"). 18 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe-andsound operation, and requires the appropriate federal
financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank expansionary proposals.19
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of BB&T's and First Citizens' subsidiary banks,
data reported by BB&T under the Home Mortgage Disclosure Act ("HMDA"), 20 other information provided by
BB&T, confidential supervisory information, and public
comment received on the proposal. A commenter opposed
the proposal and alleged, based on 2005 HMDA data
reported by BB&T for its assessment areas in North
Carolina, that BB&T engaged in discriminatory treatment
of minority individuals in its home mortgage lending.21
A. CRA Performance Evaluations
is provided in the CRA, the Board has evaluated the convenience and needs factor in light of the evaluations by the
appropriate federal supervisors of the CRA performance
records of the relevant insured depository institutions. An
institution's most recent CRA performance evaluation is a
particularly important consideration in the applications process because it represents a detailed, on-site evaluation of
the institution's overall record of performance under the
CRA by its appropriate federal supervisor.22
BB&T's largest subsidiary bank, as measured by total
deposits, is Branch Banking and Trust Company, also in
18. 12 U.S.C. §2901 et seq.; 12 U.S.C. § 1842(c)(2).
19. 12 U.S.C. §2903.
20. 12 U.S.C. §2801 etseq.
21. The commenter, without presenting any new material facts or
alleging any violations of law, also reiterated its comments in the Main
Street Proposal about (1) referrals of loan applicants by BB&T's
subsidiary banks to Lendmark Financial Services, a nonbank subsidiary of BB&T that primarily engages in subprime mortgage lending,
and (2) BB&T's acquisition under section 4(k) of the BHC Act of FSB
Financial, Ltd., a nonbanking company that purchases automobile loan
portfolios. The Board hereby reaffirms and adopts the facts and
conclusions detailed in the Main Street Order related to such comments. See Main Street Order at n.23 and n.28 (2006).
22. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36,640 (2001).

Winston-Salem, North Carolina.23 The bank received an
"outstanding" rating by the Federal Deposit Insurance
Corporation ("FDIC") at its most recent CRA performance
evaluation, as of December 20, 2004. BB&T's remaining
subsidiary banks all received "satisfactory" ratings at their
most recent CRA evaluations.24 In addition, each of First
Citizens' subsidiary banks received "satisfactory" ratings
at its most recent CRA performance evaluation by the
FDIC or the Office of Thrift Supervision.25 BB&T has
represented that its CRA and consumer compliance programs would be implemented at the operations acquired
from First Citizens after the merger of Branch Banking and
Trust Company and First Citizens' subsidiary banks.
B. H M D A and Fair Lending Record
The Board has considered carefully the lending record of
BB&T's subsidiary banks and nonbank mortgage lenders
in light of public comment about their record of lending to
minorities. The commenter asserted, based on 2005 HMDA
data, that BB&T made higher-cost loans 26 in North Carolina more frequently to African Americans and Hispanics
than to nonminorities.27 The Board notes that these data are
preliminary and will not be finalized for analysis until fall
2006.
Although the preliminary 2005 HMDA data for BB&T's
subsidiary banks and nonbank mortgage lenders indicate
that a greater percentage of higher priced loans were
made to African-American or Hispanic borrowers relative
to nonminority borrowers, HMDA data provide an insufficient basis by themselves on which to conclude whether
BB&T or its subsidiaries are excluding or imposing higher
costs on any racial or ethnic group on a prohibited
basis.28 HMDA data alone, even with the recent addition
of pricing information, provide only limited information
about the covered loans. 29 HMDA data, therefore, provide
23. As of December 31, 2005, Branch Banking and Trust Company
accounted for approximately 67.1 percent of the total domestic
deposits of BB&T's four subsidiary banks.
24. Appendix C lists the most recent CRA ratings of BB&T's other
subsidiary banks.
25. Home Bank-Ducktown was a savings association until its
conversion to a state nonmember bank on December 30, 2004.
26. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CFR 203.4).
27. The comments have been forwarded to the FDIC, the primary
regulator for BB&T's subsidiary banks, for its consideration in the
context of evaluating the banks for compliance with the fair lending
laws and regulations.
28. The Board reviewed 2004 and preliminary 2005 HMDA data
reported by BB&T's subsidiaries, including data for North Carolina.
29. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons

Legal Developments

an inadequate basis, absent other information, for concluding that an institution has engaged in illegal lending
discrimination.
Examiners found no substantive violations of applicable
fair lending laws during the fair lending reviews they
conducted in conjunction with the most recent CRA performance evaluations of BB&T's subsidiary banks. 30 In addition, the record indicates that BB&T has taken steps to
ensure compliance with fair lending and other consumer
protection laws. BB&T employs an internal second-review
process for home loan applications that would otherwise be
denied and analyzes its HMDA data periodically. Furthermore, BB&T monitors its compliance with fair lending
laws by analyzing disparities in its rates of lending for
select products and markets and by conducting a more
extensive internal comparative file review when merited.
Finally, BB&T provides fair lending training to its lending
personnel, including training to help ensure that loan
originators consistently disseminate credit-assistance information to applicants.
The Board also has considered the HMDA data in light
of other information, including the CRA performance
records of each of BB&T's subsidiary banks. Based on all
the facts of record, the Board concludes that BB&T's
established efforts and record demonstrate that BB&T is
active in helping to meet the credit needs of its entire
communities.

C147

CONCLUSION
Based on the foregoing and all facts of record, the Board
has determined that the application should be, and hereby
is, approved. In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the BHC Act. The Board's
approval is specifically conditioned on compliance by
BB&T with the conditions imposed in this order and the
commitments made to the Board in connection with the
application, including the divestiture commitment discussed above. For purposes of this action, the conditions
and commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision herein and, as such, may be enforced in proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Federal Reserve Bank of Richmond,
acting pursuant to delegated authority.
By order of the Board of Governors, effective June 12,
2006.
Voting for this action: Chairman Bernanke and Governors Bies,
Olson, Kohn, Warsh, and Kroszner.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board
C. Conclusion on CRA Performance Records
The Board has considered carefully all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by BB&T, comments received on the proposal, and confidential supervisory information. BB&T represented that the proposed
transaction would provide First Citizens' customers with
expanded products and services. Based on a review of the
entire record, and for the reasons discussed above, the
Board concludes that considerations relating to the convenience and needs factor and the CRA performance records
of the relevant depository institutions are consistent with
approval.31
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.
30. See Main Street Order.
31. A commenter requested that the Board hold a public hearing or
meeting on the proposal. Section 3 of the BHC Act does not require the
Board to hold a public hearing on an application unless the appropriate
supervisory authority for any of the banks to be acquired makes a
timely written recommendation of denial of the application. The Board
has not received such a recommendation from any supervisory authority. Under its rules, the Board also may, in its discretion, hold a public
meeting or hearing on an application to acquire a bank if a meeting or
hearing is necessary or appropriate to clarify factual issues related to
the application and to provide an opportunity for testimony (12 CFR
225.16(e)). The Board has considered carefully the commenter's
request in light of all the facts of record. In the Board's view, the
commenter had ample opportunity to submit comments on the proposal and, in fact, submitted written comments that the Board has
considered carefully in acting on the proposal. The request fails to

Appendix A
BANKING MARKETS IN WHICH BB&T AND
FIRST CITIZENS COMPETE DIRECTLY
Athens Area, Tennessee
McMinn, Meigs, and Monroe counties and the town of
Delano in Polk County.
Cleveland Area, Tennessee
Bradley County and the towns of Benton and Ocoee in Polk
County.
Knoxville Area, Tennessee
Anderson, Knox, Loudon, Roane, and Union counties and
the portion of Blount County northwest of Chilhowee
identify disputed issues of fact that are material to the Board's decision
and would be clarified by a public meeting or hearing. Moreover, the
commenter's request fails to demonstrate why its written comments do
not present its views adequately or why a meeting or hearing otherwise
would be necessary or appropriate. For these reasons, and based on all
the facts of record, the Board has determined that a public hearing or
meeting is not required or warranted in this case. Accordingly, the
request for a public hearing or meeting on the proposal is denied.

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Federal Reserve Bulletin • 2006

Mountain; the towns of Chestnut Hill, Dandridge, Dumplin, Friends Station, Hodges, New Market, and Strawberry
Plains in Jefferson County; the towns of Harriman and
Oliver Springs in Morgan County; the towns of Seymour
and Kodak in Sevier County; and the towns of Blaine,
Buffalo Springs, Joppa, Lea Springs, and Powder Springs
in Grainger County.

BB&T would become the largest depository organization in
the market, controlling deposits of approximately
$327.2 million, which represent approximately 24.5 percent of market deposits. The HHI would increase 30 points
to 1616. Eleven insured depository institutions would
remain in the banking market.
Knoxville Area, Tennessee

Sevierville Area, Tennessee

Fannin County in Georgia and the towns of Ducktown and
Copperhill in Polk County, Tennessee.

BB&T operates the fourth largest depository institution in
the Knoxville area banking market, controlling deposits of
$678.2 million, which represent 7.2 percent of market
deposits. First Citizens operates the 18th largest depository
institution in the market, controlling deposits of approximately $83.8 million, which represent less than 1 percent of
market deposits. After consummation of the proposal,
BB&T would remain the fourth largest depository organization in the market, controlling deposits of approximately
$761.9 million, which represent approximately 8.1 percent
of market deposits. The HHI would increase 13 points to
1274. Thirty-three insured depository institutions would
remain in the banking market.

