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2007 Compilation

Federal Reserve

BULLETIN

The Federal Reserve Bulletin (ISSN 0014-9209) is published annually by the Board of Governors of the
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Volume 93 D 2007 Compilation

Federal Reserve

BULLETIN

Board of Governors of the Federal Reserve System, Washington, D.C.

PUBLICA nONS COMMITTEE

Rosanna Pianalto Cameron, Chair D Scott G. Alvarez D Sandra F. Braunstein D Roger T. Cole
D Maureen T. Hannan D Jennifer 1. Johnson D Brian F. Madigan D Stephen R. Malphrus D H. Fay Peters
D Louise L. Roseman D D. Nathan Sheets D Michelle A. Smith D David 1. Stockton

The Federal Reserve Bulletin is issued annually under the direction of the staff publications committee. This committee is responsible for opinions expressed except in
official statements and signed articles. It is assisted by the Publications Department under the direction of Lucretia M. Boyer.

Table of Contents
PREFACE
ARTICLES

u.s.

Cross-Border Derivatives Data: A User's Guide. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stephanie E. Curcuru

May 15

Industrial Production and Capacity Utilization: The 2006 Annual Revision. . . . . . . . . . . . . . . . . . . .. AI7
Charles Gilbert and Maria Otoo
May 31

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006
Mark Carlson an.d Gretchen C. Weinbach

. . .. A37

July 12

The 2006 HMDA Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. A73
Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner
December 21

REpORTS ON THE CONDITION OF THE

U.S.

BANKING INDUSTRY

First Quarter, 2006

April 11

Second Quarter, 2006

June 27

LEGAL DEVELOPMENTS

Fourth Quarter, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

March 6

First Quarter, 2007

C49

June 8

Second Quarter, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. C77
October 12

Third Quarter, 2007

CI09

December 28

INDEX

Preface
The Federal Reserve Bulletin was introduced in 1914 as a vehicle to present policy issues developed by the
Federal Reserve Board. Throughout the years, the Bulletin has been viewed as a journal of record, serving to
provide the public with data and research results generated by the Board. Authors from the Board's Research
and Statistics, Monetary Affairs, International Finance, Banking Supervision and Regulation, Consumer and
Community Affairs, Reserve Bank: Operations, and Legal divisions contribute to the Bulletin, which includes
topical research articles, the Report on the Condition of the U.S. Banking Industry, orders on banking
applications, and enforcement actions.
Starting in 2004, the Bulletin was published quarterly rather than monthly. In 2006, in response to the
increased use of the Internet-and in order to release articles and reports in a more timely fashion-the Board
discontinued the quarterly print version of the Bulletin and began to publish the contents of the Bulletin on its
public website as the information became available. All articles, banking condition reports, orders on banking
applications, and enforcement actions that were published in the online Bulletin in 2007 are included in this
print compilation.
The tables that appeared in the Financial and Business Statistics section of the Bulletin from 1914 through
2003 are now published monthly as a separate print publication, the Statistical Supplement to the Federal
Reserve Bulletin. All statistical series are published with the same frequency as they were in the Bulletin, and
the numbering system for the tables remains the same.
Online access to the Bulletin and the Statistical Supplement is free. A free e-mail notification service is
available to alert subscribers to the release of articles and reports in the Bulletin; the monthly Statistical
Supplement; and press releases, testimonies, and speeches. The message provides a brief description and a link
to the recent posting.
Federal Reserve Bulletin:
www.federalreserve.gov/pubs/bulletin
Statistical Supplement to the Federal Reserve Bulletin:
www.federalreserve.gov/pubs/supplement/default.htrn
Subscribe to e-mail notification service:
www.federalreserve.gov/generalinfo/subscribe/notification.htm.

Articles

May 2007

u.s.

Cross-Border Derivatives Data:
A User's Guide
Stephanie E. Curcuru, of the Board's Division of
International Finance, prepared this article. Jonas J.
Robison provided research assistance.
The global derivatives market has grown rapidly in
the past decade. By one measure of market size-the
notional value, which is u ed to determine the payments made on a derivatives contract-the derivatives market expanded from $87 trillion in June 1998
to $454 trillion in June 2006 (figure 1).1 Measured by
the price at which a derivatives contract can be
purchased in a current transaction, or the market
value, the derivatives market grew from $3 trillion in
June 1998 to 10 trillion as of June 2006.
Available data suggest that cross-border derivatives deals-in which a resident of one country enters
into a contract with a resident of another countrymake up a substantial share of derivatives transactions. 2 Recognizing this fact, the International Monetary Fund (IMF) has recommended that its member
countries include cross-border derivatives in their
reports on external-sector finances. 3 Many countries
with financial services firms active in the derivatives
market have included derivatives in these reports
since the mid-1990s. The United States, however, has
to date published very little information on cros I. The notional value of a derivative is pecified in the contract and
serves as one basis for computing the payments made on the contract.
For example, for a contract known as a foreign exchange forward, in
which two parties agree to exchange an amount of currency at a future
date, the notional value i the amount of currency to be exchanged.
2. For exanlple, data for the United J<jngdom indicate that cro sborder derivatives with a positive market value to the domestic
counterparty totaled $1.8 trillion in that country at the end of 2005.
Refer to Office of ational Statistics (2006). Ullited Killgdom Ba/allce
of Paymellls: The Pillk Book 2006 ( ew York: Palgrave Macmillan).
Data for other countries are available in the Ba/allce of Paymellts
Statistics Yearbook. published annually by the International Monetary
Fund.
3. In 1993 the lMF recommended including derivatives as a line
item under the reporting category of "portfolio investment"; in 1998 it
further recommended that member countries report such data as a
separate reporting category-"financial derivatives." Refer to International Monetary Fund (1993), 1MF Ba/allce of Paymellls ManuaL, 5th
ed. (Washington: IMF); and International Monetary Fund (1998),
"Financial Derivatives," paper prepared for the Eleventh Meeting of
the IMF Committee on Balance of Payments Statistics, held at the
International Monetary Fund, Washington, Oct. 21-23, www.imf.org/
externallbopage/agenda.htm.

1. Gross market value and notional value of global
derivatives outstanding, 1998-2006
Trillions of U.S. dollars

Trillions or u.s. dollars

450
10

400
8

350
300

250
4

200

150
2

100

1998

I
2000

2002

I
2004

I
2006

Non: The data are semiannual and extend through June 2006. Gross
market value is the sum of the total gross positive market value of contracts
with all counterparties and the absolute value of the total gross negative
market value of contracts with nonreporting counterparties. The term gross
indicates that for multiple contracts with the same counterparty, contract
with positive market value and contracts with negative market values are not
netted. For an explanation of notional value, refer to text note I. To adjust for
double counting. the notional values of contracts with reporting counter·
parties are divided by 2.
SOURCE: Bank for International Settlements.

border derivatives because of the limited availability
of data. 4 As a result, U.S. reports on cross-border
financial flows and holdings currently exclude the
bulk of transactions and positions in cross-border
derivatives.
To address these gaps in data and reporting, the
U.S. Department of the Treasury, the Federal Re erve
Bank of New York, and the Federal Reserve Board
began collecting data on U.S. cross-border transactions and positions in derivatives in March 2005.
They collect the data through the Treasury International Capital (TIC) reporting system, which for
many years has collected imilar data for securities
such as stocks and bonds. 5 Because existing TIC
4. Some cross-border transactions in exchange-traded futures are
included in the quarterly U.S. balance of payments data, table 8a, line
B 18 ("Commercial liabilities; Advance receipts and other liabilities"),
available at www.bea.gov/international.
5. The TIC reporting system collects information on cross-border
transactions in, and holding of, portfolio securities and on other
claims and liabilities, including deposits. Reports are filed by banks

Federal Reserve Bulletin 0 May 2007

reporting forms were ill equipped to capture crossborder deri vati ves transactions and positions, the
Treasury developed a new form specifically for this
purpose-TIC form D.
This article introduces the new data collected by
form D and provides helpful information for data
users. The article begins with a discussion of the
relevance of derivatives to the U.S. external-sector
reports published by the U.S. Department of Commerce, Bureau of Economic Analysis. To date, derivatives have been largely excluded from these reports.
The article explains in detail the effects of the exclusion on two such reports-the U.S. balance of payments and the U.S. international investment position.
In particular, it shows how the omission of derivatives from reports on cross-border flows and holdings
can lead to mistaken inferences about what is driving
changes in the international investment position of
the United States. The implications of the analysis
extend beyond the omission of derivatives. The effect
of any other systematic omission of data on the
external-sector reports may be similar.
The article then summarizes the information collected by form D and shows how the data will
improve external-sector reporting. It also presents the
2006 data and discusses their relation to the derivatives data reported by other countries. The article
concludes with a discussion of the use of the data to
estimate risk exposures. Because the terminology
associated with derivatives can be somewhat daunting, detailed definitions are provided in the boxes
accompanying the main text.
DERNATIVES AND THE U.S. EXTERNALSECTOR REPORTS

The purpose of TIC form D is to collect the information needed for the inclusion of cross-border derivatives transactions and holdings in U.S. external-sector
reports. This section examines the effect of the inclusion of derivatives data in external-sector reports
through examples of accounting entries in two such
reports. The examples illustrate the current and future
treatment of derivatives transactions in the U.S. balance of payments as well as the current and future
treatment of derivatives holdings in the U.S. international investment position.

Types of Derivatives
A derivative is a financial contract whose value is
derived from something else (such as the value of a
and bank holding companies; securities brokers, dealers, and custodians; and nonfinancial companies with sizable commercial or financial
claims and liabilities vis-a-vis foreign residents.

stock or bond), referred to as the "underlying."
Anything that can be measured can serve as the
underlying to a derivative. The underlying can be the
price of a stock, the yield on a bond, a credit rating,
the value of an index, or even something more exotic,
like the average temperature in a region over a given
period.
Common types of derivatives include options, forwards, futures, and swaps. In an options contract, the
buyer pays an up-front premium for the right, but not
the obligation, to purchase or sell a specified quantity
of the underlying at a specified price on (or, in some
contracts, until) the expiration date. The two parties to
a forward or futures contract agree to exchange assets
or their cash equivalent at, or until, a future date. The
two parties to a swap agree to exchange assets or their
cash equivalent periodically until a future date (for
more information, refer to box "Overview of Derivatives").

The U.S. Balance of Payments
A country's balance of payments (BOP) is the record
of the economic transactions between its residents
and those of the rest of the world in a given period.
The Bureau of Economic Analysis (BEA) publishes
the U.S. BOP quarterly in three sections: the current
account, the capital account, and the financial account. 6 The current account records transactions in
goods and services, income, and unilateral transfers
between residents of the United States and nonresidents. Items recorded in the capital account include
non produced assets and other capital transfers, such
as debt forgiveness and transfers of goods and financial assets by foreign residents as they enter or leave
the United States. Transactions in the current and
capital accounts give rise to financial flows, which are
recorded, in tum, in the financial account. The financial account also records cross-border transactions
arising from trade in financial instruments such as
stocks and bonds, including transactions associated
with the purchase or sale of the securities and those
associated with payment for them.
Transactions in the BOP accounts are recorded as
credit or debit entries (refer to box "Accounting in
the U.S. Balance of Payments"). Credit entries are
given a positive sign, and debit entries a negative
sign. Transactions that generate a receipt of funds into
the United States, such as an export, the sale of a
security to a foreign resident, the withdrawal of U.S.
deposits from a foreign bank, and the deposit of funds
6. Before 1999, the BOP had only two sections-the current
account and the capital account. The capital account included items
that now appear in the financial account.

u.s.

Cross-Border Derivatives Data: A User's Guide

Overview of Derivatives
A derivatives contract can take many forms, but each
form has one thing in common-the value of the contract
is derived from something else, such as the value of a
stock or bond; that "something else" is referred to as the
underlying. As noted in the main text, anything that can
be measured can serve as the underlying to a derivative.
The following discussion covers several common types
of derivatives, their associated cash flows, and their uses.
Most other types of derivatives are variants of those
discussed here.

Forward Contract
A forward contract is an agreement to purchase or sell a
specified quantity of an underlying asset or its cash
equivalent at a stated price on the given maturity date of
the contract. Forwards trade in the over-the-counter
(OTC) market, in which contract terms are negotiated
between each pair of counterparties. Forwards typically
have a zero initial cost to the contracting parties-that is,
the counterparties set the delivery price so that each is
willing to enter into the contract without an initial payment. The only payment is on the maturity date, when the
counterparties will either exchange the assets specified in
the contract or their cash equivalent.'
Forwards can be used to lock in, or "hedge," future
expenses. They provide protection against future adverse
movements in the value of the underlying asset, but they
do so at the expense of losing future gains from favorable
movements. For example, consider a firm that imports
products into the United States. If the value of the U.S.
dollar falls relative to the foreign currency, the dollar cost
of the imported products will rise. To limit potential
losses from exchange rate moves, the firm can enter into a
foreign exchange forward contract to exchange a specified quantity of U.S. dollars for a specified quantity of the
foreign currency at a future date, thereby locking in the
exchange rate.

Swap Contract
A swap contract is basically a series of forwards, aU
with the same delivery price and quantity. As with
individual forwards, swaps trade in the aTe market,
and many are zero cost. Interest rate swaps are commonly used to change the flows of claims or liabilities
from fixed to floating, or vice versa. For example, if a
firm desires a loan with a fixed interest rate but can
obtain a more favorable loan with a floating rate, the
firm may choose the floating-rate loan and then enter
into an offsetting swap agreement in which it pays a
fixed rate and receives a floating rate. Because a swap is
equivalent to a series of forwards, the counterparties
will exchange assets or their cash equivalents periodically over the life of the contract.

I. Generally, forward contracts are not sold before maturity. Instead,
one or both panies to the contract will enter into an offsetting contract
with a third party.

Futures Contract
A futures contract is similar to a forward contract, but it
trades on an organized exchange with standardized contract terms, including maturity date and quantity. Futures
are subject to daily settlement to limit credit exposure.
Each day, the current value of the contract, the "variation
margin," is added to or subtracted from the owner's
account, thereby returning the value of the contract to
zero. Traders are required to maintain enough funds on
deposit in a margin account to cover potential losses.
As with forwards and swaps, futures are also typically
zero cost. 2 However, because of daily settlement, many
cash flows occur between the purchase date and the sale
or maturity date. Futures can be used for the same
hedging purposes as forwards.

Option Contract
The owner of an option has the right, but not the
obligation, to purchase (call option) or sell (put option) a
fixed quantity of the underlying asset at a predetermined
price, the strike price, on a predetermined date, the
exercise date. Unlike forwards, swaps, and futures, which
are typically zero cost, options can have a sizable initial
cost, or premium. To the option purchaser, the option
premium represents the maximum potential loss, whereas
for forwards, swaps, and futures, the loss potential of both
counterparties is unlimited. A call (or put) option has
value if the possibility remains that the price of the
underlying will be above (or below) the strike price on the
exercise date. An option is "in the money" if the current
price of the underlying is above (call option) or below
(put option) the strike price. Options trade in the aTe
market, with customized contract terms between the two
parties; and on exchanges, with standard contract terms,
such as set dates, strikes, and notional amounts.
For calls and puts, one of three scenarios is possible
before or on the expiration date. If the option is sold, the
sale proceeds are transferred to the owner. If the option is
in the money on the expiration date, funds are transferred
to the owner, and the amount transferred corresponds to
the difference between the strike price and the price of the
underlying, multiplied by the quantity of the underlying
specified in the contract. 3 If the option expires worthless,
no funds are transferred.
Options can be used for the same hedging purposes as
other derivatives. For example, a firm seeking protection
against adverse exchange rate movements can enter into
an option contract to exchange a quantity of currency or
its cash equivalent at a future date if the exchange rate
moves beyond the strike price.
2. For exchange-traded derivatives, an initial margin deposit is required
before the start of trading. Unless it is in the form of securities, the deposit
is recorded as a banking transaction, not a derivatives transaction. When
securities are used as margin deposits, no banking or other category of
transaction is recorded.
3. This example assumes that the option contract specifies cash settlement as opposed to physical settlement. If the option underlying is an
equity or commodity. physical settlement will involve actual physical
delivery of the underlying, whereas cash settlement will involve an
exchange of cash equal to the intrinsic value of the option.

Federal Reserve Bulletin D May 2007

Accounting in the U.S. Balance of Payments
Transactions in the U.S. balance of payments (BOP) are
recorded on the basis of the double-entry system of
accounting. I In this system all transactions are classified
as debits or credits. For every debit entry there must be a
corresponding credit entry; hence the term double entry.
Corporations use this accounting method in preparing
their financial statements. In corporate financial statements, receipts and expenses, as well as assets and
liabilities, are shown as positive numbers, and balances
are derived through subtraction. For example, expenses
are deducted from receipts to derive net income, and
liabilities are deducted from assets to derive net worth. In
the BOP the convention is somewhat different. Transactions that generate credit entries in an accounting sense
(increases in liabilities or decreases in assets, or increases
in revenues or decreases in expenses) are shown with a
positive sign in the balance of payments, and transactions
that generate debit entries (decreases in liabilities or
increases in assets, or decreases in revenues or increases
in expenses) are shown with a negative sign; the positive
and negative entries are added to derive BOP balances,
such as the balance in the current account, the capital
account, or the financial account.
A single international transaction will frequently involve four parties-a purchaser, a seller, and their respective banks-and each party that is a U.S. resident will
contribute one or more entries to the BOP, possibly in
more than one accounting period. For example, when a
U.S. resident purchases a bond from a foreign resident,
U.S. holdings of foreign securities will rise (a debit entry
in the BOP) and liabilities to foreign residents will also
rise in recognition of the new obligation to pay for the
bond (a credit entry). When the U.S. investor pays for the
bond in the subsequent accounting period, its own
I. Additional information is in Bureau of Economic Analysis (1990),
The Balance of Payments of the United States: Concepts, Data Sources,
and Estimating Procedure (Washington: BEA, May), www.bea.gov/scb/
pdf/internatlbpalmethlbopmp.pdf.

in a U.S. bank by a foreign resident, are each recorded
with a credit (positive) entry. They have offsetting
debit (negative) entries to reflect transactions that
generate payments of funds to foreign residents. For
example, an import, the purchase of a security from a
foreign resident, the deposit of new or additional U.S.
funds in a foreign bank, and the withdrawal of a
foreigner's deposit from a U.S. bank are each recorded with a debit (negative) entry. Because of this
accounting convention, the international transactions
accounts should always have a zero balance, as every
positive entry in the BOP should have a corresponding negative entry.
For most current account transactions, the offsetting entry is in the financial account. For example, a
U.S. firm's purchase of steel from a foreigner gener-

liabilities to foreign residents will fall to zero (a debit
entry) and its bank's liabilities to foreign residents will
increase (a credit entry). The means by which U.S. bank
liabilities increase may not be obvious. The increase
occurs because the U.S. investor could extinguish its
liability by issuing a check against its account at a U.S.
bank, which the foreign investor would deposit at its local
bank abroad. That bank would, in tum, present the check
to the U.S. investor's U.S. bank for settlement. Thus, the
series of transactions ultimately results in an increase in
foreign bank claims on U.S. banks and an increase in
U.S. holdings of foreign securities.
The BOP uses a similar accounting treatment for
imports or exports of goods and services. When a business purchases goods from a foreign resident, U.S.
imports will rise (a debit entry in the BOP), and liabiHties
to foreign residents will also rise because of the new
obligation to pay for the imported goods (a credit entry).
When the U.S. importer pays for those goods, its own
liabilities to foreign residents fall to zero (a debit entry),
and its bank's liabilities to foreign residents increase (a
credit entry).
A transaction may be recorded in one or more BOP
accounts depending on the type of transaction. Some
transactions, such as the purchase of a foreign bond,
result in only financial account entries, whereas others,
such as the importation of goods, result in entries in more
than one set of accounts (in the example of goods
purchased from a foreign resident, both the current
account and the financial account recorded entries). Nonetheless, transactions summed across all BOP accounts
should equal zero because, in principle, each transaction
should have a corresponding positive or negative entry.
Incomplete or erroneous information affects the "statistical discrepancy" in the BOP. The statistical discrepancy
is derived by summing all recorded BOP transactions and
reversing the sign of the total; it reflects the (net) value of
all BOP entries during a given period that were not fully
or correctly captured in the accounts.

ates a debit (negative) entry in the current account for
the imported steel. The associated payment is recorded as an offsetting positive entry in the financial
account and can take any of several forms, including
decreased U.S. deposits in a foreign bank or increased
foreign deposits in a U.S. bank.
Accounting for Financial Instruments Other Than
Derivatives
Many transactions do not involve a current account
payment or receipt but instead are recorded entirely in
the financial account. For example, for transactions
that involve the purchase or sale of financial instruments such as stocks or bonds, both the change in
financial instrument holdings and the offsetting in-

u.s.

I. Example of entries in the financial account of the U.S.
balance of payments: Purchase by a foreign resident of a
U.S. stock from a U.S. resident, and subsequent sale of
the stock
U.S. dollars
Financial flow
Foreign-owned assets in the United States
Year I
U.S. securities other than U.S. Treasury securities.
U.S. liabilities reported by U.S. banks,
not included elsewhere
Statistical discrepancy ...

I Year 2

100

-50

-100

NOTE: Here and in subsequent tables. refer to text for details; a positive
value indicates a net financial inflow to the United States. and a negative value
indicates a net financial outflow from the United States.

crease or decrease in deposits are reported in the
financial account. For most financial account transactions, the relevant information is collected through
the TIC system.?
By way of illustration, suppose that in year I a
foreign resident purchases $100 of U.S. stock through
a U.S. broker using funds that had been on deposit at
a U.S. bank (table I). The U.S. financial services
firms that facilitate this cross-border transaction are
responsible for reporting it on the TIC forms. The
U.S. broker in the example is responsible for reporting the stock purchase in its monthly report of TIC
securities transactions. The U.S. bank records the
foreigner's deposit balance at the end of each month
on the TIC banking report; the decline in deposits is
inferred from changes in these month-end balances.
In the example, the values reported through the
TIC system generate two financial account entries.
The account for U.S. securities held by foreigners
("U.S. securities other than U.S. Treasury securities") increases by $100, which is the purchase price
of the stock, shown as a positive amount, or credit.
The account of U.S. banking liabilities to foreigners
("U.S. liabilities reported by U.S. banks, not included
elsewhere") decreases by the $100 used to purchase
the stock, shown as a negative amount, or debit.
Continuing with the example, also suppose that the
value of the stock falls to $50 and that in the second
year the foreign resident sells the $50 worth of stock.
After the sale, the cash proceeds are transferred to the
U.S. bank account of the foreign resident, and so the
banking deposit balance of the foreign resident increases by an amount equal to the proceeds from the
sale of the stock and will be captured on the monthly
7. Exceptions are direct investment. currency shipments, and some
U.S. government transactions. all of which are collected through other
means. The TIC data include commissions paid to intermediaries,
which are recorded in the current account. not the financial account.
The BEA adjusts the TIC data by subtracting estimated brokerage
commissions to determine financial account transactions.

Cross-Border Derivatives Data: A User's Guide

TIC banking reports. As with the stock purchase, the
stock sale will be included in the reports of TIC
securities transactions. Accordingly, two financial
account entries arise from values reported through the
TIC system: a decrease (debit) of $50 in U.S. securities held by foreigners and an increase (credit) of the
same amount in U.S. banking liabilities to foreigners.
No entry in the financial account records the change
in the stock value. s
The final line in the BOP is a reconciliation line
labeled "statistical discrepancy." Because the BOP is
based on the double-entry accounting system, the sum
of all current account, capital account, and financial
account transactions should equal zero. Any remaining balance due to errors or omissions in the recorded
international transactions is reported as a statistical
discrepancy. In the example of the stock purchase and
sale, each transaction has an exactly offsetting transaction within the financial account, the sum of all
transactions recorded in each year is zero, and therefore no statistical discrepancy arises in either year.
The current presentation of the U.S. financial
account includes direct investment, securities (stocks
and bonds), currency, and loans and deposits (banking and brokerage). Transactions in all these instruments are recorded in the financial account as described in the example, but transactions in derivatives
contracts are recorded on only a limited basis.
Accounting for Derivatives
As with transactions involving stocks or bonds, transactions involving derivatives are recorded in the
financial account as increases or decreases in U.S.
banking claims on, or liabilities to, foreigners. However, to date, no corresponding entry in the financial
account reflects the change in the quantity of U.S.
derivatives claims on, or liabilities to, foreigners.
Thus, the international transactions accounts shown
in the BOP capture only one side of most derivatives
transactions. 9
The effect of the incomplete accounting for derivatives transactions in the BOP can be seen in the
following example. Suppose that instead of purchasing a U.S. stock from a U.S. broker, as in the earlier
example, a foreign resident purchases a derivative
(such as an option) for $100 from a U.S. resident with
funds on deposit in a U.S. bank (table 2). The change
in the foreigner's deposit balance, reported by the
U.S. bank at the end of each month on its TIC
8. Valuation changes are included in the U.S. international investment position, discussed later in the article.
9. The BEA plans to include derivatives in the U.S. BOP starting in
June 2007.

Federal Reserve Bulletin 0 May 2007

2. Example of entries in the financial account of the U.S.

balance of payments: Purchase by a foreign resident of a
derivative from a U.S. resident, and subsequent sale of
the derivative
u.s. dollars
Financial flow
Foreign-owned assets in the Uniled States
Year I
U.S. financial derivatives liabilities'
U.S. liabilities reported by U.S. banks.
not included elsewhere .
.
Statistical discrepancy

n.a.

-100

50
-50

100

The U.S. International Investment Position

Year 2

n.a.

reporting system, in which data on cross-border
derivatives transactions are incompletely recorded,
gives rise to a statistical discrepancy in the BOP
accounts.

I. Transactions in derivatives liabilities are shown for illustrative purposes
only. As discussed laler in the article, derivatives transactions are collected on
a net basis and will appear on that basis in the BEA's presentalJons of the U.S.
balance of payments and the U.S. international investment posllJon.
n.a. Not available.

banking report, reflects the banking transaction associated with the purchase of the derivative (in addition
to banking activity arising from other transactions).
The deposit balance is reported to the compilers of
the financial account, and so a decrease (debit) in U.S.
banking liabilities to foreigners equal to the purchase
price of the derivative, or $100, is recorded in that
account.
However, in the absence of TIC form D, the U.S.
resident has no way of reporting a purchase or sale of
a derivative, as this type of transaction is recorded on
no other TIC report. As a result, the compilers of the
financial account have no way of knowing that the
banking transaction was for the purchase of a derivative, and thus no entry in the financial account reflects
the increase in derivatives liabilities to foreigners.
The failure to record a credit entry for the changes in
derivatives liabilities creates an imbalance in the
international transactions accounts, which results in a
statistical discrepancy of $100, the purchase price of
the deri vati ve. 10
Also suppose that during year 1 the value of the
derivative falls to $50 and that in year 2 the foreign
resident sells the derivative. After the sale the $50
proceeds are transferred to the U.S. bank account of
the foreign resident. Because banking deposits are
reported on the TIC banking reports, an increase in
U.S. banking liabilities of $50 is recorded in the
financial account when the derivative is sold. However, nothincr in the financial account reflects the
e
decrease in derivatives liabilities to foreigners, and so
a statistical discrepancy of negative $50, equal to the
proceeds from the sale of the derivative, results in
year 2. This example illustrates how the current BOP
10. The statistical discrepancy is found by summing all recorded
transactions and reversing the sign of the total. In this example, the
only recorded transaction is negative $100, and so the statistical
discrepancy is positive $100.

Like the BOP, the U.S. international investment position (lIP) currently includes only a limited amount of
derivatives claims and liabilities. The lIP reports the
value of U.S.-owned assets abroad and that of foreignowned assets in the United States. In other words, it
reports the current value of the assets accumulat~d
throucrh the transactions recorded in the finanCIal
e
account of the BOP. In the lIP, the BEA decomposes
each outstanding position at the end of each calendar
year into three parts: the position at the end of the
previous year, net transactions recorded in the BOP
during the current calendar year, and valuation adjustments attributable to changes in exchange rates,
prices, and other factors, such as the inclusion of data
from new reporters.
Accounting for Financial Instruments Other Than
Derivatives
The catecrories in the lIP are similar to those in. the
e
financial account of the BOP, and the transactIOns
reported in the lIP come directly from the BOP. As
previously mentioned, U.S. banking deposit claims
on, and liabilities to, foreigners are collected on the
monthly TIC banking reports; these data are used in
the lIP. For the U.S. stock and bond holdings of
forei crn residents and the foreign stock and bond
holdi~gs of U.S. residents, the custodial firms holding
the securities report them on periodic TIC surveys of
claims and liabilities, and the BEA uses the holdings
information to construct the lIP.
The presentation of holdings on the lIP can be
illustrated with a variation on the previous example of
the purchase and eventual sale of U.S. stock by a
foreign resident. Besides the details already mentioned, we suppose that the foreign resident has $200
on deposit at a U.S. bank at the end of year 0 and that
the deposit balance is reported as the year-end position on the lIP for that year (table 3). Using the BOP
transactions data from the earlier example, the lIP for
year 1 reports an increase in U.S. securities held by
foreigners and a decrease in U.S. banking liabilities to
foreigners, both of which correspond to the purchase
price of the stock ($100). As before, we suppose that
the value of the stock decreases by $50 between the
purchase date and the end of year 1. The year-end
market value of the stock, as reported on the TIC

u.s.

Cross-Border Derivatives Data: A User's Guide

3. Example of entries in the U.S. international investment position: Purchase by a foreign resident of a U.S. stock from a
U.S. resident, and subsequent sale of the stock
U.S. dollars
Year 0
Foreign-owned assets in the United States

Ending
balance

~e~~g~~~ I a~j~~~~~~t I

Total .... ...............

Ending
balance

;;::~~~i~~ I adjustment I
V~luation
BOP

150

-50

-100

100

-50

150

100

200

Ending

balance

-50

200

U.S. securities other than U.S. Treasury securities.
U.S. liabilities reported by U.S. banks,
not included elsewhere

Year 2

Year I

BOP U.S. balance of payments.

holdings survey, is recorded in the lIP as the ending
balance for year 1 ($50). The lIP reports this $50
decline in value as a valuation adjustment due to price
changes. For year I, the value of the total position
decreases by the amount of the valuation adjustment,
to $150. If the stock is sold before the end of year 2
and there are no further price changes, the total value
of the position is unchanged. At the end of year 2, no
stock claims by foreigners remain---only a banking
deposit balance.
The lIP captures only the banking deposit transactions and positions associated with purchases and
sales of cross-border derivatives. Just as cross-border
derivatives transactions go largely unrecorded in the
BOP, so cross-border derivatives positions are also
mostly missing from the lIP.
Accounting for Derivatives
The current treatment of derivatives in the BEA's
presentation of the lIP is illustrated by the next
example, in which a foreign resident purchases a
derivative instead of a stock from a U.S. resident
(table 4). A recorded transaction will reflect the
decrease in U.S. bank liabilities to foreigners corresponding to the purchase price of the derivative, and
the remaining balance of $100 in U.S. bank liabilities
to foreigners will be correctly reported at the end of

year 1. As in the BOP, no transaction corresponding
to the purchase of the derivative will be reported.
Although the value of the derivative decreases to $50
before the end of year 1, the lIP wi II not report the
valuation adjustment. The total foreign liability position of $100 at the end of year 1 will include the
correct value of the banking deposits but not the value
of the derivative. When the derivative is sold in year
2, the increase in U.S. banking liabilities to foreigners
equal to the total sale proceeds ($50) will be recorded
correctly, but no transaction will reflect the decreased
derivatives liabilities to foreigners resulting from the
sale of the deri vati ve.
The positions at the end of years 0 and 2 on the lIP
are both correct, as derivatives were held at the end of
neither of those years-only at the end of year 1.
However, total transactions and total valuation adjustments over the two-year period are both incorrect.
The lIP attributes the $50 change in the position over
the period-from $200 to $150-to a net outflow of
$50, when in fact the $50 change in the position is
due to a price change.
As shown in this analysis, the current omission of
derivatives positions from the lIP adversely affects
external-sector reporting and can lead to incorrect
inferences about the cause of position changes in the
lIP. In the lIP presented in the example, the failure to

4. Example of entries in the U.S. international investment position: Purchase by a foreign resident of a derivative from a U.S.
resident, and subsequent sale of the derivati ve
u.s. dollars

U.S. financial derivatives liabilities l
U.S. liabilities reponed by U.S. banks,
not included elsewhere ..............................
Total

...........

I. Refer to table 2, note I.
BOP U.S. balance of payments.
n.a. Not available.

Year 2

Year I

Year 0
Foreign-owned assets in the United States

Transacti~n

I adjustment I
Valuation

Ending
balance

Transaction

n.a.

200

-100

100

200

-100

100

Ending
balance

rec~~e:

rec~~~d

Valuation
adj ustment

Ending
balance

n.a.

150

Federal Reserve Bulletin 0 May 2007

account for transactions in, and holdings of, derivatives contracts created two problems. First, it misrepresented the cross-border positions. At the end of
year 1, the true foreign position of $150 ($100 plus
the correct value of the derivative-$50) was recorded as $100. Second, the valuation adjustments in
derivatives positions incorrectly appear as net foreign
outflows of $50. These problems can be resolved
through the inclusion of specific information about
cross-border derivatives transactions and positions in
the lIP-the information collected on TIC form D.
OVERVIEW OF TIC FORM D

U.S. regulatory agencies have collected some information on derivatives holdings for many years in
reports outside of the TIC system. However, the
reports do not collect most of the information needed
to include derivatives in the international transactions
accounts. For example, the reported data have excluded cross-border transactions and have either
excluded some cross-border positions-such as those
between a parent firm and its cross-border affiliatesor collected positions on an ultimate-risk basis rather
than a locational basis. I I As noted earlier, to address
the gaps in data collection, the Treasury Department
introduced TIC form D in 2005 to gather information
on cross-border derivatives transactions and positions.J2

Information Collected
TIC form D collects information on U.S. residents'
derivatives contracts with foreign entities, including
all foreign affiliates of U.S. multinational firms. It
focuses on two values: (1) the amount for which a
derivatives contract can be exchanged in a transaction
as of the end of the quarter, referred to as the fair
value, and (2) the sum of all derivatives transactions
II. The TIC forms collect data on cross-border transactions and
positions on a locational basis, as is required for reporting in the
international transactions accounts. In other words, counterparties are
identified according to the country in which the immediate transactor
is located or the country in which the position is booked, as transactions and positions are recorded in this way in the BOP and lIP. Other
reports collect cross-border position information on an ultimate-risk
basis. These reports identify counterparties according to the country in
which the ultimate risk lies. For example, a claim against a subsidiary
firm will be reported vis-a-vis the country of the parent to the
subsidiary. For more information on the differences between data
collected on a locational basis and data collected on an ultimate-risk
basis, refer to Carol C. Bertaut, William L. Griever, and Ralph W. Tryon
(2006), "Understanding U.S. Cross-Border Securities Data," Federal
Reserve Bulletin, vol. 92, pp. A59-A75, www.federalreserve.gov/pubs/
bulletin/default.htm.
12. TIC form D and instructions for its use are available at
www.treas.gov/tic/forms-d.shtml.

that occur within the reporting quarter, including the
proceeds from the purchases and sales of derivatives
and all contractual flows, referred to as net settlements. 13
As is the case on other regulatory reports, fair
values on form D are aggregated according to whether, \
from the reporter's perspective, the value on the last
day of the quarter is positive or negative. The gross
positive (or negative) fair value is the sum of all
positions with positive (or negative) balances from
the perspective of the reporter. 14
Along with fair values as of the end of the quarter,
the net payments, or settlements, between the reporter
and foreign residents in each quarter are reported on
form D. All transactions occurring during each quarter, including those that arise from the purchases and
sales of derivatives as well as from periodic contractual payments, are aggregated and reported as net
settlements.
In part 1 of form D, reporters provide totals by type
of contract and type of underlying (table 5). Contracts
that trade in the over-the-counter (OTC) market are
reported separately from those that trade on exchanges. OTC contracts are categorized by the predominant type of underlying (that is, single-currency
interest rate, foreign exchange, or other).15 Data on
exchange-traded contracts are reported separately for
U.S. reporting firms' own contracts on foreign exchanges, the contracts of their U.S. customers on
foreign exchanges, and foreign counterparties' contracts on U.S. exchanges. The fair values of OTC
derivatives are reported separately for common contract types (that is, forwards, swaps, or options),
while only the aggregate fair values of all types of
exchange-traded contracts (such as futures and options) are reported. Aggregate fair values are also

13. If a derivatives contract is not actively traded, the reporter must
estimate the fair value using the prices of other financial instruments.
Additional information on the calculation of fair values is available in
Financial Accounting Standards Board (1998), "Statement of Financial Accounting Standards No. 133: Accounting for Derivative Instruments and Hedging Activities" (Norwalk, Conn.: FASB). For a
discussion of why contractual payments on derivatives are included in
the financial account instead of the current account, refer to box
"Derivatives in the International Transactions Accounts."
14. Although reporters are encouraged to report fair values on a
gross basis, the instructions state that multiple contracts with a single
counterparty can be reported on a net basis if a master netting
agreement is in place and if the contracts are carried at net values in the
reporting entity's accounting records and statements of financial
position. A master netting agreement is a contract between two
counterparties to net their trades with positive and negative balances.
This practice reduces credit exposure, which, in turn, reduces collateral requirements. To date, a limited number of TIC form D reporters
have provided some of their fair values on a net basis.
15. Other underlying types include credit ratings, equity prices, and
commodity prices.

u.s.

Cross-Border Derivatives Data: A User's Guide

5. Data reported on TIC form D: U.S. holdings of, and transactions in, derivatives contracts with foreign residents,
as of 2006:Q4
Millions of U.S. dollars
Fair value of derivatives contracts with
foreign residents al end of reporting quaner

Holdings and transactions. by contract type
and by foreign economies and organizations

PART

Gross positive

Gross negative

U.S. net seulements
during the quaner
with foreign residents

U.S. net selliements
during 2006 with
foreign residents

OF FORM: CONTRACT "J'yPES

Over-the-counter contracts
.
.
Single-currency interest rate contracts ...........•......••...
Forwards...................
.
.
Swaps.
.
.
Options................
.
.
Foreign exchange contracts ..
Forwards
Swaps
.
Options
.
.
Other contracts. . . . . . . . . . . .

1,211,924
789,994
1.747
702,266
85.981
175,713
44,928
102.255
28.530
246,217

1,155,726
746,635
1,622
678,278
66,735
150,272
47,063
77,621
25,588
258,819

-2,125
-2,543

14.553
11,201

142

-211

276

3,563

............................•...

25,640
7,471
4.589
2.882
18.169

22,903
6,765
4,027
2,738
16,138

342
1,056
162
894
-714

14.209
10,365
6.628
3,737
3.844

1,237,564

1,178,629

-1,783

28,762

318,987
10,746
415,979

312.853
9,601
397,523

211

2,120

1,045,720
9.881
72.559
97,243
80,219
12,228
23,3%
29.412
697.207
308,976
1,013.071
31,527
14,346
67,156
49.661
58,723
39,075
3,085
14,294
13,369
2,713

993,391
9,291
66.746
85.356
77,926
5.863
21,280
28,054
668,332
286,459
962,042
27,059
13,299

147
-15
-570
-1,515

19,855
-315
759

340
-556
439
-1,371
4.422
-2.487
2,068
42
-1,369

4,415
215
1,914

73,000

-608

57,345
53,938
37,568
2,153
11,173
10,444
4,616

-705
102
-933
243
-1,543

Exchange-traded contracts

Total on foreign exchanges

Own derivatives contracts on foreign exchanges
U.S. customers' derivatives contracts on foreign exchanges
Foreign counterparty derivatives contracts on U.S. exchanges ...

Total

MEMO
Contracts with own foreign offices
Contracts with foreign official institutions ....................•...
Contracts of U.S. depository institutions with foreigners
.
PART

OF FORM: FOREIG

EcONOMIE AND ORGA IZATIONS

Europe'

Belgium .. _..............................................•...

France
Germany
Ireland
Italy
Netherlands . . . . .. .
Switzerland
United Kingdom
Euro area
European Union
Canada............
.
Latin America
........
.
Caribbean
Cayman Islands
Asia
.
Japan
Africa
Other countries
Australia
.
International and regional organizations' .....•

.
.
.
.
.
.
.
..
.
.
.
.
.
.
.
..
.

-1.648
1,203

~87

4,8~9

6.550
9,158
n.a
-4,507
-1,464
5,325
4,840
5,862
-346
610
-2,317
-2,505
5,396

I. Selection of economies listed in form.
2. Summation of organizations listed in form.
. . . Not applicable.
n.a. Not available.
SOURCE: Treasury International Capital reporting system, www.treas.govltic.

reported for three memoranda items: contracts with
the reporting firm ' own foreign offices, contracts
with foreign official institutions, and contract of U.S.
depository institutions with foreigners. In part 2 of
form D, fair values and net settlements are reported in
aggregate by the counterparty's country of residence.
For many OTC contracts, cash flows are few or
even nonexistent during a quarter, while fair values
are significant. For those exchange-traded products
(such as futures) that settle daily, the fair value is at
most the change in value on the last day of the
quarter, and so it will generally be quite small. The
difference between net settlements and fair values for
exchange-traded products will generally be smaller
than the corresponding difference for OTC contracts,

as net settlements for exchange-traded products include the sum of all the daily changes in the value of
a contract over the quarter.

Reporting Threshold and Requirements
The reporting threshold u ed to determine who must
file TIC form D is based on a common measure of the
size of total derivatives positions, the notional value,
defined earlier in the article as an amount used to
determine contractual payments. All U.S. banks, securities dealers, and other firms with worldwide holdings of derivatives exceeding $100 billion in notional
value (in their own and their customers' accounts) are
required to fill out form D on a quarterly basis. The

AlO

Federal Reserve Bulletin 0 May 2007

Derivatives in the International Transactions Accounts
Derivatives do not fit neatly into the international transactions accounts for two reasons. The first is that, unlike
financial instruments such as bonds and stocks, some
derivatives contracts cannot be categorized solely as
claims or liabilities. Clearly an option written by a U.S.
resident and purchased by a foreign resident is a U.S.
liability to foreigners; but the distinction is less clear for
products such as swaps, forwards, and futures. Over the
lives of these products, the fair market value may be
positive at times and negative at times, and it may switch
signs several times within a quarter. So these instruments
are neither strictly claims, with consistently positive fair
values and payments to the U.S. resident counterparty to
the contract, nor strictly liabilities, with consistently
negative fair values and payments from the U.S. resident
counterparty.

reporting threshold was intentionally set at a high
level because, according to results obtained by other
forms that collect global derivatives information,
derivatives activity is concentrated in a small number
of firms; fifty companies met the threshold in 2006.
Forms are filed with, and validated by, the Federal
Reserve Bank of New York. After further evaluation
by the Federal Reserve Board, results are forwarded
to the Treasury Department for release to the public.
To ease the burden on reporters, reporting requirements for form D were phased in over the first three
quarters of 2005. In the first quarter, reporters were
required to provide all categories of gross positive
and gross negati ve fair values, net settlements of OTC
foreign exchange contracts, and net settlements with
foreign official institutions. In the second quarter, net
settlements of exchange-traded contracts were added
to the requirements. Finally, in the third quarter, all
remaining information was required.

TIC Form D and Reporting on the U.S.
External Sector
Starting in mid-200?, the compilers of the financial
account at the BEA will have access to information
from TIC form D on transactions and positions in
cross-border derivatives. Unlike other financial instruments, derivatives do not fit easily into the standard
BOP and lIP frameworks. For example, some derivatives contracts are difficult to classify strictly as
claims or liabilities (refer to box "Derivatives in the
International Transactions Accounts"). Because of
this difficulty, in the international transactions accounts, the gross positive fair value will be recorded

The second reason that derivatives are not easily
incorporated into the international transactions accounts
is the ambiguous status of the associated payments. The
periodic payments on derivatives can be considered
returns on invested capital, which are recorded in the
current account; alternatively, they can be considered
realized gains from changes in the contractual value,
which are recorded in the financial account. Because the
return from derivatives for many end users comes in the
form of trading gains and losses, the International Monetary Fund has recommended that periodic payments on
derivatives be recorded as financial account transactions. l
I. Refer to Robert M. Heath (1998), "The Statistical Measurement of
Financial Derivatives," IMF Working Paper 98/24 (Washington: International Monetary Fund, March).

as the claims position, the gross negative fair value as
the liabilities position, and net settlements as the net
of claims and liabilities transactions.
To show how the information collected on form D
will be used in the BOP and lIP, we return to the
second example, in which a foreign resident purchases a derivative from a U.S. resident for $100 in
year I. Recall that the value decreases to $50, and the
foreign resident sells the derivative for $50 in year 2.
As shown previously, without the information collected on form D, at the end of year 1 the banking
transaction corresponding to the payment of $100 for
the derivatives contract is included in the BOP as a
decrease in U.S. bank liabilities to foreigners, but the
offsetting transaction corresponding to the increased
U.S. derivatives liabilities to foreigners is not recorded in the accounts; rather, it appears as a statistical discrepancy. When the derivative is sold, there is
an increase of $50 in U.S. bank liabilities to foreigners but no offsetting decrease in U.S. derivatives
liabilities to foreigners, and so another statistical
discrepancy is recorded.
That situation will change once the net settlements data collected on form D are incorporated
into the BOP. Because the purchase price of the
derivati ve ($100) and the sale proceeds ($50) wi II
be included in net settlements on the U.S. resident's
form D reports, the compilers of the financial account will have the information needed to include
derivatives transactions in that account (table 6). The
transactions will be correctly recorded in years 1 and
2, and no statistical discrepancy will be reported in
either year.

u.s.

6. Example of entries, including those for derivatives data,
in the financial account of the U.S. balance of payments:
Purchase by a foreign resident of a derivative from a
U.S. resident, and subsequent sale of the derivative
u.s. dollars
Financial flow
Foreign-owned assets in the United States
Year I

Year 2

100
.

-50

-100

U.S. financial derivatives liabilities'
U.S. liabilities reponed by U.S. banks,
not included elsewhere .....
Statistical discrepancy

I. Refer to table 2, note I.

The fair values and transaction information collected on form D will also enable the compilers of the
lIP to include derivatives contracts. The purchase
price of the derivative ($100) and the year-end fair
value ($50) will be included in the lIP for year 1, and
the decrease in the total value of foreign assets from
$200 to $150 will be correctly attributed to the price
change of the derivative (table 7). The position at the
start of year 2 will be correctly reported, as will the
transactions in that year. As shown in this example,
the information collected on form D substantially
improves the reporting of both the BOP and the lIP.
RESULTS FROM THE 2006 FORM D DATA

The Treasury Department recently released aggregate
values of the data reported on TIC form D in 2006. In
December 2006, the gross positive fair value of
derivatives totaled $1.238 trillion, and the gross negative fair value $1.179 trillion (table 5, row labeled
"Total"). Data for December 2006 are representative
of broader trends for the year as a whole in terms of
the relative magnitudes of the fair values reported in
each category of form D. The largest fair values are
for OTC derivatives, primarily single-currency interest rate swaps. The fair values reported for exchangetraded derivatives are much smaller. As discussed
previously, this result is expected because exchange7.

Cross-Border Derivatives Data: A User's Guide

All

traded futures that settle daily account for the bulk of
exchange-traded derivatives; for these products, the
fair values generally consist entirely of one-day market moves. For most types of derivatives, the reported
gross positive fair value exceeds the reported gross
negative fair value. Therefore, residents of the United
States have net derivatives claims on foreign residents.
Unlike fair values, reported net settlements vary
widely between quarters, and the flows associated
with both OTC and exchange-traded derivatives are
significant. During the fourth quarter of 2006, total
net settlements represented a $1.783 billion outflow
from the United States, primarily associated with
single-currency interest rate products (table 5, row
labeled "Total"). However, the result over the previous three quarters was quite different: a net inflow to
residents of the United States, also primarily from
single-currency interest rate products. So for all of
2006, net settlements represented a $28.8 billion
inflow to the United States. The amount was evenly
split between inflows associated with OTC contracts
and those associated with exchange-traded contracts.
As with other TIC data on securities and banking,
the bulk of fair values and net settlements is vis-a-vis
the United Kingdom, but large balances are also
recorded against other European countries, the Caribbean financial center countries (such as the Cayman
Islands), and Japan. 16 In December 2006, the gross
positive fair value of derivatives vis-a-vis residents of
the United Kingdom totaled $697 billion, while the
gross negative fair value totaled $668 billion, each of
which represented more than half of the total reported
gross fair values (table 5, row labeled "United King16. Because TIC transactions are recorded against the country
through which the transaction occurred, the data exhibit "financial
center bias"; in other words, a majority of transactions are recorded
vis-a-vis countries in which many financial services firms active in the
derivatives market are located. For more information on the issue of
financial center bias in TIC data, refer to Bertaut, Griever, and Tryon,
"Understanding U.S. Cross-Border Securities Data."

Exa~ple o~ entries, incl~din.g those for derivatives data, in the U.S. international investment position: Purchase by a
foreIgn reSIdent of a denvatlve from a U.S. resident, and subsequent sale of the derivative

U.s. dollars
Year 0
Foreign-owned assets in the United States

U.s. financial derivatives liabilities' ..
U.S. liabilities reponed by U.S. banks,
not included elsewhere .
Total
I. Refer to table 2, note I.
BOP U.S. balance of payments.

Ending
balance

Year I
Transaction
recorded in
BOP

I adjustment I
.
Valuation

Ending
balance

Transaction
recorded in
BOP

-50

100

200
200

-100

100

-50

150

Year 2
Valuatlon
.
adjustment

o
o
o

Ending
balance

o
150
150

A 12

Federal Reserve Bulletin 0 May 2007

8. Effect of deri vatives data on the statistical discrepancy in
the international transactions accounts of the U.S.
balance of payments, by quarter, 2006
Billions of U.S. dollars

9. Net international investment position of the United States
and selected components, and aggregate fair values of
derivatives, year-end 2005
Billions of U.S. dollars

Financial flow
Account
2006

Scenario A (without derivatives)
Current account ......
Capital account .....
Financial account ....
Total ..............
Statistical discrepancy

I Q2 I Q3

Amount

Item

-857
-4
719
-141
141

-214
-2
171
-44
44

-218
-I
154
-65
65

-229
-I
230
0
0

-196
-I
165
-32
32

Scenario B (with derivatives)
Current account ......
-857
Capital account ...
-4
Financial account ....
719
Derivatives ......
........... 29
Total
............... -113
Statistical discrepancy ...........
113

-214
-2
171
2
-43
43

-218
-I
154
14
-51
51

-229
-I
230
15
15
-15

-196
-I
165

-2
-34
34

NOTE: Components may not sum to totals because of rounding. Data for financial derivatives represent net settlements as reported on TIC form D.
SOURCE: Bureau of Economic Analysis, "U.S. International Transactions,"
www.bea.gov/international; and TIC form D.

dom"). Net settlements vis-a-vis U.K. residents totaled $4.4 billion during the fourth quarter of 2006
and $6.6 billion for all of 2006, the largest flows (in
absolute magnitude) into or out of any single country.