Appendix B

Sevierville Area, Tennessee

Sevier County, excluding the towns of Seymour and Kodak,
and the portion of Blount County southeast of Chilhowee
Mountain.
Cherokee and Clay Counties, North Carolina
Cherokee and Clay Counties.
Blue Ridge Area, Georgia-Tennessee

MARKET DATA FOR TENNESSEE AND NORTH
CAROLINA BANKING MARKETS
Athens Area, Tennessee
BB&T operates the second largest depository institution in
the Athens area banking market, controlling deposits of
$175.1 million, which represent 14.4 percent of market
deposits. First Citizens operates the 13th largest depository
institution in the market, controlling deposits of approximately $13.9 million, which represent 1.1 percent of market deposits. After consummation of the proposal, BB&T
would remain the second largest depository organization in
the market, controlling deposits of approximately
$188.9 million, which represent approximately 15.6 percent of market deposits. The HHI would increase 33 points
to 1398. Fourteen insured depository institutions would
remain in the banking market.
Cleveland Area, Tennessee
BB&T operates the tenth largest depository institution in
the Cleveland area banking market, controlling deposits of
$8.4 million, which represent less than 1 percent of market
deposits. First Citizens operates the largest depository
institution in the market, controlling deposits of approximately $318.8 million, which represent 23.8 percent of
market deposits. After consummation of the proposal,

BB&T operates the fifth largest depository institution in the
Sevierville area banking market, controlling deposits of
$123.6 million, which represent 8.9 percent of market
deposits. First Citizens operates the eighth largest depository institution in the market, controlling deposits of
approximately $13.1 million, which represent less than
1 percent of market deposits. After consummation of the
proposal, BB&T would remain the fifth largest depository
organization in the market, controlling deposits of approximately $136.7 million, which represent approximately
9.9 percent of market deposits. The HHI would increase
16 points to 1782. Ten insured depository institutions
would remain in the banking market.
Cherokee and Clay Counties, North Carolina
BB&T operates the sixth largest depository institution in
the Cherokee and Clay counties banking market, controlling deposits of $17.6 million, which represent 3.5 percent
of market deposits. First Citizens operates the fifth largest
depository institution in the market, controlling deposits of
approximately $25.1 million, which represent 5 percent of
market deposits. After consummation of the proposal,
BB&T would become the fifth largest depository organization in the market, controlling deposits of approximately
$42.7 million, which represent approximately 8.5 percent
of market deposits. The HHI would increase 35 points to
2956. Six insured depository institutions would remain in
the banking market.

Legal Developments C149

Appendix C
CRA PERFORMANCE EVALUATIONS OF BB&T'S BANKS
Bank

CRA Rating

Date

Supervisor

1. Branch Banking and Trust Company,
Winston-Salem, North Carolina
2. Branch Banking and Trust Company of South Carolina,
Greenville, South Carolina
3. Branch Banking and Trust Company of Virginia,
Richmond, Virginia
4. BB&T Bankcard Corporation,
Columbus, Georgia
5. Main Street Bank,
Covington, Georgia

Outstanding

December 2004

FDIC

Satisfactory

December 2004

FDIC

Satisfactory

December 2004

FDIC

Satisfactory

May 2005

FDIC

Satisfactory

December 2004

FDIC

ORDERS ISSUED UNDER SECTION 4 OF
THE BANK HOLDING COMPANY ACT

New York, and has received approval to establish a representative office in Miami, Florida.
The proposed activities would be undertaken within the
IdenTrust system in which IdenTrust serves as a central
rulemaking and coordinating body for a global network of
institutions that act as digital certification authorities. Certification authorities verify or authenticate the identity of
customers conducting financial and nonfinancial transactions over the Internet and other "open" electronic networks. To provide these services, IdenTrust and its network
of participating financial institutions use digital signatures
created with encryption technology. These digital signatures uniquely identify participants in the IdenTrust system
who send signed messages over electronic networks. Certification authorities issue digital certificates that certify that
the digital signature is uniquely associated with a particular
message sender so that the message recipient can be
assured of the identity of its trading partner.

Banco Latinoamericano de Exportaciones,
S.A.
Panama City, Republic of Panama
Order Approving Notice to Engage in
Nonbanking Activities
Banco Latinoamericano de Exportaciones, S.A. ("Bank"), a
foreign banking organization subject to the Bank Holding
Company Act ("BHC Act"), 1 has requested the Board's
approval under sections 4(c)(8) and 4(j) of the BHC Act2 and
section 225.24 of the Board's Regulation Y 3 to act as a
certification authority in connection with financial and
nonfinancial transactions and engage in related dataprocessing activities. Bank proposes to engage in these
activities by entering into an agreement with IdenTrust, Inc.
("IdenTrust"), New York, New York. The agreement will be
assigned to a wholly owned, indirect subsidiary of the Bank
currently in organization, Clavex, LLC ("Clavex").
Notice of the proposal, affording interested persons an
opportunity to comment, has been published in the Federal
Register (71 Federal Register 8858 (2006)). The time for
filing comments has expired, and the Board has considered
the notice and all comments received in light of the factors
set forth in section 4 of the BHC Act.
Bank, with total consolidated assets of approximately
$3.2 billion, is the third largest bank in Panama. In the
United States, Bank maintains an agency in New York,
1. As a foreign bank operating an agency in the United States, Bank
is subject to the BHC Act by operation of section 8(a) of the
International Banking Act of 1978 (12 U.S.C. § 3106(a)).
2. 12 U.S.C. §§ 1843(c)(8) and 1843(j).
3. 12 CFR 225.24.

As a certification authority, Clavex would provide the
technical systems and support necessary for banks to verify
and authenticate the identity of customers conducting electronic transactions and to register digital certificates to
customers. Clavex would provide these services to Bank as
well as to other banks in Puerto Rico, Mexico, the Caribbean, Central America, and South America that enter into
contracts with Clavex.4 Bank, and any other banks to which
Clavex may provide services, would be responsible for
performing the due diligence on customers that request
digital credentials, a role referred to as "registration authority." Bank and other registration authorities would register
the digital certificates issued to their customers, and Clavex
would maintain a database of all certificates issued through
its registration authorities. Clavex would also provide
registration authorities with the software and hardware
required to use the IdenTrust system.

4. These banks would also have to enter into agreements with
IdenTrust to participate in the IdenTrust system.

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Federal Reserve Bulletin • 2006

The Board has previously determined by order or regulation that acting as a certification authority in connection
with financial and nonfinancial transactions5 and data processing6 are activities closely related to banking for purposes of section 4(c)(8) of the BHC Act. The proposed
activities are consistent with those that have been approved
by the Board. In addition, Bank has committed to conduct
these activities in accordance with the limitations set forth
in Regulation Y and the Board's orders governing these
activities.7
To approve the notice, the Board also must determine
that the proposal can reasonably be expected to produce
benefits to the public that outweigh possible adverse effects,
such as undue concentration of resources, decreased or
unfair competition, conflicts of interests, or unsound banking practices.8 As part of its evaluation of these factors, the
Board considers the financial and managerial resources of
the companies involved and the effect of the proposal on
those resources.9 The Board has considered, among other
things, information provided by Bank, confidential reports
of examination, other confidential supervisory information,
and publicly reported financial and other information in
assessing the financial and managerial strength of Bank.
In evaluating the financial factors of this proposal, the
Board has considered a number of factors, including capital
adequacy and earnings performance. Bank's capital ratios
exceed the minimum levels that would be required by the
Basel Capital Accord and are considered equivalent to the
capital that would be required of a U.S. banking organization. Moreover, consummation of this proposal would not
have a significant impact on the financial condition of Bank.
Based on its review of the record, the Board finds that Bank
has sufficient financial resources to effect the proposal.
In addition, the Board has carefully considered the
managerial resources of Bank, the supervisory experiences
of the relevant banking supervisory agencies with Bank,
and Bank's record of compliance with applicable U.S.
banking laws. The Board has also reviewed reports of
examination from the appropriate supervisors of the U.S.
operations of Bank that assessed its managerial resources.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources of Bank are consistent with approval.
The Board has also considered carefully the competitive
effects of the proposal in light of all the facts of record.
Bank does not currently act as a certification authority. In
addition, the Board notes that the IdenTrust system is
structured so that its participants would remain free to
compete with each other in providing certification authority
and related services to customers. Based on all the facts of
5. See Bayerische Hypo- und Vereinsbank AG, ! i Federal Reserve
Bulletin 56 (2000) ("Bayerische Order").
6. 12 CFR 225.28(b)(14).
7. See Bayerische Order.
8. 12U.S.C. §1843(j)(2)(A).
9. 12 CFR 225.26.

record, the Board concludes that Bank's proposed activities
are not likely to have any adverse competitive effects.
The Board expects that the proposed activities would
result in benefits to the public by enhancing Bank's ability
to serve its customers. The certification authority activity
would facilitate customers' ability to conduct commercial
transactions over the Internet and other "open" electronic
networks. These customers will also benefit from the
broader array of products and services Bank will be able to
offer and from the ability to purchase such products and
services on a regional basis.
The Board has determined that the conduct of the
proposed nonbanking activities within the framework of
Regulation Y and Board precedent is not likely to result in
adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or
unsound banking practices. Based on all the facts of record,
the Board has concluded that consummation of the proposal can reasonably be expected to produce benefits that
would outweigh any likely adverse effects. Accordingly,
the Board has determined that the balance of the public
benefits that it must consider under section 4(j)(2) of the
BHC Act is consistent with approval.
Based on the foregoing, the Board has determined that the
notice should be, and hereby is, approved. In reaching its
conclusion, the Board has considered all the facts of record
in light of the factors that it is required to consider under the
BHC Act. The Board's approval is specifically conditioned
on compliance by Bank with the conditions imposed in this
order and the commitments made to the Board in connection
with the notice. The Board's approval is also subject to all
the conditions set forth in Regulation Y, including those in
sections 225.7 and 225.25(c),10 and to the Board's authority
to require such modification or termination of the activities
of Bank or any of its subsidiaries as the Board finds
necessary to ensure compliance with, and to prevent evasion
of, the provisions of the BHC Act and the Board's regulations and orders issued thereunder. For purposes of these
actions, the conditions and commitments are deemed to be
conditions imposed in writing by the Board in connection
with its findings and decision and, as such, may be enforced
in proceedings under applicable law.
This transaction shall not be consummated later than
three months after the effective date of this order unless
such period is extended for good cause by the Board or the
Federal Reserve Bank of New York, acting pursuant to
delegated authority.
By order of the Board of Governors, effective June 8,
2006.
Voting for this action: Chairman Bernanke and Governors Bies,
Olson, Kohn, Warsh, and Kroszner.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board
10. 12 CFR 225.7 and 225.25(c).

Legal Developments

Banco Santander Central Hispano, S.A.
Madrid, Spain
Order Approving the Acquisition of Shares
of Savings Associations
Banco Santander Central Hispano, S.A. ("Santander"), a
financial holding company within the meaning of the Bank
Holding Company Act ("BHC Act"), has requested the
Board's approval under sections 4(c)(8) and 4(j) of the
BHC Act and section 225.24 of the Board's Regulation Y 1
to acquire up to 24.99 percent of the voting shares of
Sovereign Bancorp, Inc. ("Sovereign") and to control
Sovereign2 and its subsidiary savings association, Sovereign Bank, both of Wyomissing, Pennsylvania, and Independence Community Bank Corp. ("Independence") and
its subsidiary savings bank, Independence Community
Bank ("Independence Bank"), 3 both of Brooklyn, New
York. For purposes of the BHC Act, the Board finds that
Santander would control Sovereign and, thus, Sovereign
would become a nonbanking subsidiary of Santander.4
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (70 Federal Register 74,816 (2005)). The
time for filing comments has expired, and the Board has
considered the proposal and all comments received in light
of the factors set forth in section 4 of the BHC Act.
Santander, with total consolidated assets equivalent to
approximately $939 billion, is the 19th largest banking
organization in the world and the largest banking organization in Spain.5 Santander engages in a broad range of
banking and financial services worldwide through an extensive network of offices and subsidiaries. Santander, with
total consolidated assets of approximately $61 billion in the

1. 12 U.S.C. §§ 1843(c)(8) and (j); 12 CFR 225.24.
2. Pursuant to its investment agreement with Sovereign, Santander
would acquire 19.8 percent of Sovereign's common stock outstanding
on the transaction closing date and would have the right to purchase
additional shares not to exceed in the aggregate 24.99 percent of
Sovereign common stock. Pursuant to sections 4(c)(8) and 4(j) of the
BHC Act (12 U.S.C. §§ 1843(c)(8) and (j)) and section 225.24 of the
Board's Regulation Y (12 CFR 225.24), Santander is required to
obtain the Board's prior approval to acquire additional shares that
would result in Santander controlling more than 24.99 percent of any
class of Sovereign's voting shares.
3. Independence Bank is a state-chartered savings bank deemed to
be a savings association under section 10(1) of the Home Owners'
Loan Act and under the BHC Act. See 12 U.S.C. §§ 1467a(l) and
1841Q).
4. Immediately following Santander's acquisition of a controlling
interest in Sovereign, Sovereign proposes to acquire all of Independence's voting shares. Santander's acquisition of an indirect controlling interest in Independence Bank is also subject to approval by the
New York State Banking Department ("NYSBD"), and Sovereign's
acquisition of Independence Bank is subject to approvals by the Office
of Thrift Supervision ("OTS") and the NYSBD. Sovereign has
reported its intent to merge Independence Bank into Sovereign Bank
several months after acquiring Independence. That merger would be
subject to approval by the OTS under the Bank Merger Act.
5. Asset data and rankings are as of December 31, 2004, and are
based on the exchange rate then in effect.

C151

United States, operates one U.S. subsidiary-insured depository institution in Puerto Rico only, Banco Santander
Puerto Rico ("BSPR"), San Juan. BSPR controls $5.6 billion in deposits, which represent less than 1 percent of total
deposits in insured depository institutions in the United
States ("total U.S. deposits"). 6 Santander also operates
branches in New York, New York, and Stamford, Connecticut, and an Edge corporation in Miami, Florida.7
Sovereign, with total consolidated assets of approximately $64 billion, is the 28th largest depository organization in the United States.8 Sovereign operates one insured
depository institution, Sovereign Bank, with offices in
Connecticut, Delaware, Maryland, Massachusetts,
New Hampshire, New Jersey, New York, Pennsylvania,
and Rhode Island. Sovereign Bank controls approximately
$36 billion in deposits, which represents less than 1 percent
of total U.S. deposits.
Independence, with total consolidated assets of approximately $19 billion, is the 62nd largest depository organization in the United States. Independence operates one
insured depository institution with offices in New York and
New Jersey that controls deposits of approximately $16 billion, which represent less than 1 percent of total U.S.
deposits.
On consummation of the proposal, Santander would
have total U.S. assets of approximately $144 billion.
Santander would control deposits of approximately $58 billion, representing less than 1 percent of total U.S. deposits.
The Board previously has determined by regulation that
the operation of a savings association by a bank holding
company is closely related to banking for purposes of
section 4(c)(8) of the BHC Act.9 The Board requires that
savings associations acquired by bank holding companies
conform their direct and indirect activities to those permissible for bank holding companies under section 4 of the
BHC Act. Santander and Sovereign have committed to
conform all the activities of Sovereign Bank and Independence Bank to those permissible under section 4(c)(8) of
the BHC Act and Regulation Y 1 0
In reviewing the proposal, the Board is required by
section 4(j)(2)(A) of the BHC Act to determine that the
proposed acquisition of Sovereign, Independence, and their
subsidiary savings associations "can reasonably be expected to produce benefits to the public that outweigh
possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of

6. Deposit data are as of June 30, 2005. In this context, the term
"insured depository institution" includes insured commercial banks,
savings associations, and savings banks.
7. Edge corporations are organized under section 25A of the Federal
Reserve Act (12 U.S.C. §611 et seq.).
8. Domestic asset and ranking data are as of December 31, 2005.
9. 12 CFR 225.28(b)(4)(ii).
10. Santander has committed that it will use its best efforts to cause
Sovereign to, and Sovereign has committed that it will, conform its
direct and indirect nonbanking activities and investments, including by
divestiture if necessary, to the requirements of the BHC Act within two
years of consummation of the proposal.

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Federal Reserve Bulletin • 2006

interests, or unsound banking practices." 11 As part of its
evaluation of a proposal under the public interest factors,
the Board reviews the financial and managerial resources of
the companies involved, as well as the effect of the
proposal on competition in the relevant market and the
public benefits of the proposal.12 In acting on notices to
acquire a savings association, the Board also reviews the
records of performance of the relevant insured depository
institutions under the Community Reinvestment Act
("CRA"). 13
The Board has considered these factors in light of all the
facts of record, including confidential supervisory and
examination information, publicly reported financial and
other information, and public comments submitted on the
proposal.14 The Board also has consulted with, and considered information provided by, the primary home-country
supervisor of Santander and various federal and state
supervisory agencies, including the Federal Deposit Insurance Corporation ("FDIC"), the OTS, the NYSBD, and the
Securities and Exchange Commission ("SEC").

COMPETITIVE CONSIDERATIONS
As part of the Board's consideration of the public interest
factors under section 4 of the BHC Act, the Board has
considered carefully the competitive effects of the proposal
in light of all the facts of record. Sovereign and Independence control insured depository institutions that engage in
retail operations in the Metro New York banking market
(the "New York banking market"). 15 In the New York
banking market, Santander operates only two uninsured
branches that do not engage in retail banking operations. In
weighing the competitive factors, the Board has also taken
into account Sovereign's proposal to acquire Independence. The Board has considered the number of competitors that would remain in the banking market; the relative
share of total deposits in depository institutions in the
market ("market deposits") controlled by Sovereign and
Independence;16 the concentration level of market deposits
11. 12U.S.C. § 1843(j)(2)(A).
12. See 12 CFR 225.26; see, e.g., BancOne Corporation, 83 Federal
Reserve Bulletin 602 (1997).
13. 12U.S.C. §2901 etseq.
14. The Board received comments objecting to the proposal from an
investment advisor to a mutual fund family that controls 4.9 percent of
Sovereign's voting shares and from two other commenters. The
commenters primarily expressed concern about the managerial resources of Santander or Sovereign, the financial resources of Sovereign, or the manner in which the proposal was developed.
15. The New York banking market includes Bronx, Dutchess,
Kings, Nassau, New York, Orange, Putnam, Queens, Richmond,
Rockland, Suffolk, Sullivan, Ulster, and Westchester counties in
New York; Bergen, Essex, Hudson, Hunterdon, Mercer, Middlesex,
Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, and
Warren counties in New Jersey; Monroe and Pike counties in Pennsylvania; and Fairfield County and portions of Litchfield and New Haven
counties in Connecticut.
16. Deposit and market share data are as of June 30, 2005 (adjusted
to reflect mergers and acquisitions through April 26, 2006), and are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board has previously indicated that thrift

and the increase in this level as measured by the HerfindahlHirschman Index ("HHI") under the Department of Justice
Merger Guidelines ("DOJ Guidelines"); 17 and other characteristics of the markets.
Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in the New York
banking market. After consummation, the New York banking market would remain moderately concentrated, as
measured by the HHI, and numerous competitors would
remain.18
Based on all the facts of record, the Board concludes that
consummation of the proposal would not result in any
significantly adverse effect on competition or on the concentration of banking resources in the New York banking
market or in any other relevant banking market.

FINANCIAL AND MANAGERIAL RESOURCES
In reviewing the proposal under section 4 of the BHC Act,
the Board has carefully considered the financial and managerial resources of Santander, Sovereign, Independence,
and their subsidiaries. The Board also has reviewed the
effect the transaction would have on those resources in light
of all the facts of record, including confidential reports of
examination, other supervisory information from the primary federal and state supervisors of the organizations
involved in the proposal, publicly reported and other
financial information, information provided by Santander,
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has
included thrift deposits in the calculation of market share on a
50 percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal
Reserve Bulletin 52 (1991). Because control of the deposits of
Sovereign Bank and Independence Bank would be acquired by a
commercial banking organization, these deposits are included at
100 percent in the calculation of the post-consummation share of
market deposits. See, e.g., First Banks, Inc., 76 Federal Reserve
Bulletin 669 (1990).
17. Under the DOJ Guidelines, 49 Federal Register 26,823 (1984),
a market is considered unconcentrated if the post-merger HHI is under
1000, moderately concentrated if the post-merger HHI is between
1000 and 1800, and highly concentrated if the post-merger HHI is
more than 1800. The Department of Justice has informed the Board
that a bank merger or acquisition generally will not be challenged (in
the absence of other factors indicating anticompetitive effects) unless
the post-merger HHI is at least 1800 and the merger increases the HHI
by more than 200 points. The Department of Justice has stated that the
higher-than-normal HHI thresholds for screening bank mergers for
anticompetitive effects implicitly recognize the competitive effects of
limited-purpose lenders and other nondepository financial institutions.
18. Sovereign operates the 29th largest depository institution in the
New York banking market, controlling deposits of $6.5 billion, which
represent less than 1 percent of market deposits. Independence operates the 20th largest depository institution in the New York banking
market, controlling deposits of approximately $10 billion, which
represent less than 1 percent of market deposits. After consummation
of the proposal, Santander would become the eighth largest depository
organization in the market, controlling deposits of approximately
$17 billion, which represent approximately 2 percent of market
deposits. The HHI would decrease 19 points to 1034. Two hundred and
sixty-four bank and thrift institution competitors would remain in the
market.