The 2006 Data in the BOP and IIP
The important role played by cross-border derivatives
in U.S. financial markets becomes apparent when the
TIC form D aggregates are compared with the transactions and positions in other financial instruments
recorded in the international transactions accounts in
2006. Derivatives transactions reported on form D
varied substantially throughout 2006, ranging from a
$15 billion inflow in the third quarter to a $2 billion
outflow in the fourth quarter (table 8, row labeled
"Derivatives"). This variability is typical of crossborder flows in securities such as stocks and bonds.
For 2006, derivatives net settlements amounted to
inflows of $29 billion, or 4 percent of the $719 billion
in total financial inflows reported in the BOP.
Derivatives net settlements appear more significant
when they are compared with the magnitude of the
statistical discrepancy. As shown in previous examples, if the international transactions accounts contained no errors or omissions except the omission of
derivatives, the inclusion of derivatives data would
reduce the BOP statistical discrepancy to zero. Although including the 2006 data on total form D net
settlements in the BOP would not erase the statistical
discrepancy, it would reduce it in that yearP For
2006, the statistical discrepancy totaled $141 billion
17. Because, as previously discussed, some derivatives transactions
are already included in the international transactions accounts, this

Net position

.. . . . . . . . . .

-2,694

.
U.S.-owned assets abroad
U.S. official reserve assets
....
. . .. .
U.S. government assets other than official reserve assets
.
U.S. private assets
.
Direct investment abroad (current cost)
.
Foreign securities
.
Bonds
.
Corporate stocks
.
U.S. claims on unaffiliated foreigners reported
by U.S. non banking concerns ...
U.S. claims reported by U.S. banks,
not included elsewhere
_ .

10,009
188

Foreign-owned assets in the United States
. .•.
Foreign official assets in the United States
.
Other foreign assets
.
Direct investment in the United States (current cost) ..
U.S. Treasury securities
.
U.S. securities other than U.S. Treasury securities ..
Corporate and other bonds
..........•....
Corporate stocks
.
U.S. currency
.
U.S. liabilities to unaffiliated foreigners reported
by U.S. nonbanking concerns
.
U.S. liabilities reported by U.S. banks,
.
not included elsewhere. . . . . . .. .

12,702
2,216
10,486
1,874
705
4,391
2,275
2,115
352

Aggregate fair values of derivatives
Gross positive
.
Gross negative

78
9.743
2,454
4,074
988
3,086
785
2,431

564
2,601
1,190
1,132

SOURCE: For net international investment position, Bureau of Economic
Analysis (2006), Survey of Current Business, vol. 86 (July), table I, pp. 9-19;
for aggregate fair values, TIC form D.

(table 8, scenario A); the inclusion of derivatives net
settlements in the BOP would have lowered the
discrepancy roughly 20 percent (table 8, scenario
B). t8 As the quarterly data show, the effect of derivatives on the statistical discrepancy may vary from
quarter to quarter and year to year, as errors and
omissions elsewhere in the international transactions
accounts may outweigh the effect of derivatives.
The U.S. gross positions in derivatives are comparable in magnitude with the U.S. positions in other
financial instruments (table 9). The gross positive fair
value of derivatives totaled $1,190 billion at the end
of 2005, slightly more than U.S. residents' holdings
of foreign bonds, which totaled $988 billion. The
gross negative fair value of derivatives totaled
$1,132 billion, about half of foreign holdings of U.S.
bonds or stocks. On net, however, the inclusion of
derivatives has little effect on the net international
investment position of the United States. Adding the
net position in derivatives of $58 billion (aggregate
estimate is only a rough approximation of the effect of derivatives data
on the statistical discrepancy in the BOP financial account.
18. For a discussion of other possible sources of the statistical
discrepancy, refer to Norman S. Fieleke (1996), "What [s the Balance
of Payments?" Special Report No.3 (Boston: Federal Reserve Bank of
Boston, October), www.bosfed.org/economic/speciallbalofpay.pdf.

u.s.

Cross-Border Derivatives Data: A User's Guide

A13

Other Derivatives Reports
As discussed in the main text, TIC form D was developed
because most of the information necessary to include
derivatives in the U.S. balance of payments and the U.S.
international investment position was not captured on
other reports. For example, most ofthe existing derivatives
forms require firms to provide consolidated exposure to
both domestic and foreign counterparties. Although the
information collected on these other forms is not exactly
comparable with that collected on form D, it is useful for
data verification at the firm and product levels.
One form with data on global derivatives holdings is
the FR Y-9C ("Consolidated Financial Statements for
Bank Holding Companies," prepared by the Federal
Reserve Board), which is required of bank holding companies; the data are publicly available and are used by the
Office of the Comptroller of the Currency in its Bank
Derivatives Quarterly Report. For U.S. branches of foreign banks, similar information is collected on form
FFIEC 002 ("Report of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks," prepared by
the Federal Financial Institutions Examination Council,
or FFIEC). Another form that requests data on derivatives'
fair values is the FR 2436 ("Semiannual Report of
Derivatives Activity," prepared by the Federal Reserve
Board), which collects information on gross positions in
over-the-counter (OTC) derivatives from the largest U.S.
bank and nonbank dealers. The reported results are
confidential, and aggregates are forwarded to the Bank

gross positive fair value minus aggregate gross negative fair value) only slightly improves the U.S. net
international investment position, from negative
$2,694 billion to negative $2,636 billion.

Comparison of u.s. and Foreign Aggregate
Totals
From a global perspective, a relationship exists
between the cross-border transactions into and out of
the United States and those into and out of other
countries. Many other countries currently report
derivatives transactions and positions separately on
their balance of payments and international investment position. If all countries were to report crossborder transactions accurately and on the same basis,
then the summation of all cross-border flows in each
asset class into and out of all countries would equal
zero. That is, the derivatives outflows from one
country should be recorded as derivatives inflows to
other countries. The same relationship holds for positions: The sum across countries of net cross-border
positions in each asset class should equal zero. Such
comparisons of international flows and positions represent two checks at the macro level on the reason-

for International Settlements, which consolidates them
with results from other global reporters for publication in
its quarterly Consolidated Bank Statistics and in other of
its reports, such as the Regular aTC Derivatives Market
Statistics.
Although cross-border derivatives are included in the
totals, most of the existing derivatives forms do not
require separate reporting of cross-border derivatives.
The few reports that do separately report the cross-border
exposure, like the FFIEC 009 ("Country Exposure Report," prepared by the FFIEC), collect it on an ultimaterisk basis instead of the locational basis required for
reporting in the international transactions accounts. 1
Whereas holdings are included in some form on other
reports, no report other than TIC form D collects payments information for OTC derivatives. For exchangetraded derivatives, however, net settlements are often
equivalent to net trading profits and losses (excluding
commissions). Because reporters already provided such
profits and losses to the U.S. tax authorities, existing
systems could be adapted to fulfill form D requirements.

I. An exception is the Commodity Futures Trading Commission's
form 40, which collects daily position data on futures and futures options
from the largest traders on U.S. exchanges. The information includes the
trader's country of residence. The Bureau of Economic Analysis has used
this information in compiling the U.S. balance of payments and the U.S.
international investment position.

ableness of the information reported on form D, and
they complement the cross-checks performed at the
micro level by the Federal Reserve Bank of New York
(refer to box "Other Derivatives Reports"). 19
A comparison of aggregate form D net settlements
with the cross-border transactions and positions reported by other countries suggests that U.S. residents
are counterparties to a significant share of the transactions in the global cross-border derivatives market.
Total U.S. transactions as reported on form D were
larger in absolute value than those reported by any
other country in 2006 (table 10). In 2005 and 2006,
all other countries recorded a net derivatives outflow,
while in 2006 the United States recorded a net inflow.
The recorded net derivatives inflow into the United
19. Countries other than the United States, including Australia and
the United Kingdom, have reported problems with the collection and
quality of cross-border derivatives data. Refer to Graham Semken
(2005), "Financial Derivatives in the UK Sector Balance Sheets and
Financial Accounts," Economic Trends, vol. 618 (May), pp. 37-44;
and Australian Bureau of Statistics, International and Financial
Accounts Branch (1998), "Financial Derivatives in Australia's International Accounts," paper prepared for the Eleventh Meeting of the
IMF Committee on Balance of Payments Statistics, held at the
International Monetary Fund, Washington, Oct. 21-23, www.imf.org/
externalfbopagelagenda.htm.

Federal Reserve Bulletin 0 May 2007

A14

10. Aggregate cross-border derivatives transactions for
selected foreign countries, the United States, and the
world, 2005-06

NOTE: Components may not sum to totals because of rounding. Net flows
reported in balance of payments statistics. World totals include flows of countries not shown.
n.a. Not available.
SOURCE: For selected foreign countries and the world, individual country
pages of the IMF website, www.imf.org; for the United States, TIC form D.

resulted in values that varied considerably from zero,
for the year as a whole it resulted in a value much
closer to zero, an indication that U.S. data from TIC
form D will significantly reduce the gap in world
accounting in the BOP.20
A comparison of U.S. aggregate derivatives claims
and liabilities with those of other countries further
shows the sizable role played by the United States in
the global derivatives market. In 2005 U.S. derivatives claims and liabilities, approximated using the
gross positive and gross negative fair values on
form D, were greater than those reported by all
countries except the United Kingdom (table 11). On a
net basis, the U.S. year-end derivatives position for
2005 was a net claim of $58 billion. This U.S. net
claim is similar in magnitude and opposite in sign to
the sum of the net derivatives positions reported by
all other countries, which is a $55 billion liability. As
with transactions, including the U.S. position in the

States in 2006 ($28.8 billion) is similar in magnitude
to the sum of the outflows reported by all other
countries (negative $23.0 billion). Although on a
quarterly basis the inclusion of U.S. derivatives transactions in the calculation of net world transactions

20. This analysis is incomplete, however, because some countries
and organizations with significant flows vis-a-vis the United States do
not report cross-border transactions (for example, Caribbean financial
center countries, Switzerland, and the Bank for International Settlements).

Billions of U.S. dollars
2006
Country or area

2005

2006
QI

Australia ..
Denmark ...
France ..
Hong Kong

Italy
Japan
Netherlands ...
United Kingdom
United States.
World excluding the
United States ..
World .............

-1.6
1.7
9.9
4.0
3.1
-6.6
-4.4
-4.4

.5
2.8
4.3
5.1
-1.6
2.0
-7.1
-26.2

-.2
1.2
I.I
.3
.3
-.4
-2.8
-10.5

.6
.4
3.0
1.9
.4
1.8
-.6
-5.3

-.5
.3
2.2
l.l
-1.8
-.1
-1.6
-7.6

.6
.9
-2.0
1.8
-.5
.7
-2.1
-2.8

n.a.

28.8

1.6

14.0

14.9

-1.8

-22.5
-22.5

-23.0
5.8

-18.4
-16.8

.6
14.6

-1.8
13.1

-3.4
-5.2

11. Aggregate cross-border derivatives claims and liabilities, and net positions in derivatives, for selected foreign countries,
the United States, and the world, 2000-05
Bi lIions of U.S. dollars

Year

Australia

Denmark

France

Hong
Kong

Italy

Japan

Netherlands

United
Kingdom

United
States

29
45
72
87
86
70

669
858
1,245
1.393
1,594
1,761

o.a.
o.a.

24
49
87
95
99
87

674
861
1,259
1.424
1,624
1,780

World
excluding
the United
States

World

876
1,101
1,562
1,803
2,087
2,262

876
1,101
1,562
1,803
2,087
3,452

869
1,088
1,579
1,848
2,132
2,317

869
1,088
1,579
1,848
2,132
3,449

7
13
-17
-45
-45
-55

7
13
-17
-45
-45
3

Claims
2000
2001
2002
2003
2004
2005

....
..
....
.

13
15
20
33
38
27

14
II
31
24
37
9

95
110
108
136
169
226

17
18
23
20
22
17

4
4
II
23
28
30

3
3
3
5
6
26

o.a.
o.a.
0.3.

1,190

Liabilities
2000 ..
2001 ..
2002 ....
2003 ....
2004 ..
2005.

13
13
21
37
38
28

13
II
28
20
33
0

98
105
112
148
175
243

13
12
21
20
21
17

3
5
9
16
26
38

3
4
4
7
II
33

n.a.
o.a.

n.a.
0.3.

o.a.

1,132

Net position (claims less liabilities)
2000
2001
2002
2003
2004
2005

....
.
....
....
....
....

-I
2
-I
-3
0
-I

I
0
2
3
4
9

-3
5
-4
-II
-6
-17

4
5
I
0
I
0

I
0
2
7
2
-8

0
-I
0
-2
-5
-7

5
-5
-15
-8
-13
-17

-5
-3
-14
-32
-30
-19

0.3.

n.a.
n.a.
o.a.

n.a.
58

NOTE: Components may not sum to totals because of rounding. World totals include positions of countries not shown. U.S. claims are aggregate gross positive fair
values, and U.S. liabilities are aggregate gross negative fair values. The claims and liabilities positions of some countries include values reported on a net basis. For
countries other than the United States, data on cross-border claims, liabilities, and net positions for year-end 2006 were not available as of the publication date.
n.a. Not available.
SOURCE: For selected foreign countries (except the United Kingdom) and the world, International Monetary Fund, Balance of Payments Statistics Yearbook 2006
(Washington: IMF); for the United Kingdom, Office of National Statistics (2006), United Kingdom Balance of Payments: The Pink Book 2006 (New York: Palgrave
Macmillan), table FD, p. 114; for the United States, TIC form D.

u.s.

Cross-Border Derivatives Data: A User's Guide

A15

Implied Valuation Change
The information on TIC form D can be used to estimate
exposure to the underlyings through calculation of the
valuation change implied by quarter-end movements in
the fair values and net settlements. Specifically, the
change in net fair value (gross positive fair value minus
gross negative fair value) between two consecutive
reporting quarters is the result of the combination of cash
flows and valuation changes due to underlying price
movements. That is, aside from the effect of trading
activity, the following accounting relationship must hold:
Net fair vaLue (start) + VaLuation changes =
Net fair vaLue (end) + Net payments received.

In addition to measuring exposure, if the implied
valuation changes are too large, they signal possible
misreporting on form D. Because the magnitude of
valuation changes can vary with the number and value of
positions, dividing each valuation change by a scaling
factor such as the average of gross positive fair values at
the start and end of the quarter assists in error identification.
The following example shows how implied valuation
change can be used to identify exposure to the underlying
and errors in reported net settlements and fair values. A
U.S. resident has one swap contract with a foreign
counterparty. The fair value of the swap is $100, due the
U.S. resident at time I (refer to table). Between time I
and time 2, the U.S. resident receives a $20 payment, and,
if the price does not change, the fair value of the swap at
time 2 is $80. If everything i reported correctly on form D,
the implied valuation change i zero (scenario A).I But if
net settlements are erroneously reported as $150, the
implied valuation change is $130 (scenario B); if that
value is divided by the average gross positive fair value,
the scaled implied valuation change is 144 percenl. 2
Alternatively, if the gross positive fair value at time 2 is
erroneously reported as $20, the implied valuation change
is negative $60, which corresponds to a scaled implied
I. The implied valuation change is $80 - $100 + $20 = $0.
2. The implied valuation chaoge is $80 - $100 + $150 = $130; the
scaled implied valuation change is $130 / [($100 + $80)/2] = 1.44, or
144 percent.

calculation of the net world position moves the world
position closer to zero.
USING THE DATA TO ESTIMATE RISK
EXPOSURE

Form D data can be used to estimate two types of risk
exposure of interest to users of the data. The first type
concerns the potential losses incurred if counterparties fail to fulfill their obligations, usually referred to
as credit exposure. The data can be used to estimate
an upper bound on cross-border credit exposure as of
the report date. Because the total gross positive fair

Example of the use of implied valuation change to
identify errors in the net settlements and net fair values
reported on TIC form D
U.S. dollars except as noted
Implied valuation change

Gross
positive
fair value

Net
settlement

Scenario A
Time I
Time 2 ......

100
80

0
20

Scenario B
Time I ....
Time 2

100
80

0
ISO'

130

144

Scenario C
Time I
Time 2 .......

100
20 1

0
20

-60

-100

Period

Amount

Scaled
(percent)

I. Erroneously reported.
. . . Not applicable.

valuation change of negative ]00 percent (scenario C).3
In scenarios B and C, a high absolute value for the scaled
implied valuation change signifies a reporting error.
The effectiveness of implied valuation change as an
error-identification tool depends on the number of purchases and sales of derivatives and on movements in the
underlyings. At one extreme, given no changes in a
reporter's derivatives contracts and on market move in
the underlying prices, the valuation changes should be
small; in such cases, the calculation of large implied
valuation changes will effectively indicate the presence of
an error. At the other extreme, given significant purchases
or sales of derivatives or high volatility in the underlying
markets, relating the implied valuation change to the
movements in the underlyings will be difficult, and thus
this methodology will be less effective at identifying
errors.
3. The implied valuation change is $20 - $100 + $20 = -$60. If the
implied valuation change is divided by the average of the gross positive
fair values, the scaled implied valuation change is -$60 / [($100 + $20)12]
= -1.00, or -100 percent.

value is the um of the fair values of all claims with a
positive balance from the reporters' perspective, it is
the maximum loss that would be sustained if foreign
counterparties defaulted on their obligations. 21 In
practice, most of these positions are covered by
legally enforceable netting agreements. In such cases,
in the event of a counterparty default, positions with a
counterparty that have po itive fair values are reduced
by the value of positions with the same counterparty
that have negati ve fair values. As a result, the actual
21. An estimate of cross-border credit exposure should exclude
those positions with affiliates, also reported on TIC form D.

A16

Federal Reserve Bulletin 0 May 2007

credit exposure is much less than would be implied
by the gross positive fair value. Similarly, the gross
fair value vis-a-vis foreign residents of a given
country is somewhat indicative of the maximum
credit exposure of U.S. residents to residents of that
country. However, because all TIC data are reported
on a locational basis rather than an ultimate-risk
basis, the true nationality of counterparty exposure is
unknown.
Another type of risk exposure of interest to users of
the form D data concerns U.S. investors' potential
losses or gains from changes in certain underlyings,
such as exchange rates or interest rates, referred to as
market exposure. Although form D fair values and net
settlements may be related to the magnitude of market exposure, the information needed to accurately
gauge that exposure is not collected. Fair values are a
weak proxy for market exposure for several reasons.
One reason is that a positive fair value does not
indicate the direction of exposure; depending on the
nature of the contract, the value of the derivative may
either increase or decrease when the value of the
underlying increases.
Another source of difficulty in gauging market
exposure is that derivatives can be highly leveraged.
Accordingly, small movements in the value of the
underlying can cause very large changes in the fair
value. The net aggregate fair value may include both
the fair values of contracts with high leverage and
those of contracts with little or no leverage. Finally,
the D data provide at most a partial picture of
reporters' market exposure because they include no
information about positions with offsetting risks.
Nevertheless, a rough estimate of the exposure to
the underlyings may be constructed by examining the
changes in quarter-end fair values and net settlements. For example, a comparison of the valuation
changes implied by the reported quarter-end net fair
values and net settlements of single-currency interest
rate contracts with the quarter-end moves in interest
rates can be used to construct a rough estimate of the
aggregate exposure to underlying interest rates (refer
to box "Implied Valuation Change"). However, this

analysis may be misleading because of changes in the
number of derivatives contracts within the quarter.

SUMMARY
This article introduced the new data on transactions
in, and holdings of, U.S. cross-border derivatives and
discussed the new form that will collect the dataTIC form D. To date, the United States has published
very little information on cross-border derivatives
because of the limited availability of data. The article
showed how the omission of derivatives from reports
on cross-border flows and positions gives rise to a
statistical discrepancy in the BOP accounts and can
also lead to mistaken inferences about what is driving
changes in the international investment position of
the United States.
The article demonstrated how the information
collected on form D substantially improves the reporting of both the BOP and the lIP. Because the
compilers of the financial account will have the
information needed to include derivatives transactions in that account, the contribution of derivatives
to the statistical discrepancy will be reduced. Similarly, the fair values and transaction information
collected on form D will enable the compilers of the
lIP to include derivatives contracts, thereby improving the lIP's accuracy.
The article also presented the results from the 2006
form D data and showed that they are consistent with
expectations. For example, although including the
2006 data on total form D net settlements in the BOP
would not erase the statistical discrepancy, it would
reduce it in that year. Moreover, when U.S. transactions are included, net world transactions in derivatives in 2006 are closer to zero. Finally, including the
U.S. position moves the net world position closer to
zero. Although the data collected thus far are consistent with expectations, the Treasury Department, the
Federal Reserve Bank of New York, and the Federal
Reserve Board continue to seek ways to improve data
quality and reduce the burden on reporters.
0

AI7

May 2007

Industrial Production and Capacity
Utilization: The 2006 Annual Revision
Charles Gilbert and Maria Otoo, of the Board's
Division of Research and Statistics, prepared this
article. Betsy Wang provided research assistance.
On December 11, 2006, the Federal Reserve published revisions to its index of industrial production
and the related measures of capacity and capacity
utilization. The revision affected the data from 1972
through October 2006, but the largest changes were
for the period beginning in 2003. From the fourth
quarter of 2002 to the third quarter of 2006, industrial
production, as revised, increased about 1% percentage points less than previously reported. By year, the
change in output was revised down a little for 2003,
down substantially for 2004, up a little for 2005, and
down a touch for 2006 (table 1).1 Revisions for
previous years were small.
On balance, the revision to capacity utilization was
relatively small. For the fourth quarter of 2005, the
rate of capacity utilization for total industry was
revised up V4 percentage point, to 80.7 percent. For
the third quarter of 2006, capacity utilization, at
82.3 percent, was only slightly lower than previously
reported and was 1.3 percentage points above its
1972-2005 (long-run) average. 2 The operating rate
4
for manufacturing was revised down about 1/ percentage point for both the fourth quarter of 200S and the
third quarter of 2006. Downward revisions in several
industries, including computers, communications
NOTE: Charles Gilbert directed the 2006 revision and, with Kimberly Bayard, David Byrne, Wendy Dunn, Christopher Kurz, Paul
Lengermann, Norman Morin, Maria Otoo, John Slevens, and Daniel
Vine, prepared the revised estimates of industrial production. David
Byrne prepared the improved estimates for communications equipment. Norman Morin, John Stevens, and Daniel Vine prepared the
revised estimates of capacity and capacity utilization.
I. Revised data reported in this article extend through year-end
2006 and were first published in the Board of Governors of the Federal
Reserve System (2007), Statistical Release G.17, "Industrial Production and Capacity Utilization" (May 16). Data referred to in this article
as "previous," which appeared in the G.17 release published on
November 16, 2006, extend through year-end 2006 for capacity but
only through the third quarter of 2006 for production and capacity
utilization. Therefore, for 2006, statements comparing revised with
previously reported data for production and capacity utilization cover
the year only through the third quarter, whereas such comparisons for
capacity in 2006 cover the entire year.
2. These comparisons use quarterly average data.

equipment, and textiles, were partly offset by sizable
upward revisions in the semiconductor and chemical
industries.
In mining, the capacity utilization rate was revised
up 2V4 percentage points for the fourth quarter of
2005, to 85 percent, but the revised rate for the third
quarter of 2006, at 90.9 percent, was only a bit above
the previous estimate. The operating rate for utilities
was revised down in both 2005 and 2006.
Compared with the previous estimates, total industrial capacity is now reported to have grown more
slowly in 2003, 2004, and 2005. In 2006, total
industrial capacity expanded more rapidly than previously estimated, and the gains appeared in all three
major industrial sectors-manufacturing, mining, and
utilities.
The updated measures of production, which incorporate the Census Bureau's 2004 and 2005 Annual
Surveys of Manufactures (ASM), show slightly lower
annual levels of output than previously estimated.
Other new source data for the revision include
selected 2005 Current Industrial Reports (also from
the Census Bureau), new annual data on mineral
extraction for 2004 and 2005 from the U.S. Geological Survey, and updated deflators from the Bureau of
Economic Analysis. The new monthly production
estimates reflect the incorporation of updated seasonal factors and monthly source data that became
available (or were revised) after the close of the
regular four-month reporting window. 3
The revised capacity utilization rates incorporate
the results from the Census Bureau's 200S Survey of
Plant Capacity for the fourth quarter of that year. In
addition, the revisions to the capacity indexes and
capacity utilization rates incorporate the revised production indexes and newly available data on industrial capacity from the U.S. Geological Survey, the
Energy Information Agency of the Department of
Energy, and other organizations.

3. After the initial estimate of industrial production is issued, it may
be revised in the next three monthly releases and will then be left
unchanged until the next major revision to industrial production.

A18

Federal Reserve Bulletin 0 May 2007

1. Revised rates of change in industrial production and capacity, revised rates of capacity utilization, and the difference
between revised and previously reported rates, 2002-06
Percent except as noted

Item

Production
Total index .
Manufacturing ...............
Excluding selected high-tech
industries I . . . .
Selected high-tech industries
Mining and utilities
Capacity
Total index .....
Manufacturing ...............
Excluding selected high-tech
industries' .............
Selected high-tech industries
Mining and utilities
Capacity utilization
Total index .......
Manufacturing .....
. ...
Excluding selected high-tech
industries' ..................
Selected high-tech industries
Mining and utilities .............

Memo:
2006

Difference between rates
(revised minus previous, percentage points)

Revised rate

pg~~~n 2~;:1

2002

2003

I 2004 I 2005 I 2006 2~;: I 2002 I 2003 I 2004 I 2005 I 2006

100.0
81.9

2.7
3.0

2.7
2.7

1.2
1.3

3.0
3.4

3.2
4.4

3.5
3.4

-.2
-.2

.5
.6

-.4
-.4

-1.4
-1.7

.2
.2

-.1
.1

77.0
4.8
18.1

2.1
17.7
1.2

2.3
8.3
2.7

.3
17.2
.5

3.0
10.4
.7

2.9
28.1
-1.6

2.0
24.6
3.9

-.2
-.8
-.1

.3
3.5
.0

-.2
-4.0
-.1

-1.3
-8.0
.2

.0
2.4
.4

.0
2.0
-1.2

100.0
82.5

.7
.8

.8
.4

-.9
-.9

.1
.0

l.l

1.7

2.4
2.7

-.2
-.3

.1
.0

-.7
-.8

-.5
-.5

-.5
-.3

.4
.1

77.0
5.5
17.5

.1
11.2
1.1

-.4
12.6
2.6

-.8
1.4
1.0

-.2
4.3
1.2

.6
18.3
-.9

1.4
19.6
1.4

-.3
.2
.3

-.2
3.1
.3

-.4
-6.6
-.4

-.3
-2.5
.0

.0
-2.5
-.8

-.4
7.4
1.8

100.0
82.5

78.7
77.1

75.3
73.4

76.8
75.0

79.0
77.6

80.7
79.6

81.5
80.1

.0
-.2

.0
.0

.3
.3

-.4
-.6

.2
-.2

-.2
-.3

77.0
5.5
17.5

77.7
70.3
86.8

74.8
57.8
87.2

75.7
66.8
86.8

78.1
70.7
86.4

79.8
76.5
85.8

80.3
79.7
87.9

-.2
-.5
.2

.1
-.7
-.1

.2
l.l
.2

-.5
-2.1
.3

-.5
.8
1.3

-.4
-1.5
-.5

NOTE: For production, the revised rates of change are from the fourth quarter of the previous year to the fourth quarter of the year indicated; the differences between revised and previously reported production are also calculated
from Q4-to-Q4 rates except for 2006, for which they are calculated from annualized rates of change between 2005:Q4 and 2006:Q3.
For capacity, the revised rates of change are calculated in a manner identical
to that for production; the differences between revised and previous capacity,
including those for 2006, are calculated from Q4--to-Q4 rates.

RESULTS OF THE REVISION

As revised, total industrial production for the third
quarter of 2006 was 112.3 percent of output in 2002,
and capacity stood at 136.5 percent of output in 2002.
Both indexes are lower than reported previously. The
capacity utilization rate for total industry in the third
quarter of last year, at 82.3 percent, was revised down
slightly. Results of the revision can be found in the
appendix tables. 4

Industrial Production
The overall contour of industrial production (IP) in
this revision is similar to that published previously.
4. Table A.I shows the revised data for total industrial production,
and table A.2 shows the revised data for capacity and capacity
utilization for total industry. Tables A.3 and AA show the revised rates
of change (fourth quarter to fourth quarter) of industrial production for
market groups, industry groups, special aggregates, and selected detail
for the years 2002 through 2006. Table A.5 shows the revised rates of
change of annual industrial production indexes for market and industry
groups for the years 2002 through 2006. Tables A.6 and A.7 show the
revised figures for capacity and capacity utilization. Table A.8 shows
the annual proportions of market groups and industry groups in total
[P. Tables A.3, AA, A.5, and A.6 also show the difference between the
revised and previous rates of change. Table A.7 shows the difference
between the revised and previous rates of capacity utilization for the
final quarter of the year.

Capacity utilization rates are for the fourth quarter of the year indicated; differences between revised and previously reported capacity utilization are calculated from Q4 rates except for 2006, for which they are calculated from Q3
rates.

I. Manufacturing excluding semiconductors and related electronic components, computers and peripheral equipment, and communications equipment.

As reported earlier, total IP increased in each year
from 2003 through 2006, albeit at a slower pace for
this period as a whole. Data from the 2004 and the
2005 Annual Survey of Manufactures, the most significant contributors to the revision, show that the
slower growth in total output over this period was due
mostly to a downward revision of 1.4 percentage
points in 2004. Revisions in other years were relatively modest (figure 1).5
Market Groups
The most prominent change to the production index
for final products and nonindustrial supplies occurred
in 2004, when widespread revisions caused growth in
this index to be adjusted down 1.7 percentage points
(figure 2 and table A.3). In addition, gains in the index
were revised down '/2 percentage point in 2003 and
'/4 percentage point in 2006. No change was made to
the increase in the index in 2005. Nevertheless, the
output of this market group accelerated from 2003
through 2005 and advanced further in 2006; it is now
5. The gains in total industrial production were revised up 0.5 percentage point in 2002, down 0.4 percentage point in 2003, down
1.4 percentage points in 2004, up 0.2 percentage point in 2005, and
down 0.1 percentage point in 2006.

Industrial Production and Capacity Utilization: The 2006 Annual Revision

A 19

Industrial production, capacity, and capacity utilization: Total industry, January 1999-April 2007
Ratio scale. 2002 outpUl = 100

ProductJon and capacity

Revised
Previous

Capacity utilization

Percent

140
130

Capacity

84
82
80

120

78
-

110

100

76
74

1999

I
2001

2003

2005

Llu...'_---'-I_---'-I_-..L1_-..L1_--I.1_----I.1--'1

I _IL-_LI_-,-,I
L

1999

2007

NOTE: Here and in the following figures, the shaded areas are periods of
business recession as defined by the National Bureau of Economic Research.
Data labeled "revised" are the corresponding data in the Federal Reserve
Statistical Release G.17," Industrial Production and Capacity Utilization,"

reported to have increased 1.3 percent in 2003,
2.6 percent in 2004, 4.8 percent in 2005, and 2.6 percent in 2006.
Over the 2003-06 period, revisions to the index for
consumer goods were small, on balance, as substantial downward revisions to the output of consumer
2.

200 I

2003

2005

2007

published on May 16,2007. Data labeled "previous" are those published
before the December II, 2006, annual revision. The "previous" data for
capacity extend through the end of 2006 because the capacity indexes are
based on annual projections that are convened to a monthly basis.

durable goods were in large part offset by upward
revisions for nondurables. Among durable goods producers, the output of automotive products was revised
down sharply and is now shown to have increased
4.8 percent in 2003 but to have fallen each year from
2004 through 2006. In contrast, the production gains

Industrial production: Market groups, January 1989-April 2007

Products

Ralio scale. 2002 = 100

Equjpment

Ratio scate. 2002 = 100

155
110

135
115

100

75
80
55
70

lnduslrial materials

110
100

115
100
85

90
70
80
55
70

A20

Federal Reserve Bulletin 0 May 2007

for home electronics in 2004 and 2006 were revised
up appreciably. Among consumer nondurables, the
production indexes for foods and tobacco, consumer
chemical products, and consumer energy products
were revised up overall. The indexes for clothing and
for paper products are now noticeably lower than
estimated previously.
The increase in the production of business equipment since 2002 is now reported to have been weaker.
Although the increase in transit equipment over this
period was revised up a bit, the gains in information
processing equipment and in industrial and other
equipment were both revised down noticeably. The
production of defense and space equipment also
increased less over the 2003-06 period than reported
initially.
The 2004 increase for construction supplies was
revised down to 1.6 percent and is now about in line
with the increases in 2002 and 2003. A strong gain in
2005-8.0 percent-was followed by a decrease of
2.1 percent in 2006. Increases in the output of business supplies over the 2003-06 period were revised
down slightly. After rising about 1 percent in 2003,
production of business supplies advanced nearly
3 percent, on average, from 2004 to 2006.
The increase in the output of materials over the
2003-06 period was little changed, on balance. The
production of energy materials was about the same in
2003 and 2004. In 2005, the output of energy materials was revised up and is now reported to have fallen
less than initially reported. In contrast, the 2006
rebound in output, at 504 percent, is a lower estimate
than that initially reported. Excluding energy, the
production of materials grew briskly, on average,
from 2003 through 2006 despite downward revisions
in 2003 and 2004. Durable goods materials were
revised down, on balance. The index for consumer
parts, in which motor vehicle parts is a sizable
component, was revised down as well. Although
growth in the production of equipment parts is now
lower from 2003 to 2005 than previously reported,
output still advanced at a brisk pace in recent years.
Revisions to the index of other durable materials were
largely offsetting and left the overall level about the
same.
The production of nondurable materials was revised up, on balance, from 2003 to 2006; the output
indexes for textile, paper, and chemical materials
were all revised upward. Thi index is now shown to
have fallen less in 2003 and 2005 and to have
increased more in 2004 and 2006.

Industrial production: Manufacturing, and manufacturing
excluding selected high-technology industries,
January I989-April 2007
Ratio scale. 2002; 100

Level

115
105
95
85

75
65

Percenl

Change (rom year earlier

Manufacturing
10

o
5

NOTE: For definition of manufacturing. refer to text note 6.
The selected high-technology industries are semiconductors and related
electronic components (NAICS 334412-9), computers and peripheral
equipment (NAICS 3341), and communications equipment (NAICS 3342).

Industry Groups
Manufacturing production has expanded in each year
since 2002, albeit at a somewhat slower rate, on
average, than previously reported (figure 3 and table
A.3). Increases in the output of durable goods have
remained robust in recent years despite downward
revisions in 2003 and 2004. For nondurable goods,
increases in output were revised up from 2002 to
2005 and little changed in 2006. Excluding selected
high-technology industries, factory output advanced
1/4 percent in 2003, about 3 percent in 2004 and 2005,
and about 2 percent in 2006 (table AA).
Across industry groups, downward revisions in the
durable goods sector were widespread. Increases in
the output of computer and electronic products were
revised down from 2003 through 2005, in part
because of downward revisions to the strong advances

I
Industrial Production and Capacity Utilization: The 2006 Annual Revision

Industrial production: Selected high-technology
industries, January 1998-April 2007

Capacity

Ratio scale. 2002 = 100

I
_

270
220

Semiconductors

rV- '-

Communications

170

equiP:Q

120
100

Computers

70
50
35

I I

A21

1998 1999 2000 200 I 2002 2003 2004 2005 2006 2007

NOTE: For the NArCS categories of these industries, refer to the note to
figure 3.

for communications equipment and for semiconductors and related electronics (figure 4). The production
of motor vehicles and parts over this period is now
reported to have been weaker than originally estimated. For 2004, the output of machinery was revised
down substantially, but gains for that year and subsequent years were still strong. Within the nondurable
goods sector, the indexes for apparel and leather
goods and for plastics and rubber products were
revised down for the period since 2002. The cumulative increases since 2003 for all the other major
components of nondurable goods are now higher than
previously reported.
The revision lowered the rate of change in the
output of the publishing and logging industries about
I percentage point per year, on average, from 2003 to
2006; the IP index continues to include these two
industries under manufacturing, although they are
classified elsewhere under the North American Industry Classification System (NAICS).6
The output of mining received small revisions in
2003 and 2004 and is now reported to have decreased
somewhat less in 2005. Although it rose 2 percentage
points more slowly than initially reported for 2006,
the mining index still surged 8 percent. The output of
utilities is now estimated to have grown more slowly
from 2003 through 2006.
6. In the IP index, manufacturing comprises the following NAICS
categories: the manufacturing sector, the logging .industry, and the
newspaper, periodical, book, and directory publishing tndustnes.
Logging and publishing are not classified under manufactunng In
NAICS (they are under agriculture and information respectively), but
historically they were considered to be manufacturing industries and
were c1as ified as such under the Standard Industrial Classification
(SIC) system. In December 2002, the Federal Reserve reclassified all
its industrial output data from the SIC system to NAICS.

Total industrial capacity is estimated to have expanded less rapidly over the 2003--06 period (table
A.6). Relative to previous reports, it is estimated to
have fallen 3/4 percentage point more rapidly in 2003
and to have risen 1/2 percentage point more slowly in
both 2004 and 2005. In 2006, however, capacity is
estimated to have increased nearly 2 1 percent,
/2
roughly 1/2 percentage point more quickly than initially published. The contour of manufacturing capacity and the revisions to that contour are similar to
those for total industry. The revision shows that,
relative to previous reports, aggregate capacity for the
selected high-technology industries rose less quickly
from 2003 to 2005 but increased more rapidly in
2006. Excluding high-technology industries, manufacturing capacity declined in 2003 and 2004 and
expanded in 2005 and 2006; the rates of increase
were marked down in each year except 2005, which
was unrevised.
Capacity at mines is still estimated to have contracted from 2003 to 2005 but is now shown to have
increased in 2006. Capacity at electric and gas utilities was revised upward in 2006 but was revised little
in previous years.
By stage of processing, capacity in the crude stage
fell from 2003 to 2005 and is estimated to have edged
up 0.3 percent in 2006. Capacity at the primary and
semifinished stages declined in 2003 but rose from
2004 through 2006. Capacity for finished goods
expanded from 2003 to 2006.

Capacity Utilization
Overall, capacity utilization for total industry was
little changed by the revision from 2003 to 2006
(table A.7). In the third quarter of 2006, the capacity
utilization rate for total industry was 82.3 percent,
1,3 percentage points above its 1972-2005 average
and 0.2 percentage point lower than reported previously. The utilization rate for total industry was
revised up 1/4 percentage point in the fourth quarters
of 2003 and 2005 and revised down 0.4 percentage
point in the fourth quarter of 2004 and 0.2 percentage
point in 2006.
The manufacturing operating rate was 80.9 percent
in the third quarter of 2006, 0.3 percentage point
below the previous estimate but 1.1 percentage points
above its 1972-2005 average. For 2004 and 2005, the
rates were also marked down: 0.6 percentage point
and 0.2 percentage point, respectively. For 2003, the
rate was revised up 0.3 percentage point. Utilization
rates for durable goods manufacturers were lower

A22

Federal Reserve Bulletin 0 May 2007

Capacity utilization: Selected high-technology industries,
and manufacturing excluding selected high-technology
industries, January I 989-April 2007

Capacity utilization: Selected high-technology industries,
January 1996--April 2007
Ratio scale. percenl

Percenl

110
90

75
65

Communjcatlons equjpment

110

90
70
50

NOTE: The high-technology industries are identified in the note to figure 3.

from 2004 to 2006 than previously published. Some
of the largest downward revisions were in machinery
and in electrical equipment, appliances, and components. Revisions generally were upward for wood
products, primary metals, fabricated metal products,
and furniture. On balance, utilization rates for nondurable goods industries were revised upward; the largest upward revisions were in textile and product mills,
petroleum and coal products, and chemicals. The
largest downward revisions were in food, apparel and
leather, and plastics and rubber products. Capacity
utilization in the other (non-NAICS) manufacturing
industries was revised upward in 2003 and 2004 and
downward in 2005 and 2006.
Among selected high-technology industries, the
operating rates for computers and peripheral equipment and for communications equipment were lowered noticeably in recent years, whereas utilization in
the semiconductor industry was revised up substantially (figures 5 and 6). On balance, the aggregate of
selected high-technology industries now shows that
utilization was lower in 2004 and 2006 but higher in
2003 and 2005. By the third quarter of 2006, the
operating rate had climbed to 78.8 percent, % percentage point above its 1972-2005 average.
Capacity utilization in mining was revised up
between 2003 and 2006, mainly because of higher
operating rates in the oil and gas extraction industries.
As of the third quarter of 2006, the utilization rate for
mining is now estimated to be 90.9 percent, up
5.9 percentage points from the fourth quarter of 2005,
when the effects of Hurricane Katrina reduced the
operating rates of oil and gas extraction facilities. In
electric and gas utilities, capacity utilization rates
were revised down in 2005 and 2006 but were little
changed in previous years. At 86.4 percent in the third

110
90
70
50

I
I
1997

I
I
1999

2001

2003

I
I
2005

I
I
2007

quarter of 2006, the operating rate for utilities was
0.4 percentage point below its long-run average.
TECHNICAL ASPECTS OF THE REVISION

The benchmark indexes for manufacturing-defined
for each six-digit NAICS industry as nominal gross
output divided by a price index-were updated to
include new as well as revised information for 2003,
2004, and 2005 from the 2004 and 2005 ASMs. This
revision also incorporates the 2005 Survey of Plant
Capacity, other annual industry reports, recent information on prices, and revised monthly source data on
physical product and production-worker hours.
As in the 2003 ASM, the reports for 2004 and 2005
did not provide data for all six-digit NAICS industries
but combined some of them into higher-level industry
aggregates. The benchmark indexes for manufacturing IP are calculated from gross output for six-digit
industries and then aggregated to the IP industry level
using proportions based on value added. To maintain
benchmark references that are consistent over time,
the Federal Reserve imputed estimates of gross output for industries no longer reported separately, which
are based on values for the aggregate industries that

Industrial Production and Capacity Utilization: The 2006 Annual Revision

contained them and the gross output shares for the
disaggregate industries in 2002.

Communications Equipment
The Federal Reserve's production indexes for communications equipment (NAICS 3342) have been
developed, updated, and expanded over a period of
years. The benchmark production indexes developed
for the 2000 revision incorporated a quality-adjusted
price index for the networking equipment (routers,
switches, and hubs) used by businesses and telecommunications service providers; the detail underlying
the series was expanded to include wireless networking equipment in the 2005 revision. The 2002 revision introduced a new annual price index for other
types of communications equipment that included,
among other items, the transmission (fiber optic)
equipment that had grown rapidly in relative importance in the 1990s. The 2005 revision updated and
refined that effort.?
This revision introduced further enhancements to
the IP index for communications equipment. The
improvements affected data from 1972 forward and
included (I) refined estimates of the annual value of
U.S. production for detailed product groups, (2) newly
developed annual price indexes for mobile phones
and related equipment and for satellites and related
equipment, (3) updated annual and quarterly price
indexes for networking equipment that use new
source data for selected components, (4) new benchmark price indexes that incorporate price indexes for
secondary products and miscellaneous receipts, and
(5) newly incorporated indicator data for networking
equipment-a part of the index for telephone apparatus manufacturing (NAICS 334210).8
The first four of these improvements affect the
benchmark indexes for communications equipment
(discussed in the sections below on specific types of
equipment), and the fifth affects a monthly indicator

7. Refer to the following Bulletin articles on the 2000, 2002, and
2005 revisions for further details: Carol Corrado (200 I), "Industrial
Production and Capacity Utilization: The 2000 Annual Revision"
Federal Reserve Bulletin, vol. 87 (March), pp. 132-48; Carol Corrado
(2003), "Industrial Production and Capacity Utilization: The 2002
Historical and Annual Revision," Federal Reselve Bulletin, vol. 89
(April), pp. 151-76; and Kimberly Bayard and Charles Gilbert (2006),
"Industrial Production and Capacity Utilization: The 2005 Annual
Revision," Federal Reserve Bulletin, vol. 92, www.federalreserve.gov/
pubs/bulletin.
8. The price indexes for secondary products (noted in item 4 above)
fall notably slower than the indexes for primary products. The
resulting industry price index falls about I percentage point slower, on
average, than the index for primary products.

A23

used in IP (discussed in "Changes to Individual
Production Series").9
The refinements to values of production for detailed product groups were based in large part on
information in the Census Bureau's restructured Current Industrial Report (CIR) on Telecommunications,
which was issued in August 2006. The report presented new groupings of data that better represent the
communications equipment industry and that are
better aligned with the price indexes estimated by the
Federal Reserve. Previously issued data for 2004
were restated to be consistent with the new groupings,
and the Federal Reserve developed historical series
for the new data groupings based on data in previous
years' CIRs.
In addition to the new price and production indexes
for mobile phones and for satellite-based equipment
that were developed for this revision, industry and
government sources on prices were used to update the
previously developed indexes for networking equipment, central office equipment, transmission (fiber
optic) equipment, and PBX (private branch exchange)
equipment. The remaining price indexes for communications equipment products and for secondary products and miscellaneous receipts were updated based
on producer price indexes from the Bureau of Labor
Statistics. 10
The new product prices for communications equipment declined more than estimated previously (figure 7). Accordingly, the output of communications
equipment is now shown to have risen about 6 percent more per year, on average, from 1972 through
2005. The yearly pattern was little changed; exceptions were 2004 and 2005, when upward revisions
from faster falling prices were more than offset by
downward revisions caused by benchmarking to the
2004 and the 2005 ASM.
Mobile Phones and Related Equipment
The revision incorporated a new price index for
mobile phones (excluding satellite phones) and related network equipment that was constructed from
detailed data available from Gartner. Previously, the
IP index relied on the producer price index for these
products. The revised index fell 17.2 percent, on
average, from 1994 to 2005 (table 2).
9. The benchmark indexes for most industries in the Federal
Reserve's IP index incorporate updated price indexes from the industry output program of the Bureau of Economic Analysis. However, the
price indexes for semiconductors and communications equipment are
constructed by the Federal Reserve from alternative sources.
10. Producer price indexes are used as price indexes for broadcast
and studio equipment, alarm systems, vehicular and pedestrian traffic
equipment, intercom systems, and other voice equipment.

A24

Federal Reserve Bulletin 0 May 2007

Industrial production: Communications equipment,
January 1972-April 2007
Ratio scale. 2002 = 100

-~
_/
II II

1972

200
100
50

II I II I I

I I I I

1982

1987

1992

I I I I I

1997

I I I

Annual average

5
2

II I I I I II

2002

Satellites and related equipment................
Mobile phones and related equipment..........
etworking equipment.........................
Previous....................................

-14.8
-17.2
-18.5
-19.8

NOTE: The previous estimate for networking equipment is that published for
the 2005 annual revision to industrial production.

Revised

Type

I percent change
------------'---

V
1977

2. Price changes for communications equipment, by type,
1994--2005

2007

developed using information from Current Industrial
Reports issued by the U.S. Census Bureau and other
government and industry sources. These gross value
estimates were deflated by the price indexes just
described to obtain benchmark indexes of real output
of mobile phones and related equipment.

Average annual percent change

Satellites and Related Equipment
Period
1972-94 average
1995-2002 average
2001

2002
2003
2004
2005

6.8
13.2
-10.2
-30.0
.1

16.6
24.4

Revised
12.7
19.7
-3.1
-23.5
7.6
9.7
7.9

Data on U.S. unit sales and prices of mobile phones
categorized by function (basic, enhanced, smart, and
cellular PDA) and type of signal (that is, GSM,
CDMA, TDMA, and so on) were used to create a
Fisher price index, which fell, on average, 17.8 percent per year. 11 For mobile phone network equipment,
a price index was constructed using prices and units
for U.S. sales of base stations, which transmit signals
to and receive signals from mobile phones, and
related switching equipment. This index declined an
average of 14 percent per year from 1994 to 2005. In
contrast, the producer price index for this category
was little changed over this period.
The combined price index for mobile phones and
related equipment was extended backward to 1972
using the producer price index for the product class
containing mobile phones adjusted by the average
bias (14 percent) from 1994 to 2005. 12
Estimates of the annual gross value of U.S. production of mobile phones and related equipment were
11. GSM (Global System for Mobile Communications), CMDA
(Code Division Multiple Acce ), and TDMA (Time Division Multiple
Access) are common types of cell phone signals.
12. Jerry Hausman (1999), "Cellular Telephone, New Products,
and the CPI," Journal of Business & Economic Statistics, vol. 17
(April), pp. 188-94; Hausman suggests that mobile phone prices
dropped substantially during the years before 1994, whereas the
producer price index for that product c1as changes very lillie between
1972 and 1994.

Data from industry groups on prices for satellites and
related ground equipment were used to construct a
price index for this product class. The index fell
14.8 percent, on average, from 1994 to 2005 (table 2).
Information from Futron on satellite manufacturinoo
revenues and total satellite capacity launched, proxied
by transponder bandwidth, was used to construct an
estimate of satellite unit costs, which fell 27 percent,
on average, over the 2000--05 period. Pricing information for the highly diverse ground equipment
category is not widely available. Detailed information
from the NPD Group on one such product-GPS
navigation equipment-yielded a price index that fell
an average of 12.2 percent per year from 2002 to
2006. The technologies underlying mobile phone
networking equipment and satellite ground equipment are similar, so the geometric mean of the GPS
index and the price index for mobile phone networking equipment was used as a deflator for ground
equipment.
From 2000 to 2005, the FRB price index for
satellites and related equipment fell about 15 percent
per year on average, more than 12 percentage points
faster than the annual PPI that previously represented
these products in the deflator used to calculate the
benchmark index for IP. The FRB price index was
extended back before 2000 using a bias-adjusted PPI.
Networking Equipment
The IP series for the production of networking equipment is not published in the monthly statistical
release, but it is included in the broader IP aggregate
for communications equipment and updated on an
ongoing basis. Tables 3 and 4 report the price index

Industrial Production and Capacity Utilization: The 2006 Annual Revision

4. Production and prices for U.S. networking equipment,
1998-2005

3. Price indexes for communications equipment
manufacturing, 1997-2005
2002 price = 100

Prices

Value of
production
(millions of
dollars)

Index, 2002= 100
Year

1997
1998
1999
2000
2001
2002
2003
2004
2005

................
................
................

........
..............•.
.......
......

Total

210.7
179.3
157.3
140.4
119.1
100.0
86.5
78.4
71.3

Networking
Other
equipment
communications
and serviceequipment
provider routers
333.8
240.7
197.2
175.3
132.7
100.0
80.6
67.3
60.5

186.2
164.8
147.3
131.5
114.0
100.0
88.6
81.7
74.6

MEMO

Average percent
change, 1997-2005 ..

-12.5

-18.5

A25

-10.9

for networking equipment. For the 1994-2000 period,
the price index is based on detailed price and quantity
information from Gartner on routers, switches, and
hubs. With this revision, the component price indexes
for routers and switches are based on data from
Synergy from 2001 on. The price index for wireless
networking equipment, such as adapters and access
ports, is based on data from Gartner from 1994 to
2005.
The previous price indexes for routers and switches
required a downward adjustment of 8 percentage
points to align their results with quality-adjusted price
indexes based on research using item-level prices and
characteristics for 1995-2000. 13 A similar exercise
was conducted to update the bias adjustment. A price
index was computed from data for constant-quality,
high-end routers (that is, specific models of a particular type and brand of router) from 2002 to 2005. The
Fisher price index based on the quarterly Synergy
data yielded results that were very close to the price
index based on the specific models, so the previous
downward adjustment was phased out between 2000
and 2004.
On average, the movements in the overall networking price index and the component price indexes are
revised only slightly, but the pattern is somewhat
different, particularly in the router index, primarily
because of the switch to Synergy source data.

Changes to Individual Production Series
With this revision, the monthly production indicators
for some series have changed, and some new series
have been created.
13. Mark Doms and Christopher Forman (2005), "Prices for Local
Area Network Equipment," Information Economics and Policy,
vol. 17 (July), pp. 365-88.

Period
Production

Annual estimates
1998 .....
1999 ................
2000 ......................
2001 ......................
2002 . .....................
2003 .....................
2004 ....
2005 . ...............

58.7
82.5
113.8
124.7
100.0
90.7
89.1
102.0

240.7
197.2
175.3
132.7
100.0
80.6
67.3
60.5

20.556.4
23.781.6
29,160.7
25.202.6
15,747.5
13.088.5
11,151.3
11,455.9

Quarterly estimates
1998:QI ........
Q2 .......... Q3 ..................
Q4 ..... . .. . .. . - . . . .
1999:QI ..................
Q2 ..................
Q3 ..................
Q4 ..................
2000:QI ..................
Q2 ..................
Q3 ..................
Q4 ..... ............
200I:QI
Q2 ..................
Q3 ..................
Q4 ..................
2002:QI ..................
Q2 ..................
Q3 ..............
Q4 ..................
2003:QI ..................
Q2 . .................
................
Q3
Q4 ..................
2004:QI ..................
Q2
.... . . . . . . . . .. .
................
Q3
Q4 ..................
2005:QI
Q2
.............
Q3 ..................
Q4
.... ........

49.9
59.1
62.5
63.3
78.3
82.7
82.1
87.0
103.3
113.9
117.4
120.6
136.7
124.1
120.5
117.4
10I.l
102.5
98.5
97.9
94.0
86.7
89.8
92.3
95.9
89.6
86.3
84.5
88.7
109.9
100.9
108.4

288.3
255.3
198.5
220.3
225.3
202.0
173.7
185.8
199.9
178.8
153.7
166.7
160.2
143.6
110.1
118.3
126.2
122.7
74.6
82.4
103.5
95.6
64.5
64.0
81.8
75.2
55.9
58.7
72.7
64.6
52.7
54.3

19,361.9
21,667.2
20,516.9
20,806.8
23,513.5
23,906.1
23,545.0
24,224.3
27,993.8
28,940.9
29,722.5
29,970.2
29,004.9
25,699.2
23,512.1
22,504.3
17,062.0
16.765.8
14,914.0
14,158.7
13,208.2
13.634.8
13,349.1
12,057.9
12,689.1
10,716.9
10.995.1
10,241.2
10,456.8
11.598.7
11.607.9
12,090.7

Ethanol
A new industrial production index for ethyl alcohol
(also known as ethanol, NAICS 325193) was introduced with this revision. The index begins in 1997
and uses as a monthly indicator data on fuel-ethanol
production from the Monthly Oxygenate Report, published by the Energy Information Agency of the
Department of Energy. Previously, ethanol production
had been included in the production index for organic
chemicals (NAICS 32511, 32519), which used the
output of eight basic organic chemicals as its highfrequency indicator. The data for those eight chemicals now serve as the indicator for a new series that
covers the combined output of petrochemicals (NAICS
32511) and other organic chemicals (NAICS 32519),
except ethanol. The new ethanol series is classified
both in the energy materials market group (86.5 percent by weight) and in the business supply market
group (13.5 percent by weight). Like the old series for
all of organic chemicals, the new series for organic
chemicals other than ethanol is classified both in

A26

Federal Reserve Bulletin 0 May 2007

non-energy chemical materials (86.5 percent) and in
business supplies (13.5 percent).
Unitary Air Conditioners
The output of unitary air conditioners is now represented by separate production indexes for residential
and nonresidential units for the period 1997 to the
present. Unitary air conditioners include both central
air units and heat pumps and are a part of NAICS
industry 333415, which covers air conditioners, nonhousehold refrigeration equipment, and warm air
furnaces. Previously, a single production index for
unitary air conditioners was based on data for shipments and inventories from the Air-Conditioning and
Refrigeration Institute (ARI).
The new indexes take advantage of additional
detail available in the ARI report both to develop
indexes for the residential and nonresidential markets
and to weight units of various sizes by relative prices.
The ARI shipments data are available for seventeen
size categories that range from units with cooling
capacity of less than 16,500 British Thermal Units per
hour (BTUH) to tho e with cooling capacity of
640,000 BTUH or more. The shipments for each size
category are split between residential and nonresidential units; the bulk of the units with cooling capacity
less than 65,000 BTUH are assumed to be residential,
and the bulk of the units with cooling capacity of at
least 65,000 BTUH are assumed to be nonresidential.
The shipments of the smaller units are split into eight
size categories; the units are assumed to be 97 percent
residential in the smallest category, 96 percent in the
next smallest category, and so on, until the share
decreases to 90 percent in the largest of these mostly
residential categories. A share of the larger-sized units
is assumed to be for use in apartments and other
multifamily residential buildings. The residential
share of units with cooling capacity between 65,000
and 96,000 BTUH is assumed to be 20 percent. This
share decreases 2 percentage points for each larger
category, falling to 4 percent for units with cooling
capacity of 640,000 BTUH or more.
Relative prices for the various size categories are
derived from the Current Indu trial Report (CIR) on
Refrigeration, Air Conditioning, and Warm Air Heating Equipment from the Census Bureau for 2004 and
2005; previously, the single index was based on an
unweighted sum of units. Annual shipments in terms
of both unit volumes and dollars are available from
the CIR for several types of unitary air conditioners
broken down by size categories very similar to the
ARI size categories. Unit values were calculated for
the various size categories in the CIR. These values

were very nearly proportional to the midpoint of the
cooling capacity range in each category, which allowed the calculation of unit values for those ARI
size categories that did not exactly line up with the
CIR categories. The relative prices appeared stable
across time, so the indicators for the new IP indexes
were constructed as fixed-weight aggregates of the
ARI shipments series.
ARI published estimates of the change in manufacturers' overall inventories-not broken into size
categories-up through the summer of 2006. Previously, the inventory change figures had been added to
unit shipments to construct an estimate of unit production. These data on inventory change were extended with model-based estimates of inventory
change and used the method implemented for other
industries in recent annual revisions to industrial
production. 14 The weighted shipments aggregates are
then multiplied by the ratio of implicit production to
shipments for overall unitary air conditioners to compute the monthly product indicator for the residential
and nonresidential production indexes.
Audio and Video Equipment
The monthly indicator for audio and video equipment
(NAICS 3343) was updated to include both digital
televisions and speakers for the period 2002 to the
present. Previously, the index reflected shipments of
analog televisions with diagonal sizes of 24 inches or
larger that were adjusted for imports, but the rapid
transition of the market from analog to digital televisions in the past few years made it necessary to expand
the scope of the index. In addition, data on the output
of speakers were included in the new indicator; shipments of speakers and commercial sound systems
account for about 15 percent to 20 percent of U.s.
audio and video equipment shipments in recent years. 15
The new monthly indicator is a Fisher quantity
index, which in late 2006 was based on eighteen
distinct components. Unit and dollar sales of digital
televisions are available by technology (plasma, LCD,
projection, and digital tube) and by size (length of
diagonal) from the Consumer Electronics Association
(CEA). In late 2006, sales of plasma TVs were
available for three size groupings: sets with diagonals
up to 49 inches, sets with diagonals between 50 and
59 inches, and sets with diagonals 60 inches and
above. In addition, sales of LCD TVs were available
14. Kimberly Bayard and Charles Gilbert (2005), "Industrial Production and Capacity Utilization: The 2004 Annual Revision," Federal Reserve Bulletin, vol. 91 (Winter), pp. 9-25.
15. U.S. Census Bureau, Current Industrial Reports, Consumer
Electronics: 2005, www.census.gov/cir/www/334/ma334m.html.

Industrial Production and Capacity Utilization: The 2006 Annual Revision

in seven size categories that ranged from sets with
diagonals up through 18 inches to those with diagonals 40 inches and longer. Data for projection TVs
were grouped into four categories: diagonals less than
50 inches, diagonals from 50 to 54 inches, diagonals
from 55 to 59 inches, and diagonals 60 inches and
above. Data for digital tube sets were available for
two groups: those with diagonals less than 30 inches
and those with diagonals of 30 inches or more.
Speakers and analog television sets with diagonals 24
inches and above were included as separate components of the Fisher index. Smaller analog TV sets are
generally imported.
A price index was derived for each of the components of the Fisher index. For the digital televisions,
the price indexes were just the unit values calculated
from the dollar and unit sales figures. For the analog
televisions, the price index was assumed to equal the
price index for personal consumption expenditures on
televisions from the national income and product
accounts. For speakers, a producer price index was
used.
The source data from the CEA are sales figures,
so an adjustment was made so they better represent
U.S. production. The Current Industrial Report for
Consumer Electronics includes domestic factory shipments data for speaker systems, flat panel televisions (plasma and LCD), projection TVs, and tube
TVs (digital and analog). The ratios of these data to
the nominal sales data were used to adjust the nominal values for each of the components in the Fisher
index. 16
Semiconductors
As in previous years, the index for the production of
semiconductors is based on worldwide sales data
from the Semiconductor Industry Association, adjusted for net trade using a domestic production share
estimated from various government and industry
sources. Before this revision, Current Industrial Reports issued by the U.S. Census Bureau and announcements from major manufacturers of microprocessor
units (MPUs) were used to estimate shares. With this
revision, annual information from Gartner on the
location of specific facilities and information from
Instat on quarterly production at speci fic establishments were used to refine production share estimates
(figure 8). The resulting shares are noticeably different from previous estimates; the revised pattern of
16. Nominal sales data from the CEA are used for the digital
televisions and the speakers. Nominal sales of analog TVs are derived
as the product of the unit sales and the price index.

A27

U.S. share of worldwide production of microprocessors,

1992-2006
P~rccnt

100

I I II II
1992

1994

II II

1996

II II II

1998

2000

II II

2002

2004

2006

production of MPUs contains more-noticeable decelerations in 1994, 2001, and 2005 and a more rapid
acceleration in 1995. Abrupt and pronounced movements in the series coincide with changes to the small
number of facilities that account for the bulk of
worldwide production, such as idling a plant to install
upgraded equipment.
Communications Equipment Quarterly Indicator
This revision introduced a new data source, Synergy
Research Group, for the quarterly indicator for data
networking equipment, which is part of telephone
apparatus manufacturing (NAICS 334210). Synergy
provided data from 2002 forward on U.S. sales of
routers and switches that were more comprehensive
and timely than the previous source.
Periodicals and Other Publishers
The index for periodicals and other publishers (NAICS
51112, 51114, and 51119) was split into separate
indexes for periodicals (NAICS 51112) and other
publishers (NAICS 51114, 51119). Both new indexes
use production-worker hours as monthly indicators
and begin in 1987. The separate indicators will allow
comparisons to other industry data.
Series Switched from Product Data to
Production-Worker Hours
Product data used as indicators for several IP indexes
were discontinued in the past few years and have
been replaced by production-worker hours for 2002
to the present. The industries affected are coffee
(NAICS 31192), cotton and synthetic fabrics (part of
NAICS 31321), wool fabrics (part of NAICS 31321),

A28

Federal Reserve Bulletin 0 May 2007

5. Industrial production data, by type, available in reporting
window, 2005
Percentage

Month of estimate
Type of data
4th

1st
Product-based .......
Production-worker hours
Total available ...
Federal Reserve estimates ....

27
43
70
30

42
43
84
16

54
43
96
4

54
43
97
3

NOTE: Industrial production for a month is issued in the middle of the following month and revised in the subsequent three monthly G.17 releases. The
columns in this table show the percentages of industrial production, based on
value added, that have been derived from different types of source data for the
initial estimate and subsequent revisions.

tire cord (NAICS 314992), hosiery (NAICS 31511),
pigments (NAICS 31523), synthetic rubber (NAICS
325212), and electron tubes (NAICS 334411).

Reliability of Monthly Estimates
The first estimate of output for a month is preliminary
and is subject to revision in each of the subsequent
three months as new source data become available.
By the third revision (the fourth month of estimate),
the product-based content of IP is 54 percent (table 5).

Changes to Individual Capacity Series
The capacity index for organic chemicals (NAICS
32511, 9) was split irito two series-ethyl alcohol (or
ethanol, NAICS 325193) and organic chemicals
excluding ethanol (NAICS 32511,9 except 325193)for 1997 and onward. The capacity indicator for
ethanol is gallons of ethanol capacity from the
Renewable Fuels Association (RFA). The capacity
index and corresponding index of capacity utilization
were constructed as follows: A physical utilization
rate was calculated as the ratio of production data
from the Monthly Oxygenate Report (published by
the Energy Information Agency of the Department of
Energy) and the physical capacity indictor from the
RFA. This physical utilization rate was then divided
into the industrial production index for ethanol to
create a corresponding capacity index. 17 The capacity
17. Typically, the capacity indexes resulting from this methodology
are further smoothed using a model-based approach that accounts for
features of the data collection process or different measurement errors.
With the short history of these series, we did not find it necessary to
smooth the resulting capacity indexes as a part of this revision.
However, the capacity index was constructed using the production
index before applying the correction factor that aligns the production
indicator to the benchmark output information in the Census of

indicator for organic chemicals excluding ethanol is
based on utilization rates from the Survey of Plant
Capacity.
Capacity for synthetic rubber is now based on
utilization rates from the Survey of Plant Capacity
and begins in 2002. Capacity for previous years is
still derived from physical capacity data from the
International Institute of Synthetic Rubber Producers.

Weights for Aggregation
The IP index is a Fisher index. This reVISion uses
information from the Census of Manufactures to
obtain updated estimates of the industry value-added
weights used in the aggregation of IP indexes and
capacity utilization rates. The Federal Reserve derives
estimates of value added for the electric and gas
utility industries from annual revenue and expense
data issued by other organizations. The weights for
aggregation, expressed as unit value added, were
estimated using the latest data on producer prices.
Table A.8 shows the annual value-added proportions
in the IP index from 1997 through 2005.

Revised Monthly Data
This revision incorporates product data that became
available after the regular four-month reporting window for monthly IP was closed. These data are
released with too great a lag to be included with
monthly IP estimates; however, the data are available
for inclusion in the annual revision.

Revised Seasonal Factors
Seasonal factors for all series were reestimated using
data that extend into 2006. Factors for productionworker hours-which adjust for timing, holiday, and
monthly seasonal patterns-were updated with data
through September 2006 and were prorated to correspond with the seasonal factors for hours aggregated
to the three-digit NAICS level. The updated factors for
the physical product series, which include adjustments
for holiday and workday patterns, used data through
2006. Seasonal factors for unit motor vehicle assemblies have been updated, and projections through June
2007 are on the Federal Reserve Board's website at
www.federalreserve.gov/releases/gI7/mvsf.htm.
0
Manufactures and Annual Surveys of Manufactures. This correction
factor was then applied to both the production and the capacity
indexes.

Appendix tables start on page A29

Industrial Production and Capacity Utilization: The 2006 Annual Revision

A29

Appendix Tables Based on the G.17 Statistical Release, May 16, 2007
A.I. Revised data for industrial production for total industry
Seasonally adjusted data except as noted
Quarter
Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.
I

Annual
avg. 1

Industrial production (percent change)
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

................
.
..
..

.............
................
................

..............

.
.....
.....•......•...
................
................
............•...
................
................
.........
................
................
................
................
................
................
..
................

-.6
-\.3
-.7
.5
-.5
-1.9
1.9
2.0
-.3
.5
-.3
.0
.2
-.6
-.5
-.5
.5
.5
.4
-.8
.2
.5
.6
.1
-.7
.5
.6
.2
.3
.0
-.5

\.5
.4
.6
.0
-.5
2.0
-.6
.5
.4
-.8
\.3
.4
-.5
.9
-.7
.7
.3
.0
.1
1.5
\.2
.1
.5
.4
-.6
.1
.3
.7
.6
.3
.8

1.3
\.8
.3
-.3
.6
-.7
.9
.5
.2
-.6
.2
.3
.3
.5
-.5
.8
.0
\.0
.1
-.2
.8
.0
.2
.4
-.4
.8
-.2
-.6
-.1
.5
-.3

.9
2.1
-1.1
-2.0
-.5
-.8
\.2
.6
-.2
.1
.6
.5
.0
-.1
.2
.7
.3
.5
-.1
.9
-.1
.5
.2
.8
-.3
.4
-.8
.6
.1
.9
.7

.8
.3
.8
-2.5
.7
-.7
.7
.5
.1
.2
.7
-.1
-.7
.2
\.0
.4
-.4
.5
.2
.7
.6
.7
.8
.3
-.7
.4
-.1
.6
.4
-.1

.7
.7
.0
-\.3
.5
-.4
.6
.4
.1
-.3
.5
.2
.0
.3
\.0
.1
.3
.7
.3
.9
.4
-.5
-.1
.1
-.6
.9
.2
-.7
.6
.9

.2
.0
-.2
-.6
.7
-.3
1.6
.3
-.6
.6
.6
.2
-.9
-.2
.0
.8
.4
.2
-.4
-.2
.5
-.3
.7
-.3
-.4
-.3
.4
.6
.0
.4

.1
.4
-.7
.3
.0
-.8
1.1
.1
.5
-.2
.7
.5
\.0
.3
.2
-.5
.0
.5
\.3
.7
\.3
2.2
.5
-.3
-.4
.2
-.1
.2
.3
.2

.5
.3
.1
\.6
-.6
-.4
\.5
-.1
.4
.2
.3
-.3
-.3
.2
.9
.2
.5
.3
.4
.5
.9
-.2
-.4
.5
-.4
.1
.5
-.2
-\.6
-.3

.3
.9
.6
\.3
-.7
-.8
.9
-.1
-.4
.4
\.5
.6
-.1
-.7
-.2
.7
.8
.9
-.2
.0
.8
.7
1.3
-.5
-.6
-.3
-.1
.7
\.2
-.2

.0
.7
-.1
\.7
-1.1
-.4
.3
.4
.3
.5
.5
.2
.3
-\.2
-.1
.4
.4
.7
.3
.9
\.0
-.1
.6
.0
-.5
.4
.8
.2
1.1
-.4

.2
.6
.1
.6
-\.I
-.8
.5
.1
\.0
.9
.5
.4
.7
-.7
-.3
.1
.6
1.1
.3
.7
.4
.4
.9
-.4
.0
-.4
.0
.6
.8
.6

8.4
-\.2
2.0
1.7
\.0
-7.6
4.4
12.5
\.2
2.4
5.4
3.4
\.5
3.0
-7.6
-.3
3.7
5.6
6.0
2.0
8.3
4.7
4.9
5.3
-5.7
2.7
2.3
3.3
4.6
5.0
.9

12.8
16.8
-.5
-15.9
\.5
-4.9
9.6
6.5
.7
-2.4
7.2
3.4
-\.8
2.8
2.7
7.1
1.1
7.3
\.0
8.4
5.5
3.3
4.0
5.9
-5.4
6.4
-3.2
2.5
2.8
6.5

4.9
3.6
-\.4
-6.2
4.3
-5.9
14.8
2.9
-.5
\.7
7.3
2.1
-2.4
\.4
5.7
3.1
2.4
5.1
3.8
5.2
9.0
3.8
4.4
-.5
-5.6
2.3
2.5
\.8
.8
4.0

2.9
7.6
1.4
16.2
-8.5
-7.4
11.0
.5
2.7
4.6
9.9
3.3
\.8
-5.9
\.0
4.0
6.4
8.3
3.5
6.1
11.1
5.3
8.2
-\.6
-5.1
-.4
3.3
4.3
4.7
-\.5

7.7
5.5
3.1
-2.6
\.4
-5.1
2.7
9.1
1.4
\.1
5.1
5.1
.9
\.0
-\.5
2.9
3.4
5.5
5.0
4.3
7.2
6.1
4.7
4.5
-3.5
.0
\.1
2.5
3.2
3.9

53.1
56.8
56.7
56.2
54.7
51.4
57.1
60.1
6\.1
62.0
66.5
68.4
68.4
67.6
68.2
70.9
73.5
78.7
8 \.0
85.7
92.8
96.4
102.1
103.3
97.7
100.4
102.0
105.3
109.1
112.2

50.4
52.8
56.7
56.9
55.8
54.3
52.3
58.6
60.2
6 \.0
62.4
66.7
68.4
68.5
66.8
68.3
7 \.4
74.1
79.1
81.1
86.8
93.3
97.4
102.7
102.1
98.6
101.2
102.6
106.0
109.5
112.2

52.0
54.9
56.6
54.5
56.0
53.6
53.5
59.5
60.3
60.6
63.5
67.3
68.1
69.0
67.3
69.5
7\.6
75.4
79.3
82.8
87.9
94.1
98.3
104.1
100.7
100.1
100.3
103.2
106.7
111.2

52.6
55.4
56.4
53.6
56.6
52.8
55.4
59.9
60.2
60.9
64.6
67.6
67.7
69.2
68.2
70.0
72.0
76.4
80.0
83.8
89.9
95.0
99.4
104.0
99.2
100.7
10\.0
103.7
106.9
112.3

53.0
56.4
56.6
55.7
55.3
51.8
56.9
60.0
60.6
6\.6
66.1
68.2
68.0
68.2
68.4
70.7
73.1
77.9
80.7
85.1
92.3
%.2
101.3
103.6
97.9
100.6
10\.8
104.8
108.1
111.9

52.0
54.9
56.6
55.1
55.9
53.1
54.5
59.5
60.3
6 \.0
64.1
67.4
68.1
68.7
67.7
69.7
72.0
76.0
79.8
83.2
89.2
94.6
99.1
103.6
100.0
100.0
101.1
103.6
106.9
111.1

Industrial production (2002=100)
1977 ... ...........
1978 ...............
1979 ... ............
1980 ..
1981 ...
1982.
1983.
1984 ...
1985 ...
1986 ...............
1987 ....
1988 ...........
1989 ..............
1990 ..............
1991 ..............
1992 . ..............
1993 ..............
1994 . . . . . . . . . . . ...
1995 . ..............
1996 . . . . . . . . . . . . . . .
1997 ................
1998. .............
1999 ................
2000 ................
2001 .. . . . . . . . . . . . .
2002 ................
2003 .............
2004 ... ............
2005 ... ............
2006 ... . . . . . . . . . . .
2007 ... ............

.
.
.
.

49.7
52.3
56.4
56.9
55.9
53.7
52.4
58.3
60.0
6\.4
6\.8
66.5
68.6
68.0
67.2
67.9
7\.2
73.9
79.0
80.3
85.9
93.3
96.9
102.2
102.6
98.3
101.1
102.3
105.6
109.1
111.7

50.5
52.6
56.8
56.9
55.6
54.7
52.1
58.6
60.2
60.9
62.6
66.7
68.2
68.6
66.8
68.3
7\.5
73.9
79.0
8 \.6
86.9
93.3
97.5
102.7
102.0
98.4
101.4
103.0
106.2
109.4
112.6

51.1
53.5
56.9
56.8
55.9
54.4
52.5
58.9
60.4
60.6
62.7
66.9
68.4
68.9
66.5
68.8
7\.5
74.7
79.2
8 \.4
87.6
93.4
97.6
103.1
10\.6
99.1
101.1
102.4
106.1
110.0
112.2

5\.6
54.7
56.3
55.6
55.6
53.9
53.2
59.2
60.2
60.6
63.1
67.2
68.4
68.8
66.6
69.3
7\.7
75.0
79.1
82.1
87.5
93.8
97.8
103.9
101.3
99.5
100.3
103.1
106.2
110.9
113.0

52.0
54.8
56.8
54.2
56.0
53.5
53.6
59.5
60.3
60.7
63.5
67.2
68.0
68.9
67.3
69.6
71.4
75.4
79.2
82.7
88.0
94.4
98.6
104.2
100.6
99.9
100.2
103.7
106.6
110.9

52.4
55.2
56.8
53.5
56.3
53.3
53.9
59.8
60.3
60.5
63.8
67.3
68.0
69.1
68.0
69.6
7\.6
75.9
79.5
83.4
88.4
94.0
98.5
104.3
100.0
100.9
100.4
102.9
107.3
111.9

52.5
55.2
56.7
53.2
56.7
53.2
54.7
59.9
60.0
60.9
64.2
67.4
67.3
69.0
68.0
70.2
7 \.9
76.1
79.2
83.3
88.8
93.7
99.2
104.0
99.6
100.6
100.8
103.6
107.3
112.3

OTE: Monthly percent change figures show the change from the previous
month; quarterly figures show the change from the previous quarter at a compound annual rate of change. Production and capacity indexes are expressed as
percentages of output in 2002.

52.5
55.4
56.3
53.4
56.7
52.7
55.3
60.0
60.2
60.8
64.7
67.8
68.0
69.2
68.1
69.9
7 \.9
76.4
80.2
83.8
89.9
95.7
99.7
103.8
99.2
100.7
100.8
103.8
107.6
112.5

52.8
55.6
56.3
54.2
56.4
52.5
56.2
59.9
60.5
60.9
64.9
67.6
67.8
69.4
68.7
70.0
72.3
76.6
80.6
84.3
90.8
95.5
99.3
104.2
98.8
100.8
101.3
103.6
105.8
112.2

52.9
56.0
56.6
54.9
55.9
52.1
56.7
59.8
60.3
6\.2
65.8
68.0
67.7
68.9
68.5
70.5
72.8
77.3
80.4
84.3
9 \.5
96.1
100.6
103.7
98.3
100.5
101.2
104.4
107.1
112.0

53.0
56.5
56.6
55.9
55.3
5\.8
56.9
60.1
60.5
6\.5
66.2
68.1
67.9
68.1
68.4
70.8
73.1
77.8
80.7
85.1
92.4
96.1
101.3
103.7
97.8
100.9
102.0
104.7
108.2
111.5

Estimates from February 2007 through April 2007 are subject to funher revision in the upcoming monthly releases.
I. Annual averages of industrial production are calculated from nol seasonally adjusted indexes.
... NOl available as of May 16.2007.

A30

Federal Reserve Bulletin 0 May 2007

Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued
A.2. Revised data for capacity and capacity utilization for total industry
Seasonally adjusted data except as noted
Quarter
Year

Jan.

Feb.

Mar.

Apr.

May

June

Aug.

July

Sept.

Oct.

Nov.

Dec.
I

Annual
avg. 1

Capacity (percent of 2002 output)
1977 ...... .... ...
1978 ... ....... ...
1979 .... .......
1980 ................
1981 ..... ..... .....
1982 .. . . . . . . . . . . . . .
1983 .... ...........
1984 ...............
1985 ............. ..
1986 .. ..........
1987 ..
.....
1988. .............
1989 ............
1990 . . . . . . . . . ....
1991 ..............
1992 . .. .....
1993 .. .......
1994 .. .............
. ......
1995 ...
1996 ...............
1997 ....... ......
1998 ........ ........
1999
.......
2000 .............. ..
2001 .. ... - ..........
2002 ... .......... ..
2003 .. .............
2004 ..............
2005 ..............
2006 ... .. ..... . ...
2007 ..............

.....

.......

61.5
63.7
65.8
67.5
69.2
71.3
72.7
73.3
75.0
77.0
78.2
79.9
80.6
82.5
84.4
85.9
87.8
89.5
92.9
97.6
103.1
110.6
118.2
124.3
129.6
133.1
133.5
132.4
132.7
134.6
137.8

61.7
63.9
65.9
67.6
69.4
71.4
72.8
73.4
75.2
77.1
78.4
79.9
80.8
82.7
84.5
86.1
87.9
89.7
93.2
98.1
103.6
111.3
118.7
124.8
130.0
133.3
133.3
132.4
132.7
134.8
138.0

61.8
64.1
66.1
67.8
69.6
71.6
72.8
73.5
75.4
77.2
78.5
80.0
80.9
82.8
84.6
86.2
88.1
89.9
93.6
98.5
104.1
112.0
119.2
125.3
130.3
133.5
133.2
132.5
132.8
135.1
138.2

62.0
64.2
66.2
67.9
69.7
71.8
72.9
73.6
75.6
77.3
78.7
80.1
81.0
83.0
84.8
86.4
88.2
90.1
94.0
98.9
104.7
112.7
119.7
125.8
130.6
133.6
133.0
132.5
132.9
135.4
138.5

62.2
64.4
66.4
68.0
69.9
71.9
72.9
73.7
75.8
77.4
78.9
80.1
81.2
83.2
84.9
86.5
88.3
90.4
94.4
99.4
105.2
113.5
120.2
126.3
131.0
133.7
132.9
132.5
133.0
135.7

...

62.4
64.6
66.5
68.2
70.1
72.1
72.9
73.8
76.0
77.5
79.0
80.1
81.3
83.3
85.0
86.7
88.4
90.6
94.8
99.8
105.8
114.1
120.7
126.8
131.3
133.8
132.8
132.5
133.1
136.0

62.5
64.8
66.7
68.3
70.2
72.2
73.0
74.0
76.2
77.6
79.2
80.2
81.5
83.5
85.1
86.9
88.6
90.9
95.1
100.3
106.4
114.8
121.2
127.2
131.6
133.9
132.7
132.6
133.2
136.2

...

62.7
65.0
66.8
68.5
70.4
72.3
73.0
74.1
76.3
77.7
79.3
80.2
81.6
83.6
85.3
87.0
88.7
91.2
95.5
100.7
107.1
115.4
121.7
127.6
131.9
133.9
132.6
132.6
133.4
136.5

...

62.9
65.1
66.9
68.6
70.6
72.4
73.0
74.3
76.5
77.8
79.5
80.3
81.8
83.8
85.4
87.2
88.8
91.5
95.9
101.2
107.7
116.0
122.2
128.1
132.1
133.8
132.5
132.6
133.6
136.8

.. .

63.1
65.3
67.1
68.8
70.8
72.5
73.1
74.5
76.6
77.9
79.6
80.4
82.0
83.9
85.5
87.4
89.0
91.8
96.4
101.7
108.4
116.5
122.7
128.5
132.4
133.8
132.5
132.6
133.8
137.0

63.3
65.5
67.2
68.9
70.9
72.6
73.2
74.7
76.8
78.0
79.7
80.5
82.2
84.1
85.6
87.5
89.1
92.2
96.8
102.1
109.1
117.1
123.2
128.9
132.7
133.7
132.4
132.6
134.1
137.3

63.5
65.6
67.4
69.1
71.1
72.7
73.2
74.8
76.9
78.1
79.8
80.5
82.3
84.2
85.8
87.7
89.3
92.5
97.2
102.6
109.8
117.6
123.7
129.3
132.9
133.6
132.4
132.7
134.3
137.5

...

83.7
86.2
84.2
81.0
78.0
71.4
77.7
80.5
78.8
78.8
83.0
84.7
82.7
80.9
79.9
80.9
82.0
84.4
83.4
83.3
84.7
82.0
82.2
80.5
73.7
75.5
77.1
78.9
80.7
81.3
...

83.6
86.5
84.1
81.3
77.0
70.8
78.0
80.4
79.5
79.4
83.3
84.9
83.1
80.2
79.5
80.8
82.3
85.1
83.3
83.5
84.5
81.9
82.6
79.9
73.6
75.2
77.1
79.4
81.3
81.6

61.7
63.9
65.9
67.6
69.4
71.4
72.8
73.4
75.2
77.1
78.4
79.9
80.8
82.7
84.5
86.1
87.9
89.7
93.2
98.1
103.6
111.3
118.7
124.8
130.0
133.3
133.3
132.4
132.7
134.9
138.0

62.2
64.4
66.4
68.0
69.9
71.9
72.9
73.7
75.8
77.4
78.9
80.1
81.2
83.2
84.9
86.5
88.3
90.4
94.4
99.4
105.3
J 13.4
120.2
126.3
131.0
133.7
132.9
132.5
133.0
135.7

62.7
65.0
66.8
68.5
70.4
72.3
73.0
74.1
76.3
77.7
79.3
80.2
81.6
83.6
85.3
87.0
88.7
91.2
95.5
100.7
107.1
115.4
121.7
127.6
131.8
133.9
132.6
132.6
133.4
136.5

62.5
64.7
66.6
68.3
70.2
72.1
73.0
74.0
76.0
77.5
79.1
80.2
81.4
83.4
85.1
86.8
88.5
90.9
95.0
100.1
106.3
114.3
120.9
126.9
131.4
133.6
132.8
132.5
133.3
136.1

...

63.3
65.5
67.2
68.9
70.9
72.6
73.2
74.7
76.8
78.0
79.7
80.5
82.2
84.1
85.6
87.5
89.1
92.2
96.8
102.1
109.1
117.1
123.2
128.9
132.7
133.7
132.4
132.6
134.1
137.3
.. .

...

81.8
82.7
86.0
84.1
80.4
75.9
71.9
79.8
80.0
79.1
79.6
83.4
84.7
82.9
79.1
79.4
81.2
82.7
84.8
82.7
83.7
83.8
82.0
82.3
78.5
74.0
75.9
77.5
79.8
81.2
81.3

83.6
85.2
85.3
80.1
80.1
74.5
73.4
80.7
79.6
78.3
80.5
84.0
83.9
82.9
79.3
80.3
81.1
83.5
84.0
83.3
83.6
82.9
81.8
82.5
76.9
74.9
75.5
77.9
80.2
82.0

83.9
85.3
84.5
78.3
80.4
73.0
75.9
80.8
78.9
78.4
81.4
84.2
82.9
82.7
80.0
80.5
81.2
83.8
83.7
83.2
83.9
82.3
81.7
81.5
75.3
75.2
76.1
78.2
80.1
82.3

83.7
86.2
84.3
80.7
78.0
71.3
77.8
80.4
79.0
78.9
83.0
84.7
82.8
81.1
79.9
80.8
82.1
84.6
83.4
83.3
84.5
82.2
82.3
80.4
73.8
75.3
76.8
79.0
80.7
81.5

...

83.2
84.9
85.0
80.8
79.7
73.7
74.8
80.4
79.4
78.7
81.1
84.1
83.6
82.4
79.6
80.3
81.4
83.6
84.0
83.1
83.9
82.8
81.9
81.7
76.1
74.8
76.1
78.1
80.2
81.7
.. .

Capacity utilization (percent)

1977 ... . ..... .....
1978 .. .. .... .. ..
1979 .. . . . . . . . . . . . . .
1980 . . . . . . . . . . . . . . .
1981 ... ..........
1982 . .............
......
1983 ...
1984.
.. . .....
1985.
. ..... ....
1986 ............
1987 .. ...... .. .
1988 ............
1989 .. ......
. ...
1990 ................
1991 .. ..............
1992 ...............
1993 . .......
..
1994 .. · . . . . . ... . ..
1995 .. · . . . . .. . . . . .
1996 ................
1997 ... · . . . . . . . . . .
1998 ...
.......
1999 . ............. 2000 ..... .....
2001
2002 ............
2003 .... ........
2004 ...............
2005 .... .......
2006 .... ...........
2007 ....... ... ....

.
~

...

....

.
.

...............

80.8
82.2
85.8
84.3
80.7
75.3
72.0
79.5
80.0
79.8
79.0
83.2
85.0
82.4
79.7
79.0
81.1
82.6
85.1
82.3
83.3
84.3
82.1
82.3
79.2
73.8
75.7
77.2
79.6
81.1
81.1

81.8
82.3
86.1
84.2
80.1
76.6
71.5
79.8
80.1
79.0
79.9
83.5
84.5
83.0
79.0
79.4
81.3
82.4
84.8
83.2
83.8
83.9
82.1
82.3
78.5
73.8
76.0
77.8
80.0
81.1
81.6

82.7
83.6
86.2
83.8
80.3
75.9
72.1
80.1
80.0
78.4
79.9
83.6
84.6
83.2
78.5
79.9
81.1
83.1
84.6
82.6
84.1
83.3
81.9
82.3
78.0
74.3
75.9
77.3
79.9
81.4
81.2

83.2
85.1
85.1
81.9
79.8
75.1
73.0
80.5
79.7
78.4
80.2
84.0
84.4
82.9
78.6
80.3
81.3
83.3
84.1
83.0
83.6
83.2
81.8
82.6
77.5
74.5
75.4
77.8
79.9
81.9
81.6

83.6
85.1
85.5
79.7
80.2
74.4
73.5
80.8
79.6
78.4
80.5
83.9
83.7
82.9
79.3
80.4
80.9
83.5
84.0
83.2
83.6
83.2
82.1
82.5
76.8
74.7
75.4
78.2
80.2
81.7
...

84.0
85.5
85.4
78.5
80.4
74.0
73.9
80.9
79.4
78.1
80.8
84.0
83.6
83.0
79.9
80.3
81.0
83.8
83.9
83.6
83.5
82.3
81.6
82.3
76.2
75.4
75.7
77.7
806
82.3
...

83.9
85.2
85.0
77.9
80.7
73.6
75.0
81.0
78.7
78.5
81.1
84.1
82.6
82.7
79.8
80.8
81.2
83.7
83.2
83.0
83.5
81.6
81.8
81.8
75.7
75.1
76.0
78.1
80.5
82.4

83.8
85.3
84.2
77.9
80.5
72.9
75.8
80.9
78.9
78.3
81.6
84.5
83.3
82.8
79.8
80.3
81.1
83.8
84.0
83.2
84.0
82.9
81.9
81.3
75.3
75.2
76.0
78.3
80.7
82.4

83.9
85.3
84.1
79.0
79.8
72.5
76.9
80.6
79.1
78.3
81.6
84.2
82.8
82.8
80.4
80.3
81.4
83.8
84.0
83.3
84.3
82.3
81.3
81.4
74.8
75.3
76.4
78.2
79.2
82.0

...

NOTE: Estimates from February 2007 through April 2007 are subject to further revision in the upcoming monthly releases.

83.9
85.8
84.4
79.8
79.1
71.8
77.5
80.3
78.6
78.6
82.7
84.6
82.6
82.1
80.1
80.8
81.8
84.2
83.5
83.0
84.4
82.5
82.0
80.8
74.2
75.1
76.4
78.7
80.0
81.7

...

Refer also to the general note in table A.1.
... Not available as of May 16.2007.

...

Industrial Production and Capacity Utilization: The 2006 Annual Revision

A31

Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued
A.3. Rates of change in industrial production, by market and industry groups, 2002-06 1

2002
Total industry

Difference between rates of change:
revised minus previous (percentage points)

Revised rate of change (percent)

NAICS
code'

Item

2.7

2003

I 2004 I

2005

I 2003 I

2004

-.4

-1.4

-.1

-1.7

-.2

-2.4
-2.1
.2

2.0

-.2
-1.5
-3.6
17.9

-.7

-.5
.0
-.9
-1.7

.0
.1
-1.3
11.2

.1
-.5

-.2
-.9

.4
.2
-3.5
1.6

.4
.5
.5
-1.6
1.3

.2
-.2
.4

.3
-.3

-.8
.2

2006

2002

1.2

3.0

3.2

3.5

2005

2006

MARKET GROUPS

Final products and nonindustrial supplies

1.8

Durable
Automotive products
Home electronics
.
Appliances, furniture, carpeting
Miscellaneous goods
Nondurable
.

Non-energy
Foods and tobacco
Clothing.
.
Chemical products
Paper products
Energy....
.

.
.
.

2.6

2.7
2.3
-1.8
16.8
3.1
6.4
2.9
3.4
4.8

1.1
-2.5
-4.6
13.1
-4.7

.0
-.8

-4.3
-1.7
1.1
.4
7.0
-2.0
1.5

5.3
6.0
7.2
3.9
2.5

11.2
20.5
13.7
6.7
3.8

9.7
16.9
10.1
6.9

2.3

-.2

1.0
.9

1.6
2.9

8.0
3.4

-2.1
2.4

.4
.6

1.0
1.4
2.9
-1.5

3.4
4.8
5.4

8.8

9.4
4.5
3.8
-3.4
3.9

1.1
3.5
7.0
1.7
16.0
2.7
-2.1
.2
-.2
--6.5

4.7
4.5
5.6
-3.2
19.4

.6
.8
.6
1.5
.9
-.1
1.0
.7

9.2

.
..

-1.0
-10.8
--6.7

lnformation processing

Industrial and other
Defense and space equipment

6.6

1.7

Construction supplies
Business supplies

3.1

Materials

4.0
5.2
6.0
7.5
8.3
3.2
3.7
5.7
1.4
6.0
.5

Durable
Consumer parts
Equipment parts.
Other
Nondurable . . . .
.
Textile
Paper ...
Chemical

Energy

4.8

1.8
-.2
-3.2
14.2
2.2
2.1
2.6
2.2
2.3
-10.5
3.8
3.2
3.7

Business equipment
Transit

Non-energy

2.6

1.4
3.4
4.8
20.4
2.3
-1.3
.6
1.1
2.7
-10.9
2.3

-.2

1.3

2.7
7.1
11.7
-10.1
1.9
5.1
1.0
-.6
-2.9
-10.6
5.6

Consumer goods

.
.
..

.5
-1.1
-7.6
-5.2
2.4
.1

7.7
-.2

-.3
.9
2.2
1.7

-4.2

-.6
2.2
2.7
2.2

.7
3.8
3.3
.7

-.7
2.6
-7.3
2.5
4.7
5.4

1.3
.0

2.2
1.2

.5
2.1

-7.7

-2.4
-3.9

.8
-2.7
2.0
-5.5
-3.7
-7.4
-5.2
-7.2

-.7

-3.1

-.9
-.8

-1.7

-3.2
.5

-.2

-.3
-.9
-.3
-3.0
.5
.6
-1.1
1.3
.9
.2

-1.2
-2.2
-1.8
-4.7

-.5
.6
3.0
-.7
2.4
.0

-.8
-4.3
-.4
.9
3.2
.8
1.2
1.9
1.0
.6
-1.5
.0
.7

5.5
-5.7
2.4

-.7
-.2
-.3
-.6
-1.0
-3.5
.7

-.6
7
-1.1
4.0
-5.1

-.7

-5.5

-1.3

1.4
-.4

.0
.4

.0
.8
1.3
-.7
4.7
.1
.2
-1.6
.2

2.1
1.2

.0
-1.9

.2
.3

.1
.2
.6
.8
1.1
2.7

.2
.0

-.5
-.2
.6
1.0
4.6

INDUSTRY GROUPS

Manufacturing3

1.8
6.3
4.3

335
3361-3

-3.8
12.4

-1.0
3.1

3364-9
337
339

-7.3
5.8
9.1
1.5
-1.7
2.8
-10.7
4.1

31-33
.
.
.

and components

MOlor vehicles and parts ..
Aerospace and miscellaneous
transportation equipment
Furniture and related products .
Miscellaneous
.
Nondurable manufacturing
Food, beverage, and tobacco products
Textile and product mills
Apparel and leather
.
Paper .......
Printing and support
Petroleum and coal products
Chemical
.
Plastics and rubber products

.
.

Mining

311,2
313,4
315,6
322
323
324
325
326

2.7
3.1
4.3
1.5
1.2

5.5

-3.3
2.3

1133,5111

Other manufacturing (non-NAICS)
Utilities
Electric
.
Natural gas

321
327
331
332
333
334

1.3
1.6
2.6
4.6
1.9
4.3
-2.2
-2.0
13.6

.....................••.........

Manufacturing (NAICS)
.
Durable manufacturing. .
Wood products
Nonmetallic mineral products
Primary metal
Fabricated metal products
.
Machinery.........
. ..
Computer and electronic products
Electrical equipment, appliances,

.
,

.
.

5.4
5.0
-2.5

21
2211,2
2211
2212

-3.7
7.0
5.6
15.7

I. Rates of change are calculated as the percent change in the seasonally adjusted index from the fourth quarter of the previous year to the fourth quarter
of the year specified in the column heading. For 2006, the differences between
the rates of change are calculated from annualized rates of change between the
fourth quarter of 2005 and the third quarter of 2006.
2. North American Industry Classification System.

3.4
3.5
3.7
1.8
3.8
7.4
1.6
5.0
10.2

4.4
4.6
7.9
10.5
5.8
6.1
8.2
18.3

3.4
3.6
4.7
-14.5
-1.9
-3.5
3.8
5.3
18.3

2.0
-1.6

3.8
.2

-3.7
.1
.1

2.0
3.5
2.2

.4
2.6
-4.7
-10.5
-5.4
-2.4
1.0
2.0
-.2

3.2
1.2
-.7
-9.6
3.0
1.9
10.0
6.1
.8

-3.4

2.6

.6
.6
1.8
--6.0

-.8

-5.5
2.1
3.4
-3.4

1.6
2.2
-1.4

-.4
-.4
-1.4
.6

-1.7

2.2
1.5

-1.5
-3.0
-2.1

-3.4
-1.3
-1.2
3.6
-3.7
--6.5
-5.9

2.4
-3.8

-1.7
.2

-.3
-1.5

-3.1

-3.2

-4.3

-2.1

15.0
1.7
8.7

14.7
-1.2
4.8

.0
-1.6

-3.3
-.1

-3.3

-.5

.9
5.3

2.3

20
.4
-.1
1.9
-3.6

-7.7

.7
.5
.6
-3.8
.7
-.1

-.5
.8
.9
-.5
-1.1
.6
.7

3.1
3.7
3.9

-2.3

-2.5
3.0

2.6
-.1
-.1
5.2
2.6
3.8
.2
.2
8.0
.3
.0
1.9

.5
.6

.2
-1.1

-.6
1.8
.6

.1
.1
.0

.0
.1

-.2
3.3

1.3
-1.7
.4

-.5

3.1
2.9

-.6
2.1
1.9
-4.7

-.5

-5.8
-.1

.9
1.9

2.3

.7
1.3
.0

3.1
-7.5
-1.5
.4
3.7
1.8
-2.4

-.9

-.4

-1.2

.1
-.2
-.1
-.4

-.3

1.4
-.7
-.4
-1.8

.4
.2
1.5

.8
.6
.2
2.4
1.0

.4
2.5

2.2

.2
-1.1
-.1
-1.0
-.1

-3.3
.7
-1.1
-.2
.3
-.5
-1.1

-2.3
.1
-.1
1.4

3. Manufacturing comprises North American Industry Classification System
(NAICS) manufacturing industries (sector 31-33) plus the logging industry
and the newspaper, periodical, book, and directory publishing industries. Logging and publishing are classified elsewhere in NAJCS (under agriculture and
information respectively), but historically they were considered to be manufacturing industries and were included in the industrial sector under the Standard
Industrial Classification (SIC) system. In December 2002, the Federal Reserve
reclassified all its industrial output data from the SIC system to NAICS.
Not applicable.

A32

Federal Reserve Bulletin D May 2007

Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued
AA. Rates of change in industrial production, special aggregates and selected detail, 2002-06 1

2002

......................

Difference between rates of change:
revised minus previous (percentage points)

Revised rate of change (percent)

NAICS
code'

Item

2003

I 2004 I 2005 I 2006

2002

I 2003 I 2004 I 2005 I 2006

2.7

1.2

3.0

3.2

3.5

-.4

-1.4

-.1

2.8
9.2
4.3
-15.2
4.3
-1.5

.6
-1.7
4.8
21.2
1.0
-.3

1.5
3.7
4.5
8.3
2.1
-1.3

-1.8
1.7
.5
11.8
-2.5
-4.9

4.0
.7
2.3
14.7
2.2
6.8

.0
-.3
.0
.2
.1

.1
.2
-.4
.0
.4
.1

.8
2.0
2.0
.0
.5
-.3

.7
.0
-2.3
.0
-.3
1.9

-.8
.7
2.5
.5
-1.9
-1.9

3341
3342

2.7
8.3
-2.9
-13.6

1.3
17.2
4.8
13.9

3.3
10.4
6.6
6.2

4.6
28.1
30.4
12.9

3.3
24.6
12.1
14.8

.6
3.5
-.3
9.0

-.4
-4.0
-.9
4.0

-1.8
-8.0
2.0
-16.1

.2
2.4
18.3
-12.5

.0
2.0
-4.9
-8.9

334412-9

28.0

24.4

13.7

33.8

34.8

2.0

-9.6

-7.7

3.9

12.1

3361-3
3361
3363

2.2
12.4
13.7
11.1

.3
3.1
7.8
-2.1

2.8
-1.6
-3.0
-1.1

3.1
.2
-2.5
1.3

1.9
-3.8
-6.0
-.2

.3
.2
-.7
.9

-.2
-1.5
-2.6
-.6

-1.4
-4.3
-4.6
-3.3

.1
-2.1
-2.4
-2.0

-.2
-.1
-.3
-.5

1.3
.2
.5
1.8
2.0
2.3

.0
1.0
-1.5
.8
-1.0
-.4

3.2
2.4
4.4
1.5
2.1
4.4

3.4
3.6
8.9
8.0
3.1
.7

2.4
1.8
10.2
-2.2
1.0
2.3

.3
.2
.2
.4
.6
.5

-.1
.4
-2.0
-.8
.5
.4

-1.2
.1
-4.6
-3.1
-1.3
-.3

.2
1.3
-.7
1.5
.4
.1

-.3
-.5

2.3
2.3
3.5

.3
.3
.7

2.5
3.0
2.8

1.9
2.9
5.2

2.4
2.0
2.0

.3
.3
.0

-.2
-.2
-1.0

-1.0
-1.3
-2.8

.1
.0
-.3

-.3
.0
.1

2.0
1.9
2.7

1.0
1.1
2.5

3.3
3.9
4.8

3.4
4.7
9.3

3.9
3.9
6.0

.5
.6
.5

-.3
-.3
-1.3

-1.1
-1.4
-3.2

.3
.3
.4

-.2

1.5
1.3

.1
.0

2.9
3.4

2.1
3.1

2.8
2.5

.3
.3

.0
.0

-.7
-1.0

.2
.2

-.4
-.1

6.7
3.8

2.2
.7

5.2
4.4

8.3
-.1

9.0
1.3

1.0
.5

-1.3
.5

-2.8
.1

.0
.7

1.9

Primary and semifinished processors

SlOge-of-process groups
Crude ..................
Primary and semi finished
Finished .....