Legal Developments

and public comments received on the proposal. 19 The
Board also has consulted with the Bank of Spain, which is
responsible for the supervision and regulation of Spanish
financial institutions.
In evaluating financial resources in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary-insured depository institutions and
significant nonbanking operations. In this evaluation, the
Board considers a variety of measures, including capital
adequacy, asset quality, and earnings performance. In
assessing financial resources, the Board consistently has
considered capital adequacy to be especially important. The
Board also evaluates the financial condition of the combined organization at consummation, including its capital
position, asset quality, and earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has carefully considered the financial resources of the organizations involved in the proposal. The
capital levels of Santander would continue to exceed the
minimum levels that would be required under the Basel
Capital Accord and are considered to be equivalent to the
capital levels that would be required of a U.S. banking
organization. In addition, Sovereign, Independence, and
their subsidiary savings associations and the U.S. subsidiary depository institution of Santander20 are well capitalized and would remain so on consummation of the proposal. Based on its review of the record, the Board finds
that Santander has sufficient financial resources to effect the
proposal.21 The proposed transaction is structured as a cash

19. Some commenters objected to the proposal because Sovereign's
shareholders were not afforded an opportunity to vote on Santander's
proposed investment in Sovereign, and they disagreed with Sovereign's decision to postpone its annual shareholder meeting. The
commenters also alleged that Sovereign's board of directors breached
its fiduciary duty by agreeing to the proposed transaction with
Santander. These are matters of state law and may be raised before a
court with the authority to provide commenters with adequate relief, if
deemed appropriate. The Board also notes that the New York Stock
Exchange ("NYSE") has determined that Sovereign's proposed issuance of shares to effect the transaction would not trigger NYSE's rules
requiring shareholder approval of change of control transactions. The
Board has consulted with the SEC about this matter. The Board has
also consulted with the SEC about a commenter's allegations that
Sovereign made false or misleading disclosures in statements filed
with the SEC.
20. Santander BanCorp ("SBC"), San Juan, an intermediate bank
holding company through which Santander holds BSPR, has restated
financial statements for the years 2000-2004 after concluding that
some transactions booked as mortgage loan purchases or sales during
those years did not meet accounting requirements for treatment as
sales. SBC also delayed issuing its annual report for 2005 pending its
review of similar transactions executed in 2005. SBC has indicated
that the restatements lower its cumulative net income by less than
1 percent during the covered period. The Board has considered the
corrective actions Santander and SBC have taken with respect to this
matter. The Board has broad supervisory authority under the banking
laws to address these matters, if warranted, in the examination and
supervisory process. The Board also has consulted with the SEC about
this matter.
21. A commenter questioned whether Santander has sufficient
financial resources to offer to purchase additional shares of Sovereign

C153

purchase, and Santander will use available resources to
fund the transaction.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization.22 The Board has reviewed the examination
records of Santander's U.S. operations and of Sovereign,
Independence, and their subsidiary depository institutions,
including assessments of their management, riskmanagement systems, and operations.23 In addition, the
Board has considered its supervisory experiences and those
of the other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking laws and with anti-money-laundering laws. 24
Santander, Sovereign, Independence, and their subsidiary
depository institutions are considered to be well managed.
The Board also has considered Santander's plans for
implementing the proposal, including the proposed management after consummation.25

if required to do so under Pennsylvania law. Pennsylvania corporate
law generally affords dissenting shareholders a right to demand fair
value for their shares when a person or a group of persons acting in
concert acquires 20 percent or more of the voting shares of a registered
corporation. See 15 Pa. Cons. Stat. §2541 et seq. The commenter
requested that the Board delay action on the proposal pending the
outcome of a lawsuit brought by a dissenting minority shareholder of
Sovereign to enforce this demand right and other litigation related to
the proposal. Santander represented that all lawsuits related to the
proposed transaction have been dismissed. The Board also notes that
certain recent amendments to a relevant Pennsylvania statutory provision appear to clarify that the proposal would not trigger the dissenting
shareholders' right under Pennsylvania corporate law. See 15 Pa.
Cons. Stat. § 2543(b)(2)(vii) (added by Senate Bill 595).
A commenter also objected to the pricing of the transactions. The
price of a transaction or the consideration received by shareholders is
not, by itself, within the limited statutory factors the Board may
consider when reviewing an application under the BHC Act. See
Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th
Cir. 1973).
22. The Board has previously determined that Santander is subject
to comprehensive consolidated supervision by the Bank of Spain. See,
e.g., Banco Santander, S.A., 85 Federal Reserve Bulletin 441 (1999).
23. A commenter expressed concern about Santander's ability to
share information for purposes of complying with applicable U.S.
anti-money-laundering laws. The Board has reviewed confidential
supervisory information on the policies, procedures, and practices of
Santander's U.S. operations for complying with the Bank Secrecy Act
and other U.S. anti-money-laundering laws. Further, the Board notes
that Santander has committed to make available to the Board information on the operations of Santander and any of its affiliates that the
Board deems necessary to determine and enforce compliance with
applicable laws.
24. The commenter also expressed concern based on a news article
discussing a fine imposed by the U.K. Financial Services Authority
("FSA") on Abbey National PLC ("Abbey"), London, United Kingdom, a foreign bank subsidiary of Santander. The Board notes that the
activities of Santander and its affiliates in the United Kingdom are
subject to the supervision of the FSA and the requirements of U.K.
law. Santander has represented that the fine imposed by the FSA on
Abbey was due to actions that occurred before Santander acquired
Abbey.
25. A commenter expressed concern about Sovereign's relationships
with unaffiliated pawn shops and other nontraditional providers of
financial services. As a general matter, the activities of the consumer
finance businesses identified by the commenter are permissible, and
the businesses are licensed by the states where they operate. Santander
represented that Sovereign does not focus on marketing credit services

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Federal Reserve Bulletin • 2006

Based on all the facts of record, the Board has concluded
that the financial and managerial resources of the organizations involved in the proposal are consistent with approval
under section 4 of the BHC Act.26

CRA PERFORMANCE RECORDS
As previously noted, the Board considers the records of
performance under the CRA of the relevant insured depository institutions when acting on a notice to acquire a
savings association. The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe-andsound operation, and requires the appropriate federal
financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome neighborhoods, in evaluating bank expansionary
proposals.27
As provided in the CRA, the Board has evaluated the
proposal in light of the evaluations by the appropriate
federal supervisors of the CRA performance records of the
relevant insured depository institutions. An institution's
most recent CRA performance evaluation is a particularly
important consideration in the applications process because
it represents a detailed, on-site evaluation of the institution's overall record of performance under the CRA by its
appropriate federal supervisor.28
BSPR received an "outstanding" rating at its most recent
CRA performance evaluation by the FDIC, as of August 9,
2005. Sovereign Bank received an "outstanding" rating at
its most recent CRA performance evaluation by the OTS, as
of March 11, 2005, and Independence Bank received a
"satisfactory" rating at its most recent CRA performance
evaluation by the FDIC, as of November 3, 2003. Santander
has represented that Sovereign intends to implement Sovereign Bank's CRA program at Independence Bank.
Based on a review of the entire record, and for the
reasons discussed above, the Board concludes that the CRA
performance records of the relevant depository institutions
are consistent with approval.

OTHER CONSIDERATIONS
The Board also has carefully considered the lending record
and data reported by Sovereign Bank and Independence
to such nontraditional providers and generally does not have extensive
commercial loan relationships with such providers. Santander also has
represented that Sovereign does not play any role in the lending
practices, credit review, or other business practices of those firms.
26. A commenter expressed concern that Santander did not expressly
state in its application that it would serve as a source of strength to
Sovereign. The Board expects a bank holding company to serve as a
source of financial and managerial strength to the insured depository
institutions that it controls.
27. 12U.S.C. §2903.
28. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36,640 (2001).

Bank under the Home Mortgage Disclosure Act
("HMDA") 29 in light of public comment about their record
of lending to minorities. A commenter opposed the proposal and alleged, based on 2004 HMDA data, that those
institutions engaged in discriminatory treatment of minority individuals in their home-mortgage lending operations.30 The commenter asserted that Sovereign Bank and
Independence Bank made higher-cost loans to African
Americans and Hispanics more frequently than to nonminorities.31 The commenter also alleged that Sovereign Bank
and Independence Bank disproportionately denied applications for HMDA-reportable loans by African-American and
Hispanic applicants. The Board has analyzed 2004 HMDA
data reported by Sovereign Bank and Independence Bank
in their primary assessment areas. 32
Although the HMDA data might reflect certain disparities
in the rates of loan applications, originations, denials, or
pricing among members of different racial or ethnic groups
in certain local areas, they provide an insufficient basis by
themselves on which to conclude whether or not Sovereign
Bank or Independence Bank is excluding or imposing higher
credit costs on those groups on a prohibited basis. The Board
recognizes that HMDA data alone, even with the recent
addition of pricing information, provide only limited information about the covered loans. 33 HMDA data, therefore,
have limitations that make them an inadequate basis, absent
other information, for concluding that an institution has
engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
29. 12U.S.C. §2801 et seq.
30. The commenter also expressed concerns about Santander's
acquisition of Island Finance Puerto Rico, Inc. ("Island Finance"), an
entity engaged in subprime lending. As a general matter, the activities
of the consumer finance business identified by the commenter are
permissible, and the commenter did not provide evidence that
Santander or Island Finance had originated, purchased, or securitized
"predatory" loans or otherwise engaged in abusive lending practices.
31. Beginning January 1, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CFR 203.4).
32. The commenter also alleged that Sovereign Bank and Independence Bank engaged in discriminatory lending based on a review of
the prices and numbers of loans extended to African-American and
Hispanic borrowers as compared to nonminority borrowers in 2005.
The commenter based this allegation on 2005 HMDA data derived
from loan application registers that it obtained from the savings
associations. These data are preliminary, and 2005 data for lenders in
the aggregate are not yet available. See Frequently Asked Questions
About the New HMDA Data, page 2 (April 3, 2006), available at
www.federalreserve.gov/boarddocs/press/bcreg/2006.
33. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

Legal Developments

that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe-andsound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and taken into account other information,
including examination reports that provide on-site evaluations of compliance by Sovereign Bank and Independence
Bank with fair lending laws. In the fair lending reviews that
were conducted in conjunction with the most recent CRA
performance evaluations of Sovereign Bank and Independence Bank, examiners noted no substantive violations of
applicable fair lending laws. The Board has also forwarded
the comments to, and consulted with, the OTS and the
FDIC about the fair-lending and consumer-protection compliance records of Sovereign Bank and Independence Bank
respectively.
The record also indicates that Sovereign has taken steps
to ensure compliance with fair lending and other consumer
protection laws. Santander represented that Sovereign's
consumer and mortgage lending units have second-review
policies for loan applications that would otherwise be
denied, and that Sovereign's compliance training program
features online programs, including proficiency testing, and
seminars taught by compliance staff or trade association
employees. Santander has represented that Sovereign intends to implement its consumer compliance program at
Independence Bank after consummation of the proposal.
The Board also has considered the HMDA data in light
of other information, including the CRA performance
records of Sovereign Bank and Independence Bank. These
established efforts and records demonstrate that Sovereign
and Independence are active in helping to meet the credit
needs of their entire communities.