-.2
4.5
1.2

-.4
.6
2.4

3.1
3.2
2.6

-7.2
4.3
5.6

6.9
2.3
4.1

.9
.3
.6

1.3
-.6
-.5

1.1
-1.3

1.5
.1

-2.2

-1.4
.6
-.8

Total industry

Energy ..... _...
Consumer products ......
Commercial products
...... ......
Oil and gas well drilling
Converted fuel ..
..................
Primary materials .........
. . . . . . . . . . ..

Non-energy
Selected high-technology industries
Computers and peripheral equipment.
Communications equipment .....
Semiconductors and related
electronic components .......
Excluding selected high-technology
industries
Motor vehicles and parts ....
Motor vehicles
. . . . . . . . . ... Motor vehicle parts
Excluding motor vehicles and parts

Consumer goods

...............

Business equipment ...
Construction supplies ..............
Business supplies
Materials .......

Measures excluding selected high-technology
industries
Total industry ......
..
Manufacturing3 ...........
.. .. .. .. .. ....
.. . . . . . . . . . . . .
Durable .....
Measures excluding motor vehicles and parts
Total industry

Manufacturi ng3 ...................
Durable . . . . . . . . . . . .
Measures excluding selected high-technology
industries and mO/or vehicles and parts
Total industry ..
..............
Manufacturing 3 .....
Measures of non-energy materials inputs
Finished processors

-.2

.3
-.1
-.6
.0

.0
.4

...............
. ...........

213111

I. Rates of change are calculated as the percent change in the seasonally adjusted index from the fourth quarter of the previous year to the fourth quarter
of the year specified in the column heading. For 2006. the differences between
the rates of change are calculated from annualized rates of change between the
fourth quarter of 2005 and the third quarter of 2006.

2. North American Industry Classification System.
3. Refer to footnote 3 in table A.3.
Not applicable.

Industrial Production and Capacity Utilization: The 2006 Annual Revision

A33

Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued
A.5. Rates of change for annual industrial production indexes, 2002-06'
Difference between rates of change:
revised minus previous (percentage points)

Revised rate of change (percent)
Item
2002

............

2003

2004

2005

2006

2002

2003

2004

2005

2006

1.1

2.5

3.2

4.\

-.\

-1.6

-.2

1.9
5.4
.6
-7.1
-.6

1.4
1.4
1.4
4.3
.2
2.0
2.2
3.1
4.3
-.2

2.8
1.0
3.5
7.9
5.5
4.8
3.4

1.3

-.3
-.9
-.1

.3
-.6
.7
.2
-1.2

-.7
-1.4
-.3

.7
-.9
1.3
-1.1
-5.2

-.2
-.5
-.1

.9
1.2
.0

1.3
3.4
.5
.2
3.8
-.2
1.5
.9
1.3
-.1

Manufacturing 2 . . . . .
Manufacturing (NAICS) . . . . . . . . . . . . .
Durable manufacturing
Nondurable manufacturing
Other manufacturing (non-NArCS)

.0
.2
-.4
1.0
-3.1

1.1
1.3
2.3
.1
-3.0

Mining ...

-4.3
3.1

-.1
1.9

2.9
3.0
4.0
1.9
.9
-.6
1.4

Total industry

MARKET GROUPS
Consumer goods
Durable
.............
...........
Nondurable
Business equipment
Defense and space equipment .. ..............
Construction supplies
Business supplies ....
Materials
Non-energy
................ .
Energy

-.5
.0

.0
1.7
11.7
2.3

.7
-.4

-.1
-.1
.0

.7
8
.5
.6
.3

-5.0
-7.6
-3.5
-1.0
-1.2
-1.5
-.2

4.7
5.0
7.6
2.1
-1.3

-.1
-.1
-.2
0
-.1

.5
.6
.0
1.3
-.1

2.7
.7

.0
.0

.1
-.1

-.3
-.2

-1.3

3.5
3.2
4.7
5.9
1.8

3.9
4.0
5.5
2.4
1.8
-1.6
2.0

2.2
3.6

.8
-.2

-.8
-4.0
-.5
-.1

.2
.1
.5

.3
.5
.0

-1.9
-2.0
-3.3
-.3
-.9

.0
.1
-1.0
1.6
-1.3

-.2
-.1
.3
-.2
-.9

-.4
.2

.5
-.4

-.2
.1

INDUSTRY GROUPS

Utilities

I. The rates of change are calculated from annual averages of seasonally adjusted industrial production indexes rather than between the fourth quarter of
one year and the fourth quarter of the next. The differences between revised
and earlier changes for 2006 are computed from annualized rates of change between the full year 2005 and the first three quarters of 2006.

2. Refer to footnote 3 in table A.3.

A.6. Rates of change in capacity, by industry groups, 2002-06 1

2002
Total industry

......................

Manufacturing 2
Manufacturing (NAICS)
..............
Durable manufacturing ..................
Nondurable manufacturing ...
Other manufacturing (non-NAICS)
Mining .. ...........
Utilities .......... ............
Selected high-technology industries
Manufacturing except selected
high-technology industries2
Stage-of-process groups
Crude. . . . . . . . . . . . ............ .............
Primary and semifinished ...........
Finished ..
...........

2003

2004

2005

Difference between rates of change:
revised minus previous (percentage points)

Revised rate of change (percent)
Item

2006

2002

2003

2004

2005

2006

-.9

1.1

2.4

-.7

-.5

.4
.5
.9
.1
-2.4
-.5
4.5
12.6

-.9
-.7
-.2
-1.1
-3.8

1.7
1.8
3.3
.3
.6
-1.7
.0
18.3

2.7
2.8
4.2
1.0
.9
.6
2.1
19.6

.0
.0
-.2
.4
.3
.8
.0
3.1

-.8
-.8
-1.4
.0
-.7
-1.1

3.2
1.4

.0
.0
.5
-.3
-.1
-.3
2.6
4.3

-6.6

-.5
-.5
-.9
.4
-.5
.3
.0
-2.5

-.3
-.4
-.7
.5
.1
-1.1
.0
-2.5

.1
.1
.5
-.3
.8
2.0
1.4
7.4

-.4

-.8

-.2

1.4

-.2

-.4

-.3

-.4

.2
.9
.6

-2.2
-1.4
.3

-.1
.4
.5

-1.1
1.4
2.0

.3
3.0
2.3

1.3
.0
.0

-.1
-1.3
-.3

1.0
-.5
-.3

-.2
-1.1
.8

1.4
1.0
-.5

-2.1

2. Refer to footnote 3 in table A.3.

A34

Federal Reserve Bulletin 0 May 2007

Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued
A.7. Capacity utilization rates, by industry groups, 1972-2006

NArcs
code'

Item

I
I

1
I

2003:Q4j2004:Q412005:Q4I 2006:Q3

81.0

76.8

79.0

80.7

82.3

-.4

-.2

75.0
74.6
72.4
80.3
79.2
80.4
72.2
70.2
67.1

77.6
77.2
74.8

80.9
80.8
79.5
80.4
82.3
88.8
80.7
82.1
77.2

-.2
-.2
2.1
.8
.1

-.6
-.6
-1.5
.3
-1.3
1.8
-.3
-4.8
-1.2

-.2
-.2
-.9

81.1
86.8
73.6
73.5
71.7

79.6
79.3
78.1
88.5
83.8
83.7
78.0
78.8
75.1

321
327
331
332
333
334

79.8
79.5
78.0
80.2
79.4
80.6
77.2
78.6
78.4

-.3
-.2
-.9
1.3
1.0
2.2
2.1
-5.4
-3.7

335
3361-3

83.2
77.6

75.9
79.9

79.1
79.0

83.4
78.6

85.4
75.6

.1
-.4

-2.0
-1.5

-4.3

3364-9
337
339

60.4
72.4
75.3
77.4
77.8
73.3
66.2
81.7
72.9
89.0
75.2
81.6

61.5
76.5
75.0
80.1
78.2
75.6
67.9
84.5
76.0
94.4
78.5
85.0

70.3
78.6
78.2
80.6
81.4
79.8
71.5
85.0
78.0
87.9
75.7
87.3

77.6
79.5

-3.7

-1.4
5.3
-.2
.5

-.4
5.7
-.8

82.4
81.1
78.3
74.1
85.4
79.3
93.1
79.5
87.5

-1.9
-1.3
.6
.2

311,2
313,4
315,6
322
323
324
325
326

72.4
78.5
76.7
81.7
81.6
82.4
78.9
87.9
83.8
86.1
78.3
83.8

-.5

-1.2

-.5

-.8

-1.3
-.5
.4
1.3
.6

2.6
-8.8
-.1
.7

2.7

1133,5111

84.8

85.2

83.2

87.3
86.8

82.9
88.8
85.5

85.2

21
2211,2

88.4
84.7

85.0
86.5

3341
3342

78.0
78.2
75.6

66.8
74.5
49.0

70.7
79.8
54.4

76.5
76.2
63.8

90.9
86.4
78.7
74.5
71.8

1.1
-.4
1.9

334412-9

80.5

75.6

76.8

83.2

83.5

1.4

77.5
75.7

79.5
78.1

80.9
79.8

82.6

81.3

86.4
82.2
77.8

85.2
79.3
72.2

88.0

81.3

83.0
83.5
76.5

89.4
84.1
77.9

Manufacturing2 . . . . . . . . . . . . . . . . . • . .
Manufacturing (NArCS) .
Durable manufacturing ..
Wood products
Nonmetallic mineral products
Primary metal ....
Fabricated metal products
Machinery
.
Computer and electronic products .....
Electrical equipment, appliances, and
components
Motor vehicles and parts ....
Aerospace and miscellaneous
transportation equipment
Furniture and related products
Miscellaneous
.
Nondurable manufacturing ..
Food, beverage, and tobacco products
Textile and product mills ..
Apparel and leather
Paper....
.
.
Printing and support
.
Petroleum and coal products .
Chemical
.
Plastics and rubber products .,
Other manufacturing (non-NAlCS) ........•..

Utilities.
Selected high-technology industries
.
Computers and peripheral equipment ..
Communications equipment
.
Semiconductors and related electronic
.
components ..

Measures excluding selected
high-technology industries
Total industry ...

Manufacturing2
Stage-oj-process groups
Crude ..
Primary and semi finished .
Finished

19722005 avg.12003:Q41 2004:Q4 2005:Q4 2006:Q3

Difference between rates of change:
revised minus previous
(percentage points)

81.1
79.9

Total industry

Mining

Revised rate
(percent of capacity, seasonally adjusted)

I. North American Industry Classification System.
2. Refer to footnote 3 in table A.3 .
... Not applicable.

31-33

81.3

73.9

78.1

.2
1.8

.7
.4

1.3
-1.7

-5.0
-1.0
1.1
1.0
1.2
.1

1.4
.6

.2
1.9

-4.7
-3.1
-1.0

.6
1.6
-1.7

-8.0
-.3

-11.3
.4
-1.1
.5
2.1
-2.5

-4.3

-.9
2.3
-.4
.8
-4.2
-10.4

-1.5
-8.6
-12.8

-2.6

8.0

5.7

.2
.2

-.3
-.5

-.5

-.2
-.4

.2
.7
-.2

1.6

-1.4

-1.8

.6
-1.9

.8
.7
-.1

.2
.1
.2
-2.1
3.5

-2.0
-.1
-1.2

Industrial Production and Capacity Utilization: The 2006 Annual Revision

A35

Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued
A.8. Annual proportion in industrial production, by market groups and industry groups, 1998-2006

~~~~,S I

Item

1998

1999

2000

200 I

2002

2003

2004

2005

2006

100.0

tOO.O

100.0

58.1
28.1
7.9
3.7
.4
1.4
2.4
20.2
16.9
9.2
1.5
3.8
1.9
3.2

57.6
28.2
8.0
3.9
.4
1.4
2.4
20.2
16.7
9.2
1.4
3.8
1.9
3.5

57.6
28.6
7.9
3.7
.4
1.4
2.4
20.7
16.9
9.4
1.2
3.9
1.9
3.7

59.1
30.1
8.1
4.0
.4
1.4
2.3
22.0
18.2
10.0
1.1
4.5
2.0
3.8

58.9
31.1
8.9
4.7
.4
1.4
2.4
22.2
18.3
9.8
.9
5.0
2.0
3.9

58.3
31.1
8.7
4.6
.4
1.4
2.3
22.4
18.1
9.8
.8
5.0
1.9
4.3

57.3
30.4
8.0
4.0
.4

57.5
30.3
7.5
3.6
.4

1.3

2.2
22.5
17.4
9.5
.7
4.9
1.9
5.1

2.2
22.8
17.0
9.3
.6
4.8
1.8
5.8

57.4
29.3
7.2
3.3
.4
1.2
2.2
22.2
16.9
9.2
.6
4.8
1.8
5.3

12.2
2.5
4.0
5.8
1.9

11.8
2.3
4.0
5.5
1.8

11.6
2.0
4.0
5.6
1.5

11.1
2.0
3.7
5.4
1.8

10.1

9.6
1.6
2.9
5.1
1.8

9.4
1.6
2.8
4.9
1.7

9.4

1.8
3.0
5.3
1.8

1.7

9.9
2.0
2.8
5.1
1.7

4.3
11.2

4.3
11.1

4.3
11.2

4.3
11.1

4.3
11.0

4.4
11.1

4.6
11.0

41.9
33.3
21.4
4.2
8.1
9.1
11.9
1.0
2.8
4.6
8.6

42.4
33.1
21.4
4.4

42.4
32.3
20.9
4.1

8.1

8.1
8.6
11.4

41.1
30.7
19.1
4.0
6.7
8.4
11.6

41.7

9.0
11.7
1.0
2.9
4.5
9.3

40.9
30.9
19.6
3.8
7.3
8.4
11.3

2.8
4.2
10.1

2.7
4.5
10.4

2.5
4.7
11.5

42.5
29.8
18.3
3.4
6.2
8.7
11.5
.6
2.3
5.3
12.7

42.6
30.8
19.2
3.3
6.6
9.2
11.6

2.8
4.3
10.1

42.7
30.2
18.6
3.6
6.4
8.6
11.6
.7
2.4
5.2
12.5

321
327
331
332
333
334

86.4
81.8
47.1
1.5
2.3
2.9
6.1
6.2
10.2

85.8
81.0
46.6
1.6
2.3
2.8
6.0
5.8
10.3

84.5
79.7
45.5
1.5
2.2
2.5
6.1
6.0
10.3

84.1
79.2
44.2
1.4
2.3
2.3
5.9
5.6
9.1

83.9
79.0
43.4
1.5
2.3
2.3
5.7
5.3
8.0

42.3
1.6
2.2
2.4
5.6
5.0
7.9

81.5
77.0
41.0
1.6
2.2
2.8
5.4
4.9
7.8

80.9
76.6
40.2
1.5
2.3
2.8
5.4
4.9
7.4

81.8
77.7
41.5
1.4
2.4
3.3
5.6
5.1
7.5

335
3361-3

2.6

6.6

2.5
7.0

2.5
6.6

2.4
6.5

2.2
7.5

2.0
7.3

2.0
6.5

1.9
5.9

2.0
5.5

3364-9
337
339

4.1
1.7
2.8

3.8
1.7
2.8

3.3

3.8
1.7
3.1

3.6
1.8
3.3

3.3

3.1
1.6
3.1

3.3
1.6
3.2

3.8
1.6
3.2

34.4
10.4
1.5
1.4
3.2
2.6
1.7
9.6
3.8

35.6
11.4
1.4
1.0
3.1
2.4
1.8

36.0
11.1
1.2

36.2

10.8

3.2
2.6
1.9
9.4
3.7

35.0
11.4
1.4
1.2
3.1
2.6
1.8
9.8
3.7

36.4

311,2
313,4
315,6
322
323
324
325
326

34.7
10.6
1.6
1.6
3.2
2.6
1.5
9.9
3.7

1133, 5111

4.7

4.8

4.9

21
2211 ,2
2211
2212

4.8
8.7
7.6
1.2

5.5
8.7
7.4
1.2

6.5
9.0
7.6
1.4

6.4
9.5

Total industry
MARKET GROUPS

Final products and non-industrial supplies
Consumer goods
.
Durable
.
Automotive products
Home electronics
.
Appliances, furniture, carpeting
Miscellaneous goods
Nondurable
.
Non-energy
.
Foods and tobacco
Clothing
.
Chemical products
Paper products
.

.
.

Energy
Business equipment ..
.
Transit
Information processing
Industrial and other
Defense and space equipment
Construction supplies
Business supplies
Materials
.
Non-energy
.
Durable
.
Consumer parts. .
Equipment parts
Other
.
Nondurable
.
Textile
Paper
Chemical
.
Energy . .

..
.
.

.
..

..
. ..•..........

30.2
18.7
3.8
6.5
8.3
11.5

1.7
2.7
4.9

.6
2.3
5.5
11.8

INDUSTRY GROUPS

Manufacturing2 .
Manufacturing (NAtCS) .
Durable manufacturing
Wood products
.
Nonmetallic mineral products
Primary metal .
Fabricated metal products .
Machinery
Computer and electronic products
Electrical equipment, appliances,
and components.
Motor vehicles and parts
.
Aerospace and miscellaneous
transportation equipment
Furniture and related products ..
Miscellaneous
.
Nondurable manufacturing
Food, beverage, and tobacco products
Textile and product mills
Apparel and leather
.
Paper
.
Printing and support
.
Petroleum and coal products
Chemical
Plastics and rubber products
Other manufacturing (non-NAJCS)

Mining

Utilities
.
Electric .
Natural gas

31-33

NOTE: The IP proportion data are estimates of the industries' relative contributions to the overall IP change between the reference year and the following
year. For example, a I percent increase in durable goods manufacturing between 2006 and 2007 would account for a 0.415 percent increase in total !P.

1.7
2.9
34.2
10.7
1.4

1.3

8.1
1.4

82.5

77.9

1.7
3.3
35.6
11.5
.9
2.9
2.3
2.2
10.9
3.7

10.8
1.1
.6

2.8
2.1
3.3
11.4
3.5

2.6
2.0
4.2
11.5
3.4

2.6
2.0
3.8
11.8
3.5

4.8

4.6

4.5

4.3

4.2

6.4
9.7
8.3
1.4

7.5

8.7
9.8
8.1
1.7

9.2

8.6
9.6
8.1
1.5

10.8
3.8

1.3

9.9
8.3
1.6

I. North American Industry Classification System.
2. Refer to footnote 3 in table A.3.
... Not applicable.

1.1

9.9
8.1
1.7

A37

July 2007

Profits and Balance Sheet Developments
at U.S. Commercial Banks in 2006
Mark Carlson and Gretchen C. Weinbach, of the
Board's Division of Monetary Affairs, prepared this
article. Thomas C. Allard assisted in developing the
database underlying much of the analysis. Isaac L.
Laughlin provided research assistance.
The U.S. commercial banking industry continued to
be quite profitable in 2006, and industry assets grew
considerably. The strength in profitability and growth
of bank balance sheets last year reflected favorable
U.S. financial market conditions and the generally
solid economic expansion. Industry return on equity
advanced from its 2005 level, and the return on assets
edged up to match its highest annual level in recent
decades (figure 1). Profitability was supported by
brisk growth in non-interest income and generally
strong asset quality; the flattening of the yield curve
and competitive pressures, however, further weighed
on net interest margins.
In U.S. financial markets during 2006, short-term
interest rates generally moved higher with the target
NOTE: The data in this article cover insured domestic commercial
banks and nondeposit trust companies (hereafter, banks). Except
where otherwise indicated, the data are from the Consolidated Reports
of Condition and Income (Call Report). The Call Report consists of
two forms submitted by domestic banks to the Federal Financial
Institutions Examination Council: FFIEC 031 (for those with domestic
and foreign offices) and FFIEC 041 (for those with domestic offices
only). The data thus consolidate information from foreign and domestic offices, and they have been adjusted to take account of mergers and
the effects of push-down accounting. For additional information on the
adjustments to the data, refer to the appendix in William B. English
and William R. Nelson (1998), "Profits and Balance Sheet Developments at U.S. Commercial Banks in 1997," Federal Reserve Bulletin,
vol. 84 (June), p. 408. Size categories, based on assets at the start of
each quarter, are as follows: the 10 largest banks, large banks (those
ranked 11 through 100), medium-sized banks (those ranked 101
through 1,000), and small banks. At the staIt of the fourth quarter of
2006, the approximate asset sizes of the banks in those groups were as
follows: the 10 largest banks, more than $136.7 billion; large banks,
$7.3 billion to $135.7 billion; medium-sized banks, $481 million to
$7.2 billion; and small banks, less than $480 million.
Data shown in this article may not match data published in earlier
years because of revisions and corrections. Call Report data reflect
information available as of April 13,2007. In the tables, components
may not sum to totals because of rounding. Appendix table A.I, A-E,
reports portfolio composition, income, and expense items, all as a
percentage of overall average net consolidated assets, for all banks and
for each of the four size categories. Appendix table A.2 reports income
statement data for all banks.

Bank profitability, 1990--2006

Percent

----------------

1.8

Return on equity

16
14

1.6
1.4

1.2

1.0

I990 1992 I994 1996 1998 2000 2002 2004 2006
NOTE:

The data are annual.

federal funds rate, which increased 1 percentage point
over the first half of the year as monetary policy was
tightened and then held steady thereafter (figure 2).
Intermediate- and longer-term interest rates also rose
significantly over the first half of the year, but much
of those increases were later reversed. The Treasury
yield curve flattened further and at times was inverted.
Interest rates on fixed-rate home mortgages rose
somewhat on average and, like Treasury yields,
peaked around midyear. Corporate risk spreads generally remained quite narrow, and spreads on highyield corporate bonds fell to levels seldom seen since
1997.
The U.S. economy expanded at a brisk pace over
the first quarter of 2006 and then grew moderately, on
average, over the rest of the year. In the corporate
sector, spending picked up relative to 2005 as businesses increased their investment in fixed assets and
inventories. Although hefty corporate profits and substantial cash balances helped fund business spending,
firms' demand for external financing still rose notably. Demand was also supported by heavy merger and
acquisition activity and record levels of share repurchases. Availability of bank-intermediated business
credit also increased during the year as banks reportedly eased terms on their commercial and industrial
(C&I) loans, particularly spreads of loan rates over

A38

Federal Reserve Bulletin 0 July 2007

2. Selected interest rates, 2002-07
Percent

7
6

5
4
3
2

I
14
13
12

Moody's Baa
corporate bonds

II
10
9
8
7
6

Thirty-year
_fixed-rate mongages

4
I

2002

2003

2004

2005

2006

2007

NOTE: The data are monthly and extend through March 2007.
SOURCE: For Treasury securities, mongages, and Moody's corporate
bonds, Federal Reserve Board, Statistical Release H.15, "Selected Interest
Rates" (www.federalreserve.gov/releaseslhI5); for federal funds, Federal
Reserve Board (www.federalreserve.gov/fomc/fundsrate.htm); for high-yield
bonds, Merrill Lynch Master II index.

their costs of funds. Strong fundamentals in the
commercial real estate sector, including rising property values and declining vacancy rates, bolstered the
demand for commercial mortgages.
In the household sector, higher mortgage rates and
a cooling of the pace of house-price appreciation
combined to damp residential housing activity. By the
end of 2006, home sales had ebbed markedly, and
home construction activity had slowed significantly.
In addition, mortgage refinancing activity declined,
on average, last year. Moderate growth in consumer
spending was supported by continued strength in the
labor market and gains in household wealth from
significant increases in equity prices and advances in
home prices during the first half of the year.
These financial and economic conditions shaped
balance sheet developments at commercial banks. On
the asset side, borrowing by businesses to finance
capital expenditures and merger and acquisition activity contributed to the rapid growth in C&I lending for
the second consecutive year. The financing of residen-

tial home construction likely helped fuel the construction and land development component of commercial
real estate loans in recent years, but the pace of such
lending moved lower in 2006 as home construction
activity slowed. Apart from the consolidation of a
sizable amount of thrift assets onto banks' books in
the fourth quarter that resulted from a reorganization
within a large bank holding company, residential real
estate lending also decelerated. Growth in consumer
loans-which had been particularly lackluster in
2005, when households apparently substituted mortgage debt for consumer debt-picked back up to a
moderate pace. l The attractiveness of mortgage financing relative to consumer loans probably diminished
last year as mortgage rates rose and appreciation in
house prices slowed. On the liability side, increases in
short-term interest rates likely contributed to some
shifts in the profile of banks' deposits. Small time
deposits, whose yields track market rates relatively
closely, grew particularly quickly, whereas other components of core deposits expanded more slowly or
even contracted. 2 With their rates lagging market
rates on average, core deposits as a whole grew at a
slower pace than total assets, and banks tapped
managed liabilities, particularly large time and
foreign-booked deposits, to fund their asset growth.
Economic and financial conditions also had a
strong effect on bank profitability. Brisk growth in
non-interest income supported profits; for large banks,
trading revenue surged, and income from securitization and investment banking activity also grew notably, the latter likely boosted in part by the financing of
corporate mergers and acquisitions. Although noninterest expense grew-mainly because of an increase
in salaries and benefits costs-its growth lagged that
of non-interest income. The configuration of market
interest rates and competitive pressures caused the
industry's net interest margin to edge lower, and
margins at large banks were affected the most. Loss
provisioning continued to be near the low end of its
historical range as a share of assets, although this
measure turned up a bit in the fourth quarter. The low
level of provisioning reflected asset quality that generally remained solid. Banks' direct exposure to
subprime mortgages generally appeared limited. Still,
I. In this article, consumer loans consist of loans to households that
are not secured by real estate, and they include credit card loans.
2. In this article, core deposits consist of transaction deposits,
savings deposits (including money market deposit accounts). and
small-denomination time deposits (those issued in denominations of
less than $100,000). Managed liabilities consist of large time deposits
booked in domestic offices, deposits booked in foreign offices, subordinated notes and debentures, federal funds purchased and securities
sold under repurchase agreements, Federal Home Loan Bank advances, and other borrowed money.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

Number of banks, and share of assets at the largest
banks, 1990-2006
Thousands

-----------------Number

14
12

10
8
6

I
Percent

-----------------Share of assets

10 largest

I I
1990

I I
1992

I I
1994

I I
1996

I I
1998

I I
2000

I I
2002

I I
2004

I I
2006

NOTE: The data are as of year-end. For the definition of bank size, refer to
the general note on the first page of the main text.

delinquency rates associated with residential real
estate moved up in the second half of the year from
exceptionally low levels. Charge-off rates remained
quite low for all major loan categories.
The number of new banks chartered in 2006 picked
up for the fourth consecutive year but remained below
the number of bank mergers and consolidations. As a
result, the number of banks declined further, to 7,403
at year-end 2006 from 7,522 at year-end 2005 (figure 3). Merger and consolidation activity involving
the top 10 banks pushed the share of industry assets
accounted for by these banks up 2.3 percentage
points, to 51.7 percent, at year-end. The share of
assets held at the 100 largest banks rose 1.6 percentage points, to 78.5 percent. According to the Federal
Deposit Insurance Corporation (FDIC), 2006 was the
second consecutive year with no bank failures.
There was more merger activity at the holdingcompany level in 2006 than in 2005, and the rate at
which bank holding companies were formed held
about steady, There were 5,102 bank holding companies at year-end 2006, 52 less than at year-end 2005
(for multi tiered bank holding companies, only the
top-tier organization is counted in these figures). At
the end of 2006, the 50 largest bank holding companies with major commercial banking operations accounted for 76 percent of all bank holding company
assets, a figure unchanged from 2005. 3 The number of
3. The 50 largest bank holding companies are defined here as the 50
largest (as measured by total consolidated assets) after the exclusion of

A39

financial holding companies rose last year-it moved
up from 625 at year-end 2005 to 643 at year-end
2006. Most of the largest bank holding companies are
also financial holding companies. As a result, about
86 percent of the assets of bank holding companies
were held by financial holding companies. 4
BALANCE SHEET DEVELOPMENTS

Total bank assets expanded 12.4 percent in 2006, the
largest annual gain in the past two decades and about
5 percentage points faster than total domestic nonfinancial sector debt (table I). Bank loans grew at a rate
of 12 percent; the increase importantly reflected
strong C&I lending, which was spurred by greater
financing needs related to inventory accumulation
and capital investment by nonfinancial firms as well
as from increased merger-related financing activity.
Robust real estate lending was a significant contributor to bank loan growth, especially in the first half of
the year, but---excluding the effects of the sizable
thrift-to-bank consolidation noted above-growth in
real estate loans slowed notably later in the year as
home construction and sales decelerated. Banks'
securities holdings expanded at a rate of 11.5 percent.
Total bank assets expanded at a faster pace than either
loans or securities in 2006 as federal funds sold and
securities purchased under resale agreements and
balances due from depository institutions, which
together account for 7 percent of assets, increased
20 percent.
On the liability side of the balance sheet, core
deposit growth remained moderate. Rising short-term
interest rates in the first half of the year made liquid
deposits less attractive because their interest rates
adjust sluggishly to changes in market rates. This
slow growth, however, was partly offset by the brisk
expansion of small time deposits, interest rates on
a few institutions whose commercial banking operations account for
only a small portion of their assets and earnings. The quarterly article
in the Federal Reserve Bulletin, "Report on the Condition of the
U.S. Banking Industry," at www.federalreserve.gov/pubs/bulletinl
default.htm, provides information on the 50 large bank holding
companies (the 50 largest as defined here) and on the banking industry
from the perspective of bank holding companies (including financial
holding companies) that file reports FR Y-9C and FR Y-9LP; currently,
only abollt 1,000 top-tier bank holding companies are required to file
those reports (refer to "Report on the Condition" table I, last row, and
note I).
4. Financial holding company statistics include both domestic bank
holding companies that have elected to become financial holding
companies and foreign banking organizations operating in the United
States as financial holding companies and subject to the Bank Holding
Company Act. For more information, refer to the Board of Governors
of the Federal Reserve System (2003), Report 10 the Congress on
Financial Holding Companies under the Gramm-Leach-Bliley Act
(Washington: Board of Governors, November), at www.
federalreserve.gov/pubs/ reports_other.htm.

A40

Federal Reserve Bulletin 0 July 2007

1. Change in balance sheet items, all U.S. banks, 1997-2006
Percent
MEMO
Dec.
2006
(billions
of
dollars)

Item

1998

1999

2000

2001

2002

2003

2004

2005

2006

Assets

1997

9.22
8.66
5.32
12.02
9.30
9.53
9.67
9.32
.34
-2.19
-7.91

8.18
8.16
8.70
12.94
7.99
7.97
6.36
10.29
8.79
.34
13.46

5.44
5.87
8.10
7.88
12.22
12.36
9.70
16.06
6.28
-1.48
7.17

8.76
8.66
9.24
8.54
10.74
11.02
9.28
13.31
-1.62
8.04
7.01

5.11
3.95
1.82
-6.73
7.94
8.02
5.70
10.95
3.97
4.16
-2.02

7.19
7.54
5.90
-7.41
14.44
14.85
19.86
8.81
-7.41
6.55
-.03

7.18
7.28
6.51
-4.56
9.75
9.66
10.01
9.19
15.74
9.31
8.31

10.78
11.29
11.20
4.35
15.41
15.09
15.75
14.20
35.59
10.11
3.57

7.72
7.96
10.38
12.53
13.80
13.93
11.95
16.61
7.19
2.24
-.18

12.36
12.44
11.98
11.86
14.94
15.06
15.15
14.94
8.68
6.30
2.97

9.996
8,687
5,853
1,132
3,395
3,339
1,891
1,448
56
849
547

-.45
8.85
8.66
-8.85

3.08
8.40
12.07
-25.17

2.37
5.11
6.68
-1.89

7.98
6.36
2.85
-32.72

13.15
7.22
8.88
-40.27

5.73
16.20
13.53
41.92

-2.68
9.44
8.70
14.14

-4.19
10.58
6.15
-15.87

-5.74
2.40
1.19
-17.59

1.81
11.53
6.91
-19.30

70
2,099
1,633
40

14.18
11.21
10.00
38.53
13.03

17.01
26.99
-13.32
3.78
8.37

1.83
20.90
-6.93
-8.37
2.64

3.75
13.39
37.16
10.30
9.45

12.84
12.18
-3.72
13.02
12.79

18.09
2.72
36.12
-2.92
5.10

9.68
5.98
14.01
6.82
6.61

9.46
3.02
36.81
14.28
7.60

-1.83
10.12
7.96
5.81
6.18

4.71
13.68
31.46
19.14
11.85

1,016
577
466
736
1,308

9.11
4.52
-4.55
12.96
4.18
13.79
20.14
11.13
21.05

8.06
7.04
-1.41
18.32
.53
9.44
9.10
8.71
17.00

5.58
.23
-8.97
6.68
-.76
15.54
14.19
14.60
5.07

8.59
7.53
-1.31
12.51
7.20
8.79
19.37
7.84
13.98

4.45
10.55
10.20
20.68
-7.23
-2.73
-3.65
-10.96
9.56

7.13
7.58
-5.12
18.46
-4.92
5.34
5.05
4.49
-.59

7.24
7.29
2.82
13.71
-6.79
6.96
1.42
12.63
5.08

9.55
8.25
3.20
11.72
1.58
12.06
21.86
16.84
10.49

7.74
6.41
-1.21
6.94
12.91
12.23
22.85
6.32
11.41

12.10
5.80
-4.24
5.52
16.72
19.51
16.16
29.67
22.60

8,971
4,474
704
2,898
872
3,904
1,006
1,193
149

30.51
-4.04

4.35
15.65

1.56
35.27

6.49
1.80

5.72
-.28

12.75
.97

-8.70
22.00

8.40
1.37

15.62
6.15

9.47
18.90

695
861

36.94
14.82
10.44

3.44
12.73
9.53

-13.20
-1.26
3.89

7.47
20.61
10.65

-17.06
14.90
12.30

33.44
5.23
7.84

14.02
5.28
6.61

-12.61
17.08
23.14

-17.86
-1.74
7.59

6.89
22.24
14.74

144
449
1,025

10.13
14.16

11.37
22.12

13.10
29.05

o.a.

15.42
-3.34
o.a.

12.16
3.29

o.a.

0.3.

6.82
15.54
17.21

8.99
10.12
3.71

13.93
13.45
3.73

16.87
2.06
10.00

14.89
8.92
29.80

1,444
960
349

lnterest-earning assets
Loans and leases (net)
Commercial and industrial
Real estate
.
Booked in domestic offices
One- to four-family residential
Other real estate
.
Booked in foreign offices ..
Consumer
.
Other loans and leases .
Loan-loss reserves and unearned
income.
_
Securities
.
Investment account
U.S. Treasury
.
U.S. government agency and
corporation obligations ..
Other
..
Trading account

.
.
..

Other..
..
..
Non-interest-eaming assets
Liabilities
Core deposits
. ....
Transaction deposits ..
Savings deposits (including MMDAs)
Small time deposits ..
Managed liabilities 1 •••••• • •••••••••••
Large time deposits
.
Deposits booked in foreign offices ..
Subordinated notes and debentures.
Gross federal funds purchased
and RPs
.
Other managed liabilities
Revaluation losses held in trading
accounts

Other .......
Capital account

MEMO
Commercial real estate loans 2
Mortgage-backed securities
Federal Home Loan Bank advances

NOTE: Data are from year-end to year-end and are as of April 13,2007.
I. Measured as the sum of large time deposits in domestic offices, deposits
booked in foreign offices, subordinated notes and debentures, federal funds
purchased and securities sold under repurchase agreements, Federal Home
Loan Bank advances, and other borrowed money.
2. Measured as the sum of construction and land development loans secured
by real estate; real estate loans secured by nonfarm nonresidential properties or

by multifamilly residential properties; and loans to finance commercial real
estate, construction, and land development acti vities not secured by real estate.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.

which moved more in line with market rates. On net,
growth In overall core deposits was modest, and
banks, especially the largest ones, turned to managed
liabilities to fund the rapid expansion of assets.
Banks' capital expanded somewhat faster than
assets. Equity capital was boosted by increased goodwill and by strong retained earnings. Regulatory
capital, which generally excludes goodwill, grew a
touch slower than equity capital. Nevertheless, regulatory capital expanded a bit faster than risk-weighted
assets, and regulatory capital ratios ticked higher.

Loans to Businesses
Increases In both fixed and inventory investment
boosted spending by U,S, nonfinancial corporations
in 2006. The stepped-up pace of capital expenditures
pushed the financing gap into positive territory despite firms' strong profits and robust cash positions
(figure 4).5 To help fund investment, businesses relied

5. The net financing gap is defined here as the difference between
capital expenditures and internally generated funds. The rise in the

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

Financing gap at nonfarm nonfinancial corporations,
1990-2006
Billions of dollars

300
250
200
150
100
50
+

50
100
150

1990 1992 1994

1996 1998 2000 2002 2004 2006

NO'rE: The data are four-quarter moving averages. The financing gap is the
difference between capital expenditures and internally generated funds.
SOURCE: Federal Reserve Board, Statistical Release Z.l, "Flow of Funds
Accounts of the U.S.," table F.102 (www.federalreserve.gov/releases/zl).

more on external resources, including C&I loans and
corporate bond issuance. Merger and acquisition
(M&A) activity among nonfinancial firms has been
strong over the past few years and continued apace in
2006. Financing needs associated with this activity
also added to C&I loan demand. Equity share repurchases remained very strong last year and likely
supported the growth of business borrowing. C&I
loan growth last year reflected importantly a substantial expansion in syndicated loans (refer to box "Syndicated Loans"). Commercial real estate lending
expanded robustly, but the pace was a bit slower than
it was in 2005.
The strength in C&I lending was evident at commercial banks of all sizes last year, as this category of
loans expanded 12 percent at both larger and smaller
banks. According to respondents to the Senior Loan
Officer Opinion Survey on Bank Lending Practices
(BLPS), loan demand was rising as the year started
and held steady thereafter (figure 5). Banks reporting
stronger demand during the year generally pointed to
increased needs by businesses to finance M&A activity, accumulate inventory, or invest in plant and
equipment.
In light of the rapid pace of corporate merger
activity in 2006 and the frequency with which BLPS
respondents cited customer M&A financing needs as
an important reason for increased demand, the October 2006 survey contained some special questions on
the influence of M&A activity on C&I lending. About
financing gap at the end of 2004 is due in part to a large dividend
payout by Microsoft. The drop during 2005 generally reflects the
repatriation of profits held at foreign subsidiaries of U.S. nonfinancial
corporations, which was encouraged by temporary tax provisions.

A41

15 percent of institutions, including some of the
largest C&I lenders, reported that between 11 percent
and 30 percent of the C&I loans on their books were
related to mergers and acquisitions. Most of the
remaining banks noted that these loans accounted for
less than 10 percent of their C&I loan portfolio. Half
the respondents, again including some of the largest
C&I lenders, indicated that the share of loans on their
books that were M&A-related had increased over the
past twelve months, a pattern consistent with other
reports suggesting that this type of activity has supported the growth in C&I lending. A sizable portion
of the recent wave of mergers and acquisitions took
the form of leveraged buyouts. As with M&A-related
loans in general, a few banks reported significant
involvement in these transactions, with about 15 percent of respondents indicating that more than 30 percent of the M&A-related loans on their books were
used to finance leveraged buyouts. Close to 80 percent of banks, however, reported that they were not
very involved in providing loans to finance this type
of deal.
Changes in lending standards and terms may also
have supported C&I loan growth in 2006. Early in the
year, a modest net share of BLPS respondents indicated that they had eased their lending standards for
C&I loans. Somewhat larger net fractions also reported easing lending terms on C&I loans, especially
by reducing the spread of loan rates over their cost of
funds. Respondent banks most frequently cited competition from other funding sources as a reason for
easing their C&I lending policies. A small number of
institutions reported tightening lending terms-in particular by raising the premiums charged on riskier
loans-and frequently pointed to a less-favorable or
more-uncertain economic outlook, as well as a reduced tolerance for risk, as reasons for doing so.
Commercial real estate (CRE) loans also expanded
briskly last year, but the pace of the advance was
down slightly from 2005. All banks registered strong
growth in this loan category, but the expansion was a
bit faster at the banks outside the top 100. As a result
of this rapid growth, CRE loans now account for
slightly more than 45 percent of the loans of these
smaller institutions, well above the levels of the
1990s (figure 6). This level of concentration has not
gone unnoticed by bank supervisors, and in December of 2006, the Federal Reserve, FDIC, and Office of
the Comptroller of the Currency issued interagency
guidance to promote sound risk-management practices at banks regarding their CRE loans.
For the third year in a row, CRE lending was
boosted by rapid growth of construction and land

Federal Reserve Bulletin 0 July 2007

A42

Syndicated Loans
Syndicated business loans grew briskly in 2006 and
remained an important component of bank-intermediated
credit. According to the latest data from the Shared
National Credit (SNC) Program, syndicated loan commitments totaled $1.9 trillion in mid-2006, slightly below
their 2001 peak of $2 trillion (figure A).' The volume of
such commitments expanded 15 percent over the previous year, the largest annual increase this decade. The
strong growth was fueled, in part, by the financing of
corporate mergers, acquisitions, and leveraged buyouts.
Although a wide and growing array of institutional
investors are participating in the syndicated loan market,
domestic commercial banks continue to account for a
considerable share of such commitments. The share of all
commitments accounted for by domestic banks stood at
44 percent in mid-2006, a portion that has remained fairly
steady over the past several years. By contrast, the portion
of all syndicated loan commitments held by nonbanks has
trended higher over the same period-mainly at the

I. The SNC Program generally covers credits of at least $20 million
that are shared by three or more regulated financial institutions. Credits
include syndicated loans and loan commitments, letters of credit, and
commercial leases, as well as other forms of credit. Credit commitments
include both drawn and undrawn portions of credit facilities. For more
information, refer to the Board of Governors of the Federal Reserve
System (2006), Statistical Release, "Shared National Credit Program"
(September 29), www.federalreserve.govlboarddocs/presslbcreg/2006/
20060925.

expense of foreign banking organizations-and it reached
14 percent in mid-2006? The growing competition from
nonbank institutional investors and the increased liquidity
of the secondary market have reportedly led to a compression of credit spreads in the syndicated loan market. This
combination has also reportedly resulted in some easing
of underwriting standards and terms, particularly looser
loan covenants.
Nonetheless, the credit quality of syndicated loans
generally stayed solid in 2006. The share of total commitments that were adversely rated was again around 5
percent last year, a figure in the lower portion of its
historical range (figure B).3 However, the credit quality of
syndicated loan commitments varies significantly by
holder. Classified commitments accounted for roughly 2
percent of total commitments at both domestic banks and
foreign banking organizations in mid-2006, but at nonbanks they made up nearly 12 percent. 4 The relatively
low portion of classified syndicated loan credits at banks
likely reflects the fact that banks are predominantly
exposed to investment-grade, rather than leveraged, syndicated credits.
2. Nonbanks include a wide range of institutional investors, such as
brokerage firms, mutual funds, insurance companies, hedge funds, and
securitization vehicles.
3. Adversely rated credits are those considered special mention, substandard, doubtful, or loss.
4. Classified credits are those rated substandard, doubtful, and loss.

Adversely rated commitments as share of total
commitments, 1989-2006

A. Total syndicated loan commitments, 1989-2006
Billions of dollars

Percent

2,000
-

1,500

1,000

500

I I I I I I I I I I I I I I I I I I
1990 1992 1994 1996 1998 2000 2002 2004 2006

NOTE: The data are annual.
SOURCE: Federal Reserve Board, Statistical Release, "Shared National
Credit Program" (www.federalreserve.gov/releaseslsncl).

development loans. Such loans expanded at a rate of
27 percent and accounted for more than one-third of all
eRE loans at the end of 2006 (figure 7). Aconsiderable
portion of the rapid growth in recent years likely

I I I I I I ! I I I I I I I I I I I
1990 1992 1994 1996 1998 2000 2002 2004 2006

NOTE: The data are annual.
SOURCE: Federal Reserve Board, Statistical Release, "Shared National
Credit Program" (www.federalreserve.gov/releaseslsncl).

reflects loans to residential developers, consistent with
the strength in housing construction that was evident
until early last year. However, the housing market
cooled significantly over the course of 2006, and the

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

Changes in demand and supply conditions at selected
banks for C&I loans to large and middle-market firms,
1990-2007

A43

Share of all loans consisting of commercial real estate
loans, by bank size, 1990-2006
Pcrccnl

Percent

Net percentage of banks reporting stronger demand I

20
+

30
Other banks

40
100 largest banks

60
80
1

Net percentage of banks reporting tighter standards 2
60

40
20
+

I I I I I I
1991 1993 1995

I 1 I I 1 I I I I I I I
1997 1999 200 I 2003 2005 2007

Nom: The data are drawn from a survey generally conducted four times
per year; the last observation is for the January 2007 survey, which covers
2006:Q4. Net percentage is the percentage of banks reporting an increase in
demand or a tightening of standards less, in each case, the percentage
reporting the opposite. The definition for firm size suggested for, and
generally used by, survey respondents is that large and middle-market fimls
have sales of $50 milIion or more.
I. Series begins with the November 1991 survey.
2. Series begins with the May 1990 survey.
SOURCE: Federal Reserve Board. Senior Loan Officer Opinion Survey on
Bank Lending Practices (www.federalreserve.gov!boarddocs!snloansurvey).

1 I
1992

L994

I I
1996

I I I I I I I I
1998 2000 2002 2004

1 1
2006

NOTE: The data are quarterly. Other banks are those not included in the
100 largest. For the definition of bank ize, refer to the general note on the
first page of the main text.

respondents reported little change in their standards
for approving CRE loans in the first two surveys of
2006, but considerable net fractions reported tightening standards later in the year.
The competition that led to an easing of lending
terms in the C&I loan market also appears to have
influenced CRE lending. In the January 2007 BLPS, a
large share of respondents indicated that they had
eased lending terms on CRE loans over the past
twelve months, in particular by reducing the spread of
loan rates over their cost of funds. More-aggressive
competition from other banks or nonbank lenders was
frequently cited as a somewhat important or very
important reason for easing lending terms. The increased competition may in part reflect further growth
in the market for commercial-mortgage-backed securities, which has increased the number of investors
7.

growth rate of construction and land development
loans stepped down markedly. Real estate loans backed
by nonfarm nonresidential structures, the largest category of CRE loans, grew 9.6 percent last year, a pace
about equal to the average growth rate over the past
decade. CRE loans secured by multifamily dwellings
expanded somewhat more slowly than in 2005.
The slightly slower growth of CRE loans relative
to the previous year appears to reflect shifts in
demand for such loans as well as a tightening of
lending standards (figure 8). Banks responding to the
BLPS indicated that demand for CRE loans strengthened a touch early in the year but then weakened
notably later in the year, a pattern that roughly
matches the changes in the growth rates of construction and land development loans. Similarly, survey

I I
1990

Change in commercial real estate loans, by major
components, 1990-2006
Percent

------------------

20
10

Nonfarm
nonresidential

I I I
1990

I I
1992

I 1
1994

I I
1996

Nom: The data are annual.

I I
1998

I 1 1 I
2000 2002

I I
2004

I I
2006

A44

Federal Reserve Bulletin 0 July 2007

8. Changes in demand and supply conditions at
selected banks for commercial real estate loans,

9. Level of refinancings of residential mortgages,
1990-2006

1996-2007
January 26. 1990 = I
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _--.:Percent

et percentage of banks reporting stronger demand

30
10

40
60
I

Net percentage of banks reporting tighter standards
60

40
20
+

NOTE:

I
I
1997

I
I
1999

I
I
200 I

I
I
2003

I
I
2005

I
I
2007

Refer to figure 5, general note and source note.

participating in the commercial mortgage market.
Some banks reported tightening terms on CRE loans
during 2006; these in titutions often cited concern
about the general economic outlook or about the CRE
market in general as reasons for tightening terms.

Loans to Households
Rising mortgage rates and a slowing housing market
had a marked effect on bank lending to households
last year. The higher level of mortgage rates in 2006
pushed down residential mortgage originations and
refinancing activity, although there was a bit of a
rebound in refinancing at the end of the year as
mortgage rates came off their midyear peaks (figure 9). The value of residential mortgage loans on
banks' books expanded 15 percent last year. This
increase, however, was due partly to the incorporation
of assets previously held by nonbanks into the commercial banking sector as a result of a consolidation
within a large holding company of some thrift subsidiaries with a commercial bank subsidiary. Apart from
the effect of this consolidation, residential real estate

I I
1990

I I
1992

I I
1994

I I
1996

I I
1998

I I
2000

I I
2002

I I
2004

I I
2006

I -

NOTE: The data are four-week moving averages. Residential mortgages
include both first- and second-lien loans ecured by one- to four-family
residential properties.
SOURCE: Mortgage Bankers Association.

loans on banks' books expanded 7 percent in 2006, a
further step-down from the rapid gTOwth earlier in the
decade and a pace more reflective of the slowing
housing market.
A slowdown in home equity loan growth in 2006
was particularly notable. After an adjustment for the
effect of the consolidation of thrift assets, home
equity loans expanded just 5 percent, a marked
decrease from the rapid pace of the early part of the
decade. Because interest rates on home equity loans
are often tied to other short-term interest rates, the
increase in these rates during 2006 likely contributed
to the deceleration.
The slowdown in residential real estate lending
was mirrored by reports of decreased demand for
residential real estate loans in the BLPS (figure 10).6
In each of the surveys conducted during 2006, considerable net shares of respondents reported reduced
demand for such loans over the preceding three
months. Terms on residential real estate loans were
reportedly eased a bit, on net, during the middle of the
year as mortgage rates peaked, but they were tightened again toward the end of the year, when mortgage
rates reversed a portion of their earlier rise.
During the past few years, financial institutions
introduced a variety of nontraditional mortgage products, and more mortgages were made to subprime
borrowers. The July 2006 BLPS contained several
questions about the importance of these mortgage
6. In asking banks how demand for mortgages to purchase homes
has changed over the past three months, the BLPS instructs banks to
consider only new originations as opposed to the refinancing of
existing mortgages. However, this distinction may be difficult for
banks to make in practice.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

10.

Net percentage of selected banks reporting stronger
demand for residential mortgages, 1990-2007
Percent

------------------

W\ I~,A

20
+

I I
1991

1 1 I I
1993 1995

I 1 1 I I I
1997 1999 2001

I I I I I !
2003 2005 2007

NOll;: Series begins with the October 1990 survey. For definition of residential mongages, refer to figure 9, general note. Refer also to figure 5,
general note and source note.

products for commercial banks.? According to the
responses, commercial banks generally appear not to
have been involved significantly in making nontraditional and subprime mortgages. About 45 percent of
banks indicated that less than 5 percent of their
mortgage holdings were nontraditional loans. About
half the respondents did not answer the questions on
subprime lending; the nonresponse suggests that they
are not engaged in this type of lending. In addition,
about 70 percent of those that did respond indicated
that subprime loans accounted for less than 5 percent
of loans on their books. Some banks, however, did
report that these products were a significant part of
their residential real estate portfolios. About one-fifth
of the respondents indicated that nontraditional mortgages accounted for more than 20 percent of the
residential mortgages on their books. One-tenth of
banks responding to the subprime loan questions
indicated that these loans accounted for more than
20 percent of the residential mortgages loans on their
books. A few banks reported that they had tightened
their price-related terms for both nontraditional and
7. The July 2006 BLPS defined "nontraditional mortgage products"
to include, but not be limited to, adjustable-rate mortgages with
multiple payment options, interest-only mottgages, and so-called
"alt-A" products, such as mortgages with limited income verification
and mortgages secured by non-owner-occupied properties. Respondents to that survey were instructed to exclude standard adjustable-rate
mortgages and common hybrid adjustable-rate mortgages--those on
which the interest rate is initially fixed for a multiyear period and
subsequently adjusts more frequently. Subprime mortgages were
defined as loans made to borrowers who had one or more of the
following characteristics at the time of origination: weakened credit
histories that include payment delinquencies, charge-offs, judgments,
and/or bankruptcies; reduced repayment capacity as measured by
credit scores or debt-to-income ratios; or incomplete histories. Respondents were asked to consider only first-lien loans.

A45

subprime mortgages during the previous year, for
instance, by increasing fees or widening the spreads
over the bank's cost of funds. 8
Consumer lending at banks expanded 6.3 percent
in 2006, up from 2.2 percent in 2005. Credit card
loans, which account for slightly less than half of
consumer loans, rose at banks of all sizes. By contrast, growth in other consumer lending was confined
to the ten largest banks. Consumer lending may have
been restrained in recent years as homeowners withdrew equity from their houses to finance purchases.
The rebound in consumer lending in 2006 may reflect
in part a decline in this substitution as rising mortgage
rates and slower home-price appreciation made the
use of home equity less attractive.
The expansion in consumer lending occurred despite repeated reports of weaker demand for such
loans by BLPS respondents. On average last year, a
net fraction of around one-third of respondents indicated that consumer loan demand had weakened.
Standards for approving consumer loans were reportedly not much changed on net during 2006 (figure 11). Most lending terms also did not change
much; however, a sizable fraction of banks indicated
that they had increased the minimum percentage of
outstanding credit card balances that they required to
be repaid each month.

Other Loans and Leases
Other loans and leases grew a modest 3 percent
during 2006. Loans to purchase or carry securities,
which are relatively volatile, expanded 25 percent. As
in 2005, the fiscal position of many state and local
governments was supported by rising incomes and
property valuations; nevertheless, lending to these
entities grew robustly in 2006, possibly to finance a
pickup in construction-related expenditures. Agricultural loans expanded at a pace roughly in line with
that of the preceding two years; loans in most farm
loan categories continued to rise. 9 Growth in the
8. In September 2006, federal banking regulators provided guidance to financial institutions on managing the risks associated with
nontraditional mortgage products. The guidance also proposed consumer protection practices; refer to the Office of the Comptroller of the
Currency, Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, Office of Thrift Supervision, and
National Credit Union Association (2006), "Federal Financial Regulatory Agencies Issue Final Guidance on Nontraditional Mortgage
Product Risks," press release, September 29, www.federalreserve.govf
boarddocsfpressfbcregf2006.
9. Using it Survey of Terms of Bank Lending to Farmers, the
Federal Reserve estimates non-real-estate bank loans made to farmers
by purpose of the loan, such as to obtain farm equipment and
machinery or to cover operating expenses. This information is published quarterly in the Board of Governors of the Federal Reserve

A46

11.

Federal Reserve Bulletin 0 July 2007

12. Change in selected domestic liabilities at banks,
1990-2006

Net percentage of selected banks reporting tighter
standards for consumer lending, 1996-2007
Percent

___________________
Percent

Consumer loans other than credit cards

5
+

o
5

10
_

Small time deposits

10
I

1990
Credit card loans

1992

1994

1996

1998 2000 2002

2004

2006

NOTE: The data are annual. Savings deposits include money market deposit
accounts.

40
30
20

in their investment accounts picked up in 2006 from
its slow pace in 2005. By contrast, holdings of
Treasury securities and of securities issued by state
and local governments declined.

Liabilities

1997

1999

200 I

2003

2005

2007

NOTE: Refer to figure 5, general note and source note.

remaining components of other loans, such as lease
financing receivables and loans and leases to depository institutions, which account for around half of the
total, was .about flat or declined last year. to

Securities
Banks expanded their seCUrIties holdings a robust
11.5 percent last year. Growth was particularly rapid
for securities held in banks' trading accounts, which
can fluctuate considerably year to year; the rise
reflected increased holdings of a wide variety of
security types.
Holdings of securities in banks' investment accounts grew at a more moderate rate of 6.9 percent.
Banks' accumulation of mortgage-backed securities
System, Statistical Release E.15, "Agricultural Finance Databook,"
section A, www.federalreserve.gov/releases/eI5.
10. The decline in lending to depository institutions was due in
large part to the consolidation of subsidiaries within a large holding
company. [n the absence of this consolidation, growth in this "other
loans" category would have been roughly flat.

Bank liabilities increased 12.1 percent in 2006, an
advance about in line with bank assets. Core deposits
grew only 5.8 percent, the slowest rate since 1999.
Transaction deposits contracted for the second consecutive year, and the rate of expansion of savings
deposits slowed (figure 12). By contrast, small time
deposits grew 17 percent, their largest advance since
1989. Interest rates on liquid deposits, which include
both transaction and savings deposits, tend to move
sluggishly, so rising market rates increase the opportunity cost of holding these deposits and restrain their
growth; interest rates on small time deposits generally
track market rates closely, and as short-term rates
rose, the attractiveness of these deposits relative to
liquid deposits increased. Core deposits are generally
a more important funding source for smaller banks
than larger institutions, and the growth rate of core
deposits at banks outside the 100 largest was 8.2 percent last year, noticeably faster than at larger banks.
The expansion of managed liabilities moved up to
19.5 percent, the fastest pace in more than a decade,
and growth was especially strong at the 10 largest
banks. These funding sources now account for 44 percent of the liabilities of all banks, the largest share in
the past two decades. The rapid growth in managed
liabilities was supported by the expansion of deposits

A47

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

booked in foreign offices, the largest component of
managed liabilities. Large time deposits, the next
largest component of managed liabilities, also grew at
a solid rate. ll

13.

Regulatory capital ratios, 1990-2006
Percent

------------------

Total (tier I + tier 2)

Capital
Banks' capital expanded a rapid 14.7 percent in 2006,
nearly double the rate of growth in 2005. There was a
sizable expansion in goodwill as the result of merger
and consolidation activity involving some large banks.
Retained earnings continued to be strong and also
added notably to capital. As in previous years, banks'
capital was also boosted by funding from parent
holding companies and shares issued to the public.
Regulatory capital expanded smartly last year.
Tier I capital grew 11.8 percent, and tier 2 capital
increased 17.1 percent. 12 Risk-weighted assets expanded 11.6 percent, a touch slower than total assets.
The difference is due, in part, to the slightly more
rapid growth in assets having relatively lower risk
weights, such as mortgage-backed securities and firstlien residential mortgages. As a result, banks' tier I
and total capital ratios ended the year higher than in
2005 (figure 13). The leverage ratio, which is based
on tangible average assets, also edged higher. 13 The
share of assets held at well-capitalized banks was
above 99 percent in 2006, and the average margin by
which banks remained well capitalized moved up
some after having slipped a bit over the preceding
few years (figure 14).14
II. The thrift consolidation boosted the growth rates of all types of
liabilities, but the only category for which the impact was substantial
was "federal funds purchased and securities sold under repurchase
agreements."
12. Tier I and tier 2 capital are regulatory measures. Tier I capital
consists primarily of common equity (excluding intangible assets such
as goodwill and excluding net unrealized gains on investment account
securities classified as available for sale) and certain perpetual preferred stock. Tier 2 capital consists primarily of subordinated debt,
preferred stock not included in tier I capital, and loan-loss reserves up
to a cap of 1.25 percent of risk-weighted assets. Risk-weighted assets
are calculated by multiplying the amount of assets and the credit
equivalent amount of off-balance-sheet items (an estimate of the
potential credit exposure posed by the items) by the risk weight for
each category. The risk weights rise from 0 to I as the credit risk of the
assets increases. The tier 1 ratio is the ratio of tier I capital to
risk-weighted assets; the total ratio is the ratio of the sum of tier I and
tier 2 capital to risk-weighted assets.
13. The leverage ratio is the ratio of tier I capital to tangible assets.
Tangible assets are equal to total average consolidated assets less
assets excluded from common equity in the calculation of tier I
capital.
14. Well-capitalized banks are those with a total risk-based capital
ratio of LO percent or greater, a tier 1 risk-based ratio of 6 percent or
greater, a leverage ratio of 5 percent or greater, and a composite
CAMELS rating of I or 2. Each letter in CAMELS stands for a key
element of bank financial condition----Capital adequacy, Asset quality,
Management, Earnings, Liquidity, and Sensitivity to market risks. The
estimated average margin by which banks were well capitalized was

12
II

Tier 1

Leverage

8
7

1990

1992

1994

1996

1998

2000

2002

2004

2006

NOTE: The data are as of year-end. For the components of the ratios, refer
to text notes 12 and 13.

Derivatives
The notional principal value of derivative contracts
held by banks rose 30 percent last year, surpassing
$130 trillion (table 2). Even though the notional value
of derivative contracts grew at banks of all sizes, the
share of industry contracts accounted for by the 10
largest banks has continued to edge higher and is now
above 98 percent. The share of contracts at the largest
banks likely reflects their role as dealers in derivatives markets. As dealers, these banks often enter into
offsetting positions, which significantly boost the
notional value of their deri vati ve contracts. The fair
market value of derivative contracts held by banks,
which reflects their replacement cost, is far smaller
than the notional principal amount. The fair market
value of contracts with a positive value in 2006 was
about $1.2 trillion. This value edged down for the
second consecutive year. The fair market value of
contracts with a negative value, which was also
roughly $1.2 trillion in 2006, slipped lower as well. 15
One important way for banks to hedge interest rate
risk, including that related to interest-sensitive assets
computed as follows: Among the leverage, tier I, and total capital
ratios of each well-capitalized bank, the institution's "tightest" capital
ratio is defined as the one closest to the regulatory standard for being
well capitalized. The bank's margin is then defined as the percentage
point difference between its tightest capital ratio and the con'esponding
regulatory standard. The average margin among all well-capitalized
banks-the measure referred to in figure 14-is the weighted average
of all the individual margins; the weights are each bank's share of the
total assets of well-capitalized banks.
15. The positive and negative fair market values of banks' derivatives contracts are of roughly the same aggregate magnitude because
the vast majority of the activity is accounted for by a few large dealers.
The similarity in size does not mean that banks' aggregate exposure to
the market and credit risk associated with the contracts are offsetting
because, for example, the counterparties to banks' positive- and
negative-valued contracts may differ.

Federal Reserve Bulletin 0 July 2007

A48

14. Assets and regulatory capital at well-capitalized banks,
1990-2006

15. Notional amounts of credit derivatives for which
banks were beneficiaries or guarantors, 2000-06
Trillions of dolJars

Percent

Share of industry assets at well-capitalized banks

4.5
4.0

3.5

100

.-..

Guarantor

.5
+

I
2~

NOTE:

Average margin by which banks were well capitalized

1.5

1.0

Percentage points

2.0

Beneficiary

20
I

2.5

.t-

3.0

200]

2002

2003

2005

The data are quanerly.

3.5
3.0
2.5

2.0
1.5

1m 1m

Im2~D22~2~

NOTE: The data are annual. For the definitions of "well capitalized" and
of the margin by which banks remain well capitalized, refer to text note 14.

such as mortgages and mortgage-backed securities, is
through the use of interest rate swaps.16 These swaps
are the most common type of derivative that banks
use, and they account for around 60 percent of the
notional value of banks' derivative contracts. The
notional value of these derivatives increased 26 percent in 2006, a rate of expansion about in line with the
average pace over the past decade. The solid growth
in the notional value of these instruments likely
reflects the overall growth of the deri vati ves market
and the role that some of the largest banks playas
dealers in that market. In addition to swaps, banks
employ other types of interest rate derivative contracts, such as futures, forwards, and options contracts, although not nearly to the same extent. The
notional value of these derivative contracts also
expanded at a brisk rate last year. Despite the increase
in different types of interest rate derivative contracts,
even faster growth in the use of other deri vati ve
16. Interest rate swaps are agreements in which two parties contract
to exchange two payment streams, one based on a floating interest rate
and one based on a fixed interest rate; the payment streams are
calculated on the basis of a specific notional principal amount.

contracts pushed the proportion of total derivative
contracts accounted for by interest rate deri vatives
down 2 percentage points, to 81 percent.
One of the fastest growing components of banks'
derivative portfolios in recent years has been credit
derivatives. The notional value of such derivatives at
banks jumped 55 percent, but this increase was only
about one-third of that registered in 2005. However,
the fair market value of such contracts increased
90 percent in 2006, a somewhat faster pace than in
2005. The 10 largest banks held more than 99 percent
of the notional value of all the industry's credit
derivative contracts at the end of 2006. As dealers,
these banks buy and sell contracts, an activity that
makes them, respectively, beneficiaries of credit protection or providers of protection (also referred to as
guarantors). Typically, banks are net beneficiaries of
protection and generally were again in 2006. However, the difference at year-end between the $4.52 trillion in contracts for which they were beneficiaries of
protection and the $4.50 trillion in contracts for which
they were the guarantors of protection was considerably smaller than it was at the end of 2005 (figure 15).
Banks also use derivatives related to foreign exchange, equities, and commodities. Collectively, however, these instruments account for only 12 percent of
the notional value of the derivative contracts held by
banks. The notional value of banks' foreign-exchangerelated contracts grew 29 percent in 2006; much of
the increase was due to a rise in the notional value of
options contracts. Banks' notional holdings of equity
and commodity derivatives surged 75 percent in
2006, a jump influenced importantly by one institution that has continued to expand rapidly its trading of
commodity derivatives.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

A49

2. Change in notional value and fair value derivatives, all U.S. banks, 2001-D6
Percent

Item

Total derivatives
Notional amount . ...............
Fair value
Positive ............ ... ......
Negative

.......

.............

Interest rate derivatives
Notional amount ....

... ....