PUBLIC BENEFITS
As part of its evaluation of the public interest factors under
section 4 of the BHC Act, the Board also has reviewed
carefully the public benefits and possible adverse effects of
the proposal. The record indicates that consummation of
the proposal would result in benefits to consumers and
businesses currently served by Sovereign. They would be
able to draw on Santander's global experience in retail
banking and experience with Spanish-speaking customers,
particularly as Sovereign expands in New York City, which
has a large and increasing Hispanic population. In addition,
it is expected that Santander's technological expertise will
enhance Sovereign's ability to deliver existing and new
banking products.
Based on all the facts of record, the Board concludes that
consummation of the proposal can reasonably be expected
to produce public benefits that would outweigh any likely
adverse effects. Accordingly, the Board has determined that
the balance of the public benefits under section 4(j)(2) of
the BHC Act is consistent with approval.

C155

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the notice should be, and hereby
is, approved.34 In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the BHC Act.35 The Board's
approval is specifically conditioned on compliance by
Santander and Sovereign with the conditions imposed in
this order and the commitments made to the Board in
connection with the notice. The Board's approval also is
subject to all the conditions set forth in Regulation Y,
including those in sections 225.7 and 225.25(c),36 and to
the Board's authority to require such modification or
termination of the activities of the bank holding company
or any of its subsidiaries as the Board finds necessary to
ensure compliance with, and to prevent evasion of, the
provisions of the BHC Act and the Board's regulations and
orders issued thereunder. For purposes of this action, these
conditions and commitments are deemed to be conditions
imposed in writing by the Board in connection with its
findings and decisions herein and, as such, may be enforced
in proceedings under applicable law. The acquisition shall
not be consummated later than three months after the
effective date of this order, unless such period is extended
for good cause by the Board or by the Federal Reserve
Bank of New York, acting pursuant to delegated authority.
By order of the Board of Governors, effective May 25,
2006.
Voting for this action: Chairman Bernanke and Governors Bies,
Olson, Kohn, Warsh, and Kroszner.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

34. Two commenters requested that the Board hold a public hearing
or meeting on the proposal. The Board's regulations provide for a
hearing under section 4 of the BHC Act if there are disputed issues of
material fact that cannot be resolved in some other manner (12 CFR
225.25(a)(2)). Under its rules, the Board also may, in its discretion,
hold a public meeting or hearing on an application if a meeting or
hearing is necessary or appropriate to provide an opportunity for
testimony (12 CFR 262.3(i)(2)). The Board has considered carefully
the commenters' requests in light of all the facts of record. In the
Board's view, the commenters had ample opportunity to submit
comments on the proposal and, in fact, submitted written comments
that the Board has considered carefully in acting on the proposal. The
requests fail to identify disputed issues of fact that are material to the
Board's decision that would be clarified by a public meeting or
hearing. Moreover, the commenters' requests fail to demonstrate why
their written comments do not present their views adequately or why a
meeting or hearing otherwise would be necessary or appropriate. For
these reasons, and based on all the facts of record, the Board has
determined that a public hearing or meeting is not required or
warranted in this case. Accordingly, the requests for a public hearing
or meeting on the proposal are denied.
35. A commenter expressed concern about the expansion of foreign
banks in the United States. The Board notes that the International
Banking Act of 1978 (12 U.S.C. §3101 et seq.) and the BHC Act
provide the general legal framework under which foreign banks may
enter and conduct banking activities in the United States.
36. 12 CFR 225.7 and 225.25(c).

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Federal Reserve Bulletin • 2006

ORDERS ISSUED UNDER SECTIONS 3 AND
4 OF THE BANK HOLDING COMPANY A C T

M&P Community Bancshares, Inc., 401(k)
Employee Stock Ownership Plan
Newport, Arkansas
Order Approving the Formation of a Bank
Holding Company and Determination on a
Financial Holding Company Election
M&P Community Bancshares, Inc., 401(k) Employee
Stock Ownership Plan ("Applicant") has requested the
Board's approval under section 3 of the Bank Holding
Company Act ("BHC Act") 1 to become a bank holding
company by acquiring an additional 1.63 percent, for a total
of 26.58 percent, of the voting shares of M&P Community
Bancshares, Inc. ("M&P BHC"), Newport, a financial
holding company within the meaning of the BHC Act, and
to acquire control of Merchants & Planters Bank ("M&P
Bank"), Newport, and Greers Ferry Lake State Bank
("GFLS Bank"), Heber Springs, all of Arkansas. Applicant
also has filed an election to become a financial holding
company pursuant to section 4(1) of the BHC Act and
section 225.82 of the Board's Regulation Y.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published (71
Federal Register 933 (2006)). The time for filing comments
has expired, and the Board has considered the application
and all comments received in light of the factors set forth in
section 3 of the BHC Act.
Applicant is an employee stock ownership plan
("ESOP") organized under section 4975(e)(7) of the Internal Revenue Service Code.3 Applicant has an underlying
trust that is organized on behalf of the employees of M&P
BHC, M&P Bank, and GFLS Bank and invests in the shares
of M&P BHC.
M&P BHC, with total consolidated assets of approximately $199 million, is the 50th largest depository organization in Arkansas, controlling deposits of approximately
$170 million.4 M&P BHC operates two subsidiary depository institutions with branches only in Arkansas, M&P Bank
and GFLS Bank, and several nonbanking subsidiaries.5

1. 12U.S.C. §1842.
2. 12 U.S.C. § 1843(0; 12 CFR 225.82(f).
3. 26 U.S.C. §4975(e)(7).
4. State deposit data are as of June 30, 2005, and ranking data reflect
mergers consummated before April 26, 2006. In this context, insured
depository institutions include commercial banks, savings banks, and
savings associations.
5. Applicant proposes to acquire indirectly the shares of the
nonbanking subsidiaries of M&P BHC in accordance with section 4(k)
of the BHC Act and the post-transaction notice procedures in section

CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has considered these factors in light of all the facts of
record, including confidential reports of examination, other
supervisory information from the primary federal and state
banking supervisors of the organizations involved, financial and other information provided by Applicant, and
public comment on the proposal.7
In evaluating financial factors in BHC Act proposals
involving an ESOP, the Board reviews the financial condition of the ESOP as well as the related bank holding
company and its subsidiaries. The Board considers a variety of measures in this evaluation, including the financial
obligations and cash flow of the ESOP, and the capital
225.87 of Regulation Y (12 U.S.C. § 1843(k); 12 CFR 225.87).
6. 12 U.S.C. § 1842(c)(l).
7. One commenter, a minority shareholder of M&P BHC ("Commenter"), alleged that M&P BHC's management has engaged in selfdealing and breached its fiduciary duties. In particular, Commenter
questioned the valuation of M&P BHC stock in connection with
certain stock transactions involving the company's management officials and has filed a shareholder derivative suit involving these
allegations in an Arkansas court against M&P BHC's board of
directors. Management has denied any wrongdoing or breach of
fiduciary duty in the pending lawsuit, and the matter is currently under
review in the appropriate legal forum. The Board does not have
authority to resolve this dispute. See Western Bancshares, Inc. v. Board
of Governors, 480 F.2d 749 (10th Cir. 1973). Moreover, action on this
proposal would not interfere with the court's ability to resolve the
pending litigation.

Legal Developments

adequacy, asset quality, and earnings performance of the
banking organization. In assessing financial factors, the
Board has considered capital adequacy to be especially
important. The Board also evaluates the financial effects of
the proposed transaction on the condition of the organization, including the organization's capital position, earnings
prospects, and the impact of the proposed funding of the
transaction. M&P BHC and each of its subsidiary depository institutions are well capitalized and would remain so
on consummation of the proposal. Based on its review of
the record, the Board finds that Applicant has sufficient
financial resources to effect the proposal and that the
financial resources of M&P BHC and its subsidiaries would
not be adversely affected by the proposal. The proposed
transaction is structured as a cash purchase.
The Board also has considered the managerial resources of the organizations involved. The Board has
reviewed the examination records of M&P BHC and its
subsidiary depository institutions, including assessments
of their management, risk-management systems, and operations. The Board notes that the three trustees of Applicant's underlying trust are outside directors of M&P
BHC. In addition, the Board has considered its supervisory experiences and those of the other relevant banking
supervisory agencies with the organization and its record
of compliance with applicable banking law. M&P BHC
and its subsidiary depository institutions are considered to
be well managed.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of Applicant and the institutions involved are consistent with approval, as are the other
supervisory factors under the BHC Act.8

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
8. Commenter expressed concern about the managerial resources of
M&P BHC. In addition to the stock valuation and fiduciary duty
concerns discussed above, Commenter asserted that M&P BHC's
management may have acquired shares of the company through
Applicant in a manner that would have required applications to the
Board for prior approval under the BHC Act. The Board has considered this allegation in the context of all the facts of record regarding
the management of M&P BHC, and it has reviewed information
provided by both Commenter and Applicant, as well as confidential
supervisory information about the ownership and transfer of M&P
BHC shares. The record does not support a finding that Applicant
previously acquired more than 24.9 percent of M&P BHC in violation
of the BHC Act. Commenter also asserted that the organization's
management mishandled a relationship with a delinquent businessloan customer. The Board has reviewed confidential examination
reports about this lending relationship. In addition, the Board forwarded these comments to, and consulted with, both the Federal
Deposit Insurance Corporation ("FDIC") and the Arkansas State Bank
Department, the primary supervisors of M&P BHC's subsidiary
depository institutions, about Commenter's allegations concerning the
management of M&P BHC and its operation of the subsidiary
depository institutions. As noted above, M&P BHC and its subsidiary
depository institutions are considered to be well managed.

C157

convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA"). 9 M&P Bank, M&P BHC's lead bank,
received an overall "satisfactory" rating at its most recent
CRA performance evaluation by the FDIC, as of October
2002. GFLS Bank also received a "satisfactory" rating at
its most recent CRA performance evaluation by the FDIC,
as of August 2002.
The Board has carefully considered all the facts of
record, including reports of examination of the CRA
records of the institutions involved and confidential supervisory information. Based on all the facts of record, the
Board concludes that the considerations relating to the
convenience and needs of the community to be served and
the CRA performance records of the relevant depository
institutions are consistent with approval.

FINANCIAL HOLDING COMPANY DECLARATION
As noted, Applicant has also filed with the Board an
election to become a financial holding company pursuant
to section 4(1) of the BHC Act and section 225.82 of
Regulation Y. Applicant has certified that all depository
institutions controlled by M&P BHC are well capitalized
and well managed and will remain so on consummation
of the proposal. Applicant has also provided all the information requested under Regulation Y.
The Board has reviewed the examination rating received by each insured depository institution controlled
by M&P BHC under the CRA and other relevant examinations and information. Based on all the facts of record,
the Board has determined that the election to become a
financial holding company will become effective on Applicant's consummation of the proposed share acquisition.

CONCLUSION
Based on the foregoing and all facts of record, the Board
has determined that the application should be, and hereby
is, approved. In reaching its conclusion, the Board has
considered all the facts of record in light of the factors
that it is required to consider under the BHC Act and
other applicable statutes. The Board's approval is specifically conditioned on compliance by Applicant with the
conditions imposed in this order and the commitments
made to the Board in connection with the application. For
purposes of this action, the conditions and commitments
are deemed to be conditions imposed in writing by the
Board in connection with its findings and decision herein
and, as such, may be enforced in proceedings under
applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of
this order, or later than three months after the effective
date of this order, unless such period is extended for good
9. 12 U.S.C. §2901 et seq.; 12 U.S.C. § 1842(c)(2).

C158 Federal Reserve Bulletin • 2006

cause by the Board or the Federal Reserve Bank of St.
Louis, acting pursuant to delegated authority.
By order of the Board of Governors, effective May 23,
2006.

Voting for this action: Chairman Bernanke and Governors Olson,
'
'
Kroszner. Absent and not voting: Governor Bies.

Kohn Warsh and

ROBERT DEV. FRIERSON
Deputy Secretary of the Board

C159

Legal Developments: Third Quarter, 2006
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY A C T

Federation Nationale du Credit Agricole
Paris, France
SAS Rue La Boetie
Paris, France
Order Approving the Formation of Bank
Holding Companies and Acquisition of a
Bank
Federation Nationale du Credit Agricole ("FNCA") and
SAS Rue La Boetie ("Boetie") (together "Applicants")
have requested the Board's approval under section 3 of the
Bank Holding Company Act ("BHC Act")1 to become
bank holding companies and thereby retain control indirectly of Espirito Santo Bank ("ES Bank"), Miami,
Florida, through their subsidiary, Credit Agricole S.A.
("Credit Agricole"), Paris, France, a foreign bank that is a
bank holding company within the meaning of the BHC
Act.2
Applicants filed to become bank holding companies in
compliance with commitments made by Boetie in connection with a temporary exemption from certain filing requirements of the BHC Act granted under section 4(c)(9) of the
BHC Act in 2003.3 The Board granted that exemption in
conjunction with Credit Agricole's proposed acquisition of
Credit Lyonnais ("Credit Lyonnais"), another French bank
also in Paris, to allow Boetie and Credit Agricole to acquire
Credit Lyonnais's U.S. nonbanking subsidiaries subject to
the condition that Boetie seek approval from the Board
1. 12U.S.C. §1842.
2. Credit Agricole controls indirectly more than 25 percent of the
voting shares of Banco Espirito Santo, S.A., Lisbon, Portugal.
3. 12 U.S.C. § 1843(c)(9). Section 4(c)(9) of the BHC Act provides
that the Board may grant to foreign companies exemptions from the
provisions of section 4 of the act, provided such exemptions are not
substantially at variance with the purposes of the BHC Act and are in
the public interest.

under section 3 of the BHC Act to become a bank holding
company. FNCA, an unincorporated association that became Boetie's parent, later joined Boetie's application.
Approximately 40 regional cooperative banks ("Regional Banks") directly owned more than 90 percent of the
shares of Credit Agricole before the formation of Boetie
and the subsequent acquisition of Credit Lyonnais. Boetie
was formed in connection with Credit Agricole's public
offering of shares undertaken, in part, to facilitate its
acquisitions.4 In connection with the share issuance by
Credit Agricole, the Regional Banks sought to consolidate
their ownership interest in Credit Agricole and transferred
their shares to Boetie.5 Boetie, which currently holds
approximately 55 percent of Credit Agricole's voting
shares, votes the shares of Credit Agricole in order to
maintain the Regional Banks' control of Credit Agricole.
FNCA acts as a consultative and representative body for the
Regional Banks.
FNCA, Boetie, Credit Agricole, and Calyon, S.A. ("Calyon"),6 Paris, a wholly owned French bank subsidiary of
Credit Agricole (jointly, "FHC electors"), have also filed
elections to become and be treated as financial holding
companies pursuant to section 4(k) and (/) of the BHC Act
and section 225.82 and 225.91 of the Board's Regulation Y.7
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (68 Federal Register 34,608). The time
for filing comments has expired, and the Board has considered the proposal and all comments received in light of the
factors set forth in section 3 of the BHC Act.
4. Credit Agricole was formerly known as Caisse Nationale de
Credit Agricole.
5. Credit Agricole supports, coordinates, and supervises the operations of the Regional Banks and approximately 2600 local cooperative
banks, which operate a retail branch network in France. FNCA,
Boetie, Credit Agricole, and the regional and local cooperative banks
together comprise the Credit Agricole Group. Boetie and FNCA
engage in no activities in the United States except through Credit
Agricole.
6. Calyon is the successor to Credit Agricole Indosuez, S.A., Paris,
France.
7. See 12 U.S.C. §§1843(k) and (/); 12 CFR 225.82 and 225.91.
FHC electors have provided all the information required under Regulation Y. Based on all the facts of record, the Board has determined that
these elections to become and be treated as financial holding companies are effective as of the date of this order. ES Bank and applicable
foreign banks are well capitalized and well managed in accordance
with the applicable provisions of Regulation Y. See 12 CFR 225.90
and 225.2.

C160

Federal Reserve Bulletin • 2006

Credit Agricole, with total consolidated assets of approximately $913 billion, is the largest bank in France.8 Credit
Agricole conducts banking and nonbanking operations in
the United States indirectly through Calyon and Credit
Lyonnais, a wholly owned subsidiary of Credit Agricole.
Calyon operates branches in New York, Chicago, and Los
Angeles and representative offices in Houston and Dallas.
Credit Lyonnais operates a representative office in New York
and an agency in Miami. ES Bank, the U.S. subsidiary bank
of Banco Espirito Santo, S.A., is an indirect subsidiary of
Credit Agricole.9 Banco Espirito Santo, S.A. also operates
a branch in New York. Calyon engages through subsidiaries
in the United States in a broad range of permissible
nonbanking activities, including securities and futures trading, leasing, financing, brokerage, and financial consulting
activities.10
ES Bank has total assets of approximately $409 million
and has one office in Miami. ES Bank is the 87th largest
insured depository organization in Florida, controlling
deposits of approximately $301 million, which represent
less than 1 percent of the total amount of deposits of
insured depository institutions in the state.11

impact of the proposed funding of the transaction.
The Board has carefully considered the financial factors
of this proposal. France's risk-based capital standards are
consistent with those established by the Basel Capital
Accord ("Accord"). The capital ratios of Credit Agricole
and Applicants' foreign subsidiary banks with U.S. banking
operations would continue to exceed the minimum levels
that would be required under the Accord and are considered
equivalent to the capital levels that would be required of a
U.S. banking organization. In this regard, Applicants'
subsidiary banks with U.S. banking operations are well
capitalized. The Board also has considered the financial
resources of Applicants and other organizations involved in
the proposal. Based on its review of these factors, the
Board finds that the financial factors of the proposal are
consistent with approval.
The Board also has considered the managerial resources
of the organizations involved and the combined organization.12 The Board has reviewed the examination records of
ES Bank and the U.S. banking operations of the organizations involved in the proposal, including assessments of
their management, risk-management systems, and operations. In addition, the Board has considered its supervisory
experiences and those of the other relevant banking supervisory agencies with ES Bank and the U.S. banking
operations of organizations involved in the proposal and
their records of compliance with applicable banking law,
including compliance with anti-money-laundering laws. 13
Furthermore, the Board has consulted with the Commission
Bancaire about Applicants and about the managerial resources of Credit Agricole, including its compliance with
applicable laws and regulations.14 Credit Agricole and

12. A commenter asserted that Boetie violated the BHC Act by
acquiring the voting shares of Credit Agricole before submitting the
proposal to the Board for approval. In addition, the commenter
complained that Boetie and Credit Agricole violated the BHC Act
through the acquisition of all the shares of Credit Lyonnais in 2003
without the Board's prior approval for the acquisition of Credit
Lyonnais's nonbanking operations. The commenter asserted that the
Board lacked authority to waive the BHC Act's application filing
requirements with respect to such transactions and inappropriately
shielded such transactions from comment. As noted above, Boetie and
Credit Agricole have operated the U.S. subsidiaries under the temporary authority granted by the Board under section 4(c)(9) of the BHC
Act, which does not provide for public notice.
13. A commenter cited various news and congressional reports from
2003 through 2005 regarding allegations that ES Bank concealed
assets and money laundering in connection with accounts held for the
benefit of certain international individuals, including former Chilean
President Augusto Pinochet. According to those reports, ES Bank's
relationship with the Pinochet family ended in January 2000. As noted
above, the Board has considered the assessments of the Federal
Deposit Insurance Corporation ("FDIC"), ES Bank's primary federal
supervisor, of the bank's compliance with anti-money-laundering laws
in confidential reports of examination.
14. Three commenters expressed concern about Credit Agricole's
managerial record in light of past enforcement matters, including an
enforcement action concerning alleged false representations by Credit
Lyonnais in connection with its investment in Executive Life, a failed
California insurer. The Board notes that there is no evidence or
allegation that Credit Agricole was involved in any manner in the