Fair value
Positive .. ............ . ...

Negative .. ...... ... . ......

Exchange rate derivatives
Notional amount ... ..... . ...
Fair value
Positive ........ .... ........
Negative .. ... ...... . .....
Credit derivatives
Notional amount .. .... . ......
Guarantor ..... ....... ......
Beneficiary ... ..... .........
Fair value
Guarantor ....................
Positive ...................
Negative ..... .... ........
Beneficiary ...................
Positive. ..... ..... ......
Negative ....

2002

2003

2004

2005

2006

MEMO
Dec. 2006
(billions of
dollars)

11.47

24.14

26.54

23.69

15.38

29.75

132,145

26.42
20.82

85.41
89.18

.36
1.00

13.71
13.75

-<i.46
-5.78

-4.52
-4.29

1,205
1,193

2001

.....

.......

Other derivatives'
Notional amount . ..........
Fair value
Positive ....... ......... ....
Negative .......... ....

15.93

26.83

27.62

22.07

11.92

27.10

107,399

63.87
56.55

108.20
113.02

-5.95
-5.07

13.14
12.94

-5.52
-5.15

-14.55
-15.06

839
816

-7.00

7.34

18.81

21.03

7.69

29.27

12,564

-16.21
-15.65

8.67
15.73

41.81
38.81

14.86
12.74

-35.84
-37.36

22.68
21.21

180
175

-1.20
21.84
-16.89

52.47
38.57
66.36

55.98
61.82
51.13

134.52
139.07
130.46

148.09
137.87
157.53

54.92
67.69
44.02

9,019
4,496
4,523

68.31
378.09
-<i8.87
19.85
-<i3.13
295.74

69.92
74.56
38.37
51.28
2.64
66.36

81.43
-5.62
827.98
83.50
505.51
2.79

92.95
201.36
-1.59
90.25
3.96
187.44

69
50
19
78
23
55

n.a.
n.a.
n.a.
n.a.

0.3.

n.a.

n.a.
n.a.

n.a.

-12.06

6.70

3.77

32.66

29.43

75.17

3,163

-34.72
-42.63

20.28
24.62

3.16
-5.25

8.55
19.73

58.51
74.29

18.99
24.15

113
128

NOTE: Data are from year-end to year-end and are as of April 13,2007.
I. Other derivatives consist of equity and commodity derivatives and other contracts.
n.a. Not available.

TRENDS IN PROFITABILITY
The profitability of the commercial banking industry
remained quite strong in 2006. Although mergers
boosted the goodwill component of reported equity
again in 2006, return on equity (ROE) moved up to
13.67 percent last year, a level well within the high
range that has prevai led since the mid-1990s.1 7 Banks'
return on assets (ROA) increased to 1.39 percent,
matching the peak annual level reached in 2003. Last
year's rise in both ROE and ROA can be traced to
large banks and to those specializing in credit card
loans; these two broad measures of profitability
declined modestly for other banks. ls The fraction of
17. For information on the effects of large mergers on bank capital
and profitability in 2005, refer to Elizabeth C. Klee and Gretchen C.
Weinbach (2006), "Profits and Balance Sheet Developments at U.S.
Commercial Banks in 2005," Federal Reserve Bulletin, vol. 92,
www.federalreserve.gov/pubslbulletin.
18. The adjustments made to the data take account of mergers
between banks but do not capture the effects of mergers between banks
and thrifts. However, the sizable thrift-to-bank consolidation in the
fourth quarter of 2006 (noted above) did not have a material impact on
aggregate industry profitability measures in 2006. For information on
the merger adjustments to the data, refer to the appendix in English

banks that incurred losses rose for the second year in
a row, to 7.4 percent, but such banks accounted for
just under 0.5 percent of industry assets, the lowest
share on record.
The flattening of the yield curve and ongoing
competitive pricing pressure, particularly in the C&I
loan and deposit markets, reportedly caused the industry net interest margin to edge lower last year. The
decline was concentrated at the ten largest banks, for
whom pricing competition may be especially intense;
banks of other sizes experienced stable net interest
margins, and those specializing in credit card loans
saw a sizable increase in margins. Non-interest income grew briskly last year and as a share of total
revenue was the second highest in more than two
decades. A surge in trading revenue and in income
related to investment banking activity at the ten
largest banks and a sharp rise in income related to
securitization at large banks drove the increase in
non-interest income. Banks' investment banking activity may have been lifted by the wave of merger and
and Nelson, "Profits and Balance Sheet Developments at U.S. Commercial Banks in 1997," p. 408.

A50

Federal Reserve Bulletin D July 2007

17.

16. Bank stock prices, by market value of bank, and
the S&P 500, 2001-07

Premium on credit default swaps on subordinated debt
at selected bank holding companies, 2002-07
Basis points

January 2006 = 100

120

100

60
80

40
60

200 I

2002

225 largest banks
2003

2004

2005

2006

2007

NOTE: The data are monthly and extend through March 2007. Stock prices
are weighted by market value.
SOURCE: Standard & Poor's and American Banker.

acquisition activity. The continued trend decline in
the ratio of non-interest expense to total revenue also
contributed to profitability. Profits were boosted in the
fourth quarter by a rise in extraordinary items because
of an asset trade between two large banks. This event
is estimated to have boosted industry ROA 2 basis
points for 2006 as a whole.
Asset quality generally remained solid in 2006, a
factor that helped buoy bank profits. The health of
business and household balance sheets was supported
by continued economic growth, hefty corporate profits, and increases in household wealth stemming from
gains in equity prices. Indeed, the delinquency rate on
all loans and leases averaged 1.57 percent again last
year. However, some pockets of distress in the real
estate sector became evident in the second half of
2006, when the overall delinquency rate rose 18 basis
points, reaching 1.69 percent by year-end. Banks
continued to provision for losses at about the same
low average rate as a share of assets as in 2005
providing support for profits. On a quarterly basis:
banks increased their provisioning moderately toward
the end of the year,
Supported by strong profitability, the growth of
dividend payments surged in 2006. The share of
profits paid out as dividends increased several percentage points last year, and, as a result, retained
earnings expanded only a bit. Nevertheless, retained
earnings remained high in 2006 and provided support
for equity capital. Against this backdrop, the stocks of
bank holding companies outperformed the robust
gains posted by the S&P 500 in 2006 (figure 16).
Credit default swap premiums on banks' subordinated debt moved down a bit further last year from
already low levels (figure 17),

I
2002

2003

2004

2005

2006

2007

NOTE: The data are monthly and extend through March 2007.
SOURCE: Markit.

Interest Income and Expense
For a second year in a row, the average rates of
interest earned on banks' assets and paid on banks'
liabilities rose in 2006; both were lifted in part by the
monetary policy tightenings in the first half of the
year. However, the average rate earned increased less
than the average rate paid, and the industry net
interest margin narrowed 7 basis points, to 3.47 percent. Last year's decline extended the downward
trend in this measure that has been evident since the
mid-1990s (figure 18). The industry net interest margin declined early in 2006 but widened in the fourth
quarter; at year-end it stood a few basis points above
its year-earlier level.
The decline in the industry net interest margin last
year was driven almost entirely by a decrease of
11 basis points at the 10 largest banks; net interest
margins for banks outside the 10 largest, by contrast,
remained about flat. At the 10 largest banks, however,
the share of interest-earning assets rose to its highest
level since 1993, and the return on such assets increased 96 basis points. But the ratio of interestbearing liabilities to interest-earning assets reached
another record high, likely a reflection of these banks'
increased reliance on managed liabilities (noted earlier), and interest expense as a share of interest-earnino
'"
assets rose 107 basis points. Still, net interest margins
at the ten largest banks rose significantly in the fourth
quarter; these banks registered a particularly large
increase in interest income on loans that quarter. t9

19. The fourth-quarter increase in the net interest margin at the ten
largest banks did not appear to have been dri ven by the sizable
thrift-to-bank consolidation that quarter.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

18.

Net interest margin, by size of bank, 1990-2006

19.

AS!

Net percentage of selected domestic banks reporting
increased spreads of rates on C&lloans over cost of
funds, by size of borrower, 1990-2007

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ PcrcenL

All banks

Percem

4.50

------------------

4.25

40
20
+

4.00

3.75

20
40

3.50
I

80
4.75
4.50

1991

1993 1995 1997 1999 2001 2003 2005 2007

NOTE: Refer to figure 5, general note and source note.

4.25
4.00
3.75
3.50
3.25
3.00

1990

1992

1994

1996 1998 2000 2002 2004 2006

NOTE: The data are annual. Net interest margin is net interest income
divided by average interest-earning assets. For definition of bank size, refer to
the general note on the first page of the main text.

The increases in rates earned by banks last year
were highest for credit card and other consumer
loans. Indeed, the net interest margins of banks that
specialized in credit card loans rose for the third year
in a row, and the profitability of these banks moved
up considerably more than for the industry as a
whole. Rates earned on C&I loans increased significantly last year, but their rise was the lowest among
major loan components. The increase in C&I loan
rates was particularly small for the ten largest banks.
As noted earlier, significant net fractions of respondents to BLPS surveys had trimmed spreads of C&I
loan rates over their cost of funds last year, which
likely helped to restrain the rise in these loan rates
(figure 19). The survey banks, which tend to be large,
have reported lower C&I loan rate spreads, on balance, since the middle of 2003. Nearly all the banks
that trimmed their rate spreads on C&I loans last year
indicated that more-aggressive competition from other
banks or nonbank lenders was the most important
reason for having done so.
The average rates that banks paid on deposits rose
in 2006 by the largest amount in more than 15 years,

putting downward pressure on net interest margins.
Growth of generally lower-cost core deposits was
down last year from 2005. By contrast, the growth of
managed liabilities surged in 2006, lifting the share of
these higher-cost liabilities in total interest-bearing
liabilities to a five-year high.
The downward pressure on banks' net interest
margins last year was partially offset by higher returns
on assets funded with non-interest-bearing liabilities
and capital. 2o Because these instruments, by definition, have no explicit interest expense, the level of the
return on bank assets, which rose significantly last
year-rather than the spread between the average
rates earned on assets and those paid on liabilities,
which declined last year-helped to buoy banks' net
interest margins. However, after holding about steady
in 2005, the share of interest-earning assets funded by
non-interest-bearing instruments declined somewhat
last year because of a considerably smaller increase in
non-interest-bearing savings deposits.

Non-interest Income and Expense
Non-interest income grew briskly in 2006-its 11 percent rise was the highest in 7 years. The share of total
revenue accounted for by non-interest income climbed
to almost 44 percent last year, the high end of its
range this decade (figure 20). The rise in this share
was nearly fully accounted for by a surge in trading
revenue, which is highly concentrated at the ten
20. For more discussion, refer to box "The Role of Non-InterestBearing Instruments in the Net Interest Margin" in Mark Carlson and
Roberto Perli (2004), "Profits and Balance Sheet Developments at
U.S. Commercial Banks in 2003," Federal Reserve Bulletin, vol. 90
(Spring), p. 173.

A52

20.

Federal Reserve Bulletin 0 July 2007

on-interest income and selected components as
a proportion of revenue, 1990-2006

21.

Deposit fee income as a proportion of total domestic
deposits, 1990-2006
Percent

Percent

-----------------Total

.80
45
.75
.70

.65
35

.60
.55

30
.50

I I

I
1990

Selected components

N01E:

I I
1992

I I
1994

I I
1996

I I I I I I I I
1998 2000 2002 2004

I
2006

The data are annual.

Other non-interest income

20
15

Fiduciary income plus trading income

---------

Deposit fees

I I
1990

I I
1992

I I
1994

I I
1996

I I
1998

I I
2000

I I
2002

I I
2004

I I
2006

NOTE: The data are annual. Revenue is calculated as the sum of noninterest income and net interest income.

largest banks. Increases in equity- and foreignexchange-related trading income drove the pickup in
industry trading revenue. The rise in equity-related
trading income coincided with broad gains in share
prices last year. In addition, after notable growth in
2005, industry trading revenue associated with interest rate and commodity exposures rose further in
2006, perhaps because of banks' expanding derivatives activities. Although growth in both fiduciary and
deposit fee income picked up relative to 2005, each
declined slightly as a share of total revenue. Despite
the higher growth in deposit fee income, it was again
exceeded by the expansion in deposits, and the ratio
of deposit fees to deposits moved down for the fourth
straight year (figure 21).
Taken together, the other components of noninterest income rose about in line with industry
revenue last year. Income related to securitization and
investment banking activity grew briskly. The considerable amount of merger and acquisition activity and
relatively hefty volume of corporate bond issuance
last year likely fueled, at least in part, the pickup in
banks' income related to investment banking activity.

Although the rate of growth in non-interest expense
in 2006 was somewhat higher than its historical
average, non-interest expense as a share of total
revenue moved lower, boosting banks' profitability
(figure 22). Brisk growth in salaries and benefits costs
accounted for most of last year's increase in noninterest expense, but the share of industry revenue
accounted for by salaries and benefits held about
steady after rising in each of the previous four years.
The number of bank employees rose a bit faster than
its average rate of the past several years, and pay per
employee moved up. Expenses associated with banks'
premises grew at a relatively slow rate, and they
declined as a share of total revenue. Other components of non-interest income also grew at a slower
pace than total revenue.

Loan Performance and Loss Provisioning
Overall credit quality generally remained solid last
year, although delinquency rates for some loan categories may have bottomed out around the middle of
last year. Delinquency rates on both residential and
commercial real estate loans turned up noticeably in
the second half of the year-especially in the fourth
quarter-albeit from very low levels. By contrast,
delinquency rates on C&I loans declined last year,
and those on consumer loans moved up only a little.
Charge-off rates on all loans and leases declined
further, reaching their low point in the fourth quarter
of the year. Meanwhile, banks provisioned for losses
at a relatively low rate, although provisioning rose a
bit late in the year. In the January 2007 BLPS, banks
reported that they expected a deterioration in the
quality of their loans to both businesses and households during the year, a judgment based on the

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

22.

Non-interest expense and selected components as
a proportion of revenue, 1990-2006

A53

Delinquency and charge-off rates for loans to
businesses, by type of loan, 1990-2006

23.

Percent

Total

Delinquencies

Commercial real estate

58
I

Selected components

Net charge-offs
35

2.0

1.5

1.0

fixed assets

2.5

~mises and

3.0

Other

5
t

I I
1990
NOTE:

I I
1992

I I
1994

I I
1996

I I
1998

I I
2000

1 I
2002

I I
2004

I I
2006

The data are annual.

assumption that economic activity progresses in line
with consensus forecasts. The net fraction of banks
that anticipated deterioration this year was notably
higher than in the year-earlier survey.
C&I Loans
The credit quality of banks' C&I loan portfolios
improved further in 2006. The delinquency rate on
C&I loans drifted lower for the fourth straight year
and dropped below 1.2 percent in the fourth quarter,
the lowest level in more than 15 years (figure 23). The
decline was concentrated at the 100 largest banks, but
the rest of the industry registered an improvement in
C&I loan quality as well. The continued high credit
quality of C&I loans likely reflected generally healthy
corporate balance sheets-the interest-payment ratio
for nonfinancial corporations remained quite modest
last year (figure 24)-and a very low incidence of
corporate default. Moreover, the rapid growth in C&I
loans over the past two years may have temporarily
reduced delinquency rates because loans are presumably less likely to become delinquent soon after they
are extended. Although the net charge-off rate on C&I

I I
1990

I I
1992

I I
1994

I I
1996

I I
1998

I I
2000

I I
2002

I I
2004

I I
2006

NOTE: The data are quarterly and seasonally adjusted; the data for
commercial real estate begin in 1991. Delinquent loans are loans that are not
accruing interest and those that are accruing interest but are more than thirty
days past due. The delinquency rate is the end-of-period level of delinquent
loans divided by the end-of-period level of outstanding loans. The net
charge-off rate is the annualized amount of charge-offs over the period, net of
recoveries, divided by the average level of outstanding loans over the period.
For the computation of these rates, commercial real estate loans exclude loans
not secured by real estate (refer to table I, note 2).

loans edged up a couple of basis points last year on a
quarterly average" basis, it remained exceptionally
low.
Commercial Real Estate Loans
The credit quality of commercial real estate loans
generally remained strong in 2006, although it appeared to deteriorate some in the second half of the
year. As noted earlier, fundamentals in the sector
continued to improve last year---commercial property
values and rents rose, vacancy rates in both the office
and industrial sectors continued to drift down, and the
vacancy rate for retail buildings remained low. Accordingly, both delinquency and net charge-off rates
on commercial real estate loans generally remained
around historically low levels. Delinquency rates
drifted lower during the first half of last year, but they
rose noticeably over the second half at banks of all

A54

Federal Reserve Bulletin 0 July 2007

25. Delinquency and charge-off rates for loans
to households, by type of loan, 1990-2006

24. Interest-payment ratio for businesses, and financial
obligations ratio for households, 1990-2006

Percent

------------------

Delinquencies

Interest-payment ratio for nonfinancial corporations

18
4

16
3
14
2

_ Net charge-offs

Financial obligations ratio for households

3
Other consumer
I

16
Residential real estate

I I
1990

I I
1992

I I
1994

I I
1996

I I
1998

I I
2000

I I
2002

I I
2004

I I
2006

I I
1990

I I
1992

I I
1994

I I
1996

I I
1998

I I
2000

I I
2002

I I
2004

I I
2006

NOTE: The data are quarterly. The interest-payment ratio is calculated as
interest payments as a percentage of cash flow. The financial obligations ratio
is an estimate of debt payments and recurring obligations as a percentage of
disposable personal income; debt payments and recurring obligations consist
of required payments on outstanding mortgage debt, consumer debt, auto
leases, rent, homeowner's insurance, and property taxes.

NO'rE: The data are quarterly and seasonally adjusted; data for delinquencies and for net charge-offs of residential real estate loans begin in
199 I. For definitions of delinquencies and net charge-offs, refer to the note
for figure 23.

SOURCE: For interest-payment ratio, national income and product accounts

real estate loans climbed in the second half of 2006,
reaching 1.9 percent in the fourth quarter (figure 25).
Although the fourth-quarter rate was a multiyear
high, it was well below the rates seen in the early
1990s. The rise in delinquencies on residential real
estate loans in the second half of last year was
widespread: Delinquency rates rose for mortgages on
one- to four-family residences and on revolving home
equity loans, and they rose at banks of all sizes. Last
year's increase may have been, at least in part, the
result of higher variable-rate mortgage rates, on balance, and a slowing in home-price appreciation in the
second half of the year, a combination of factors that
likely put pressure on households with variable-rate
mortgages. Indeed, broad measures of delinquency
rates on variable-rate subprime mortgages moved up
considerably last year. (For further discussion, refer
to box "Credit Quality of Subprime Residential Mortgages.") Net charge-off rates on residential real estate
loans edged higher in 2006 but remained at very low
levels. Charge-off rates on one- to four-family residential mortgages ticked down over the first half of

and Federal Reserve Board; for financial obligations ratio, Federal Reserve
Board (www.federalreserve.gov/releaseslhousedebt).

sizes. The upturn was concentrated in loans for
construction and land development, a category of
funding that includes loans to residential real estate
developers. By contrast, net charge-offs on commercial real estate loans held about steady at a low level
over the four quarters of last year. In credit markets,
spreads on commercial-mortgage-backed securities
widened a bit, on average, in 2006 but remained
relatively narrow.
Loans to Households
Even though bank-intermediated household debt grew
more slowly in 2006 than in 2005, household credit
quality deteriorated somewhat on balance last yearhigher interest rates increased households' debt service payments further and lifted their financial obligations ratio to an all-time high. After holding steady for
several quarters, the delinquency rate on residential

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 ASS

26.

Credit card delinquency rate and household
bankruptcy filings, 1993-2006
Per J00.000 persons

Percent

Credit card delinquencies

900

5.0
800
4.5

700
600

4.0
500
3.5

400
300

Bankruptcy filings

3.0

200

1994

tit

1996

1998

2000

2002

2004

2006

NOTE: The data are quarterly and seasonally adjusted. The series shown for
bankruptcy filings begins in 1995:QI. For definition of delinquencies, referto
the note for figure 23.
SOURCE: For bankruptcy filings, staff calculations are based on data from
Lundquist Consulting.

the year, but they increased over the second half when
gains in homeowners' equity cooled.
The rate of household bankruptcy filings plunged
in the wake of the bankruptcy reform law that took
effect in October 2005, and a markedly lower rate of
bankruptcy prevailed in 2006 (figure 26).21 Nonetheless, the delinquency rate on credit card loans rose, on
average, last year. The increase occurred in the first
half of the year--credit card delinquencies receded in
the second half but ended the year at 3.9 percent,
somewhat above their year-earlier level. By contrast,
the net charge-off rate on credit card loans on banks'
books fell significantly last year relative to 2005, even
after excluding the large fluctuation in charge-offs
caused by the new bankruptcy law. 22 Last year's
decline continued the downward trend in credit card
charge-offs that has been evident, on balance, for the
past few years.
Banks were queried about the effects of the bankruptcy reform legislation on their lending policies for
credit card loans to individuals and households in the
January 2007 BLPS survey. Nearly all domestic
21. For a discussion of the change in bankruptcy law that was
implemented in 2005 and its effect on credit card loans, refer to box
"The New Bankruptcy Law and Its Effect on Credit Card Loans" in
Klee and Weinbach, "Profits and Balance Sheet Developments at U.S.
Commercial Banks in 2005," p. A89.
22. The new bankruptcy law caused a surge in the rate of credit
card charge-offs in the fourth quarter of 2005 that was followed by a
relatively low rate in the first quarter of 2006 (figure 25). Excluding
these values, the rate of credit card charge-offs averaged 4.3 percent in
2005 and 3.7 percent in 2006 (without excluding those values,
charge-off rates averaged 4.7 percent and 3.5 percent respectively).

institutions indicated no change in their lending policies for these credit card loans in response to the
bankruptcy reform; only two reported that they had
tightened credit standards for approving credit card
loan applications. In addition, about one-fourth stated
that, after accounting for changes in their lending
standards and terms, they anticipated that charge-offs
on their credit card loans would be lower in the long
term because of the reform.
In the April 2006 BLPS, banks were queried about
their minimum required payment on credit card balances for individuals and households. One-third of
respondents, on net, had increased their required
minimum payment over the previous year. 23 Despite
concerns raised by some industry commentators
regarding the effects of higher minimum payments on
defaults and loan losses, these increases do not appear
to have had a signi ficant effect on such measures.
The delinquency rate on other consumer loans
edged lower, on average, in 2006, and charge-off rates
on such loans stepped down significantly. On a
quarterly basis, however, delinquency and charge-off
rates on other consumer loans rose in the second half
of last year; their levels at year-end were above those
registered early in the year.
Securitized Loans
After declining in 2005, the delinquency rates on
many types of securitized loans registered mixed
changes last year but remained relatively low. Although the average delinquency rate on securitized
residential mortgages was unchanged relative to 2005,
it dipped markedly in the first quarter of 2006 and
then increased steadily over the remainder of the
year: At year-end 2006, this rate stood 50 basis points
higher than its year-end 2005 level, but that was still
below the year-end levels of the previous several
years. For the third year in a row, the delinquency rate
on securitized home equity loans moved up. By
23. The increases in required minimum payments in 2006 may be
related to guidance that was issued by federal banking regulators in
January 2003 governing account management and loss allowance
practices for credit card lending. The guidance outlined the supervisory agencies' expectations for prudent risk management, income
recognition, and loss allowance practices and provided guidance for
minimum payments and negative amortization. When the guidance
was issued, it was recognized that some banks might require additional
time to implement changes in policies, practices, and systems. Refer to
the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of the Comptroller of the
Cun'ency, and the Office of Thrift Supervision (2003), "FFIEC Agencies Issue Guidance on Credit Card Account Management and Loss
Allowance Practices," press release, January 8, www.
federalreserve.gov/newsevents.htm.

A56

Federal Reserve Bulletin 0 July 2007

Credit Quality of Subprime Residential Mortgages
Serious delinquency rates on residential mortgages-that
is, the fraction of loans that are ninety days or more past
due or are in foreclosure-have moved higher, on balance, since mid-20OS. This rise is largely accounted for
by a sharp increase in the delinquency rate on subprime
residential mortgages (figure A). J By contrast, delinquency rates on prime residential mortgages, which make
up the majority of outstanding residential loans, have
remained fairly low and stable over this period. The
deterioration in the subprime sector has been concentrated among borrowers whose mortgages have variable
interest rates; serious delinquency rates on subprime
fixed-rate mortgages have barely budged, on net (figure
B). Amid slowing house-price appreciation and rising
interest rates, one would expect residential mortgage
defaults to rise because borrowers have slimmer equity
cushions with which to buffer increases in their mortgage
payments or other sources of financial stress. However,
adjustable-rate subprime loans originated in 2006 have
also been plagued by so-called "early payment defaults,"
in which the borrower defaults well before their mortgage
payment resets.
In June 2007, the federal financial regulatory agencies
issued a "Statement on Subprime Mortgage Lending" to
address issues relating to certain adjustable-rate mortgage
products that can cause payment shock. 2 The statement
described the prudent safety and soundness and consumer
protection practices that institutions should follow to
ensure borrowers obtain loans that they can afford to
repay. The safety and soundness practices included loan
I. The subprime category of residential mortgages typically includes
loans made to borrowers who had one or more of the following characteristics at the time the loans were originated: weakened credit histories that
include payment delinquencies, charge-offs, judgments, or bankruptcies;
reduced repayment capacity as measured by credit scores or debt-toincome ratios; or incomplete credit histories. The prime category of
residential mortgages includes loans made to borrowers who typically had
relatively strong. well-documented credit histories; relatively high credit
scores; and relatively low debt-to-income ratios at the time the loans were
originated.
2. For more information, refer to the Board of Governors of the Federal
Reserve System, Federal Deposit Insurance Corporation, National Credit
Union Administration, Office of the Comptroller of the Currency, and
Office of Thrift Supervision (2007), "Federal Financial Regulatory Agencies Issue Final Statement on Subprime Mortgage Lending," press release,
June 29, www.federalreserve.govlboarddocs/presslbcreg/2007/.

contrast, the delinquency rate on securitized credit
card receivables continued its multiyear decline in
2006, although the decrease was much smaller than in
previous years.
Loss Provisioning
With credit quality generally remaining strong in
2006, banks continued to provision for loan losses at

underwriting based on both principal and interest obligations at the fully indexed rate with a fully amortizing
repayment schedule, plus a reasonable estimate for real
estate taxes and insurance. The statement also cautioned
about risk-layering features. The consumer protection
practices included clear and balanced product disclosures
to customers and limits on prepayment penalties that
allow for a reasonable period of time for customers to
refinance before the expiration of the initial fixed interest
rate period without penalty.
Available evidence suggests that commercial bank
exposure to troubled subprime mortgages is generally
small. Delinquency rates on all residential mortgage loans
on banks' books have risen a bit since mid-2005, but
these rates have remained relatively low. Disaggregating
these delinquency rates reveals that the increase in such
rates has occurred at banks that held a fairly small portion
of all residential mortgage loans (figure C). Banks that
responded to the special questions in the July 2006 Senior
Loan Officer Opinion Survey on Bank Lending Practices
reported that their holdings of subprime mortgages were
generally small-just 3 of the 56 banks surveyed indicated that their holdings of subprime mortgages accounted for more than 20 percent of all residential
mortgages on their books at that time. And although the
dollar amount of foreclosed residential properties on
banks' books rose to $2.5 billion at the end of 2006,
compared with a level of around $1.5 billion at the end of
both 2005 and 2004, such assets accounted for less than
0.2 percent of all outstanding residential real estate
loans? Finally, banks may be exposed to subprime mortgages through their holdings of mortgage-backed securities, but these holdings are largely backed by the U.S.
government or by government-sponsored enterprises.
The credit quality of residential mortgages is significantly lower in some areas of the U.S. than in the nation

3. These figures are based on the sum of two components of other real
estate owned reported on the Call Reports: "1-4 family residential
properties in domestic offices" and "foreclosed properties from 'GNMA
(Government National Mortgage Association) loans.''' Excluding the
GNMA item, which was added to the Call Reports in March 2006, the
total for year-end 2006 was $1.7 billion, up from an average of $1.5 billion at year-end for both 2005 and 2004.

about the same average rate as in 2005. 24 Measured as
a share of average net consolidated assets or as a
proportion of total revenue, banks' provisioning for
loan and lease losses declined a couple of basis points
24. Banks boosted their provisioning in the third and fourth quarters of 200S because of the surge in personal bankruptcies associated
with the bankruptcy reform law that took effect in October 200S and
the effects of Hurricanes Katrina and Rita.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

AS7

as a whole. According to the Mortgage Bankers Association, the share of residential loans of all types in foreclosure in the first quarter of 2007 was highest in Ohio,
Indiana, and Michigan-states that have been particularly
hard-hit by recent troubles in the auto industry. Foreclosures were also relatively high in Louisiana and in

Mississippi early this year, states where losses related to
Hurricanes Katrina and Rita have been significant. Banks
that experienced losses in 2006 were not particularly
concentrated in these states, but the average return on
assets of banks located in these states was lower than that
for the industry as a whole last year.

Rate of serious delinquency on residential mortgages,
by loan category, 2000-07
Percent

Rate of serious delinquency on subprime residential
mortgages, by type of interest rate, 2000-07
Percent

--------------

9
4

All loans

Prime loans

l--r
2000

2001

2002

2003

2004

2005

2006

2007

2000

NOTE: The data are quarterly and exlend through 2007:Q I. Seriously
delinquent loans are ninety days or more past due or in foreclosure. The
prime category contains some near-prime loans.
SOURCE: Mortgage Bankers Association, National Delinquency Survey.

200 I

2002

2003

2004

2005

2006

2007

NOTE: The data are monthly and extend through March 2007. Seriously
delinquent loans are ninety days or more past due or in foreclosure.
SOURCE: First American LoanPerformance.

Rate of serious delinquency on residential real estate loans, 1991-2007

Percent

------------------------------------

5
4

-- =

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

NOll': The data are quarterly and extend through 2oo7:QI. Delinquency rates are for Inans ninety days or more past due or non-accrual. The 90th and
95th percentiles are weighted by residential real estate loan portfolios.

last year (figure 27). By either measure, the rate of
provisioning continued to be in the low end of the
range seen over the past two decades. On a quarterly
basis, banks' provisioning was moderately higher in
the fourth quarter of last year relative to the first three
quarters, a reflection of a rise in provisioning by the
ten largest banks and by small banks. Although banks
that specialize in credit card loans provisioned less as

a share of average assets last year than in 2005, their
provisioning rose significantly in the fourth quarter.
Provisioning outpaced charge-offs in 2006, so that
loan-loss reserves increased in dollar terms, but the
ratio of loss reserves to total loans and leases declined
further (figure 28). However, the ratio of reserves to
delinquent loans remained near the high end of its
range of the past two decades. Reserves as a share of

Federal Reserve Bulletin 0 July 2007

A58

27.

Provisions for loan and lease losses as a
proportion of total revenue, 1990--2006
Pcrcenl

I I
1990

I I
1992

I I
1994

I I
1996

I I
1998

I I
2000

I I
2002

I I
2004

I I
2006

The data are annual.

NOTE:

net charge-offs increased in 2006-as it has in three
out of the past four years-and stood near its highest
level of the past decade.
INTERNATIONAL OPERATIONS OF
COMMERCIAL BANKS

Us.

The share of assets of U.S. banks booked in foreign
offices increased 115 basis points, to 12.9 percent, in
28.

Reserves for loan and lease losses, 1990--2006
Percent

As a percentage of total loans and leases

3.0
2.5
2.0
1.5

1.0

Itt

As a percentage of delinquent loans
100
80
60
40
I

As a percentage of net charge-offs

500

400
300
200
100

I I
1990

I I
1992

I I
1994

I
1996
t

I I
1998

I I
2000

I I
2002

I I
2004

I I
2006

2006. Rapid growth in banks' lending and derivatives
activities with Asian economies lifted U.S. institutions' total exposure to such countries as a share of
tier I capital to nearly 35 percent (table 3).25 By this
measure, banks' exposure to China tripled over the
past three years, but it remained below their exposure
to India and well below that to Korea. Banks' exposure to Latin American and Caribbean economies
surged in terms of dollars, but it edged down as a
share of tier I capital.
DEVELOPMENTS IN EARLY 2007

U.S. economic activity slowed in the first three
months of 2007. Growth in business expenditures
stepped down somewhat relative to 2006-spending
on fixed investment accelerated, but inventory investment slowed. Although merger and acquisition activity reportedly stayed elevated, corporate profits remained strong, and firms reduced their demand for
external financing. Consumer spending picked up,
and job growth continued at a solid pace through the
first quarter of2007. However, the financial condition
of some households deteriorated as terms reset on
variable-rate subprime mortgages and house prices
leveled out. Readings on core inflation ticked up in
the first two months of the year before coming back
down in March. Measures of inflation expectations
posted small mixed changes-inflation expectations
based on Treasury inflation-protected securities rose a
bit, but longer-term survey-based measures edged
lower. Against this backdrop, the Federal Open Market Committee maintained its target for the federal
funds rate at its first two meetings in 2007.
Intermediate-term interest rates declined somewhat
over the first three months of the year, and longerterm interest rates held about steady, on balance.
In late February 2007, volatility in global financial
markets jumped, and prices of risky assets dropped as
investors appeared to reduce their exposure to risk. In
particular, concerns about conditions in the U.S.
subprime residential mortgage market and possible
spillover to the broader economy grew as delinquency rates on such mortgages climbed and potentially high exposures to troubled subprime mortgages
surfaced at some financial entities. By the end of the
first quarter, measures of implied volatility in Treasury markets and the volatility of the S&P 500 index
had retreated somewhat but remained higher than
earlier in the year.
Data from the Federal Reserve show that growth of
domestic banks' assets stepped down a bit in the first

NOTE: The data are annual. For definitions of delinquencies and net
charge-oft's, refer to the note for figure 23.

25. Exposures consist of lending and derivatives exposures for
cross-border and local office operations.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

A59

3. Exposure of U.S. banks to selected economies at year-end relative to tier I capital, 1997-2006
Percent
Asia
Year
All
1997
1998
1999

.
.
.

2000

2001
2002
2003
2004
2005
2006

.
.
.
.
.
..

25.4
28.2
26.1
24.0
22.4
21.9
22.8
32.2
30.7
34.7

China
1.0
1.0
.8
.8

.9
.9

1.3
1.4
2.4
4.1

Latin America and the Caribbean
India

Eastern
Europe

Total
exposure to
developing
economies

Korea

All

1.5
2.4
2.4
2.6
2.6
2.7
3.9
4.2
4.9
6.1

7.4
7.1
6.6
6.4
5.8
5.8
5.5
15.0
12.9
13.6

29.7
42.9
39.0
37.9
54.1
38.9
32.9
31.8
31.8
30.8

5.5
9.9
9.5
9.1
26.0
20.8
18.0
16.7
17.4
16.9

9.7
11.3
10.5
11.2
3.0
8.4
6.8
6.5
6.9
5.7

3.5
3.5
2.9
4.4
4.3
5.5
5.4
6.1
5.9
6.5

77.9
100.1
90.7
87.9
100.3
84.8
79.8
89.2
86.4

5.1
5.4
6.2
7.5
7.7
8.7
13.6
16.3
21.6
33.6

25.3
17.3
17.2
18.1
17.5
18.4
19.2
58.7
56.7
74.8

10I.7
104.7
101.6
107.3
162.4
123.5
115.2
124.4
139.7
168.9

18.8
24.2
24.8
25.7
78.0
66.2
63.0
65.2
76.1

33.4
27.6

11.9
8.5
7.4
12.3
12.9
17.6
19.1
23.8
25.7
35.5

267.1
244.7
236.4
249.1
301.4
269.4
280.1
348.9
378.8
508.2

Mexico

Brazil

92.6

MEMO
Total exposure (billiolls
of dollars)

1997
1998
1999

.
.
.

2000 .......•.....•.•.

2001..
2002
2003
2004
2005
2006

.....•..

.
.
..
.

.
.
.
.
..

87.1
69.1
67.9
68.0
67.2
69.5
79.9
125.8
134.8
190.5

3.5
2.3
2.0
2.2

2.7
2.7
4.4
5.3
10.4
22.7

92.5

27.3

31.6
39.0
26.6

23.7
25.5
30.4
31.5

OTE: Exposures consist of lending and derivatives exposures for crossborder and local office operations. Respondents may file information on one
bank or on the bank holding company as a whole. For the definition of tier I
capital, see text note 12.

The year·end 2006 data cover 66 banks with a total of $549.0 billion in
tier I capital.
SOURCE: Federal Financial Institutions Examination Council (2007), Stat·
istical Release E.16. "Country Exposure Lending Survey" (March 30),
www.ffiec.gov/EI6.htm.

quarter of 2007 relative to 2006. 26 As businesses
sought less external financing, C&I loan growth
slowed at banks of all sizes. Aside from a sizable
bank-to-thrift conversion in the first quarter, loans
secured by real estate continued to expand at around
the same pace as in 2006. By contrast, loans to
consumers picked up a bit, consistent with the rise in
consumer spending. With steady growth in core
deposits in the first quarter of 2007 and the lower
growth in assets, the expansion of managed liabilities
dropped back.
Although the tone of first-quarter earnings reports
of major bank holding companies was mixed, industry profitability generally appeared to have held up in
early 2007. Several banks reported that their profitability was supported by continued strong noninterest income, such as from trading activities. Net
interest income rose at some institutions; others indicated that their margins remained under pressure.
Decreased demand for new mortgages and write-offs
of servicing income on existing mortgages weighed
on the profitability of several institutions. Credit
quality reportedly generally stayed solid, but some
banks noted increased losses in their mortgage portfolios.

Despite banks' generally strong balance sheets and
continued profitability in the first quarter of 2007, an
index of the stock prices of the 225 largest banks
underperformed the S&P 500 index over the period
(figure 29). Investors apparently became concerned
about possible implications of the troubles in the
subprime mortgage sector for banks' earnings. The
bank stock index dropped about 10 percent in late
February and early March-about twice as much as
the broader market-but some of this decline later
reversed in March. Credit default swap premiums on
29.

January 6. 2006 = 100

115
110
105
100
95

I
26. Board of Governors of the Federal Reserve System, Statistical
Release H.8, "Assets and Liabilities of Commercial Banks in the
United States" (www.federalreserve.gov/releases/h8). The H.8 includes only domestic assets.

Bank stock prices, by market value of bank,
and the S&P 500, 2006-07

2006

2007

NOTE: The data are weekly and extend through March 2007. Stock prices
are weighted by market value.
SOURCE: Standard & Poor's and Amerieall Ballker.

A60

Federal Reserve Bulletin 0 July 2007

banks' subordinated debt moved higher for a time in
late February; these premiums subsequently retreated
some but remained above their year-end 2006 levels

at the end of March. Bank mergers in the first quarter
of 2007 occurred at about the same pace as in the first
0
quarter of 2006.

Appendix tables start on page A6/

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

A61

A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006
A. All banks
Item

1997

1998

1999

2000

200 I

2002

2003

2004

2005

2006

Balance sheet items as a percentage of average net consolidated assets

Interesl-earning assets. . . . . . . . . . . . . . . . . .... .. ..
Loans and leases (net)
.., .•.. . .
Commercial and industrial
.
. .
U.S. addressees. . . ..
.
Foreign addressees. . . . . . . . . .. .
Consumer
.
Credit card
.
Installment and other
.
Real estate
.
In domestic offices
.
Construction and land development
.
Farmland
.
One- to four-family residential
.
.
.
Home equity..
Other
.
Multifamily residential
.
Nonfaml nonresidential
. .•.......
In foreign offices . . . . . . .. ..
. .....
To depository institutions and
.
acceptances of other banks

86.49
58.95
16.08
13.69
2.39
9.23
3.63
5.60
27.10
26.60
2.85
.55
14.67
2.18
12.49
.97
7.56
.50

86.42
57.83
14.07
12.04
2.04
9.35
3.78
5.57
28.39
27.91
2.98
.56
15.40
2.80
12.60
1.02
7.95
.48

86.08
56.88
12.18
10.48
1.70
9.06
3.55
5.51
29.91
29.45
2.99
.54
16.96
3.40
13.57
1.05
7.91
.46

86.90
56.98
11.06
9.52
1.54
9.18
3.86
5.31
30.78
30.24
3.26
.54
17.42
4.34
13.08
1.06
7.97
.53

86.82
57.88
11.17

9.71
3.51
6.20
25.44
24.87
2.18
.56
14.10
1.76
12.34
.88
7.15
.57

87.13
60.48
17.16
14.67
2.49
9.38
3.52
5.87
27.04
26.49
2.51
.56
14.96
1.96
13.00
.99
7.48
.54

1.96
.16
.83
2.75
2.51
-.06
-1.04
20.40
18.33
17.73
2.14

1.87
.12
.78
2.58
2.63
-.05
-1.02
20.02
17.59
16.93
1.66

1.83
.10
.75
2.34
2.58
-.04
-1.04
19.53
16.82
16.48
.85

1.87

1.98
.08
.63
2.00
2.11
-.04
-1.04
21.90
18.97
18.72
.90

2.11
.08
.59
2.35
1.79
-.04
-.91
22.57
18.99
18.79
.89

1.73
.06
.56
1.58
-.03
-.79
22.04
17.87
17.71
.62

10.08
5.13
1.95
2.99
1.49

12.26
6.75
2.34
3.17
1.48

12.37
7.13
2.01
3.22
1.41
1.41
2.72
.20
3.59
4.58
2.76
13.10
2.19
10.91

11.51
6.78
1.80
2.93
1.36
1.76
2.47
.16
4.17
4.75
2.15
13.18
1.82
11.36

10.65
6.43
1.58
2.65

89.91
47.52
8.46

7.05
8.37
1.67
4.47

89.84
45.57
7.45
5.41
2.04
29.50
8.61
38.28
10.08
11.18
1.40
7.52
8.11
1.51
4.47

87.15
58.72
15.77
13.17
2.60
11.50
4.62
6.88
25.00
24.39
1.73
.55
14.41
1.94
12.47
.83
6.88
.61

86.76
58.33
16.36
13.61
2.75
10.41
4.02
6.39
24.85
24.28
1.86
.55
14.25
1.89
12.37
.82
6.80
.57

87.03
59.34
17.07
14.43

1.93
.18
.90
2.80
1.87

2.64

..
.
..
.

-1.13
20.40
17.23
16.74
3.38

1.91
.15
.89
2.78
2.12
-.07
-1.07
20.37
17.48
16.93
2.71

Govemment-backed mortgage pools.
Collateralized mortgage obligations ..
Other..........
..
..
State and local government
.
Private mortgage-backed securities
Other............
..
..
Equity.......
.
.
..
Trading account. . . . . . . . . . ..
Gross federal funds sold and reverse RPs .
Interest-bearing balances at depositories
Non-interest-earning assets
.
Revaluation gains held in trading accounts ..
Other........
..
..

9.73
4.93
1.93
2.86
1.59
.50
1.54
.50
3.16
5.18
2.86
12.85
2.59
10.26

10.28
5.16
2.12
2.99
1.57
.67
1.70
.55
2.90
5.37
2.69
13.24
2.95
10.29

10.85
5.24
2.15
3.46
1.62
.88
2.24
.61
2.06
4.61
2.68
12.97
2.57
10.41

10.31
4.75
1.92
3.63
1.52
.95
2.48

91.57
50.89
15.76
12.15
3.61
19.76
15.37
34.13
7.25
10.48
1.15
8.13
7.13

91.52
48.60
12.58
9.78
2.81
22.47
13.55
36.59
7.89
10.96

91.58
46.52
11.07
8.61
2.46
22.43
13.01
38.83
8.77
11.43
1.37
7.83

3.91

91.51
49.43
14.10
10.99
3.11
20.87
14.46
34.97
7.67
10.59
1.30
7.98
7.43
2.97
4.14

8.43

8.49

9.98
.11
7.37

Foreign governments ..

Agricultural production.
.
Other loans .
.. .. .. . ..
.
Lease-financing receivables
LESS: Unearned income on loans
LESS: Loss reserves I . .
..
Securities
Investment account. . . .. .
.. .
Debt
U.S. Treasury
U.S. government agency and

..
..
.
.
..

corporation obligations.

Liabilities
.
Core deposits
. ..
Transaction deposits. . . .. .
Demand deposits
Other checkable deposits
Savings deposits (including MMDAs)
Small time deposits
Managed liabilities'
Large time deposits

Deposits booked in foreign offices
.
Subordinated notes and debentures
.
Gross federal funds purchased and RPs
Other managed liabilities
.
Revaluation losses held in trading accounts
Other

.
..
.
..
.
.
.
.
~

.
.
.
.

Capital account ...

-.09

.09

.70
2.06
2.44

-.05
-1.11
21.27
18.30
17.99
.78

9.64

1.53
9.12
4.05
5.06
32.40
31.84
3.90
.54
18.26
4.95
13.31
1.08
8.06
.56

2.09

86.85
58.26
11.43
9.73
1.70
8.53
3.73
4.80
33.19
32.61
4.73
.53
18.23
4.71
13.52
1.06
8.07
.58
1.65
.04
.55
2.19
1.43
-.03
-.71
21.32
16.89
16.73
.47

2.98
.34
2.72
5.11
2.90
13.51
2.37
11.15

11.46
6.09
2.35
3.02
1.49
1.25
3.01
.31
2.97
4.81
2.52
13.58
2.42
11.16
90.85
48.98
10.06
7.67
2.39
28.13
10.80
35.05
8.30
9.42
1.40
7.77
8.16
2.09
4.73

90.96
49.18
9.73
7.26
2.47
30.12
9.33
34.61

2.29
3.94

91.25
47.07
10.36
8.00
2.36
24.53
12.18
37.42
8.89
10.66
1.43
7.95
8.49
2.21
4.54

9.38
1.33
7.75
8.06
2.30
4.87

90.57
48.56
9.10
6.58
2.52
31.19
8.27
35.69
8.00
10.25
1.30
7.24
8.91
1.95
4.36

8.48

8.42

8.75

9.15

9.04

9.43

10.09

10.16

10.11
.08
7.96

10.87
.06
8.27

11.58
.05
7.63

n.a.

0.3.

o.a.

0.3.

12.09
.05
8.17
2.89

12.57
.06
9.69
3.17

12.47
.06
10.39
3.19

12.78
.06
10.56
3.07

13.52
.04
10.33
3.04

14.35
.05
9.88
3.07

4,737

5,148

5.439

5.907

6.334

6,635

7,249

7,879

8,592

9,425

2.64

1.36

7.97
8.40
2.52
3.81

.66

2.43
4.12
2.52
12.87
2.28
10.58

9.44

1.09

1.30

2.78
.25
2.93
4.85
2.45
13.92
2.70
11.22

8.09

6.16

2.30
30.83
8.23
36.25
9.11

10.39
1.34

1.34

1.87
2.39
.16
4.43
5.29
1.97
13.15
1.64
11.51

MEMO

Commercial real estate loans 3 ...•.••.••.•••••••
Other real estate owned4
Mortgage-backed securities.
Federal Home Loan Bank advances.
Average net consolidated assets
(billions of dollars) .. .. . .. .. . .. .. . .. . .. ....

A62

Federal Reserve Bulletin 0 July 2007

A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006-Continued
A. All banks-Continued

1997

Item

1998

1999

2000

2001

2002

2003

2004

2005

2006

Effective interest rate (percent)'

Rales earned
Interest-earning assets .. ........................
Taxable equivalent .............•.....•..
Loans and leases, gross ......................
Net of loss provisions ... ...............
Securities
.................. ......
Taxable equi valent ...... ........ .......
Investment account ................. .......
U.S. Treasury securities and U.S.
government agency obligmions
(excluding MBS) ......... ......
Mortgage-backed securities ...... ........
Other
.............. ..... ...........
Trading account ..... ................
Gross federal funds sold and reverse RPs .. ...
Interest-bearing balances at depositories .....

8.17
8.23
9.03
8.50
6.54
6.73
6.50

8.01
8.07
8.85
8.30
6.45
6.63
6.38

7.71
7.76
8.47
7.97
6.27
6.46
6.25

8.20
8.26
9.00
8.33
6.47
6.65
6.45

7.37
7.42
8.15
7.15
6.04
6.22
6.05

6.10
6.15
6.89
5.84
4.95
5.10
5.04

5.29
5.34
6.15
5.47
3.96
4.10
4.00

5.09
5.13
5.91
5.47
3.86
3.99
3.96

5.71
5.75
6.52
6.10
4.18
4.30
4.29

6.64
6.68
7.54
7.18
4.71
4.83
4.85

n.a.
n.a.

n.a.

5.76
6.45
5.60
6.01
3.86
4.01

4.42
5.44
4.74
4.38
1.93
2.79

3.29
4.24
4.08
3.71
1.40
2.09

3.11
4.38
3.76
3.35
1.40
1.98

3.46
4.60
4.23
3.72
2.66
3.70

4.19
5.08
4.80
4.16
4.31
5.09

4.15
3.61
3.95
3.54
1.96
2.19
5.04
5.43
3.84
5.92

2.54
2.11
2.38
2.06
1.06
1.13
3.38
3.70
1.88
4.32

1.87
1.47
1.62
1.44
.75
.74
2.59
2.88
1.30
3.59

1.77
1.36
1.72
1.29
.77
.72
2.35
2.56
1.49
3.26

2.69
2.06
2.77
1.91
1.41
1.24
3.19
3.14
3.07
4.50

3.90
3.04
3.92
2.85
1.88
2.01
4.38
4.10
4.57
6.19

n.a.

n.a.
n.a.

6.75
5.45
6.23

6.85
5.29
6.32

6.47
4.78
5.95

n.a.
n.a.
n.a.
6.63
5.56
6.48

4.92
4.39
5.44
4.16
2.25
2.93
5.45
5.54
5.17
6.94

4.88
4.31
5.66
4.01
2.29
2.79
5.22
5.48
5.19
6.89

4.47
3.87
4.91
3.63
2.08
2.49
4.92
5.09
4.73
6.48

5.17
4.45
5.61
4.17
2.34
2.86
5.78
5.69
5.77
6.97

Rates paid
Interest-bearing liabilities ................. ......
Interest-bearing deposits .....•.....•.........
In foreign offices ..........................
In domestic offices ........................
Other checkable deposits ................
Savings deposits (including MMDAs) ....
Large time deposits" ....................
Other time deposits" ............... .....
Gross federal funds purchased and RPs ... ....
Other interest-bearing liabilities . . . . . . . . . . . . .

Net interest income .. ......... ........ ........
Taxable equivalent .. ........ ........ ......
Loss provisions7 ......... .... .. ................
Non-interest income ...........................
Service charges on deposits
...............
Fiduciary activities ........ .. ................
Trading revenue ... ..........................
Interest rate exposures ....................
Foreign exchange rate exposures ..........
Other commodity and equity exposures ....
Other .... .................................
Non-interest expense ....................... ..
Salaries, wages, and employee benefits ... ....
Occupancy ........... .......................
Other .......................................

7.15
7.21
5.41
1.11
.29
.35
3.48
2.48
.43
.57

6.98
7.03
5.27
1.10
.29
.32

6.73
6.78
5.12
1.14
.23
.24

7.18
7.22
5.53
1.15
.23
.27

6.38
6.43
4.92
1.00
.20
.27

5.27
5.31
4.06
.89
.09
.22

4.54
4.58
3.56
.74
.07
.18

4.44
4.48
3.42
.74
.07
.21

4.98
5.02
3.82
.77
.13
.26

5.84
5.88
4.47
.84
.23
.31

3.46
2.43
.43
.60

1.25
.81
.11
.33

1.89
1.23
.22
.44

2.79
1.84
.36
.59

3.48
3.52

3.24
3.28

3.19
3.23

3.09
3.12

3.05
3.08

1.32
3.61
1.53
.47
1.62

2.98
2.09
.31
.58
3.40
3.45
.68
2.54
.42
.35
.20
.09
.07
.03
1.57
3.57
1.49
.44
1.64

1.30
.86
.10
.33

3.52
3.57
.42
2.41
.38
.37
.15
.05
.09
.01
1.50
3.77
1.55
.47
1.76

3.76
2.56
.45
.75
3.41
3.46
.50
2.59
.40
.38
.21
.08
.08
.04
1.61
3.66
1.51
.45
1.70

1.79
1.23
.15
.41

3.68
3.73
.41
2.23
.39
.35
.17
.08
.08

3.22
2.20
.39
.63
3.52
3.56
.39
2.66
.40
.38
.19
.07
.09
.03
1.69
3.76
1.58
.48
1.70

.68
2.54
.45
.32
.16
.08
.07
.01
1.61
3.47
1.51
.44
1.52

.45
2.54
.44
.31
.16
.07
.07
.02
1.63
3.36
1.50
.43
1.43

.30
2.39
.42
.32
.13
.03
.07
.03
1.51
3.34
1.46
.42
1.46

.30
2.33
.39
.31
.17
.05
.07
.04
1.46
3.19
1.44
.41
1.34

.27
2.37
.38
.30
.20
.05
.08
.07
1.48
3.13
1.44
.39
1.30
.76
-.01

•

Net non-interest expense . . . . . . . . . . . . . . . . . . . . . .

1.38

1.36

1.11

1.07

1.03

.93

.82

.96

.86

Gains on investment account securities ..........

.04

.06

•

-.04

.07

.08

.04

•

Income before taxes and extraordinary items ....
Taxes ..... .............................. ....
Extraordinary items, net of income taxes .....

1.92
.68

•

1.81
.62
.01

2.02
.72

1.81
.63

•

1.77
.59
-.01

.10
1.%
.65

•

2.05
.67
.01

1.97
.64

1.93
.62

Net income ..................... .......... .....
Cash dividends declared .....................
Retai ned income ............................

1.25
.90
.35
14.84

1.20
.80
.40
14.07

1.31
.%
.35

1.18
.89
.29

1.17
.87
.31

15.39

13.97

13.40

1.31
1.01
.30
14.36

1.39
1.07
.31
15.35

1.33
.76
.58
14.14

1.31
.75
.56
12.99

MEMO: Return on equity .......................

•

OTE: Data are as of Apri I 13, 2007.
I. Includes allocated transfer risk reserve.
2. Measured as the sum of large time deposits in domestic offices, deposits
booked in foreign offices, subordinated notes and debentures. federal funds
purchased and securities sold under repurchase agreements. Federal Home
Loan Bank advances. and other borrowed money.
3. Measured as the sum of construction and land development loans secured
by real estate; real estate loans secured by nonfarm nonresidential properties or
by multifamily residential properties; and loans to finance commercial real estate, construction, and land development activities not secured by real estate.
4. Other real estate owned is a component of other non-interest-earning
assets.

•

2.01
.65
.03
1.39
.87
.52
13.67

5. When possible. based on the average of quarterly balance sheet data reported on schedule RC-K of the quarterly Call Report.
6. Before 1997. large time deposit open accounts were included in other
time deposits.
7. Includes provisions for allocated transfer risk.
• In absolute value, less than 0.005 percent.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.
MBS Mortgage-backed securities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A63

A.!. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006
B. Ten largest banks by assets
Item

1997

1998

1999

2000

200 I

2002

2003

2004

2005

2006

Balance sheet items as a percentage of average net consolidated assets

Interest-earning assets

81.84
50.91
16.90
10.24
6.66
6.40
1.34
5.06
17.42
15.69
.68
.09
11.02
1.70
9.31
.39
3.52
1.73

81.25
50.76
18.07
11.76
6.31
6.04
1.30
4.74
16.51
15.08
.77
.09
10.33
1.72
8.61
.38
3.51
1.43

81.49
53.37
19.20
13.14
6.06
5.94
1.36
4.58
16.96
15.55
.90
.10
10.77
1.54
9.22
.43
3.35
1.41

82.23
55.22
19.87
13.95
5.92
5.43
1.34
4.09
19.82
18.48
.98
.11
13.37
1.61
11.76
.60
3.42
1.34

81.74
53.86
18.82
13.42
5.41
6.17
1.64
4.53
19.23
18.05
1.27
.11
12.41
1.78
10.63
.51
3.76
1.18

81.68
53.61
16.16
11.69
4.47
7.82
2.90

4.20
.45
.31
4.15
2.24
-.07
-1.08
20.00
10.97
10.55
1.56

4.05
.35
.28
3.74
2.81
-.06
-1.01
19.72
12.12
11.64
1.70

4.34
.38
.26
3.96
3.40
-.05
-1.03
18.34
13.08
12.57
1.98

3.78
.28
.23
3.75
3.07
-.04
-.97
18.98
13.71
13.03
1.96

3.23
.20
.28
3.51
3.43
-.04
-.97
17.81
12.14
11.88
.68

3.20
.20
.23
2.94
3.44
-.08
-1.12
20.54
14.35
14.13
.59

corporation obligations
.
Govemment-backed mortgage pools ..
Collateralized mortgage obligations ..
Other
.
State and local government
Private mortgage-backed securities
Other
.
Equity
.
Trading account
Gross federal funds sold and reverse RPs
.
Interest-bearing balances at depositories
.
Non-interest-eaming assets
.
Revaluation gains held in trading accounts ..
Other
.

5.34
4.26
.93
.15
.51
.32
2.81
.42
9.03
7.56
3.37
18.16
7.36
10.80

6.31
5.13
.93
.26
.47
.60
2.57
.47
7.60
7.81
2.96
18.75
7.62
11.13

6.35
5.03
.79
.52
.45
.57
3.22
.51
5.25
6.64
3.14
18.51
6.66
11.85

6.59
4.88
.93
.78
.51
.51
3.47
68
5.26
5.02
3.01
17.77
5.66
12.11

6.84
4.99
1.11
.74
.55
.58
3.22
.26
5.67
6.38
3.69
18.26
5.48
12.78

8.69
6.38
1.52
.79
.59

Liabilities
Core deposits
.
.
Transaction deposits. . . .
Demand deposits
.
Other checkable deposits
.
Savings deposits (including MMDAs)
Small time deposits ...
Managed liabilities'
Large time deposits
.
Deposits booked in foreign offices
Subordinated notes and debentures .....
Gross federal funds purchased and RPs
Other managed liabilities
. .
Revaluation losses held in trading accounts
Other ..

92.61
31.66
10.19
8.98
1.21
15.32
6.15
46.02
4.17
23.39
1.80
10.26
6.40
7.53
7.39

92.58
32.94
9.45
8.46
17.07
6.42
44.42
5.04
21.23
1.89
9.78
6.49
7.67
7.55

92.28
33.76
8.55
7.83
.72
18.94
6.26
45.49
5.19
22.22
1.98
8.84
7.27
6.51
6.52

92.36
33.28
8.01
7.28
.74
19.24
6.03