Legal Developments: Third Quarter, 2006 C161

Applicants' subsidiary banks with U.S. banking operations
are considered to be well managed. 15 Based on all the facts
of record, the Board has concluded that considerations
relating to the managerial resources 16 and future prospects
of the organizations involved in the proposal are consistent
with approval.
Section 3 of the BHC Act also provides that the Board
may not approve an application involving a foreign bank
unless the bank is subject to comprehensive supervision or
regulation on a consolidated basis by the appropriate
authorities in the bank's home country.17 As noted, the
Commission Bancaire is the primary supervisor of French
banks, including Credit Agricole. The Board has previously
determined in orders approving applications18 filed under
the International Banking Act and the BHC Act involving
Credit Agricole, that Credit Agricole is subject to comprehensive supervision on a consolidated basis by its home

matters that resulted in the issuance of the enforcement action against
Credit Lyonnais. Moreover, this conduct occurred before Credit
Lyonnais became a subsidiary of Credit Agricole in 2003. In January
2004, Credit Agricole and Credit Lyonnais agreed to a consent order
that was jointly issued by the Board and the Commission Bancaire that
called for the organization to enhance its global compliance programs
and provided for close cooperation between the Board and the
Commission Bancaire to ensure that the terms of the consent order
were met. The Board has considered Credit Agricole's actions to
comply with the consent order. See Order to Cease and Desist and
Civil Money Penalty, December 18, 2003, between Credit Lyonnais
and the Board; Order Issued upon Consent, January 8, 2004, among
Credit Agricole, Credit Lyonnais, the Commission Bancaire, and the
Board.
In addition, a commenter cited news reports about fines imposed by
the Tokyo Stock Exchange and the Japanese Securities Dealers
Association against Credit Agricole Indosuez's securities brokerage
subsidiary in Japan in 2003. Credit Agricole subsequently implemented a Global Enhanced Compliance Program designed to ensure
compliance with regulatory requirements in various jurisdictions in
which Credit Agricole operates. As noted, the Board consulted with
the Commission Bancaire about Credit Agricole's compliance with
applicable laws and regulations.
15. See 12 CFR 225.90(c).
16. A commenter alleged Credit Agricole and Credit Lyonnais are
signatories to international human rights and environmental agreements and that the organizations have exhibited a lack of environmental and human rights standards. The Board notes that such matters are
not within the limited statutory factors the Board may consider when
reviewing an application under the BHC Act. See Western Bancshares,
Inc. v. Board of Governors, 480 F.2d 749 (10th Cir. 1973).
17. See 12 U.S.C. § 1842(c)(3)(B). As provided in Regulation Y, the
Board determines whether a foreign bank is subject to consolidated
home country supervision under the standards set forth in Regulation K. See 12 CFR 225.13(a)(4). Regulation K provides that a foreign
bank will be considered subject to comprehensive supervision or
regulation on a consolidated basis if the Board determines that the
bank is supervised or regulated in such a manner that its home country
supervisor receives sufficient information on the worldwide operations
of the bank, including its relationship with any affiliates, to assess the
bank's overall financial condition and its compliance with laws and
regulations. See 12 CFR 211.24(c)(l).
18. See Caisse Nationale de Credit Agricole, 86 Federal Reserve
Bulletin 412 (2000); Credit Agricole Indosuez, 83 Federal Reserve
Bulletin 1025 (1997); Caisse Nationale de Credit Agricole, 81 Federal
Reserve Bulletin 1055 (1995).

country supervisor.19 Based on all the facts of record, the
Board has concluded that Credit Agricole continues to be
subject to comprehensive supervision on a consolidated
basis by its home country supervisor.20
In addition, section 3 of the BHC Act requires the Board
to determine that an applicant has provided adequate
assurances that it will make available to the Board such
information on its operations and activities and those of its
affiliates that the Board deems appropriate to determine and
enforce compliance with the BHC Act.21 The Board has
reviewed the restrictions on disclosure in the relevant
jurisdictions in which Applicants operate and have communicated with relevant government authorities concerning
access to information.
In addition, Applicants have committed that, to the
extent not prohibited by applicable law, each will make
available to the Board such information on the operations
of its affiliates that the Board deems necessary to determine
and enforce compliance with the BHC Act and other
applicable federal law. Applicants also have committed to
cooperate with the Board to obtain any waivers or exemptions that may be necessary to enable their affiliates to
make any such information available to the Board. In light
of these commitments, the Board has concluded that Applicants have provided adequate assurances of access to any
appropriate information the Board may request. For these
reasons, and based on all the facts of record, the Board has
concluded that the supervisory factors it is required to
consider under section 3(c)(3) of the BHC Act are consistent with approval.

C162 Federal Reserve Bulletin • 2006

substantially lessen competition in any relevant banking
market, unless the anticompetitive effects of the proposal
are clearly outweighed in the public interest by its probable
effect in meeting the convenience and needs of the community to be served.22 The applications result from a reorganization of shareholder interests in Credit Agricole, which
had no effect, adverse or otherwise, on competition in the
marketplace. Based on all the facts of record, the Board
concludes that the proposal would not have a significantly
adverse effect on competition or on the concentration of
banking resources in any relevant banking market and that
competitive considerations are consistent with approval.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of a proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA"). 23 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank expansionary proposals.24
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of ES Bank, data reported by ES Bank under
the Home Mortgage Disclosure Act ("HMDA"), 25 other
information provided by Applicants, confidential supervisory information, and public comment received on the
proposal. A commenter criticized ES Bank's responsiveness to the credit needs of LMI borrowers and communities. The commenter also expressed concern, based on 2001
and 2002 HMDA data, about the lack of home mortgage
applications by African Americans to ES Bank.
A. CRA Performance Evaluation
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, on-site
evaluation of the institution's overall record of perfor-

22.
23.
24.
25.

12U.S.C.
12U.S.C.
12U.S.C.
12U.S.C.

§1842(c)(l).
§2901 et seq.
§2903.
§2801 et seq.

mance under the CRA by its appropriate federal supervisor.26
ES Bank received a "satisfactory" rating at its most
recent CRA performance evaluation from the FDIC, as of
September 26, 2003 ("2003 Evaluation"). 27 Applicants
have no plans to alter the CRA program of ES Bank.
ES Bank, the only subsidiary of Applicants that is
subject to the CRA, is a wholesale bank for CRA evaluation purposes. Examiners noted in the 2003 Evaluation that
as a wholesale bank, ES Bank does not have the business
infrastructure to directly serve the credit and banking
service needs of typical retail customers, including LMI
individuals and small businesses, and that the bank must
satisfy its CRA obligations through community development activities.
In the 2003 Evaluation, examiners characterized ES
Bank's community development lending as satisfactory
overall. Examiners stated that during the evaluation period,28 ES Bank exhibited a good record of community
development lending and had been responsive in meeting
the needs of its assessment area, including financing
projects for affordable housing, revitalization, and social
services to low-income people. During the evaluation
period, ES Bank originated seven community development
loans totaling $5.1 million. Examiners described bank
officers as proactive in identifying qualifying loans in a
highly competitive environment for community development loans and noted that the officers had taken a leadership role in some loans. Examiners noted that ES Bank
demonstrated flexibility during the evaluation period by
helping to initiate a loan consortium to finance low-income
housing acquisitions and construction in its assessment
area.
ES Bank has represented that it continues to respond to
the needs of its assessment area through community development lending activities since the 2003 Evaluation. From
January 2004 through May 2006, ES Bank originated more
than $10.1 million in community development loans in its
assessment area. As an example, ES Bank represented that
the bank approved a $4.5 million loan in 2006 to finance an
apartment building in an LMI census tract, which will be
converted into condominiums and sold at substantially
lower prices than new construction units.
Examiners characterized ES Bank's performance under
the investment test in its assessment area as satisfactory.
During the evaluation period, ES Bank made qualified
investments and donations totaling more than $2.6 million. Examiners noted that ES Bank's investment and
donation activities demonstrated a good effort by the bank
to serve the needs of its assessment area, particularly in
26. See Interagency Questions and Answers Regarding Community
Reinvestment, (>(> Federal Register 36,620 and 36,640 (2001).
27. A commenter criticized ES Bank's record of small business
lending and home mortgage lending to LMI borrowers and in LMI
communities. Examiners evaluate the record of community development of ES Bank and other wholesale banks through review of
community development loans, qualified investments, or community
development services. See 12 CFR 345.25(a).
28. The evaluation period was August 29, 2000, through September 26, 2003.

Legal Developments: Third Quarter, 2006

light of very strong competition for qualified investments
in the assessment area. ES Bank represented that it has
made more than SI million in qualified investments since
the 2003 Evaluation.
In the 2003 Evaluation, examiners noted that ES Bank
had provided community development services that were
generally responsive in supporting community development needs. During the evaluation period, bank officers
provided financial services education to a local school and
technical assistance to nine nonprofit organizations. ES
Bank has continued to provide community development
services in its assessment area since the 2003 Evaluation.
B. H M D A Data and Fair Lending Record
The Board has carefully considered the lending records and
HMDA data of ES Bank in light of the public comments
received on the proposal. A commenter expressed concern,
based on 2001 and 2002 HMDA data, that ES Bank lacked
home mortgage applications by African-American borrowers. The Board has reviewed the HMDA data from 2001
through 2005 that were reported by ES Bank in the Miami,
Florida Metropolitan Statistical Area, which comprises the
bank's assessment area.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing among members of different racial or ethnic
groups in certain local areas, they provide an insufficient
basis by themselves on which to conclude whether or not
ES Bank is excluding any racial or ethnic group or
imposing higher credit costs on those groups on a prohibited basis. The Board recognizes that HMDA data alone,
even with the recent addition of pricing information, provide only limited information about the covered loans. 29
HMDA data, therefore, have limitations that make them an
inadequate basis, absent other information, for concluding
that an institution has engaged in illegal lending
discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending but also equal access to credit by creditworthy applicants regardless of their race. Because of the
limitations of HMDA data, the Board has considered these
data carefully and has taken into account other information,
including examination reports that provide on-site evaluations of compliance by ES Bank with fair lending laws. In
the fair lending review conducted by the FDIC in conjunction with the bank's CRA evaluation in 2003, examiners
29. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

C163

noted no substantive violations of provisions of applicable
fair lending laws. The Board also consulted with the FDIC
about the concerns expressed by commenters.30
The record also indicates that ES Bank has taken steps
designed to ensure compliance with fair lending and other
consumer protection laws. Applicants represented that ES
Bank has implemented fair lending policies, procedures,
and training programs, including annual compliance training for all consumer lending department personnel on the
prevention of illegal prescreening and on discouragement
or exclusion of credit applicants. Formal lending policies
address significant criteria for loan approvals by the bank's
senior management or loan committee. Applicants also
represented that ES Bank's fair lending policies and procedures are designed to ensure that loan officers price loans
uniformly and avoid illegal discrimination and that current
and proposed lending activities and customer complaints
are reviewed. In addition, Applicants represented that ES
Bank provides for an independent review of the lending
activities of the bank to ensure all lending practices are in
full compliance with all laws, regulations, and internal
policies and procedures. Applicants further stated that an
independent consulting firm audits these efforts annually
and that those results are provided to the Internal Audit
Committee of the Board of Directors and the bank's
Compliance Department and Legal Department. Applicants
do not plan to implement significant changes to ES Bank's
compliance policies and programs.
The Board also has considered the HMDA data in light
of other information, including ES Bank's CRA community development activities and the overall performance
records of ES Bank under the CRA. These established
efforts demonstrate that the institution is active in helping
to meet the credit needs of its entire community.

C. Conclusion on Convenience and Needs and
CRA Records
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
30. A commenter questioned the veracity of ES Bank's reporting of
no denials of home mortgage applications in 2001 and 2002 and
generally alleged that the bank prescreened its home mortgage applications. Specifically, the commenter contended that ES Bank violated
HMDA by not accurately reporting its home mortgage applications
and violated the Equal Credit Opportunity Act ("ECOA") (15 U.S.C.
§ 1691 et seq.) by not providing adverse action notices when required.
ES Bank has represented that it reported no denials because it is a
wholesale bank engaged primarily in international private banking and
that its residential mortgages are generally extended as an accommodation to private banking customers where a mortgage loan approval
would be expected. The commenter also questioned ES Bank's
characterization of loans generated by brokers as accommodation
loans. Applicants represented that ES Bank began using two licensed
mortgage brokers in 2001 in an effort to increase its loan portfolio
during a period when internal referrals had slowed. Applicants also
represented that ES Bank's brokers referred a small number of
mortgage loans to the bank in 2005. The Board has consulted with the
FDIC, the primary federal supervisor of ES Bank, about the bank's
record of compliance with HMDA and ECOA in connection with this
matter.

C164

Federal Reserve Bulletin • 2006

institutions involved, information provided by Applicants,
comments received on the proposal, and confidential supervisory information. Based on a review of the entire record,
and for the reasons discussed above, the Board concludes
that considerations relating to the convenience and needs
factor and the CRA performance records of the relevant
depository institutions are consistent with approval.

Conclusion
Based on the foregoing and in light of all the facts of
record, the Board has determined that the proposal should
be, and hereby is, approved.31 In reaching this conclusion,
the Board has considered all the facts of record in light of
the factors it is required to consider under the BHC Act and
other applicable statutes.32 The Board's approval is specifically conditioned on compliance by Applicants with the
conditions in this order and all the commitments made to
the Board in connection with the proposal. For purposes of
this action, the commitments and conditions are deemed to
be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be
enforced in proceedings under applicable law.
By order of the Board of Governors, effective September 8, 2006.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin. Absent and not voting:
Governor Bies.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board
31. A commenter requested that the Board hold a public hearing or
meeting on the proposal. Section 3 of the BHC Act does not require the
Board to hold a public hearing or meeting on an application unless the
appropriate supervisory authority for any of the banks to be acquired
makes a timely written recommendation of denial of the application.
The Board has not received such a recommendation from any supervisory authority. Under its rules, the Board also may, in its discretion,
hold a public meeting or hearing on an application to acquire a bank if
necessary or appropriate to clarify factual issues related to the
application and to provide an opportunity for testimony (12 CFR
225.16(e)). The Board has considered carefully the commenter's
request in light of all the facts of record. In the Board's view, the
commenter had ample opportunity to submit comments on the proposal and, in fact, submitted written comments that the Board has
considered carefully in acting on the proposal. The commenter's
request fails to demonstrate why written comments do not present its
views adequately or why a hearing or meeting otherwise would be
necessary or appropriate. For these reasons, and based on all the facts
of record, the Board has determined that a public hearing or meeting is
not required or warranted in this case. Accordingly, the request for a
public hearing or meeting on the proposal is denied.
32. A commenter also requested that the Board extend the comment
period. As previously noted, the Board has accumulated a significant
record in this case, including reports of examination, confidential
supervisory information, public reports and information, and public
comment. In the Board's view, the commenter has had ample opportunity to submit its views and, in fact, has provided multiple written
submissions that the Board has considered carefully in acting on the
proposal. Based on a review of all the facts of record, the Board has
concluded that the record in this case is sufficient to warrant action at
this time and that neither an extension of the comment period nor
further delay in considering the proposal is warranted.

First National Bank Group, Inc.
Edinburg, Texas
Order Approving the Acquisition of Shares
of a Bank Holding Company
First National Bank Group, Inc. ("First National"), a bank
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act1 to acquire up to
9.9 percent of the voting shares of Southside Bancshares,
Incorporated ("Southside"), Tyler, Texas, and thereby
acquire an indirect interest in Southside Delaware Financial
Corporation, Dover, Delaware, and Southside's subsidiary
bank, Southside Bank, also of Tyler.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 28,865 (2006)). The
time for filing comments has expired, and the Board has
considered the proposal and all comments received in light
of the factors set forth in section 3 of the BHC Act.
First National, with total consolidated assets of $3.3 billion, is the 22nd largest depository organization in Texas,
controlling deposits of $2.4 billion, which represent less
than 1 percent of total deposits of insured depository
institutions in Texas ("state deposits"). 3 Southside, with
total consolidated assets of $1.8 billion, is the 36th largest
depository organization in Texas, controlling deposits of
$1 billion. If First National were deemed to control Southside on consummation of the proposal, First National
would become the 14th largest depository organization in
Texas, controlling deposits of approximately $3.4 billion,
which would represent 1 percent of state deposits.
The Board received a comment from Southside questioning First National's stated intention to make a passive
investment in Southside and expressing concerns about the
management of First National. The Board has considered
carefully Southside's comments in light of the factors it
must consider under section 3 of the BHC Act.
The Board previously has stated that the acquisition of
less than a controlling interest in a bank or bank holding
company is not a normal acquisition for a bank holding
company.4 The requirement in section 3(a)(3) of the BHC
Act that the Board's approval be obtained before a bank
holding company acquires more than 5 percent of the
voting shares of a bank, however, suggests that Congress
1. 12U.S.C. §1842.
2. First National currently owns 4.91 percent of Southside's voting
shares and proposes to acquire the additional voting shares through
purchases on the open market.
3. Asset data are as of March 31, 2006, and statewide deposit and
ranking data are as of June 30, 2005.
4. See, e.g., Brookline Bancorp, MHC, 86 Federal Reserve Bulletin
52 (2000) ("Brookline") (acquisition of up to 9.9 percent of the voting
shares of a bank holding company); GB Bancorporation, 83 Federal
Reserve Bulletin 115 (1997) (acquisition of up to 24.9 percent of the
voting shares of a bank); Mansura Bancshares, Inc., 79 Federal
Reserve Bulletin 37 (1993) (acquisition of 9.7 percent of the voting
shares of a bank holding company).

Legal Developments: Third Quarter, 2006

contemplated the acquisition by bank holding companies of
between 5 percent and 25 percent of the voting shares of
banks. 5 On this basis, the Board previously has approved
the acquisition by a bank holding company of less than a
controlling interest in a bank or bank holding company.6
First National has stated that the acquisition is intended
as a passive investment and that it does not propose to
control or exercise a controlling influence over Southside
or Southside Bank. In support of its stated intention, First
National has agreed to abide by certain commitments
previously relied on by the Board in determining that an
investing bank holding company would not be able to
exercise a controlling influence over another bank holding
company or bank for purposes of the BHC Act.7 For
example, First National has committed not to exercise or
attempt to exercise a controlling influence over the management or policies of Southside or any of its subsidiaries; not
to seek or accept representation on the board of directors of
Southside or any of its subsidiaries; and not to have any
director, officer, employee, or agent interlocks with Southside or any of its subsidiaries. First National also has
committed not to attempt to influence the dividend policies,
loan decisions, or operations of Southside or any of its
subsidiaries. Moreover, the BHC Act prohibits First National from acquiring additional shares of Southside or
attempting to exercise a controlling influence over Southside without the Board's prior approval.
The Board has adequate supervisory authority to monitor compliance by First National with the commitments and
the ability to take enforcement action against First National
if it violates any of the commitments.8 The Board also has
authority to initiate a control proceeding against First
National if facts presented later indicate that First National
or any of its subsidiaries or affiliates in fact controls or
exercises a controlling influence over Southside for purposes of the BHC Act.9 Based on these considerations and
all other facts of record, the Board has concluded that First
National would not acquire control of, or have the ability to
exercise a controlling influence over, Southside through the
proposed acquisition of voting shares.

C165

examination and other supervisory information received
from the primary federal supervisors of the organizations
and institutions involved in the proposal, publicly reported
and other financial information, information provided by
First National, and public comment received on the proposal.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of information, including capital adequacy, asset quality,
and earnings performance. In assessing financial factors,
the Board consistently has considered capital adequacy to
be especially important. The Board also evaluates the effect
of the transaction on the financial condition of the applicant, including its capital position, asset quality, earnings
prospects, and the impact of the proposed funding of the
transaction.10
Based on its review of the financial factors, the Board
finds that First National has sufficient resources to effect the
proposal. First National and its subsidiary bank are well
capitalized and would remain so on consummation of this
proposal. The proposed transaction is structured as a share
purchase, and the consideration to be received by Southside's shareholders would be funded from First National's
existing liquid assets.
The Board also has considered the managerial resources
of the organizations involved in the proposed transaction.
The Board has reviewed the examination records of First
National, Southside, and Southside Bank, including assessments of their management, risk-management systems, and
operations. In addition, the Board has considered its supervisory experiences and those of the other relevant ba

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