46.84
5.55
22.76
2.10
8.89
7.55
5.69
6.55

7.39

7.42

7.72

5.45
.13
5.52

5.61
.09
6.65

5.69
.06
6.40

Loans and leases (net) ..............••....
Commercial and industrial
.
U.S. addressees. .
.
.
Foreign addressees
Consumer
.
Credit card
.
Installment and nther
.
Real estate
.
In domestic offices. . . . . .
.
Construction and land development ..
Farmland
.
One- to four-family residential ..
Home equity
Other
.
Multifamily residential
Nonfarm nonresidential
In foreign offices
.
To depository institutions and
acceptances of other banks
Foreign governments

Agricultural production
Other loans
.
.
Lease-financing receivables
.
LESS: Unearned income on loans ..
LESS: Loss reserves I
.........•.
Securities
.
Investment account

Debt
U.S. Treasury

.94

83.54
51.29
10.54
7.49
3.06
8.49
3.19
5.30
23.21
22.21
1.40
.10
16.71
4.04
12.67
.45
3.55
1.00

83.96
51.35
10.61
7.74
2.87
8.80
3.60
5.21
24.55
23.52
1.70
.10
17.73
5.22
12.52
.44
3.55
1.03

84.67
52.04
11.18
8.07
3.1 I
8.23
3.1 I
5.12
25.48
24.47
2.01
.10
18.28
5.40
12.88
.44
3.64
1.01

3.54
.17
.19
2.87
2.87
-.06
-1.02
21.22
15.31
15.1 I
.82

4.10
.16
.22
3.32
2.08
-.04
-.80
22.95
15.99
15.83
.86

3.15
.12
.20
2.81
1.78
-.04
-.65
23.37
15.58
15.44
.56

2.97
.07
.20
2.88
1.60
-.02
-.56
23.04
15.1 I
14.96
.43

9.92

3.34
.22
6.18
5.26
2.28
18.32
5.40
12.93

9.20
7.59
.91
.70
.59
1.10
3.40
.20
5.91
5.79
2.18
18.61
5.79
12.83

9.69
8.65
.54
.50
.58
1.18
3.43
.14
7.79
6.96
2.28
16.04
3.50
12.54

9.47
8.63
.52
.32
.64
1.06
3.37
.15
7.93
7.60
1.99
15.33
3.07
12.27

92.14
36.38
8.40
7.50
.90

91.52
40.61
8.34
7.40
.95

91.94
41.07
7.74
6.72
1.02

91.07
37.99
5.40
4.31
1.09

22.21

26.82

28.99

5.77
43.41
5.46
20.28
2.16
9.04
6.47
5.10
7.26

5.44
38.89
5.13
17.31
2.1 I
8.83
5.53
4.63
7.39

4.34
38.60
5.53
16.62
1.92
8.62
5.90
4.88
7.40

1.78
7.79
7.35
3.95
6.34

90.81
40.18
6.05
4.90
1.15
30.11
4.02
40.83
6.28
17.51
1.89
8.39
6.76
3.21
6.60

4.51
43.77
6.84
18.48
1.99
9.51
6.94
2.83
6.47

7.64

7.86

8.48

8.06

8.36

9.19

8.93

5.87
.04
6.32

6.68
.04
6.68
.82

6.92
.03
8.82
.82

6.31
.03
9.60
.84

5.99
.03
10.30
.79

6.33
.02
10.36
.63

6.73
.03
10.21
.75

2.527

2.785

3,148

3.654

4.232

4,765

4.92

20.78
19.70
1.42
.12
13.51
2.35
11.17
.55
4.09
1.08

81.39
52.20
12.98
9.40
3.59
7.96
2.81
5.15
22.68
21.74
1.36
.10
16.03
2.96
13.07
.47
3.78

U.S. government agency and

Capital account

.99

.92

8.64
.70
.58
.57
.96
3.52
.16
6.96
6.37
2.93
16.46
4.45
12.01
91.64
42.02
6.65
5.43
1.22
31.54
3.83
39.33
5.21
17.20

28.08

MEMO

Commercial real estate loans'
Other real estate owned4
Mortgage-backed securities
Federal Home Loan Bank advances
Average net consolidated assets
.
(billions of dollars)

.
.

0.3.

n.3.

n.a.

1.514

1,820

1.935

2,234

A64

Federal Reserve Bulletin 0 July 2007

A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006-Continued
B. Ten largest banks by assets-Continued

1997

Item

1998

1999

2000

2001

2002

2003

2004

2005

2006

Effective interest rate (percent)'

Rates earned
lnterest--earning assets .. ..... .......... ........

Taxable equivalent .... ..................
Loans and leases, gross ..... ..... . ..... ....
Net of loss provisions .. .. ....... ... .....
Securities ...... ........................ ....
Taxable equivalent .... ........... . ......
love tment account ....... ....... ... .....
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) ...... ........ .. ....
Mortgage-backed securities ..........
Other
..... ... ...... ... ... .. ..
Trading account .............. .... .. .. . .. . .
Gross federal funds sold and reverse RPs . ....
Interest-bearing balances at depositories ... ..

7.57
7.60
8.25
8.10
6.78
6.85
6.76

6.55
6.40

6.83
6.86
7.50
6.55
6.23
6.31
6.23

5.82
5.85
6.52
5.30
5.04
5.1 I
5.30

4.99
5.01
5.76
5.19
4.15
4.21
4.26

4.71
4.73
5.52
5.29
4.04
4.10
4.37

5.29
5.31
6.15
5.84
4.27
4.32
4.63

6.25
6.27
7.26
6.94
4.67
4.72
5.08

n.a.
n.a.

5.01

6042

n.a.
6.70
4.93
7.43

6.34
6.24
3.86
3.73

3.74
5.55
5.30

2.62
4.51
4.28
3.87
1.60

3.29
4.92
4.26
3.57

2049

2.92
4.83
3.76
3.32
1043
1.80

4.15
5.27
4.77
3.89
4.06
5.59

5.37

4.09

4040

3.27
4.02
2.84
1.67
1.92

1.85
1.34
1.74
1.18
.80
.73
2.36
2.70
1.39
4.27

1.80
1.29
1.81
1.08
.97
.71
2.14
2.61
1.59
3.69

2.82
2.01
2.77
1.70
2.27
1.15
3.06

7.55
7.57
8.21
7.77
6.83
6.89
6.78

7.37
7.39
7.99
7.65
6.58
6.65
6.59

7.92

n.a.

n.a.
6.81

5045
6.91

n.a.

6.92
5.20
7.16

6.56
4.52
7.22

5.29

4.79
3.82
4.99
3.04
1.44
2.11
4.36
4.95
4.53
8.61

7.76
7.78

8046
6048

4046

2.20
3.40

2046
4.06

Rates paid

Interest-bearing liabilities ....... ....... .........
Interest-bearing deposits ...... ... .........
In foreign offices ..... ...... . ..............
In domestic offices .... ....... ..... ..... ..
Other checkable deposits .. ...... ......
Savings deposits (including MMDAs) ..
Large time deposits· .......
.... .. ...
Other time deposits·
.. .......... ....
Gross federal funds purchased and RPs .
Other interest-bearing liabilities .. ............

5041
4.54
5.52
3.69
1.97
2.68
5.17

5045
5.02
9.13

4040
5.83
3.39
1.67

2045
4.53
5.21
5.18
8.85

5.67
3.51
1.61

2043
5.32
5.53

5047
8.15

4040
5.11
3.81
7.01

2.54
1.94
2.59
1.67
.93
1.02
3.26
3.44
2.02
5.40

3040
3.11
5.25

4.10
2.96
3.88
2.55
2.46
1.87
4.31
4.05
4.62

7046

Income and expense as a percentage of average net consolidated assets
Gross interest income .... ... ....... ........
Taxable equivalent .. ... ... ... ..... ... . .
Loans .... ........
.... . ..... . . . . . . . . . . . . .
Securities
...... ..... ... .... ..... . .
Gross federal funds sold and reverse RPs .....
Other ..... .......... .. . ....... .... . ....
Gross interest expense .............. ..... ....
Deposits ................ .. .. . . . . . . . . . . . ..
Gross federal funds purchased and RPs ..... ..
Other ......... . . . . . . . . . ........ . . . . . . . . . . ...
Net interest income ..... ....... . .......... .....
Taxable equivalent ..... ...................
Loss provisions7
.... ..................
Non-interest income .. ......... ................
Service charges on deposits ... ... ........ . ..
Fiduciary activities . . . . . . . . . . . . . . . . . . . . .
Trading revenue ....
..... .. .. ....... . ....
Imerest rate exposures .... ...... .. .... .....
Foreign exchange rate exposures ...........
Other commodity and equity exposures. ...
Other .. ..... ..... ........ ... .... . ........
Non-interest expense ........ ..... ..... ..... . .
Salaries, wages, and employee benefits .......
Occupancy ....... . . . . . . . . . . .... ....... ....
.... ... ....
Other ....... ..... . . . . . . .

Net non-interest expense

...... ............ ....

Gains on investment account securities ........
Income before taxes and extraordinary items ..
. ..
Taxes ............ ....
Extraordinary items, net of income taxes ...
Net income ... ............. ..... . ..............
Cash dividends declared
.... .. ....... .....
Retained income ...... .... .... ......... .. ...
...... ........ . ...
MEMO: Return on equity

6.31
6.33
4.31
.73

6.21
6.22
4.27
.81

045

042

.82
3.55
2.26
.54
.75
2.76
2.79
.16
2.12
.32
.34
.43
.23
.20

6.01
6.03
4.35
.85
.30
.51
3.16
1.97
.40
.79
2.84
2.86
.26
2.55
.37
.31

.70

•

1.04
3.24
1.45

3048
2.20
.54
.74
2.73
2.75
.31
2.15
.33
.32
.33
.10
.20
.03
1.17

046
.09

3045
1.57
.50
1.38
.90
.03
1.71
.66

047

.98
.82
.15
13.22

043
.20
.14
.08
1.10
3.13
1.38

1.41

1.54
1.32
.11
1.22
.44

•

048
.20
.18
.11
1.39
3.31
1.46
.47
1.39
.77
-.03
1.60
.60

1045

047

•

.78
.53
.25
10.53

5.55
5.57
4.13
.72
.25
.44
2.69
1.74
.35
.59
2.87
2.89
.59
2.26
.44
.29

.17
.19

3047

1.33
1.12
.08
1.56
.58

6.39

6041
4.74
.88
.25
.51
3.60
2.33
.49
.78
2.78
2.80
.38
2.54
.40
.27

•

1.05
.79
.26
13.58

NOTE: Data are as of April 13, 2007.
I. Includes allocated transfer risk reserve.
2. Measured as the sum of large time deposits in domestic offices, deposits
booked in foreign offices, subordinated notes and debentures, federal funds
purchased and securities sold under repurchase agreements, Federal Home
Loan Bank advances, and other borrowed money.
3. Measured as the sum of construction and land development loans secured
by real estate; real estate loans secured by nonfarm nonresidential properties or
by multifamily residential properties; and loans to finance commercial real estate, construction, and land development activities not secured by real estate.
4. Other real estate owned is a component of other non-interest-earning
assets.

•

1.00
.86
.13
13.04

4.77
4.79
3.57
.73
.12
.35
1.65
1.05
.18
Al

3.12
3.14
.73
2.31

4.05
4.07
3.04
.63
.10

.28
1.19
.74
.13
.33
2.86
2.88
.35
2.32

3.94
3.96
2.86
.69
.10
.30
1.20
.74
.13
.33
2.74
2.76
.16
2.21

4047
4048

5.39

3.19
.72
.18
.38
1.89
1.17
.27

3.85
.79
.31
.45
2.86
1.72

045

.67
2.54
2.56
.21
2.24

2.58
2.59
.20
2.37

5041

047

048

046

045

042

.25
.32
.15
.14
.03
1.26
3.16
1.41

.26
.30
.12
.14
.04
1.30
3.02
1.39

.24
.23
.07
.12
.04
1.28
3.1 I
1.34

.27
.31
.11
.12
.07
1.38
2.99
1.38

.23
.36

045

046

045

043

1.30
.87
.08
1.48

1.18
.70
.11
1.92
.63

1.33
.91
.07
1.74
.56

1.19
.62

049

1.28
.85
.13
1.67
.56

-.01
.99
.66
.32
12.55

1.11
1.05
.06
13.14

1.29
.99
.30
16.06

1.18
.65
.53
14.07

1.18
.59
.59
12.86

•

•
1.75
.57

•

.09

.14
.13
1.24
2.80
1.39
.40
1.01
.56
-.01
1.76
.57
.02
1.21
.63
.58
13.58

5. When possible, based on the average of quarterly balance sheet data reported on schedule RC-K of the quarterly Call Report.
6. Before 1997, large time deposit open accounts were included in other
time deposits.
7. Includes provisions for allocated transfer risk.
• In absolute value, less than 0.005 percent.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.
MBS Mortgage-backed securities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

A65

A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006

c. Banks ranked

I I through 100 by assets
Item

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Balance sheet items as a percentage of average net consolidated assets
87.50
63.89
19.01
17.78
1.22
15.62
8.50
7.12
22.99
22.85
1.69
.14
13.88
2.22
11.65
.93
6.21
.15

87.85
64.37
18.92
17.59
1.33
14.52
7.67
6.86
24.59
24.42
2.03
.17
14.86
2.17
12.69
1.00
6.36
.18

88.40
64.22
19.40
18.18
1.22
13.57
6.78
6.79
24.80
24.62
2.43
.19
14.15
2.08
12.07
1.02
6.82
.19

88.67
64.88
18.19
17.64
.55
13.79
6.97
6.82
26.21
26.12
3.00
.22
14.51
2.49
12.02
1.11
7.28
.09

88.09
62.14
15.84
15.36
.48
13.20
6.97
6.23
27.29
27.21
3.31
.23
15.51
2.90
12.60
1.16
6.99
.09

88.34
60.00
13.27
12.94
.33
12.79
6.56
6.22
28.94
28.88
3.36
.22
17.05
3.92
13.13
1.20
7.05
.06

88.10
59.48
11.96
11.66
.30
12.57
6.35
6.21
30.67
30.54
3.22
.20
18.79
4.74
14.05
1.32
7.00
.13

88.18
60.63
11.90
11.64
.26
12.73
6.90
5.83
32.16
31.97
3.51
.19
19.52
5.90
13.62
1.34
7.41
.20

87.87
63.37
12.18
11.91
.27
12.84
7.44
5.39
34.89
34.73
4.21
.19
21.05
6.04
15.01
1.45
7.83
.16

87.05
62.80
12.16
11.84
.32
11.83
7.00
4.84
35.36
35.15
5.31
.17
20.32
5.02
15.30
1.46
7.89
.21

1.30
.09
.29
3.18
2.70
-.05
-1.24
15.80
15.D7
14.58
2.81

1.09
.06
.33
3.35
2.71
-.04
-1.16
16.66
16.13
15.58
2.25

.93
.06
.33
2.99
3.27
-.04
-1.11
17.79
17.28
16.64
1.70

1.05
.03
.37
2.57
3.82
-.03
-1.12
17.32
16.10
15.50
1.12

1.40
.03
.32
2.03
3.18
-.02
-1.13
19.00
17.71
17.32
.67

1.44
.02
.27
1.80
2.65
-.02
-1.17
20.30
19.17
18.82
.74

1.21
.02
.23
1.59
2.35
-.02
-1.10
21.16
20.09
19.88
.95

.54
.01
.19
1.87
2.30
-.02
-1.06
21.28
20.12
19.96
.89

.56
.02
.19
1.62
2.07
-.01
-.97
19.96
18.80
18.69
.60

.44
.01
.18
1.87
1.83
-.01
-.87
19.19
17.69
17.56
.44

Revaluation gains held in trading account ....
...............
Other

8.98
5.17
2.13
1.68
.88
.73
1.18
.49
.73
4.38
3.43
12.50
.69
11.81

9.93
4.98
2.83
2.12
.92
.96
1.53
.55
.54
3.57
3.24
12.15
.75
11.40

10.57
5.12
2.89
2.56
.99
1.35
2.02
.65
.51
3.34
3.06
11.60
.56
11.04

9.70
4.31
2.55
2.84
.96
1.66
2.06
.60
1.22
3.76
2.71
11.33
.40
10.92

10.09
5.19
2.42
2.48
.99
2.01
3.56
.39
1.29
4.06
2.88
11.91
.55
11.37

11.45
6.00
2.79
2.65
.97
2.13
3.53
.34
1.13
4.71
3.33
11.66
.47
11.19

12.99
6.08
3.72
3.19
.95
2.14
2.85
.21
1.07
4.20
3.26
11.90
.60
11.30

12.80
5.74
3.42
3.64
.96
2.65
2.66
.16
1.16
2.98
3.29
11.82
.42
11.40

11.62
4.83
3.39
3.40
.98
3.58
1.90
.11
1.16
2.30
2.24
12.13
.33
11.80

10.08
4.05
2.93
3.10
1.01
4.28
1.75
.12
1.51
2.86
2.20
12.95
.30
12.65

Liabilities
Core deposits ...........
Transaction deposits
Demand deposits
Other checkable deposits ...............
Savings deposits (including MMDAs) .
Small time deposits ................
Managed liabilities' ......................
Large time deposits ...... . . . . . . . . . . . .
Deposits booked in foreign offices
Subordinated notes and debentures ....
Gross federal funds purchased and RPs ..
Other managed liabilities .....
Revaluation losses held in trading accounts .
Other ..

91.85
51.51
16.12
14.17
1.95
21.7\
13.69
36.60
7.37
8.08
1.48
9.36
10.31
.68
3.05

91.63
49.89
14.15
12.39
1.75
22.5\
13.24
38.1 I
7.83
8.37
1.66
9.48
10.77
.76
2.87

91.66
48.35
12.12
10.52
1.60
23.90
12.32
39.83
8.17
8.19
1.71
9.77
11.99
.58
2.90

91.57
46.28
9.93
8.61
1.32
24.02
12.33
41.98
9.54
7.56
1.54
9.28
14.07
.41
2.91

91.15
46.28
8.37
7.17
1.20
26.62
11.28
40.81
9.72
7.05
1.53
9.71
12.79
.52
3.54

90.79
47.07
7.49
6.32
1.17
30.07
9.51
39.48
8.99
6.28
1.44
9.66
13.1 I
.44
3.80

90.65
47.93
7.29
5.96
1.33
32.34
8.30
38.12
8.20
6.54
1.38
9.69
12.30
.56
4.05

89.87
46.55
7.06
5.65
1.41
31.75
7.74
39.29
8.76
7.21
1.39
8.95
12.97
.40
3.64

88.86
48.18
6.64
5.35
1.29
33.33
8.21
37.05
10.10
6.02
1.31
7.17
12.44
.34
3.30

88.12
46.98
5.75
4.55
1.21
32.75
8.47
37.54
11.47
6.44
1.33
6.71
11.58
.30
3.31

8.15

8.37

8.34

8.43

8.85

9.21

9.35

10.13

11.14

11.88

9.44
.06
8.03

10.11
.04
8.76

11.00
.03
9.36

12.06
.03
8.52

n.a.

12.06
.04
9.63
4.07

12.24
.05
10.93
4.85

12.10
.06
11.93
4.75

12.85
.05
11.81
4.65

13.93
.04
11.81
5.19

15.13
.05
11.26
5.56

1,604

1,745

1,881

2,031

2,130

2,124

2,287

2,376

2,403

2,575

Interest-earning assets . ....

Loans and leases (net) .......
Commercial and industrial ....
U.S. addressees .....................
. . . . . .. . ..
Foreign addressees
Consumer
...........
Credit card ....
..................
Installment and other .. ................
Real estate ..... ..................
In domestic offices .......... ............
Construction and land development ....
............... ...........
Farmland
One- to four-family residential .......
Home equity .......................
Other ............. . . . . . . . . . . . . . . .
Multifamily residential ...
Nonfarm nonresidential .
In foreign offices ....... ...............
To depository institutions and
acceptances of other banks .........•.
Foreign governments
Agricultural production . ..................
Other loans ............

Lease-financing receivables

...........

LF.ss: Unearned income on loans.
LF.ss: Loss reserves' ..
Securities ...............
Investment account . .. ....................
......... .
Debt ...........
U.S. Treasury ............ ............
U.S. govemment agency and
corporation obligations
Government-backed mongage pools ..
Collateralized mongage obligations
Other ..
State and local govemment
Private mongage-backed securities
Other ......
............
. ..........
Equity ....

Trading account . ........
Gross federal funds sold and reverse RPs ..
Interest-bearing balances at depositories ......

Non-interest-earning assets

...............

Capital account
MF.MO
Commercial real estate loans' ..............
Other real estate owned·
Mongage-backed securities.
Federal Home Loan Bank advances ..
Average net consolidated assets
(billions of dollars) . ............

A66

Federal Reserve Bulletin 0 July 2007

A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006-Continued
C. Banks ranked II through 100 by assets-Colltilllled
Item

I997

1998

1999

2000

200 I

2002

2003

2004

2005

2006

Effective interest rate (percent)'

Rales earned
Interest-earning assets
.
Taxable equivalent ..............•.......
Loans and leases, gross ..............•.......
Net of loss provisions
.
Securities
,
..
Taxable equivalent
.
.
.
Investment account.
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) . . . . . .. .
.
Mortgage-backed securities
.
Other
.
.
.
Trading account. . ..
Gross federal funds sold and reverse RPs .
Interest-bearing balances at depositories
Rales paid
Interest-bearing liabilities
.
Interest-bearing deposits
.
In foreign offices.
... .
.
In domestic offices
.
.
Other checkable deposits
.
Savings deposits (including MMDAs)
.
Large time deposits·
.
Other time deposits·
.
Gross federal funds purchased and RPs
.
.......•..
Other interest-bearing liabilities

8.44

8.12
8.16
8.81
8.14
6.31

7.84
7.88
8.50
7.80
6.32

6.46

6046

6.64
6.77

6.33

6.34

6.66

n.a.

n.a.
n.a.

n.3.

n.a.

6.05

5.86
5.46
5.67

5.58
5.12
4.81

6.25
6.06

4.77

4.38
3.76
4.70
3.60
2.03

8.33
8.36
9.03
8.27
6.55
6.70
6.57

5045
5.76
4.79
4.22
5.23
4.04
2.01
2.84

5047
5043
5.29
5.85

4.15
5.22
3.96

2041

2049

2.76
5.32
5.35
5.22
5.81

4.96
5.03
4.87
5.41

8048
9.14
8.25

5049
5.22

4042
5.38
4.26
2.57
2.94
5.88
5.73
6.02
6.36

3.90

5.26
5.29
5.98
5.19
3.63
3.73

3.87

3.64

6.05
6.08
6.63
5.91
4.18
4.29
4.11

4.28
5.34
4.22
3.59
1.68
2.46

3.17
4.20
3.61
2.56
1.14
1.93

2.94
4.02
3.29
3.39
1.25
2.27

4.34
4.06
5.30
3.24
3.20

2041

1.80
1.35
1.23
1.36

1.71
1.29
1.42
1.27
.72
.65
2.49
2.58
1.37
2.76

2.68
2.03
2.76
1.95
1.29
1.30
3.31
3.03
3.04
3.87

7.54
7.58
8.26
6.96
5.96
6.08
6.04

6.03
6.07
6.80
5.59
4.79
4.91
4.86

5.30
5.33
6.1 I
5.11
3.80

5.83
6.60
5.13
4.83
3.86
4.38
4.16
3.60
3.67
3.60
2.32
2.30
5.11

5042
3.86
5.30

1.96
1.70
1.99
.94
1.08
3.37
3.68
1.73
3.54

.64
.66
2.70
2.95
1.20
3.02

7.06
7.09
7.72
7.17
5.05
5.16

3047

4.29
5.02
5.18
6.86
4.98
4.21

4.90

3.88
3.07
4.10
2.95
2.1 I
2.14

4046
4.09

4048
5.17

f---------------------------Income and expense as a percentage of average net consolidated assets

Gross interest income
.
Taxable equivalent
.
Loans
.
Securities
.
Gross federal funds sold and reverse RPs
.
Other....................
.
.
Gross interest expense
.
, ..
Deposi ts
Gross federal funds purchased and RPs
.
Other
.
Net interest income
.
.
Taxable equivalent ....•... .
Loss provisions7 . . . . . . . . . . . . . . . . . . • . . . . . . . • .
Non-interest income
.
Service charges on deposits
.
Fiduciary activities
.
Trading revenue
.
Interest rate exposures. . . . . . . . . . . . . . . . .. ..
Foreign exchange rate exposures
_..
Other commodity and equity exposures
.
Other
.
.
.
Non-interest expense. . . . . . . . . . . . . . .
Salaries, wages, and employee benefits
.
Occupancy.....
.
.
Other
.
Net non-interest expense

Gains on investment account securities

Income before taxes and extraordinary items
Taxes.....
.
Extraordinary items, net of income taxes

.
.

Net income....................
.
Cash dividends declared
Retained income
. ..
MEMO: Return on equity

7.26
7.30
5.87
.98
.22
.19

6.98
7.02
5.56
1.10
.18
.14
3.26
2.02
.51
.74

3.58
3.61

048

1.00
.19
.18

7.54
7.57
6.05
1.09
.22
.18

3.72
3.75
.55
3.36
Al

7.15
7.19

5.78

.52
.07
.02
.04

3041

3045

2.23
.51
.68

2.23
.51
.71

3.85
3.89
.60
2.76
.44
.44
.08
.02
.05

3.70
3.73

1.79
3.85
1.51

2.09
4.05
1.53

2.39
4.12
1.53

2.18
4.00
1.44

046

045

043

1.88

2.06

2.14

1.10
.02
2.18
.77

.95
.03

.76
-.01

-.05

2.24
.78

2.40
.86

2.02
.70

•

.53
3.09

042
049
.09
.03
.06

.08
.02
.05

•

.
..
.

1.42
.93

1045

048

049

1.54
1.16
.38

17.36

17.37

18046

.96

NOTE: Data are as of April 13,2007.
I. Includes allocated transfer risk reserve.
2. Measured as the sum of large time deposits in domestic offices, deposits
booked in foreign offices, subordinated notes and debentures, federal funds
purchased and securities sold under repurchase agreements, Federal Home
Loan Bank advances, and other borrowed money.
3. Measured as the sum of construction and land development loans secured
by real estate; real estate loans secured by nonfarm nonresidential properties or
by multifamily residential properties; and loans to finance commercial real estate. construction, and land development activities not secured by real estate.
4. Other real estate owned is a component of other non-interest-earning
assets.

3.96

2041
.56

.99

.68
3.18

042

•

.82

•

1.32
.94
.38
15.72

6.70
6.73
5.28
1.06
.15
.21
3.14
2.01
.38
.75
3.56
3.59
.91
3.35

5.31
5.34
4.15

.90
.08
.18
1.77
1.09
.17
.51
3.54
3.57

4.67
4.70
3.72
.75
.04
.15
1.30

.77
.12
AI
3.37
3.40

.80
3.30

.67
3.29

042
042

042

.08
.04
.03

.08
.04
.04

•

2043
3.95

1047
.42
2.07
.60
.09
2.14
.74

•

2.37
3.73
1.49
.40
1.84

043
.10
2.41
.82

.37
.09
.04
.04
.01
2041

4.67
4.70
3.72
.73
.03
.19
1.26
.74
.13
.40

3041
3.44
.55
3.05
.40

042

3.64

.07
-.01
.05
.03
2.16
3.55

1.47
Al
1.76
.35

.39
1.70
.50

1045

.06

2.39
.82

.77
.06
.22
1.94
1.18
.23
.53
3.40
3.43
.52
2.75
.37
.35
.06
-.01
.04
.02
1.98
3.36
1.37
.37
1.62
.61

.03

2042

5.34
5.37
4.27

.82

•

1.39

1.59

.96

.99

043

.60

1.59
1.05
.54

15.74

17.24

17.03

6.20
6.23

4.96
.88
.14
.23
2.82
1.85
.30
.67
3.38

3041
042
3.13
.35
AI
.07
.02
.05

•

2.30
3.51
1.34

.33
1.83
.38
-.03

.01

2.56
.87
.07

1.57
.95
.62

1.50
1.00
.50

1.76
1.38
.38

15.54

13048

14.80

•

2.27

.77

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

A67

A. I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006
D. Banks ranked 101 through 1,000 by assets
Item

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Balance sheet items as a percentage of average net consolidated assets
Interest-earning assets ......
Loans and leases (net) ......
Commercial and industrial .. ...........
...........
U.S. addressees
...........
Foreign addressees
Consumer ................ ................
Credit card .. . . . . . . . . . . . . .
...........
Installment and other.
Real estate ......
. ..........
In domestic offices ......
Construction and land development ..
Farmland
One- to four-family residential
Home equity .......... ...........
Other ....
. . . . . . . ... .
Multifamily residential .....
Nonfarm nonresidential ....
In foreign offices ...
To depository institutions and
acceptances of other banks
Foreign governments
.................
Agricultural production ....... .............
Other loans .................... ...........
Lease-financing receivables .....
LESS: Unearned income on loans
LESS: Loss reserves' . . . . . . . . . . . . . . . . . .
Securities .................
Investment account .....................
Debt ............. ............
. .. . .... . . . ... . .. .
U.S. Treasury
U.S. government agency and
corporation obligations .......
Government-backed mortgage pools
Collateralized mortgage obligations.
Other ...........................
State and local government
Private mortgage-backed securities
Other ........... ...........
Equity ..............
Trading account ........
Gross federal funds sold and reverse RPs ..
Interest-bearing balances at depositories ...
Non-interest-earning assets ....... ..............
Revaluation gains held in trading accounts ...
...........
Other

Liabilities . . . . . . . . . . . . . . . .
Core deposits . . . . . . . . . . . . . . . . . . ............
........... .
Transaction deposits
............
Demand deposits
Other checkable deposits ..
Savings deposits (including MMDAs) .
Small time deposits ................
Managed liabilities 2 . . . . . . . . . . . . . . . . . . . . . . . . .
Large time deposits .....................
Deposits booked in foreign offices
Subordinated notes and debentures ....
Gross federal funds purchased and RPs ..
Other managed liabilities ............
Revaluation losses held in trading accounts
Other ... .............
. ................

Capital account
MEMO
Commercial real estate loans' .. ................
Other real estate owned' ......... ...........
Mortgage-backed securities ....... .............
Federal Home Loan Bank advances .............
Average net consolidated assets
(billions of dollars) ........

91.34
62.34
12.38
12.14
.23
14.36
5.87
8.49
33.10
33.08
2.68
.52
18.08
2.29
15.78
1.28
10.52
.02

91.38
61.23
12.45
12.12
.32
12.56
4.78
7.78
33.83
33.81
2.87
.56
18.14
2.14
16.00
1.25
10.99
.02

91.68
61.48
12.64
12.32
.32
10.79
3.37
7.41
35.90
35.87
3.48
.58
18.26
1.99
16.26
1.44
12.12
.02

91.50
62.15
12.95
12.60
.36
10.19
3.27
6.92
36.93
36.91
4.15
.65
17.17
2.10
15.06
1.58
13.36
.02

91.16
62.46
13.03
12.65
.38
9.76
3.61
6.15
37.64
37.62
4.90
.66
16.18
2.21
13.97
1.69
14.18
.02

91.36
61.46
12.38
12.06
.31
8.13
2.63
5.50
38.92
38.89
5.40
.73
15.39
2.51
12.88
1.83
15.55
.03

91.34
61.32
11.51
11.20
.31
6.79
1.82
4.97
40.96
40.91
5.89
.80
15.71
2.92
12.79
2.00
16.51
.05

91.56
63.33
11.52
I I.21
.31
6.33
1.91
4.42
43.38
43.32
7.01
.91
15.33
3.46
11.87
2.24
17.82
.06

.59
.02
.73
1.47
.99
-.10
-1.19
23.37
23.26
22.65
4.94

.52
.03
.80
1.30
.99
-.09
-1.15
24.18
24.08
23.39
3.91

.46
.03
.78
1.25
.78
-.08
-1.06
25.17
25.09
24.33
2.53

.37
.03
.82
1.22
.75
-.08
-1.04
24.34
24.25
23.46
1.81

.38
.03
.85
1.22
.74

.37
.02
.86
1.18
.75
-.06
-1.10
23.86
23.80
23.30
1.22

.37
.02
.83
1.25
.67
-.06
-1.02
24.36
24.23
23.79
1.00

.25
.01
.82
1.32
.75
-.06
-.98
23.59
23.54
23.18
1.02

.81
1.36
.75
-.06
-.90
21.57
21.50
2I.21
.83

.85
1.20
.75
-.06
-.88
19.65
19.57
19.30
.60

13.91
6.20
3.00
4.71
2.43
.59
.78
.61
.10
3.59
2.05
8.66

15.08
6.45
3.21
5.42
2.69
.65
1.06
.69
.11
4.16
1.80
8.62

15.56
6.22
3.04
6.30
2.91
.99
2.19
.79
.09
3.40
1.60
8.50
.02
8.49

14.70
6.27
3.08
5.35
2.90
.94
2.42
.43

16.96
7.03
3.69
6.24
2.95
.87
2.01
.43
.14
3.85
1.81
8.66

16.70
6.80
3.41
6.49
2.92
1.08
1.46
.36
.05
2.95
1.69
8.44

15.05
5.73
3.16
6.16
2.78
1.17
l.37
.29
.08
2.83
1.76
8.68

13.61
4.84
2.85
5.92
2.75
1.10
1.24
.27

4.20
1.68
8.84
.01
8.84

15.85
6.55
3.69
5.60
2.89
.99
2.34
.50
.06
4.15
1.89
8.64
.01
8.64

8.66

8.44

8.68

89.93
61.26
11.37
8.05
3.32
32.34
17.55
26.57
12.17
.88
.34
5.27
7.90
.01
2.08

89.69
61.31
11.50
7.96
3.54
34.00
15.81
26.40
11.92
.64
.35
5.35
8.13

89.18
60.40
11.77
8.13
3.64
34.42
14.20
26.98
12.12
.65
.35
5.52
8.34

89.10
59.03
11.15
7.87
3.28
33.75
14.13
28.38
13.64
.57
.27
5.54
8.35

1.98

1.81

1.69

89.00
58.03
9.83
7.01
2.83
32.81
15.39
29.32
15.23
.52
.24
5.40
7.92
.01
1.64

-.07
-1.12
22.81
22.70
22.28
1.32

91.32
65.15
11.78
11.48
.30
5.42
1.24
4.18
45.86
45.78
8.86
.99
15.17
3.60
11.57
2.37
18.39
.08

91.06
67.05
11.69
11.45
.23
5.50
1.63
3.87
47.88
47.78
10.99
1.07
14.75
3.24
11.51
2.32
18.64
.10

.13

.14

8.66

8.62

16.29
6.72
3.52
6.05
2.91
1.00
1.60
.77
.08
3.35
1.68
8.32
.01
8.31

90.78
64.06
18.05
13.11
4.94
23.97
22.05
24.89
9.68
1.23
.33
7.06
6.59
.01
1.82

90.55
63.87
16.08
11.87
4.22
26.43
21.36
24.65
10.09
1.31
.37
6.15
6.73
.01
2.02

90.90
62.48
13.94
10.19
3.75
28.55
19.99
26.33
10.30
1.20
.35
6.90
7.57
.01
2.10

90.95
60.80
12.29
8.97
3.32
28.55
19.96
28.01
11.98
1.28
.30
6.30
8.15
2.13

90.32
60.33
11.48
8.23
3.25
29.40
19.46
27.75
12.60
1.24
.31
5.77
7.84
.01
2.23

9.22

9.45

9.10

9.05

9.68

10m

10.31

10.82

10.90

11.00

14.72
.11
9.79
n.a.

15.33
.09
10.30
n.a.

17.28
.08
11.24
n.a.

19.32
.07
10.25
n.a.

21.03
.08
10.29
5.27

23.05
.10
11.24
5.71

24.62
.11
11.59
6.29

27.28
.10
11.29
6.46

29.84
.08
10.06
6.42

32.21
.08
8.79
6.10

971

938

972

986

1,002

1,022

1,072

1,080

1,152

1,245

.11

.Q7

2.69
1.68
8.94
.03
8.91

A68

Federal Reserve Bulletin 0 July 2007

A.1. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006--Continued
D. Banks ranked 101 through 1,000 by assets-Colltilllled
Item

1997

1998

1999

2000

200 I

2002

2003

2004

2005

2006

Effective interest rate (percent)'

Rates earned
Interest-earning assets. . . . .. .
Taxable equivalent. . . . . . . .. .

8.54
863
9.53
8.79
6.43
669
6.43

Loans and leases, gross

Net of loss provisions
.
Securities
.
Taxable equivalent ..................•...
Investment account
.
U.S. Treasury securities and U.S.
government agency obligations
..
(excluding MBS)
Mortgage-backed securities
.
..
Other

8.38
8.47
9.42
8.79
6.31
6.57
6.30

7.83
7.92
8.74
8.26
6.03
6.29
6.03

8.48
8.56
9.42
8.75
6.45
6.71
6.45

7.86
7.94
8.76
7.88
5.97
6.25
5.96

6.43
6.51
7.32
6.56
4.95
5.21
4.93

5.60
5.68
6.57
6.02
3.81
4.06
3.82

5.46
5.53
6.25
5.87
3.79
4.04
3.78

6.12
6.19
6.64
4.03
4.28
4.02

6.98
7.05
7.76
7.52
4.50
4.77
4.50

4.54
5.38
4.51
14.05
1.73
1.79

3.42
3.95
4.07
3.07
1.27
1.26

3.15
4.01
4.21
10.30
1.57
1.47

3.47
4.23
4.42
6.59
3.31
3.29

4.16
4.61
4.80
4.92
4.94
4.59

2.54
2.28
2.14
2.28
1.06
1.17
3.34
3.77
1.83
4.17

1.88
1.61
1.43
1.61
.74
.76
2.58
2.86
1.29
3.60

1.73
1.44
1.43
1.44
.72
.74
2.33
2.51
1.45
3.37

2.48
2.09
3.05
2.08
1.18
1.27
3.21
3.10
2.94
4.00

3.55
3.09
4.50
3.08
1.73
2.05
4.39
4.16
4.51
4.74

n.a.

n.a.
n.a.

n.a.

n.a.
n.a.
n.a.

.
.

6.37
5.42
5.44

6.84
5.31
5.77

7.33
4.98
5.07

9.30
6.15
5.76

5.85
6.33
5.40
6.60
3.91
3.94

Rates paid
Interest-bearing liabilities
.
Interest-bearing deposits
.
In foreign offices
.
In domestic offices
.
Other checkable deposits
.
Savings deposits (including MMDAs)
.
Large time deposits·
.
Other time deposits·
. ..
Gross federal funds purchased and RPs
.
Other interest-bearing liabilities
.

4.67
4.34
5.42
4.32
2.17
3.08
5.56
5.57
5.20
6.08

4.60
4.28
5.55
4.25
2.15
2.96
5.51
5.64
5.14
5.99

4.19
3.84
5.07
3.82
1.99
2.65
5.17
5.11
4.82
5.36

4.93
4.46
6.13
4.43
2.27
3.07
6.00
5.74
5.95
6.45

4.11
3.82
4.45
3.81
1.81
2.22
5.27
5.51
3.83
5.41

Trading account. . . . . . . . . . . . . . . . . . . . . . .
Gross federal funds sold and reverse RPs
Interest-bearing balances at depositories

6.90

1---------------------------Income and expense as a percentage of average net consolidated assets

Gross interest income
.
Taxable equivalent
.
Loans.....................
.
.
Securities
.
.
Gross federal funds sold and reverse RPs
.
Other
.

Gross interest expense
. .
Deposits
.
Gross federal funds purchased and RPs .
Other
.
Net interest income
.
Taxable equivalent
.
Loss provisions'
.
Non-interest income
.
..
Service charges on deposits
Fiduciary activities
.
Trading revenue

Interest rate exposures

Foreign exchange rate exposures ..

Other commodity and equity exposures
Other
Non-interest expense
Salaries. wages, and employee benefits
Occupancy.......
.
Other
Net non-interest expense

.
.
..
.
.
.
..
.

7.79
7.87
6.05
1.49
.19
.06
3.47
2.69
.37
.42
4.32
4.39
.58
2.07
.40
.32
.01
.01

•
•

7.19
7.27
5.47
1.51
.17
.04
3.20
2.44
.34
.42
3.99
4.07

4.22
4.29
.49
2.26
.39
.37
.02
.01

•

7.79
7.86
5.96
1.58
.21
.04
3.79
2.87
.38
.54

7.16
7.24
5.59
1.33
.16
.08
3.14
2.48
.22
.44

5.85
5.93
4.57
1.15
.07
.06
1.92
1.49
.09
.34

5.08
5.16
4.08
.91
.05
.05
1.41
1.04
.07
.30

4.99
5.06
4.01
.88
.05
.05
1.29

5.57
5.64
4.55
.86
.09
.07
1.84

.92

1.34

.08
.29

.16
.34

6.37
6.44
5.27
.89
.13
.09
2.66
2.03
.24
.39

4.00
4.07

4.02
4.10

3.93
4.00

3.68
3.75

3.70
3.77

3.73
3.79

3.72
3.78

.39
2.31
.38
.38
.02
.01

7.66
7.74
5.89
1.50
.22
.06
3.45
2.70
.32
.42

.52
2.35
.36
.44
.01
.01

.65

.55
2.37
.41
.35

.40

2.37
.39
.40

.30
2.26
.39
.37
.01
.01

.24
2.02
.36
.35
.01
.01

.23
1.98
.35
.30
.01

•

1.34

1.49

3.73
1.50
.46
1.77
1.66
.02

3.86
1.56

Income before taxes and extraordinary items
Taxes
.
Extraordinary items, net of income taxes .. ..

2.10
.73

2.20

Net income
Cash dividends declared
Retained income

.
.
..

1.37
1.10
.28

2.16
.74
.06
1.47
1.01
.46

14.89

15.60

Gains on investment account securities

MEMO: Return on equity

•

1.53
3.70
1.56
.47
1.68

.47
1.83
1.60
.04

1.39
-.01

.74

•
•

•

•
•
•

•

•
•

1.61

1.55

3.73
1.64
.45
1.64

3.60
1.64
.43
1.53

1.52
.05

1.36

1.29
.05

1.90
.66

2.06

1.55
3.84
1.59
.47
1.78
1.48
-.04

1.58
3.88
1.61
.46
1.81

1.96
.67

.04

.01

•

2.03
.66
.03

.37

1.25
1.33
-.08

1.38
1.19
.19

-.25

14.21

12.93

13.75

13.53

.01

•

1.47
1.06
.40

1.29

16.11

•

-.01

2.31
.41
.34
.01
.01

.92

.67

1.39
1.64

•

1.49
3.54
1.64
.43
1.47
1.29
.02
2.13
.68

•

1.30

•
•

3.37
1.61
.41

1.32
3.34
1.58
.40

1.36
1.35

1.35
1.36

-.01

-.01
2.12

2.13
.68

.69

•

1.45
.78
.68

1.45
.87
.58

1.43
.89
.54

13.42

13.33

13.02

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006

A69

A.t. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006
E. Banks not ranked among the 1000 largest by assets
ltem

1997

1998

1999

2000

200 I

2002

2003

2004

2005

2006

Balance sheet items as a percentage of average net consolidated assets
Interest-earning assets ...............•..........
Loans and leases (net)
.
Commercial and industrial .............•..
U.S. addressees ..............•........
Foreign addressees
..
Consumer
.
Credi t card
.
Installment and other
.
Real estate
.
In domestic offices
.
Construction and land development
.
Farmland
.
One- to four-family residential
.
Home equity
.
Other
.
Multifamily residential
.
Nonfarm nonresidential
.
In foreign offices
.
To depository institutions and
acceptances of other banks
.

92.45
58.75
10.16
10.08
.08
8.98
.85
8.14
35.55
35.55
2.82
2.69
18.16
1.24
16.92
.95
10.93

•

92.55
59.76
10.64
10.55
.08
8.17
.69
7.47
36.83
36.83
3.28
2.95
17.66
1.17
16.49
.98
11.96

92.52
62.31
11.09
11.02
.07
7.98
.59
7.39
39.29
39.29
3.70
3.06
18.43
1.28
17.15
1.04
13.06

92.26
62.67
11.10
11.02
.08
7.42
.57
6.85
40.30
40.30
4.23
3.04
18.24
1.37
16.87
1.06
13.71

.14

•

.12

92.22
62.72
10.71
10.64
.06
6.77
.49
6.28
41.52
41.52
4.51
3.08
17.91
1.62
16.29
1.16
14.86

•

.10

92.14
62.32
10.42
10.37
.05
6.16
.51
5.64
42.30
42.30
4.99
3.13
17.08
1.79
15.29
1.28
15.82

•

.14
.01
4.06
.67
.26
-.15
-.87
26.91
26.88
26.34
3.34

.12
.01
3.85
.69
.27
-.11
-.88
25.40
25.38
24.82
2.12

3.76
.67
.27
-.09
-.88
22.80
22.79
22.49
1.33

3.64
.65
.31
-.07
-.90
23.34
23.33
23.05
1.04

3.40
.66
.26
-.06
-.92
23.47
23.43
23.12
.90

3.26
.68
.25
-.06
-.89
23.34
23.33
23.07
.81

3.21
.70
.24
-.05
-.87
21.92
21.90
21.70
.71

3.22
.70
.26
-.05
-.87
20.55
20.53
20.35
.61

15.58
4.01
2.19
9.38
4.60
.19
.61
.52
.03
3.95
1.49
7.55

15.43
3.90
2.02
9.51
4.80
.16
.68
.54
.04
5.13
1.72
7.36

16.89
3.95
2.00
10.93
4.96
.26
.89
.53
.03
4.17
1.71
7.45

16.95
3.47
1.70
11.78
4.64
.23
.88
.56
.02
3.22
1.59
7.48

15.27
3.78
1.94
9.56
4.51
.27
1.11
.30
.01
5.01
1.78
7.74

16.07
4.54
2.30
9.23
4.56
.26
1.12
.27
.01
4.26
1.90
7.78

16.23
4.84
2.20
9.19
4.73
.21
1.05
.31
.04
4.27
2.08
7.86

16.57
4.76
1.96
9.85
4.67
.19
.83
.26
.01
3.33
1.86
7.66

15.64
4.23
1.70
9.70
4.49
.22
.65
.20
.02
3.24
1.70
7.70

14.73
3.62
1.50
9.61
4.30
.24
.48
.17
.02
3.53
1.65
7.63

7.55

7.36

7.45

7.48

7.74

7.78

7.86

7.66

7.70

7.63

Liabilities .........................•...........
Core deposits
.
Transaction deposits
.
Demand deposits
.
Other checkable deposits
.

89.63
74.58
24.48
13.09
11.39
19.00
31.10
14.02
10.51
.10
.01
1.67
1.73

89.54
73.75
24.26
13.08
11.18
19.05
30.43
14.76
11.11
.07
.01
1.49
2.08

89.75
72.74
23.87
12.80
11.07
19.77
29.10
16.09
11.52
.08
.01
1.79
2.69

89.88
70.87
23.20
12.64
10.57

89.59
69.92
22.35
12.16
10.19

19.19

19.38

28.48
18.08
12.51
.05
.02
2.06
3.44

28.19
18.67
13.55
.06
.02
1.55
3.49

89.73
70.04
22.66
12.24
10.42
21.32
26.05
18.79
13.21
.07
.04
1.51
3.96

89.58
69.97
23.18
12.58
10.60
22.43
24.36
18.78
13.07
.06
.03
1.52
4.09

89.55
69.24
23.36
12.77
10.59
23.24
22.64
19.57
13.16
.07
.04
1.76
4.54

89.49
67.68
22.71
12.76
9.95
22.98
21.98
21.04
14.53
.06
.03
1.74
4.68

89.35
65.74
20.81
11.97
8.84
22.65
22.27
22.77
16.50
.06
.03
1.82
4.36

1.02

1.03

.92

.93

1.00

.90

.84

.74

.77

.84

10.37

10.46

10.25

10.12

10.41

10.27

10.42

10.45

10.51

10.65

14.80
.16
6.39

15.27
6.07

16.33
.11
6.22

17.91
.11
5.39

o.a.

19.15
.12
5.99
3.34

20.67
.14
7.10
3.71

22.23
.15
7.25
3.87

24.50
.14
6.91
4.32

26.77
.13
6.15
4.47

28.80
.12
5.36
4.14

647

644

652

655

675

704

742

768

805

839

Savings deposits (including MMDAs)

Small time deposits
.
Managed liabilities 2
.
Large ti me deposi ts
.
.
Deposits booked in foreign offices
Subordinated notes and debentures
.
Gross federal funds purchased and RPs
.
Other managed liabilities
.
Revaluation losses held in trading accounts .
Other...................
..
..
Capital account

•

.05

92.37
66.65
10.17
10.13
.05
4.63
.38
4.25
48.53
48.53
9.10
3.26
16.70
2.06
14.63
1.47
18.01

4.27
.67
.24
-.20
-.86
26.70
26.66
26.12
5.05

•

.07

92.30
65.44
10.21
10.15
.06
4.97
.36
4.61
46.98
46.98
7.46
3.25
17.12
2.20
14.93
1.48
17.66

4.05
.67
.25
-.24
-.87
28.24
28.21
27.68
6.70

.09

92.34
63.80
10.29
10.25
.04
5.45
.40
5.05
44.75
44.75
6.01
3.22
17.17
2.1 I
15.06
1.41
16.94

Agricultural production
.
..
Other loans
Lease-financing receivables
.
LESS: Unearned income on loans ........•.
LESS: Loss reserves I
.
Securities
..
Investment account
..
Debt
..
U.S. Treasury
..
U.S. government agency and
corporation obligations
.
Government-backed mortgage pools ..
Collateralized mortgage obligations ..
Other
..
State and local government
.
Private mortgage-backed securities
.
Other................... ..
.
Equity
.
Trading account. . . . . . . . . . . . . .
.
.
Gross federal funds sold and reverse RPs ..
Interest-bearing balances at depositories
.
Non-interest-eaming assets
.
Revaluation gains held in trading accounts
.
Other
.

Foreign governments

.20

92.64
59.11
10.33
10.25
.08
8.46
.70
7.76
36.04
36.04
3.02
2.83
18.04
1.21
16.83
.93
11.22

•

.05

•

MEMO

Commercial real estate loans' .....•..........
Other real estate owned4
..
Mortgage-backed securities
.
Federal Home Loan Bank advances
.
Average net consolidated assets
(billions of dollars) .. .
.
.

.13

A70

Federal Reserve Bulletin 0 July 2007

A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006--Continued
E. Banks not ranked among the 1000 largest by assets-Continlled
Item

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Effective interest rate (percent)'

Rates earned
Interest-earning assets .. ....... ...... . ...... . ...

Taxable equivalent ...... ................
Loans and leases, gross ... ... ....... . ........
Net of loss provisions .. .... . ...... ......
.... ... ... ..... ................
Securities
Taxable equivalent .... ...... ... ... . .....
Investment account ................ ...
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) . . . . . . . . . . . .. ......
Mortgage-backed securities .... ....... ..
....... .......... .... ... . ..
Other
Trading account ... ............. ..... . ....
Gross federal funds sold and reverse RPs .. ...
Interest-bearing balances at depositories .... ..

Rates paid

Interest-bearing liabilities .. ......... ............
Interest-bearing deposits .. ..... ....... .......
In foreign offices ..... ... ..................
In domestic offices ..... ..... .. ........
Other checkable deposits ... .. ..... . ...
Savings deposits (including MMDAs) .
Large time deposits 6 ...... ........ . ...
.........
..
Other time deposits·
Gross federal funds purchased and RPs . ......
Other interest-bearing liabilities ...... ........

8.05
8.18
9.28
8.89
5.88
6.29
5.89

8.44
8.56
9.51
9.14
6.15
6.54
6.15

7.94
8.05
9.03
8.59
5.86
6.28
5.86

6.79
6.91
7.83
7.39
5.03
5.43
5.02

5.94
6.05
7.08
6.72
3.87
4.26
3.87

5.73
5.84
6.72
6.45
3.74
4.11
3.73

6.23
6.33
7.17
6.94
3.87
4.24
3.87

7.01
7.10
7.95
7.75
4.28
4.65
4.28

n.a.

n.a.
n.a.
4.01
6.24
6.38

5.97
6.20
5.29
6.43
3.83
4.56

4.80
5.47
4.87
15.38
1.63
2.68

3.74
3.58
4.43
2.89
1.08
1.97

3.39
3.90
4.18
18.95
1.32
2.03

3.53
4.17
4.16
7.52
3.21
3.21

4.12
4.59
4.25
7.19
4.95
4.65

4.80
4.67
5.13
4.67
2.47
3.56
5.89
5.70
5.69
6.24

4.40
4.32
3.97
4.32
1.97
2.81
5.53
5.60
3.92
5.74

2.92
2.78
1.67
2.78
1.16
1.72
3.62
3.88
1.85
5.31

2.13
2.02
.85
2.02
.78
1.13
2.78
2.96
1.31
4.06

1.87
1.75
1.04
1.75
.69
1.05
2.47
2.55
1.45
3.68

2.43
2.29
2.86
2.29
1.00
1.53
3.21
3.04
2.89
4.02

3.43
3.28
4.27
3.28
1.45
2.34
4.37
4.12
4.37
4.70

5.78
5.88
4.76
.85
.11
.06
1.82
1.58
.05
.19

6.50
6.58
5.35
.88
.18
.08

8.50
8.63
9.80
9.49
6.26
6.65
6.26

8.35
8.48
9.69
9.35
6.04
6.46
6.04

n.a.

n.a

n.a.

n.a.
6.33
5.51
5.62

n.a.
5.26
5.36
5.67

n.a.
3.60
4.96
5.69

4.60
4.54
4.77
4.53
2.46
3.36
5.53
5.66
5.22
6.32

4.60
4.53
5.08
4.52
2.44
3.39
5.53
5.63
4.99
6.45

4.28
4.22
4.34
4.22
2.28
3.21
5.21
5.25
4.73
5.64

Income and expense as a percentage of average net consolidated assets
Gross interest income ... ..... .......... ........
Taxable equivalent .. .............. ........
Loans . ................ ........... . .........
.............
.... ... ......
Securities
Gross federal funds sold and reverse RPs .....
Other .. .... ... ............... .......... . ....
Gross interest expense ......... ........
Deposits ...... ... ............ ........ .......
Gross federal funds purchased and RPs ......
Other .................. ............ .... .....
Net interest income ..... ...... . ...... ... .
Taxable equivalent ... .... ... ... .. . ...... . .
Loss provisions? ........ .. .. .... ........ ......
Non-interest income ... .. ... .......... .... . ....
Service charges on deposits
...............
Fiduciary activities ... ........
Trading revenue ...... .... .... . . . . . ....... . ..
Interest rate exposures ... .. .... . ....... . ...
Foreign exchange rate exposures ........
Other commodity and equity exposures.
Other
........... ........ . .....
.. ..
Non-interest expense .... ...
Salaries, wages, and employee benefits ..... ..
Occupancy ...
.......
. ...
...
Other ...............
.. ........ . . . . . . . . .

.....

....

...... .........

7.90
8.02
5.86
1.76
.24
.04
3.48
3.28
.08
.11
4.42
4.54
.27
1.41
.44
.20

•
•
•
•

7.48
7.61
5.62
1.58
.22
.06
3.26
3.02
.08
.15
4.23
4.35
.31
1.44
.42
.26

•
•
•

7.83
7.95
5.99
1.57
.21
.05
3.64
3.30
.12
.21

•
•
•
•

•

4.20
4.31
.32
1.32
.43
.21
.01

•
•
•

3.69
1.80
.49
1.40
2.28

.86
3.74
1.82
.49
1.43
2.23

.75
3.73
1.82
.49
1.42
2.29

.01

.02

•

.68
3.58
1.78
.47
1.32
2.26
-.01

Income before taxes and extraordinary items ....
Taxes .... ... .......... ........ ........ ....
Extraordinary items, net of income taxes .. ...

1.89
.59

1.79
.53

1.62
.47

1.61
.45

Net income ..
....... .. .. ...
Cash di vidends declared ................. ...
Retai ned income ..... ...... .................

•

1.30
.74
.56
12.53

1.26
.82
.44

1.15
.70
.45

1.17
.79
.38

12.02

11.26

11.52

Net non-interest expense ... ........ .... ..... ...
Gains on investment account securities .......

MEMO: Return on equity .. ........ ......... ....

.77

7.75
7.87
5.80
1.59
.29
.06
3.46
3.25
.07
.13
4.29
4.41
.29
1.52
.42
.23

•

NOTE: Data are as of April 13, 2007.
I. 1ncludes allocated transfer risk reserve.
2. Measured as the sum of large time deposits in domestic offices. deposits
booked in foreign offices, subordinated notes and debentures, federal funds
purchased and securities sold under repurchase agreements, Federal Home
Loan Bank advances, and other borrowed money.
3. Measured as the sum of construction and land development loans secured
by real estate; real estate loans secured by nonfarm nonresidential properties or
by multifamily residential properties; and loans to finance commercial real estate, construction, and land development activities not secured by real estate.
4. Other real estate owned is a component of other non-interest-earning
assets.

•

7.35
7.45
5.75
1.32
.20
.08
3.34
3.08
.06
.20
4.01
4.12
.36
1.31
.44
.25

6.31
6.41
5.01
1.16
.07
.06
2.22
1.98
.03
.21

5.46
5.56
4.47
.89
.05
.06

.17

5.32
5.42
4.35
.87
.05
.05
1.41
1.22
.02
.17

4.08
4.19
.35
1.39
.45
.27

3.86
3.96

3.91
4.00

3.96
4.05

2.56
2.27
.08
.21
3.94
4.03

.29
1.47
.43
.28

.23
1.38
.43
.32

.20
1.31
.38
.37

•
•
•

•
•

•
•
•
•

.21
1.34
40
.33

3.56
1.82
.45
1.28
2.09

3.52
1.81
.45
1.26
2.14

3.49
1.79
.44
1.25
2.15

.01

2.18
-.01

1.55
.37

1.60
.38

1.55
.36

•

1.60
1.42
.02

•

*
.76

.61

•
•
•
•

.62
3.55
1.79
.47
1.29
2.24

.67
3.57
1.82
.46
1.28
2.18

.04
1.45
.39

.05
1.60
.41
-.01

.04
1.53
.38

1.06
.64
.42
10.17

1.18
.68
.49

1.14
.67
.47

1.17
.64
.54

1.21
.67
.54

1.19
.65
.54

11.46

10.97

11.24

11.54

11.17

•

.64

•
•
•
•

.56

3.49
1.82
.43
1.24

5. When possible, based on the average of quarterly balance sheet data reported on schedule RC-K of the quarterly Call Report.
6. Before 1997, large time deposit open accounts were included in other
time deposits.
7. Includes provisions for allocated transfer risk.
• In absolute value. less than 0.005 percent.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.
MBS Mortgage-backed securities.

Profits and Balance Sheet Developments at U. S. Commercial Banks in 2006

A71

A.2. Report of income, all U.S. banks, 1997-2006
Millions of dollars
Item

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Gross interest income .... ...........
Taxable equi valent ... ............
Loans ...................
Securities ................ ..............
Gross federal funds sold and reverse
repurchase agreements
...........
Other ...

338,869
341,303
256,144
52.660

359,536
362,000
271,300
56,599

366,144
368,771
278,539
62,117

423,846
426,481
326,804
67,667

404,406
407,093
311,664
63,089

349,731
352,478
269,519
59,315

329,334
332,116
257,813
53.317

349,721
352,705
269,509
58,579

427.976
430,930
328,296
65,868

550,644
553,898
421,619
78,848

13,659
16,406

15,001
16,637

12,331
13,155

13,546
15,829

12,649
17,006

6,223
14,672

5,015
13,189

5,142
16.490

11,045
22,764

21,240
28,936

................
Gross interest expense
Deposits ....................
Gross federal funds purchased and
repurchase agreements
Other .................

164,693
117.351

178,162
125,218

174,946
119.665

222,161
151,147

188,799
132,352

118,778
81,733

94,140
62,403

98,544
63.642

162,504
105.925

263.170
173.743

20,439
26,903

22.182
30.760

21,130
34,149

26.860
44,155

19.590
36.854

9.920
27,126

7.590
24.147

8.842
26,059

19,161
37,419

33,722
55.705

Net interest income ....
Taxable equivalent

174,176
176,610

181.374
183.838

191,198
193,825

201.685
204,320

215.607
218.294

230.953
233,700

235,194
237,976

251,177
254.161

265,472
268,426

287,474
290,728

19,402

21.403

21.186

29.386

43,238

45.278

32,766

23.895

25,580

25.249

Non-interest income ..
Service charges on deposits .
Fiduciary acti vities
Trading revenue . ..
Other. ............

105,640
18,558
16.584
8,018
62,480

124.051
19,770
19.268
7,693
71,319

144,430
21,497
20.502
10,429
92,001

153,163
23,720
22.220
12,235
94,988

160.925
26,873
21.989
12.382
99,679

168.281
29.630
21.404
10.748
106.501

183,887
31,693
22,456
11,605
118,133

187.988
33.456
25,102
10,303
119,128

200,405
33,831
26.387
14.375
125.810

223,059
36,161
28.342
19.172
139,386

............
Non-interest expense .....
Salaries, wages. and employee benefits ...
Occupancy .................
Other ............

171,063
72,348
22.080
76.634

194.118
79.548
24.164
90,405

204.634
86.153
25.866
92.616

216.434
89,038
26,766
100.631

226,027
94.209
27,945
103,875

230.293
100,454
29.316
100.521

243,290
108,460
31,317
103,512

263,349
115.271
33,256
114.823

274.142
124:041
35.052
115.049

294,744
135.800
36.366
122.577

65,423

70,067

60,204

63,271

65,102

62,012

59.403

75,361

73,737

71.685

....

Loss provisions

Net non-interest expense ....

1.825

3,090

250

-2.280

4,625

6,411

5,633

3.393

-220

-1.232

Income before taxes .
Taxes .....
. ....................
Extraordinary items, net of income taxes ...

91.178
32.001
56

92,995
31,957
506

110,056
39.211
169

106.745
37,250
-31

I I 1,891
37,284
-324

130.076
42.817
-78

148.656
48.530
427

155.317
50.267
59

165,934
53,568
241

189.309
61,082
2,652

Net income ..................

59,232

61,542

71,013

69,464

74,284

87,181

100,554

105,108

112,606

130,880

42,801
16,430

41,205
20,337

52,102
18,912

52,547
16,917

54.844
19,438

67.230
19.951

71,757
22.798

59,539
45.568

64,622
47,984

82,296
48.584

Gains on investment account securities

Cash dividends declared
Retained income

•••• a· •• • •• •

NOTE: Data are as of April 13,2007.

A73

December 2007

The 2006 HMDA Data
Robert B. Avery, Kenneth P. Brevoort, and Glenn B.
Canner, of the Board's Division of Research and
Statistics, prepared this article. Rebecca Tsang and
Sean M. Wallace provided research assistance.
Since 1975, the Home Mortgage Disclosure Act
(HMDA) has required public disclosures from most
mortgage lending institutions with offices in metropolitan areas. The release of the information, which
includes the geographic location and other characteristics of the home mortgages lenders originate or
purchase during a calendar year, is intended to help
the public determine whether institutions are adequately serving their communities' housing finance
needs; the disclosures are also intended to facilitate
enforcement of the nation's fair lending laws and
guide investment in both the public and private
sectors. Under the 1975 act, the Federal Reserve
Board implements the provisions of HMDA through
regulation. The Federal Financial Institutions Examination Council (FFIEC) is responsible for facilitating
public access to the HMDA data and for aggregating
the data by metropolitan statistical area. I
For a given calendar year, lenders covered by
HMDA publjcly release their loan data beginning on
March 31 of the subsequent year; in the following
September, the FFIEC releases summary tables pertaining to each lender and lending activity in each
metropolitan statistical area, along with a file consoliNOTE: The authors express their appreciation for the late Edward M.
Gramlich, member of the Federal Reserve Board from November
1997 to August 2005. His vision and persistence in seeking what
became the 2002 amendments to the Board's HMDA regulations
yielded the loan pricing information that has so enriched the value of
the HMDA data.
I. The FFLEC (ffiec.gov) was established by federal law in 1979 as
an interagency body to prescribe uniform examination procedures, and
to promote uniform supervision, among the federal agencies responsible for the examination and supervision of financial institutions. The
member agencies are the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the National
Credit Union Administration, the Office of the Comptroller of the
Currency, and the Office of Thrift Supervision. In 1980, federal law
gave the FFLEC responsibility for public access to HMDA data and for
the aggregation of annual HMDA data, by census tract, for each
metropolitan statistical area. In accordance with the 1980 law, the
FFLEC established an advisory State Liaison Committee (SLC),
composed of representatives from the Conference of State Bank
Supervisors, the American Council of State Savings Supervisors, and
the National Association of State Credit Union Supervisors. In 2006,
the SLC joined the FFIEC as a voting member.

dating virtually all the reported information. 2 The
nearly 8,900 lenders currently covered by the law
account for an estimated 80 percent of all home
lending nationwide. Because of its expansive coverage, the HMDA data likely provide a broadly representative picture of home lending in the United
States.
After briefly summarizing previously published
assessments of the 2004 and 2005 HMDA data and
reviewing some prominent issues surrounding pricing
in the mortgage market, this article analyzes the 2006
data. 3 As in the analyses of the previous two years,
this review focuses primarily on the pricing information included in the HMDA data and differences
observed across lending institutions, geographic areas, and population groups. The article concludes
with an assessment of factors that account for the
variation in rates of serious delinquency on mortgage
loans across counties as of March 31, 2007, including
information drawn from the HMDA data on the
incidence of higher-priced lending and from a data
file of credit scores by geographic area.
Increases in market interest rates over the course of
2004 and 2005 were an important contributor to the
substantial increase between those years in the reported incidence of higher-priced lending as measured by the HMDA data. For 2006, the relatively
subdued increases in market interest rates contributed
to a moderation in the growth of higher-priced lending for 2006. The current disturbances in the subprime
sector of the mortgage market emerged primarily in
the later portions of 2006. The effects of those
disturbances and of the associated changes in the
regulatory environment will be reflected primarily in
the HMDA data for 2007 and subsequent years.
At the outset, HMDA disclosures were limited to
summary totals covering loan extensions by type of
2. Between March and September, the FFlliC member agencies
systematically check the data for errors or omissions. To protect the
identity of borrowers, the public data exclude the dates of loan
applications and the dates of credit decisions.
3. The previously published assessments are Robert B. Avery,
Glenn B. Canner, and Robert E. Cook (2005), "New Information
Reported under HMDA and Its Application in Fair Lending Enforcement," Federal Reserve Bulletin, vol. 91 (Summer), pp. 344-94; and
Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner (2006),
"Higher-Priced Home Lending and the 2005 HMDA Data," Federal
Reserve Bulletin, vol. 92 (September 8), pp. A 123-66.

A74

Federal Reserve Bulletin 0 December 2007

loan for each census tract but included no information
on loan pricing or applications for loans that were
denied by the lender. Over the years, the Congress has
extended the reach of the law to a broader range of
institutions and expanded the types of information
that must be reported and disclosed. The most sweeping of the legislative amendments to HMDA, adopted
in 1989, required disclosure of the disposition of
applications for home loans and the income, sex, and
race or ethnicity of the individuals applying for those
loans.
Analyses of the new information revealed wide
disparities in the rates of approval of loan applications across racial and ethnic lines and prompted
widespread public discussion about the fairness of
mortgage lending decisions. 4 With the 1989 amendments, the HMDA data thus formed a new basis for
public scrutiny of the fairness of mortgage lending
and became an important aspect of fair lending
enforcement.
In response to significant changes in the mortgage
market during the 1990s, particularly the emergence
and growth of subprime lending, the Federal Reserve
Board in 2002 revised its Regulation C, which implements HMDA (for details, refer to the appendix).5
The revision substantially increased the type and
amount of public information available about home
lending in HMDA reports, beginning with data for
2004. The most important change was the requirement that lenders identify and disclose information
about mortgages with annual percentage rates (APRs,
which encompass interest rates and fees) above designated thresholds, mortgages referred to here as
"higher-priced loans."6 Other new disclosures included lien status of the loan (whether it is a first lien,
a junior lien, or unsecured-if the latter, it is a home
improvement loan), whether it is secured by a manufactured home, and whether it is subject to the
protections of the Home Ownership and Equity Protection Act of 1994.

4. For example, John Goering and Ron Wienk, eds. (1996), Mortgage Lending, Racial Discrimination, and Federal Policy (Washington: Urban Institute Press).
5. Home Mortgage Disclosure Act (12 U.S.C. §§ 280 I-II), Regulation C (12 C.ER. pt. 203), and the staff commentary accompanying
Regulation C (12 C.ER. pt. 203, Supp. I).
6. For loans with spreads above designated thresholds, revised
Regulation C requires the reporting of the spread between the APR on
a loan and the rate on Treasury securities of comparable maturity. The
thresholds for reporting differ by lien status: 3 percentage points for
first liens and 5 percentage points for junior, or subordinate, liens.
Further details are in note 12, p. A 126, of Avery, Brevoort, and Canner,
"Higher-Priced Home Lending and the 2005 HMDA Data."

HIGHLIGHTS OF THE

2004 AND 2005 DATA

For both the 2004 and 2005 HMDA data, nearly
80 percent of the reporting institutions were depositories (commercial banks, savings associations, and
credit unions); accounting for the rest were independent mortgage companies and mortgage companies
affiliated with banking institutions or their holding
companies. Although mortgage companies represented only 22 percent of the reporting institutions,
they submitted information on more than 60 percent
of all the reported loans and applications.
Most lenders reported relatively little home lending. The most active lenders (those providing information on at least 5,000 loans or applications)
accounted for about 5 percent of the reporting institutions and nearly 90 percent of all the reported loans
and applications.
A comparison of the HMDA data for 2004 and
2005 with those from earlier years documented a
number of trends, including a growing share of
lending to non-owner occupants, the growth of "piggyback" lending (homebuyers simultaneously obtaining two loans--one a first lien and the other a junior
lien-to finance the purchase of a home), and a
substantial decline in home lending insured by the
Federal Housing Administration (FHA) as a share of
all home lending.
Because of its importance, the new information on
loan pricing was the focus of much of the analyses of
the 2004 and 2005 data. The reviews found that the
incidence of higher-priced lending increased from
about 16 percent of all loans in 2004 to 26 percent in
2005. The substantial narrowing of the difference
between short- and long-term interest rates in 2005
explained part of the increase that year in the share of
reported loans that exceeded the pricing thresholds
established by Regulation C.? Estimates suggested
that the changes in interest rates accounted for about
15 percent of the increase in reported higher-priced
lending for conventional fixed-rate home-purchase
loans and about 20 percent of the increase for similar

7. Additional research on the possible reasons for the increase in
reported higher-priced lending from 2004 to 2005 is in Michael
LaCour-Little (2007), "Economic Factors Affecting Home Mortgage
Disclosure Act Reporting," paper prepared for the American Real
Estate and Urban Economics Association Mid- Year Meeting, Washington, May 29-30. The study finds that, after controlling for the mix of
loan types, for credit-risk factors, and for changes in the relationship
between short- and long-term interest rates, there was no statistically
significant increase in the volume of higher-priced lending for loans
originated directly by lenders, but there was an increase for such loans
originated through indirect channels.

The 2006 HMDA Data

loans for refinancings. Another portion of the increase
in higher-priced lending was attributable to the effects
of the narrowing spread between short- and long-term
interest rates on adjustable-rate lending, but available
data limited the ability to quantify this effect. Besides
changes in market interest rates, other factorschanges in borrower credit-risk profiles and changes
in lender business practices such as an increased
willingness to accept higher-risk borrowers-may
also have led to increased higher-priced lending from
2004 to 2005; but again, quantifying the influences
was impeded by data limitations.
Analysis of the 2004 and 2005 pricing information
also found that the incidence of higher-priced lending
varied substantially by geography and loan characteristic and across borrower groups. The incidence was
found to be elevated for borrowers residing in census
tracts characterized by larger proportions of individuals with lower credit scores and lower high-school
graduation rates; and in census tracts with larger
proportions of lower-income households, minority
households, and shares of loan applicants that were
denied credit. 8 The incidence of higher-priced lending
was also elevated for smaller loans and piggyback
loans, for loans made by depository institutions outside their local communities, and for loans originated
by independent mortgage companies regardless of
location.
Results of an analysis along racial and ethnic lines
were consistent with the results by geography: Blacks
and Hispanic whites were more likely, and Asians
somewhat less likely, to have received higher-priced
loans than non-Hispanic whites. Information included
in the HMDA data on characteristics of borrowers
and loans-such as income, amount borrowed, and
property location-does not account fully for the
variation in loan pricing across geographies and
groups. However, many factors routinely used by
lenders to underwrite and price loans-including
loan-to-value (LTV) ratios and measures of borrower
credit history (for example, a credit history score)are not included in the HMDA data and, consequently, cannot be included in an analysis of pricing
differences that relies on the HMDA data alone.
The expanded HMDA data have both raised concerns about the fairness of the lending process and
created new avenues for lenders, regulators, and the
public to address fairness. Lenders are responsible for
their compliance with fair lending laws, and the
HMDA data can both encourage and facilitate the
improvement of their compliance efforts. Likewise,
8. The term "minority" as used in this article refers to any racial or
ethnic identity other than non-Hispanic white.

A75

the regulatory agencies have been using the expanded
data in their fair lending enforcement activities. The
expanded data also increase transparency in the marketplace by identifying lenders active in the higherpriced segment of the market and by allowing a wide
variety of analyses that more fully describe higherpriced lending.
LOAN PRICING IN THE MORTGAGE MARKET

Mortgage markets have changed greatly over the
years. Historically, mortgage lenders offered consumers a relatively limited array of loan products. The
prices (interest rates, points, and fees) at which they
offered their loans varied mainly by
• loan type-for example, conventional or
government-backed
• loan type characteristic-including amount borrowed, term to maturity, and LTV ratio
• loan/type of structure securing the loan-traditional
"site built" home, factory-manufactured unit, or
multifamily units
• ownership status-owner occupied or non-owner
occupied
The prices did not, however, vary to any great degree
by the creditworthiness of the borrower; effectively,
borrowers either did or did not meet the underwriting
criteria for a particular loan product, and the borrowers who met the criteria all paid about the same price.
In the past quarter century, advances in technology,
improvements in access to the credit histories of
individuals, and the emergence of a robust secondary
market for loans over the full spectrum of credit risks
have helped spur remarkable changes in the mortgage
market. The most prominent of those developments
has been the explicit risk-based pricing of credit.
Over this period, more so than in the past, differences
in the creditworthiness of different borrowers led to
different prices for the same product. 9 Lesscreditworthy applicants, or those either unwilling or
unable to document their creditworthiness or income,
found it increasingly likely that they would be granted
a loan but that it would be offered at a price higher
than that for more-creditworthy applicants.
Explicit risk-based pricing has expanded opportunities for homeowners hip and allowed individuals,
including those who otherwise have little access to
credit, to more readily purchase homes or borrow
9. Refer, for example, to Souphala Chomsisengphet and Anthony
Pennington-Cross (2006), "The Evolution of the Subprime Mortgage
Market," Federal Reserve Bank of St. Louis, Review, vol. 88 (January!
February), pp. 31-56.

A76

Federal Reserve Bulletin 0 December 2007

against the equity they have accumulated in their
homes. Recent developments in mortgage markets
have caused some lenders to tighten underwriting and
charge higher prices to compensate for perceived risk.
However, risk-based pricing continues to be a feature
of the mortgage market. Although risk-based pricing
has broadened opportunities for many consumers, it
has been accompanied by growing concerns, some of
which are noted below.

Segments of the Market
Broadly, borrowers in the higher-priced mortgage
market generally fall into one of two "nonprime"
market segments: "subprime" and "near prime." Individuals in the subprime category pay the highest
prices because they are considered to pose the greatest risk of default or prepayment. tO Such borrowers
may also impose higher costs of origination, as it can
be more difficult and time consuming to assess their
credit profiles. Borrowers in the prime market pay the
lowest prices for loans, subprime borrowers pay the
highest prices, and near-prime borrowers pay prices
somewhere in between. In practice, the dividing line
between subprime and near prime is amorphous, as is
the line between the prime and nonprime markets.
The distinctions between all these market segments
change over time as market interest rates move, as
lenders' appetite for interest rate risk and the risks of
prepayment and default changes, and as the ability to
price risk more exactly changes.
Industry sources provide some data on the relative
sizes of these market segments. For example, in 2006
about 20 percent of mortgages were subprime, and
about 13 percent were near prime (often referred to as
"alt_A" mortgages).11
Nontraditional Loan Products
Over the first half of this decade, home values in
many areas of the country rose sharply, as did the
competitive pressures on lenders to innovate. Those
forces encouraged lenders to develop loan products
that were intended to hold down required monthly
payments, at least for the first few years of the loan.
Among those products were interest-only loans,
adjustable-rate loans with discounted ("teaser") initial
rates, and payment option loans, which increased the

10. Prepayment penalties are a common feature of loans in the
subprime market and are intended to address the elevated risk of
prepayment.
II. Inside Mortgage Finance (2007), The 2007 Mortgage Market
Statistical Annual, vol. I: The Primary Market (Bethesda, Md.: Inside
Mortgage Finance Publications).

affordability of home purchases and mortgage refinancings, at least in the short term. However, these
loan products sometimes are accompanied by minimal down payments (or a piggyback loan), and the
limited or zero repayment of principal in the amortization schedule of many of these loan products means
that mortgage payments generate little or no additional equity in the first few years. These loans also
generally involve an increase in monthly payments at
some point later in the life of the loan. Recent
evidence indicates, however, that these so-called nontraditional loan products have elevated incidence of
default and foreclosure, particularly when extended in
combination with other indicators of elevated credit
risk, such as a low credit score or no documentation
of income. Such loan products have also drawn
considerable attention from regulatory authorities,
which have provided guidance to banking institutions
on the risks posed by those products and the importance of providing clear disclosure of the loan terms
and conditions.l2
The Role of Brokers
Another notable development in the mortgage market
was the emergence of brokers as the intermediary
through which the majority of individuals obtain a
mortgage. 13 Hi storically, prospecti ve borrowers visited an office of a local banking institution to apply
for a loan. Today, a mortgage broker, often working
as an independent entity, may take loan applications
on behalf of a banking institution or other mortgage
lender and may provide the only direct contact with
the borrower until closing, when the loan documents
are signed and the mortgage is issued. In such cases,
the mortgage broker plays an important role in pricing the loan, and frequently the compensation received by the broker is based, in whole or in part, on
the interest rate and fees paid by the consumer.
The large role played by brokers in the lending
process gained increased attention in the past year or
so as delinquencies, defaults, and foreclosures increased, particularly in the subprime portion of the
mortgage market. Among the issues that have drawn

12. For example, on September 29, 2006, the federal financial
regulatory agencies (Board of Governors of the Federal Reserve
System, Federal Deposit Insurance Corporation, National Credit Union
Administration, Office of the Comptroller of the Currency, and Office
of Thrift Supervision) issued the press release "Interagency Guidance
on Nontraditional Mortgage Product Risks," www.federalreserve.gov/
boarddocs/presslbcreg/2006120060929/default.htm.
13. Industry sources indicate that mortgage brokers initiated 58 percent of the mortgage originations in 2006, down somewhat from
63 percent in 2005 (Lew Sichel man, 2007, "Broker Market Share
Down to 58%," National Mortgage News, July 9, p. I).

The 2006 HMDA Data

increased scrutiny to brokers are whether they provide consumers with sufficient information to make
sound choices in selecting a mortgage product and
whether fraud has sometimes been involved in the
broker's characterization of the borrower's creditworthiness or in the appraisal of the home being purchased. Also, brokers and, many times, the lenders
originating the loan do not bear the credit risk of the
loans they sell but share in the profits from originating the loan. As a result, the broker or other originating party may not have the incentive to fully pass
along to the loan purchasers all relevant information
needed to gauge the accuracy and completeness of the
information used to underwrite and price the loan. 14

Concerns about Loan Pricing
As price flexibility has emerged in the mortgage
market, so have concerns about the fairne s of pricing
outcomes. Such concerns generally fall into four
broad categories. First are concerns about possible
discrimination based on the race or ethnicity of the
borrower. Such concerns are heightened because loan
prices are not always determined strictly on the basis
of credit risk or cost factors but can involve elements
of discretion by loan officers or loan brokers, such as
seeking prices that differ from the lender's baseline
price guidance typically conveyed in the form of rate
sheets.
Second are concerns about whether borrowers in
the higher-priced segment of the loan market are
sufficiently informed and whether they are willing or
able to shop effectively for the loan terms most
appropriate to their circumstances. For example, it
may be difficult for borrowers to determine where
they fit along the credit-risk spectrum. Also, some
borrowers may fail to shop or negotiate for the best
available rates and terms because they need funds
immediately; such borrowers tend to focus primarily
on the amount they can borrow and the size of the
monthly payment. Such borrowers may not fully
appreciate the potential longer-run consequences of
certain loan terms such as prepayment penalties,
adjustable interest rates, negative amortization, and
balloon payments. Such borrowers may be more
easily exploited by loan officers or brokers. Also,
aggressive marketing tactics may confuse such borrowers about the cost and terms of loans.

14. In some cases, brokers and loan originators are subject to forced
repurchase of a loan that was sold if it performs poorly soon after loan
origination or if representations and warranties were violated; but in
practice, brokers and some of the firms they sometimes work with
have limited capacity to fund a repurchase.

Third, concerns have been raised about whether
competition is adequate to ensure that borrowers in
the higher-priced segment of the loan market have
access to the full range of credit opportunities. Some
believe that prime-market lenders are not present or
do not offer or promote their prime products sufficiently in certain geographic markets, including neighborhoods that have larger minority populations. In
this view, reduced access to prime lenders and their
products limits the opportunities for borrowers in
affected communities to access lower-priced loans.
Finally, the elevated default and foreclosure rates
currently experienced in the higher-priced portion of
the loan market have raised concerns about the sustainability of homeownership, the adverse effects on
neighborhoods with higher concentrations of these
loans, and the hardship on borrowers who are losing
their homes. Recognizing these concerns, the federal
and state financial institution regulatory agencies
have encouraged lenders and servicers of loans to
work with mortgage borrowers facing financial difficulties. ls
These various concerns about the functioning of
the mortgage market raise important public policy
issues that are beyond the scope of this article.
Nonetheless, the expanded HMDA data provide information that has proven useful in understanding and
addressing many of these issues.
GENERAL FINDINGS FROM THE 2006 HMDA
DATA

For 2006, lenders covered by HMDA reported information on 27.5 million applications for home loans.
Almost all the applications were for loans to be
secured by one- to four-family (so-called singlefamily) houses, as follows: 10.9 million applications
to purchase a home, 2.5 million to make home
improvements, and 14.0 million to refinance an existing home loan. The balance (about 0.1 million) was
for loans secured by multifamily dwellings-those
15. On April 17,2007, the federal financial regulatory agencies
issued guidance to encourage supervised institutions to work constructively with homeowners who are financially unable to continue
meeting their mortgage payments (www.federalreserve.gov/boarddocs/
srletters/2007/SR0706). On September 4, 2007, the federal financial
regulatory agencies and the Conference of State Bank Supervisors
(CSBS) issued a statement encouraging federally regulated financial
institutions and state-supervised entities that service securitized residential mortgages to determine the full extent of their authority under
pooling and servicing agreements to identify borrowers at risk of
default and pursue appropriate loss mitigation strategies designed to
preserve homeownership ("Federal Financial Regulatory Agencies and
CSBS Issue Statement on Loss Mitigation Strategies for Servicers of
Residential Mortgages," www.federalreserve.gov/newsevents/press/
bcreg/20070904a.htm).

A 78

Federal Reserve Bulletin 0 December 2007

I. Home loan and reporting activity of home lenders covered under HMDA, 1990-2006
Number
Applications received for home loans on one- to four-family properties,
and home loans purchased from other lenders (millions)
Applications

Year
Home
purchase

Refinance

Home

I improvement

Reporters

Loans
purchased

Disclosure
reports 2

Total'

1990 ..........•...
1991 .........•. ....
. . . ..... . . .
1992 .
1993.
............
1994.
.........

3.3
3.3
3.5
4.5
5.2

l.l
2.1
5.2
7.7
3.8

1.2
1.2
1.2
1.4
1.7

5.5
6.6
10.0
13.6
10.7

1.2
1.4
2.0
1.8
1.5

6.7
7.9
12.0
15.4
12.2

9.332
9.358
9.073
9.650
9.858

24.041
25,934
28.782
35.976
38.750

1995 ... ............
1996 .... ...... ....
.... .....
1997 ...
1998. .......... ...
......
1999 ..

5.5
6.3
6.8
8.0
8.4

2.7
4.5
5.4
11.4
9.4

1.8
2.1
2.2
2.0
2.1

10.0
13.0
14.3
21.4
19.9

1.3
1.8
2.1
3.2
3.0

11.2
14.8
16.4
24.7
22.9

9.539
9,328
7.925
7,836
7.832

36.611
42.946
47,416
57.294
56.966

..... ..........
. ...
......
.... .... ......
.. .............
.. .............

8.3
7.7
7.4
8.2
9.8

6.5
14.3
17.5
24.6
16.1

2.0
1.9
1.5
1.5
2.2

16.8
23.8
26.4
34.3
28.1

2.4
3.8
4.8
7.2
5.1

19.2
27.6
31.2
41.5
33.3

7.713
7.631
7.771
8.121
8,853

52.776
53.066
56.506
65.808
72.246

2005 ........... ....
2006 . ..............

11.7
10.9

15.9
14.0

2.5
2.5

30.2
27.5

5.9
6.2

36.0
33.7

8.848
8.886

78,193
78,638

2000
2001
2002
2003
2004

...

NOTE: Here and in subsequent tables except table 3, applications exclude
requests for pre-approval that were denied by the lender or were accepted by
the lender but not acted upon by the borrower. In this article, applications are
defined as being for a loan on a specific property; they are thus distinct from
requests for pre-approval. which are not related to a specific property.
I. Applications for multifamily homes are included only in the total columns; for 2006, these applications numbered nearly 52.380.

2. A report covers the mortgage lending activity of a lender in a single metropolitan statistical area in which it had an office during the year.
SOURCE: Here and in subsequent tables and figures except as noted. Federal
Financial Institutions Examination Council. data reported under the Home
Mortgage Disclosure Act (www.ffiec.gov/hmda).

for five or more families (table 1). These applications
resulted in nearly 14 million loan extensions. Lenders
also reported information on 6.2 million loans they
had purchased from other institutions and on 411 ,000
requests for pre-approvals of home-purchase loans;
the pre-approval requests either were turned down by
the lender or (not shown in table) were granted but
not acted on by the applicant.
The total number of reported applications and
purchased loans fell 2.3 million, or 6 percent, from
2005; most of the decline was for refinancings. The
number of applications for loans to refinance an
existing loan fell 1.9 million, or about 12 percent; the
number declined most likely because short-term interest rates increased from the end of 2005 through
much of 2006 and thereby reduced the number of
existing loans that could be refinanced at a lower rate.
Slower house-price appreciation and, in some areas,
outright declines in property values also likely diminished the attractiveness of refinancing or the borrower's ability to refinance.
For 2006, HMDA reporting requirements covered
8,886 institutions-including 3,900 commercial
banks, 946 savings institutions, 2,036 credit unions,
and 2,004 mortgage companies (table 2). Of the
mortgage companies, two-thirds were independent
entities-that is, they were neither subsidiaries of

depository institutions nor affiliates of bank holding
companies (data derived from table). The total number of reporting institutions was about the same as
that in 2005, as was the distribution of reporters by
type of institution.

Activity and Size of Lender
As in earlier years, most of the institutions reporting
HMDA data are small whether measured by asset size
or by some indicator of lending activity such as the
number of reported applications or loans (table 3).
For 2006, 60 percent of the reporting institutions,
2. Distribution of home lenders covered by HMDA, by type
of institution, 2006
Type

Number

Percent

3,900
946
2.036
6.882

43.9
10.6
22.9
77.4

Independent .
Affiliated' ...
All ..............

1,328
676
2.004

14.9
7.6
22.5

All institutions ..............

8,886

Depository institution
Commercial bank ............
Savings institution ..
Credit union
All . ............

Mortgage company

100

I. Subsidiary of a depository institution or an affiliate of a bank holding
company.

The 2006 H M DA Data

each of which provided information on fewer than
250 loans or applications, accounted for just 1.7 percent of all the reported data. At the other extreme,
5 percent of reporting institutions, each of which
provided information on 5,000 or more loans or
applications, accounted for 87 percent of all the
reported data.
Many HMDA reporters are affiliated with each
other. If individual HMDA reporters are aggregated to
their highest level of corporate organization (such as a
holding company), the concentration of mortgage
lending nationwide is evident. The twenty-five organizations reporting the largest number of applications
and loans accounted for 54 percent of the 2006 data,
roughly the same proportions as in the 2004 and 2005
HMDA data (data not shown in tables).

Disposition of Applications, Loan Types, and
HOEPA-Related Activities
For purposes of analysis, loan applications and loans
can be grouped in many ways; here the analysis
focuses on twenty-five distinct product categories
characterized by loan and property type, purpose of
the loan, and lien and owner-occupancy status. Each
product category contains information on the number
of total and pre-approval applications, application
denials, originated loans, loans with prices above the
thresholds, loans covered by the Home Ownership
and Equity Protection Act of 1994 (HOEPA), and the
mean and median APR spreads for loans priced above
the designated reporting thresholds (tables 4 and 5).16
Disposition of Applications
HMDA data are the only publicly available source of
information on the disposition of individual applications for home loans. The data include information on
the race, ethnicity, and sex of applicants as well as the
type and purpose of the loan and the location of the
property, so the disposition of applications can be
assessed along many dimensions.
The HMDA data for 2006, like those from earlier
years, indicate that lenders approve most of the
applications they receive, although the proportion
approved or denied varies by loan purpose, type of
loan and property, and lien status. In general, denial
16. Transition rules governing the reporting of the expanded
HMDA data created problems for assessing the data on loan pricing,
manufactured-home lending, and pre-approvals. The transition rules
had a large influence on the data reported for 2004 and a much smaller
effect on the 2005 data. In the 2006 data, transition rules affected only
about 6,000 applications and I, I00 loans; the pre entation here
excludes those applications and loans for analyses that pertain to
pricing, manufactured-home lending, and pre-approvals.

A79

rates are higher for refinancings and for homeimprovement loans than for home-purchase loans,
perhaps because of the prequalification and financial
counseling activities that many prospective borrowers
go through before purchasing a home (table 4).
Denial rates are lower for government-backed loans
than for conventional loans but are especially high for
loans to purchase manufactured homes. Overall, the
denial rate for all home loans in 2006 was 29 percent,
compared with 27 percent in 2005.
Conventional and Government-Backed Loans
Consistent with earlier years, most reported home
loan activity in 2006 involved conventional loansthat is, non-government-backed loans (table 4). Such
loans accounted for about 95 percent of all loans
originated in 2006. FHA-insured loans accounted for
about three-fourths of the government-backed loans,
and most of the rest involved guarantees by the
Department of Veterans Affairs (VA) (data not shown
in tables). The share of all HMDA-reported loans
backed by the FHA has fallen over the past several
years, from about 16 percent in 2000 to less than
3 percent in 2005 and 2006 (data not shown in
tables). I? (The FHA share of first-lien home-purchase
loans has also been trending down and in 2006 was
about 5 percent.) The development in recent years of
many conventional loan products that feature moreflexible and quicker underwriting has attracted borrowers who, in the past, might have sought loans with
FHA backing. Among the newer conventional loan
products are those intended to serve borrowers who
are seeking to minimize their down payment or initial
monthly payments or who are unable or unwilling to
document their incomes. Also, in some areas of the
country, high home prices have diminished the attractiveness of the FHA program, as increases in the
maximum loan value that the FHA will insure have
failed to keep pace with increases in local home
values.
For each loan made, the HMDA data show the
amount borrowed and the incomes of the borrowers.
The analysis that follows immediately in this section
considers four loan categories: (1) conventional loans
that met the definition of higher-priced loans under
HMDA, (2) all other conventional loans, (3) FHAinsured loans, and (4) VA-guaranteed loans. The
analysis is limited to site-built, owner-occupied, one-

17. VA-backed lending has also fallen some in recent years as a
share of the overall market, but not to the same extent as FHA-backed
lending. For example, VA-guaranteed loans accounted for 3.5 percent
of home purchase loans in 2000 and about 2 percent in 2006.

A80

Federal Reserve Ilulletin 0 December 2007

3. Distribution of home lenders covered by HMDA, by type of lender and the number of applications they receive, 2006
Type of lender, and
subcategory (asset size
in millions of dollars,
or affiliation)

100-249

1-99
Percent of
subcategory2

Percent of
lender type 1

..........

75.8
19.2
5.0
100

60.5
26.9
17.7
44.4

Savings institution
Less than 250
250-999 ....
...........
1,000 or more
All ......................

84.4
12.7
2.9
100

Credit union
Less than 250 .. . . . . . . . . ..
250-999 ..
1,000 or more ..............
All ..
All depository institutions
Less than 250
250-999 ...............
1,000 or more ..
All ..

Depository institution
Commercial bank
Less than 250
250-999
1,000 or more
All ....

250-999
Percent of
subcategory2

Percent of
subcategory2

Percent of
lender type I

63.1
32.0
5.0
100

28.7
25.4
10.0
25.3

25.4
60.5
14.1
100

9.9
41.3
24.2
21.7

46.9
8.7
4.7
25.8

64.3
33.6
2.1
100

34.9
22.4
3.3
25.2

22.5
66.5
11.1
100

16.2
58.8
23.3
33.4

96.0
3.8
.2
100

62.8
8.4
1.7
47.6

82.3
16.8
.8
100

26.8
18.4
3.5
23.6

34.9
57.9
7.1
100

10.3
57.1
27.0
21.4

83.1
13.6
3.3
100

59.9
19.7
12.7
42.8

68.7
27.9
3.4
100

28.6
23.4
7.7
24.8

27.4
61.0
11.6
100

10.7
47.8
24.4
23.2

37.7
62.3
100

12.1
39.1
21.2

63.6
36.4
100

13.2
14.8
13.7

77.0
23.0
100

30.2
17.8
26.0

Percent of
lender type I

Mortgage company
Independent
Affiliated
All ..

. . . . . . . . ..

All institutions ...............
MEMO
Percent of all applications,
by number reported
by lender ............

37.9

22.3

23.8

1.2

3.8

NOTE: Refer to table 2, note I. As stated in the general note to table I, applications in the present table include requests for pre-approval that were denied by the lender or were accepted by the lender but nOl acted upon by the
borrower.
I. Distribution sums vertically. For example, the first column, first row
shows that 75.8 percent of commercial banks that received 1-99 applications
in 2006 had assets of less than $250 million.

2. Distribution sums horizontally. For example, the second column, first row
shows that 60.5 percent of commercial banks with assets of less than $250 million received 1-99 applications in 2006.
. .. Not applicable.

to four-family units, and the four categories are
applied separately to home-purchase loans and refinancings.
As noted, distinguishing higher-priced loans from
others is one way to differentiate lending activity. A
second approach is to distinguish between loans
originated for a "conforming" loan amount and those
that were larger (jumbo loans).18 Fannie Mae and
Freddie Mac hold some of their purchased loans in
their own portfolios, but they convert most of them
into securities, which they sell to investors. For 2006
the size limit for conforming loans was $417,000 for
a single-family property in the continental United

States and 50 percent higher for such a property in
Alaska and Hawaii and in Guam and the U.S. Virgin
Islands. The size limits for conforming loans are
higher for structures accommodating two, three, or
four families. However, the HMDA data do not
distinguish among properties with fewer than five
units, so in this article the discussion of 2006 loans
with a conforming size refers to the $417,000 limit
for single-family properties in the continental United
States, a size that included most home loans extended
in 2006. 19
Indeed, for 2006, about 90 percent of conventional
loans for purchase and likewise for refinancing,
whether higher-priced or not, were within the singlefamily conforming loan-size limit (table 6). Higherpriced loans tended to be somewhat smaller than

18. The government-sponsored enterprises Fannie Mae and Freddie
Mac are permitted to purchase only those mortgages that are in
conformance with annually adjusted size limits and certain other
underwriting criteria. The HMDA reports do not provide all the data
needed to determine whether a loan is conforming, so a mortgage
falling within the "conforming loan amount" limit may not meet the
other criteria for conforming loans and thus might not be eligible for
purchase by Fannie Mae and Freddie Mac.

19. The 2006 limits, which ranged up to $801,950 for a four-family
unit, are given in Fannie Mae (2005), "Fannie Mae Announces 2006
Conforming Loan Limit of $417,000," press release, Nov. 29,
www.fanniemae.com/newsreleasesI2005/3649.jhtml.

A81

The 2006 HMDA Data

3. Distribution of home lenders covered by HMDA, by type of lender and the number of applications they receive, 2006-Conlinued
Type of lender, and
subcategory (asset size
in millions of dollars,
or affiliation)

1,00Q-4,999
Percent of
lender type I

5,000 or more

I subcategory2
Percent of

Percent of
lender type I

I subcategory2
Percent of

Any
Percent of
lender type I

MEMO

I subcategory2
Percent of

Number of
lenders

I applications
Percent of

Depository institution
Commercial bank
Less than 250 ..
250-999 ..... ... .... .....
I.000 or more
......
All ......... ............

6.3
30.9
62.9
100

.7
6.4
32.7
6.6

5.0
.0
95.0
100

.2
.0
15.5
2.1

55.6
31.7
12.6
100

100
100
100
100

2,170
1,238
492
3,900

1.1
1.6
22.0
24.7

Savings institution
Less than 250 ... ..........
250-999 ..... . . . . . . . . . . . . .
1,000 or more ... ..........
All ........... ..... . ...

6.4
35.1
58.5
100

1.4
9.2
36.7
9.9

5.6
5.6
88.9
100

.7
.8
32.0
5.7

46.4
37.7
15.9
100

100
100
100
100

439
357
150
946

.3
.9
9.9
Il.l

Credit union
Less than 250 ......... ....
250-999 ..... ......... ..
1,000 or more ........ .....
All .. ..... ....... . ....

1.5
51.5
47.1
100

.1
16.1
56.5
6.8

.0
.0
100
100

.0
.0
11.3
.6

72.7
21.7
5.7
100

100
100
100
100

1,480
441
115
2.036

.6
.9
1.3
2.8

All depository institutions
.. .........
Less than 250
250-999 ..... .... ... .....
1,000 or more ........ .....
.......
All

............

4.9
37.5
57.6
100

.6
9.0
37.1
7.1

4.8
2.0
93.2
100

.2
.2
18.1
2.1

59.4
29.6
11.0
100

100
100
100
100

4,089
2,036
757
6,882

20
3.4
33.1
38.5

Mortgage company
Independent ... . . . . . . . ....
Affiliated ..
..........
All
... .... ...........

78.7
21.4
100

28.0
14.9
23.6

70.7
29.3
100

16.6
13.5
15.5

66.3
33.7
100

100
100
100

1,328
676.0
2,004

36.7
24.7
61.5

All institutions ...............

...

10.8

...

5.2

...

100

8,886

100

.. .

7.5

.. .

87.0

...

100

8,886

100

...........

.....

MEMO

Percent of all applications,
by number reported
by lender ..... ...... ......

others; for example, among conventional homepurchase loans, the mean size of higher-priced mortgages was $209,000, compared with $246,000 for
others (table 6, memo item).
By their nature, government-backed loans tend to
be considerably smaller than conventional loans; the
difference reflects the relatively low guarantees or
insurance limits in the government-backed programs
and the focus of the programs on lower- and middleincome borrowers. In 2006, for example, the mean
size of FHA-insured home-purchase loans was
$133,000, and nearly half of such loans were for less
than $125,000, whereas only about one-fourth of the
conventional loans were in that size range.
Borrower incomes differ substantially by loan
product (table 7). Not surprisingly, the mean income
of borrowers with conventional loans was substantially larger than that of borrowers with governmentbacked loans. Among those obtaining conventional
home-purchase mortgages, the mean income of individuals with a loan of conforming size was $82,400,
versus a mean income of $258,000 for those with a
jumbo loan. And, again among borrowers using conventionalloans, those using higher-priced loans either
to purchase a home or to refinance had a mean

income about 20 percent lower than borrowers not
paying higher prices.
Non-Owner-Occupant Lending
Part of the strong performance of housing markets
over the first half of this decade can be traced to the
growth in sales of homes to investors or individuals
purchasing second or vacation homes, units collectively described as "non-owner occupied." HMDA
data can document the role of investors and secondhome buyers in the housing market because the data
indicate whether the subject property is intended as
the borrower's principal dwelling (that is, as an
owner-occupied unit).2o A limitation on this type of
analysis is that some buyers do not use home mortgages to finance their purchase; rather, they pay cash
for the properties or, in some instances, take out
commercial loans. After declining in the early 1990s,

20. An investment property is a non-owner-occupied dwelling that
is intended to be continuously rented. Non-owner-occupied unitsvacation homes and second homes-that are for the primary use of the
owner are not considered investment properties. The HMDA data do
not, however, distinguish between these two types of non-owneroccupied dwellings.

A82

Federal Reserve Bulletin 0 December 2007

4. Disposition of applications for home loans, and origination and pricing of loans, by type of home and type of loan, 2006
Applications

Loans originated

Acted upon by lender
Type of home and loan

Number
submitted

Number

Number
denied

Loans with APR spread above the threshold I

Percent
denied

Distribution, by percentage
points of APR spread

Number
Number

Percent
3-3.99

4-4.99

ONE- TO FOUR-FAMILY
NON8USI ESS RELATED'

Owner occupied
Site-built
Home purchase
Conventional
First lien .. ..........
Junior lien ....... ...

6,209,040
2,092,637

5,440,857
1,858,700

1,010,083
386,435

18.6
20.8

3,893,634
1,259,933

983,350
575,488

25.3
45.7

24.9
..

13.6

Government backed
First lien .. ...........
Junior lien ...........

518,564
808

459.083
611

55,711
67

12.1
11.0

382.091
504

6,805
16

1.8
3.2

89.9

. ..

4.6
. ..

Refinance
Conventional
First lien .. ...........
Junior lien ...... .....

10.3%,764
2,073,910

7.945.231
1.759,118

2,840,921
531,231

35.8
30.2

4,262,866
1,010.349

1,320,984
281,464

31.0
27.9

28.5

16.8

Government backed
First lien ....... ......
Junior lien ..... .....

186,746
524

157.536
424

34,557
75

21.9
17.7

109,238
328

3,348
14

3.1
4.3

78.0
.. .

12.4
. ..

Home improvement
Conventional
First lien ........ .....
Junior lien ...........

801,434
1,120.356

690,940
1,017,604

280,138
366,647

40.5
36.0

348,731
545.297

103,414
94.234

29.7
17.3

37.3
.. .

19.5

Government backed
First lien .............
Junior lien ...........

5,955
4,479

5.195
3,674

1,326
1,589

25.5
43.2

3,479
1.723

160
1,030

4.6
59.8

70.6
.. .

13.8
. ..

backed) ............

351,726

343,747

167,873

48.8

149.829

.. .

. ..

...

Manufactured
Conventional, first lien
Home purchase ....
Refinance ..... .. .......

348,818
171,666

335,776
154,688

163,799
77,918

48.8
50.4

100,883
59,538

50,927
31,946

50.5
53.7

30.1
34.0

23.8
26.7

.. .

. ..

...

. ..

Unsecured (conventional
or government

...

145,212

130,837

52,631

40.2

68,788

15,667

22.8

28.5

11.9

Non-owner occupietJ4
Conventional, first lien
Home purchase .... ... ..
Refinance .... ....... ...

Other .............. ..

1,327,514
1,003,827

1,180,975
852,129

225,054
240,862

19.1
28.3

838,486
523,263

239,543
155,057

28.6
29.6

51.3
41.5

15.8
14.6

Other .................. ..

495,094

434,143

121,602

28.0

262.974

128,449

48.8

4.3

1.8

Conventional, first lien
Home purchase .... .....
Refinance ..............

21.997
23,007

20,062
21,046

2,003
2,625

10.0
12.5

17.239
17.598

1.121
1,011

6.5
5.7

53.1
53.1

12.4
13.4

Other .................. ...

7.362

6,738

1,104

16.4

5,253

246

4.7

28.0

9.8

Conventional. first lien
Home purchase ..... ....
Refinance .......... ....

65,093
54,099

59,320
47,047

3,923
4,477

6.6
9.5

51,710
38.353

5,992
5,148

11.6
13.4

50.5
59.8

16.8
14.2

Other .. .. ........ ........

25,306

21,817

2,849

13.1

16.978

3,692

21.7

3.9

2.1

27,451,938

22,947,298

6,575,500

28.7

13,969,065

4,009,106

28.7

22.4

11.6

BUSINESS RELATED'

MULTIFAMILY'

Tntal .... ........ .. .....

OTE: Excludes transition-period applications (those submitted before 2004)
and transition-period loans (those for which the application was submitted before 2004).
I. Annual percentage rate (APR) spread is the difference between the APR
on the loan and the yield on a comparable-maturity Treasury security. The
threshold for first-lien loans is a spread of 3 percentage points; for junior-lien
loans, it is a spread of 5 percentage points.
2. Loans covered by the Home Ownership and Equity Protection Act of
1994, which does not apply to home-purchase loans.

3. Business-related applications and loans are those for which the lender reported that the race, ethniciry. and sex of the applicant or co-applicant are not
applicable; all other applications and loans are nonbusiness related.
4. Includes applications and loans for which occupancy starns was missing.
5. Includes business-related and nonbusiness-related applications and loans
for owner-occupied and non-owner-occupied properties.
. . . Not applicable.

A83

The 2006 HMDA Data

4. Disposition of applications for home loans, and origination and pricing of loans, by type of home and type of loan, 2006-Colltinued
Loans originated

MEMO
Transition-period applications (those submiued before 2004)

Loans with APR spread above the threshold 1
Distribution. by percentage
points of APR spread

APR spread
(percentage points)

Number of
HOEPAcovered
loans2

Loans originated
Number
submiued

Number
denied

Percent
denied

Percent with
APR spread
above
threshold

Number of
HOEPA·
covered
loans2

5-6.99

7-8.99

9 or
more

Mean

Median

51.5
58.9

9.6
37.2

.5
4.0

5.3
6.8

5.5
6.7

1,875
69

123
4

11.0
8.9

527
23

3.6
17.4

2.8
75.0

2.4
25.0

.3
.0

3.5
6.2

3.2
6.3

129
0

10
0

20.0
0

17
0

17.6
0

44.9
55.5

9.7
37.1

.1
7.5

5.1
6.9

5.2
6.8

3,894
2,655

2,472
33

84
2

7.2
10.5

93
6

4.3
0

0
0

7.8
42.9

1.7
42.9

.1
14.3

3.7
7.0

3.2
7.3

16
0

80
0

12
0

21.4
0

II
0

9.1
0

0
0

34.3
46.7

8.0
35.1

.7
18.2

4.9
7.4

4.6
7.2

1,578
3,720

8
14

0
0

3
I

0
0

12.5
41.7

2.5
33.0

.6
25.3

3.9
7.7

3.5
7.3

I
99

1
0

0
0

I
3

5.9
13.0

6
2

0
50.0

25.0

Number

30.2
28.7

12.0
8.6

3.9
2.0

5.3
4.9

4.8
4.6

1.384

32
50

23.8

12.0

6.1

5.6

1.023

25.8
35.0

6.3
8.4

.7
.5

4.6
4.9

3.9
4.5

347

369
235

12
5

5.6
4.8

83
18

7.2
5.6

35.0

34.2

24.6

7.6

7.4

276

18.2

42.9

30.4
30.7

3.8
2.7

.3
.2

4.5
4.4

3.9
3.9

7
4

0
0

6
3

0
0

44.3

14.6

3.3

5.4

5.3

18.7
19.7

12.1
5.9

1.9
.4

4.8
4.3

4.0
3.7

175
449

II
2

7.1
0.9

109
191

49.1

31.6

13.3

6.9

6.7

141

28.0

46.6

16.7

2.7

5.6

5.7

15,172

6,069

279

8.6

1,118

the share of non-owner-occupant lending among firstlien loans to purchase one- to four-family site-built
homes began rising in 1994, and it has risen in every
year between 1996 (when it was 6.4 percent) and
2005, when it reached 17.3 percent (table 8). For

2.8
1.0

4.2

2006, the share fell somewhat, to 16.5 percent. Further, in line with the experience for home-purchase
loans to owner-occupants, the number of conventiona] first-lien loans to purchase homes by nonowner-occupants fell about 17 percent from 2005.

A84

Federal Reserve Bulletin 0 December 2007

5. Home-purchase lending that began with a request for pre-approval: Disposition and pricing, by type of home, 2006
Applications preceded by requests
for pre-approval I

Requests for pre-approval

Loan originations whose applications were
preceded by requests for pre-approval
Loans with APR spread
above the threshold'

Acted upon by lender
Type of home

Number
acted upon
by lender

Number
denied

Percent
denied

Number
submitted

Number
Number

Number
denied

Number

Percent

ONE- TO FOUR-FAMILY
NONBUSINESS RELATE))3

Owner occupied
Site-built
Conventional
First lien . . . . . . . . . . .
Junior lien ....... ..

782,978
158,359

192,997
37,834

24.6
23.9

478,986
103,306

417,401
92.200

35,416
7,924

344,575
72,364

33,668
19,054

9.8
26.3

Government backed
First lien. .. ... . ..
Junior lien .. ....... ....

77,970
58

22,654
8

29.1
13.8

55,250
54

48,701
48

3,996
5

42,201
42

1,063
3

2.5
7.1

Manufactured
Conventional, first lien ...
Other ....... ....... .....

40,506
5.079

20,489
1,533

50.6
30.2

37.589
3,811

33,069
3,117

18,032
515

8,357
2,452

5,793
149

69.3
6.1

89,459
16,448

17,789
3,246

19.9
19.7

67,177
13,714

57,720
11,573

7,102
1.591

44,834
8,318

8,890
4,352

19.8
52.3

2,976
388

198
31

6.7
8.0

2,813
368

2,370
265

126
23

2,161
192

84
70

3.9
36.5

Conventional, first lien . .....
Other ......
.... .. ...

295
126

30
5

10.2
4.0

275
125

240
107

18
4

212
99

44
8

20.8
8.1

Total ....... .... ... .......

1,174,642

296,814

25.3

763,468

666,811

74,752

525,807

73,178

13.9

NOli-owner occupied"
Conventional, first lien .. ....
Other ............
BUSINESS RELATED'
Conventional, first lien ...
Other ....... ........... ..
MULTrFAMILY'

NOTE: Excludes transition-period requests for pre-approval (those submitted
before 2004). Refer to general note to table I.
I. These applications are included in the total of 27,451,938 reported in
table 4.
2. Refer to table 4, note I.

3. Business-related applications and loans are those for which the lender reported that the race, ethnicity, and sex of the applicant or co-applicant are "not
applicable"; all other applications and loans are nonbusiness related.
4. Includes applications and loans for which occupancy status was missing.
5. Includes business-related and nonbusiness-related applications and loans
for owner-occupied and non-owner-occupied properties.
. . . Not applicable.

Piggyback Lending

20 percent of the purchase price. Some borrowers
have chosen a piggyback loan instead of a loan
backed by PMI in part because, until recently, borrower payments for PMI could not be itemized for
federal income tax purposes, whereas the interest paid
on piggyback loans could be. Also, without the
piggyback loan, some home purchases might not have
been possible because the underwriting standards
applied by PMI companies may have been more
conservative than those used by the lender providing
the piggyback loan.
The expanded HMDA data document substantial
growth in piggyback lending since 2004 and, together
with data reported by PMI companies, suggest that
such lending played an important role in home sales
over the past few years. 2J In 2006, lenders covered by

Many first-time homebuyers have relatively limited
assets and thus cannot qualify for other than a mortgage with a high loan-to-value ratio. Other borrowers
have the financial capacity to make a large down
payment but prefer not to do so. Lenders and
secondary-market purchasers often require loans with
high LTV ratios to be protected with private mortgage
insurance (PMI), carried at the expense of the borrower, to indemnify them, at least in part, against the
elevated risk of default on such loans.
In recent years, so-called piggyback loans have
emerged as an alternative to PMI. In piggyback
lending, borrowers simultaneously receive a first
mortgage and a junior-lien (piggyback) loan. The
piggyback loan finances the portion of the purchase
price not being financed by the first mortgage and
sometimes any cash payment that might have been
made; the junior loan may amount to as much as

21. Piggyback loans are not identified explicitly in the HMDA data.
However, by matching junior-lien home-purchase loans with first-lien
home-purchase loans extended at the same time to borrowers with the

The 2006 HMDA Data

5. Home-purchase lending that began with a request for pre-approval: Disposition and pricing, by type of home,
Loan originations whose applications were
preceded by requests for pre-approval
Loans with APR spread above the threshold

200~Continued

MEMO
Applications with transition-period requests for
pre-approval (request submitted before 20(4)

APR spread
(percentage points)

Distribution. by percentage points of APR spread

A85

Loans originated
Number
submitted

Number
denied

Percent
denied

Number

Percent
with APR
spread above
threshold

8.7
0

14
2

0
0

I
0

11.1
0

7
0

42.9
0

3-3.99

4-4.99

5-6.99

7-8.99

9 or
more

Mean
spread

Median
spread

44.7

17.3

3 \.0
58.1

6.0
34.1

.9
7.9

4.7
6.9

4.3
6.7

35
3

2
0

72.2

18.8

5.9
66.7

3.0
33.3

.1
0

3.8
6.2

3.4
6.4

9
0

20.0
83.9

24.4
.7

40.0
3.4

13.5
12.1

2.1
0

5.4
3.8

5.2
3.3

0
0

60.0
0

18.0
0

16.6
22.8

4.3
36.1

\.2
4\.2

4.3
8.6

3.7
8.5

10
3

1
0

16.7
0

5
I

0
0

60.7
1.4

7.1
\.4

17.9
37.1

11.9
3\.4

2.4
28.6

4.6
7.8

3.5
7.7

3
0

0
0

1
0

0
0

47.7
12.5

18.2
0

27.3
62.5

4.5
12.5

2.3
12.5

4.6
7.6

4.2
6.2

0
0

30.8

12.4

36.1

15.5

5.3

5.5

5.3

9.1

10.0

HMDA reported on 1.43 million junior-lien loans to
purchase homes; almost all of them were conventional loans, and the quantity was about 4 percent
greater than in 2005 (data not shown in tables).
Almost 24 percent of the 2006 first-lien conventional
home-purchase loans on owner-occupied site-built
homes for one to four families involved a piggyback
loan as identified here, a proportion that was 2.7 percentage points higher than the comparable figure for
2005. The overall increase from 2005 to 2006 in the
number of reported junior-lien loans used to finance a
home purchase is notable because the number of
reported conventional first-lien home-purchase loans
fell nearly 12 percent from 2005 to 2006. Further, in
2006 piggyback lending apparently continued to gain
market share at the expense of PMI, as the number of
home-purchase loans backed by PMI declined about
6 percent from 2005 to 2006. 22

same characteristics and census tract location, an estimate of the
incidence of piggyback loans, at least for those originated by the same
lender, can be derived. About 85 percent of junior-lien loans reported
in the HMDA data can be matched in this manner.
22. Annual PM! data are published by the FFlEC and are available
at www.ffiec.gov.

An individual whose loan request is too large to
meet the conforming size limits also has a reason to
take out a piggyback loan: It can be used to divide the
total loan amount so that the size of the first lien will
be conforming. We estimate that in 2006, 9.6 percent
of piggyback loans were used for that purpose (down
from 10.1 percent in 2005). Looked at from the
borrower perspective, of the individuals in 2006 who
borrowed a total exceeding the conforming loan
amount, 17.8 percent used a piggyback loan to create
a first lien with a conforming size (up from 13.6 percent in 2005).
Manufactured-Home Lending
Manufactured homes, which often sell for less than
site-built homes, are an important option for many
homebuyers. 23 However, the credit risks associated
with manufactured-home lending also tend to be
higher than for site-built homes, so loans backed by
manufactured units carry relatively high interest rates.

23. Unlike site-built homes, manufactured homes are generally
assembled in factories and shipped to a home site.

A86

Federal Reserve Bulletin D December 2007

6. Cumulative distribution of home loans, by loan amount and by purpose, type, and pricing of loan, 2006
Percent

Upper bound of
loan amount
(thousands
of dollars)'
24 . ........... ....
.....
49 .. ..... .
74 ...
99 .... ......... .
...........
124 ...
149 .................
174 ...
.........
199 .................
224 . ...............
249. .. . ...........
274 ..
....... . ...
299 .................
324.
..... . ......
349 .................
374 .......... ......
399 ... ...... ......
417 .................
449 .................
499 .. ....... - .....
549 ........... ....
599 .................
649 .......... ......
699 ....... .........
749 .... ....... . ...
799 ...... ..........
More than 799 ......

..
..............
..

Refinance

Home purchase
Conventional

Conventional
Not higher
priced

Higher
priced

FHA

Total

Not higher
priced

Higher
priced

FHA

Total

.3
1.9
6.6
13.6
23.7
34.5
43.9
51.9
59.5
65.2
70.3
74.4
78.4
81.3
84.0
86.1
89.1
90.2
92.2
94.0
95.2
96.3
97.0
97.5
97.9
100

.6
3.4
12.6
23.3
34.6
44.6
52.9
59.9
66.2
71.3
75.5
79.3
82.7
85.3
87.7
89.6
91.0
92.8
95.1
96.7
97.7
98.4
98.8
99.1
99.3
100

.4
2.3
8.1
16.0
26.5
37.1
46.2
54.0
61.2
66.7
71.6
75.6
79.5
82.3
84.9
87.0
89.6
90.9
92.9
94.7
95.8
96.8
97.5
97.9
98.3
100

.1
2.5
12.9
30.1
48.4
67.4
81.3
90.0
94.4
96.8
98.1
98.8
99.2
99.5
99.8
99.8
99.9
99.9
100
100
100
100
100
100
100
100

.0
.5
3.2
10.7
21.6
36.7
52.0
64.7
74.0
81.8
87.3
91.3
94.2
96.2
97.6
98.7
99.6
99.7
99.8
99.9
100
100
100
100
100
100

.9
3.9
9.8
17.1
26.2
34.7
43.4
50.7
58.0
63.5
68.8
72.9
77.0
80.0
83.0
85.3
88.5
89.8
92.1
94.0
95.3
96.4
97.2
97.6
98.0
100

1.3
4.7
12.9
22.8
33.6
43.5
52.5
60.0
66.7
71.8
76.3
79.9
83.3
85.9
88.2
90.0
91.4
93.1
95.2
96.7
97.6
98.3
98.8
99.0
99.3
100

1.0
4.1
10.8
18.9
28.5
37.4
46.2
53.6
60.7
66.1
71.1
75.0
79.0
81.8
84.6
86.7
89.4
90.8
93.1
94.9
96.0
97.0
97.7
98.1
98.4
100

.1
2.1
9.7
23.4
40.0
57.5
71.4
81.4
88.4
92.3
94.9
96.5
97.6
98.4
99.6
99.7
99.8
99.9
100
100
100
100
100
100
100
100

.2
3.3
12.2
25.6
40.0
55.3
67.0
76.2
83.2
88.5
92.4
94.9
96.8
97.9
98.8
99.4
99.9
99.9
99.9
100
100
100
100
100
100
100

245.8
192

208.7
165

236.4
185

133.0
127

184.6
171

245.6
196

207.5
167

233.8
186

150.2
138

154.1
141

MEMO
Loan amount
(thol/sallds
of dollars)
Mean .. ...... ....
......
Median'

I. Loan amounts are reported under HMDA to the nearest $1,000.
FHA Federal Housing Administration.
VA Department of Veterans Affairs.

Beginning with the 2004 data, HMDA rules require
lenders to include a code to identify applications and
loans involving manufactured homes. 24 The 2006
data indicate that 4,477 lenders extended about
256,000 manufactured-home loans, a loan volume
little changed from 2005 (data not shown in tables).
Despite the large number of lenders extending at least
one mortgage for a manufactured home, such lending
is relatively concentrated: 83 percent of the reported
manufactured home loans were reported by just ten
lenders. About three-fifths of reported manufacturedhome loans were used to purchase homes, and a
relatively large portion of those mortgages were
FHA-insured (18 percent, versus about 5 percent on
the purchase of site-built homes).
Delinquency rates on manufactured homes tend to
be higher than for other types of home loans, and the
24. In the years preceding 2004, the Department of Housing and
Urban Development (HUD) helped users of the HMDA data identify,
albeit imperfectly, applications and loans related to manufactured
homes by producing each year a list of reporting institutions (typically
about twenty) that it believed were primarily in the business of
extending such credit (www.huduser.orgldatasets/manu.html).

resulting lender caution is reflected in very high rates
of denial for home-purchase applications on such
properties (table 4). (The elevated credit risk also is
reflected in elevated loan prices, as discussed below.)
Because the use of manufactured homes varies greatly
across populations and geographies, analyses of
denial-rate differences across groups should differentiate between site-built and manufactured housing.
Loans Covered by HOEPA
Under the Home Ownership Equity Protection Act of
1994, certain types of mortgage loans that have rates
or fees above specified levels require additional disclosures to consumers and are subject to certain
restrictions on loan terms. 25 Under the 2002 revisions
to Regulation C, the expanded HMDA data include a
code to identify whether a loan is subject to the
protections of HOEPA.

25. HOEPA is implemented by the Federal Reserve Board's Regulation Z (www.federalreserve.gov/regulationsldefault.htm).

The 2006 HMDA Data

A87

7. Cumulative di tribution of home loans, by borrower income and by purpose, type, and pricing of loan, 2006
Percent
Home purchase

Upper bound of
borrower income

Refinance

Conventional

(thousands
of dollars)'

Not higher
priced

24 .. .............
49 .. ..............
74 .. ..... .........
99 ... ..............
124.
149 ................
199 .................
249 .............
299 ..
More than 299

Higher
priced

Conventional

FHA

Toml

Not higher
priced

Higher
priced

FHA

Total

3.6
29.3
56.1
73.9
84.3
89.9
95.7
97.6
98.4
100

3.1
24.2
48.8
67.1
78.7
85.4
92.6
95.6
97.0
100

5.9
50.6
83.2
94.5
97.7
98.7
99.5
99.7
99.8
100

1.0
31.0
69.2
89.2
96.6
98.8
99.8
99.9
100
100

2.9
23.1
48.8
68.1
80.0
86.5
93.2
96.0
97.2
100

4.6
33.0
62.3
79.8
88.6
92.8
96.8
98.2
98.7
100

3.5
26.2
53.0
71.8
82.7
88.5
94.3
96.6
97.7
100

4.6
39.5
76.3
93.1
98.0
99.3
99.8
99.9
99.9
100

3.0
31.4
69.4
88.5
96.0
98.6
99.8
100
100
100

105.3
79

86.1
68

100.5
76

55.2
49

66.0
60

98.6
76

78.1
63

92.1
72

60.1
56

65.8
60

5.3
72

74.0
64

82.4
70

80.9
70

67.8
60

76.7
66

271.6
199

2.9
22.5
46.3
64.8
76.8
83.8
91.6
94.9
96.5
100

212.1
168

258.8
190

234.7
175

191.0
150

223.7
168

MEMO

Borrower income.
by selected loan
type (thousands
of dollarsf

All
Mean ...........•...
Median' .......•....
Conforming
Mean .
Median'
Jumbo
Mean ...
Median'

OTE: For loans with two or more applicants, HMDA-covered lenders repon data on only two. Income for two applicants is reponed jointly.
I. Income amounts are reponed under HMDA to the nearest $1,000.
2. By size, all loans backed by the FHA or VA are conforming.

Coverage under HOEPA is determined by a twopart test that considers both the APR and the dollar
amount of points and fees. The APR portion of the
coverage test is similar to that used to determine
which loans are higher priced under HMDA. In the
case of HMDA, identifying higher-priced loans re8.

on-owner-occupied lending as a share of all first liens
to purchase one- to four-family site-built homes, by
number and dollar amount of loans, 1990-2006
Percent
Number

Vear
1990
1991
1992
1993
1994

.
..

Dollar amount

..
..
.

6.6
5.6
5.2
5.1
5.7

5.9
4.5
4.0
3.8
4.3

1995
1996
1997
1998
1999

..
.
..
.
.

6.4
6.4
7.0
7.1
7.4

5.0
5.1
5.8
6.0
6.4

2000
2001
2002
2003

.
.
..
..

2004

8.0
8.6
10.5
11.9
14.9

7.2
7.6
9.2
10.6
13.1

17.3
16.5

15.7
14.8

2005

2006

. . . Not applicable.
FHA Federal Housing Administration.
VA Department of Veterans Affairs.

quires using the yield on the Treasury security of
comparable maturity for the fifteenth day of the
month preceding the date on which the loan rate was
set. For HOEPA, however, the APR portion of the
coverage test requires using the yield on the Treasury
security of comparable maturity for the fifteenth day
of the month preceding the month in which the
application was received. Another difference is that
the APR spreads for determining HOEPA coverage
are higher than for determining which loans must be
reported as higher-priced under HMDA. HOEPA
coverage is based on spreads that exceed 8 percentage
points and 10 percentage points for first- and juniorlien loans, respectively, versus minimum spreads of
3 percentage points and 5 percentage points, respectively, in HMDA higher-priced loans.
Before the release of the 2004 data, little information was publicly available about the extent of
HOEPA-related lending or the number or type of
institutions involved in that activity. Although the
expanded HMDA data provide important new information, the data fail to capture all HOEPA-related
lending. Some HOEPA loans are extended by institutions not covered by HMDA, and some HOEPA loans
made by HMDA-covered institutions are not reported

A88

Federal Reserve Bulletin 0 December 2007

under Regulation C, which implements HMDA. Most
notably, if the proceeds of a home-secured loan are
not used to refinance an existing home loan or to
finance home improvements, then the loan may be
covered by HOEPA but is not reportable under Regulation C. The extent of HOEPA-related lending not
reported under HMDA is unknown.
For 2006, roughly 1,200 lenders reported extending about 15,200 loans covered by HOEPA (table 4).
Only 17 lenders made 100 or more HOEPA loans, and
most lenders did not report any such loans (data not
shown in tables). A majority of the HOEPA loans
involved a refinancing, and about two-thirds of these
were first-lien loans. In the aggregate, HOEPArelated lending accounts for a very small proportion
of the loan market: HOEPA loans accounted for less
than 0.1 percent of all the originations of homesecured refinancings and home-improvement loans
reported for 2006 (data derived from table 4).
THE 2006 HMDA DATA ON LOAN PRICING

The sections that follow analyze the loan-pricing
information in the 2006 HMDA data by lender, loan
product, geography, and characteristics of borrowers
and their neighborhoods.

Incidence of Higher-Priced Lending
As with most loans reported in 2004 and 2005, most
loans reported in 2006 were not higher-priced as
defined under the Board's Regulation C. 26 Among all
the HMDA-reported loans, 28.7 percent were higherpriced in 2006, up from 26.2 percent in 2005 (table 4).
Later sections of this article focus on the changes in
the incidence of higher-priced lending from 2005 to
2006; this section focuses on 2006 pricing patterns
across loan products.
The incidence of higher-priced lending in 2006
differed by loan product (table 4). For example,
• Loans backed by the government-either insured
by the FHA or guaranteed by the VA-had a much
lower incidence of higher-priced lending than did
conventional loans used for the same purpose.
• First-lien home-purchase loans had a lower incidence of higher-priced lending than did junior-lien
loans used for that purpose.
• Manufactured-home loans exhibited the greatest
incidence of higher pricing regardless of purpose.
26. Refer to notes 5 and 6 and the appendix.

• First-lien home-purchase loans extended to nonowner occupants had a higher incidence of higherpriced lending than did comparable loans to owner
occupants.

Rate Spreads for Higher-Priced Lending
The 2006 variation in APR spreads between homepurchase loans and loans used in refinancings was
much smaller than the variations in incidence noted
above. For example, for higher-priced conventional
first-lien loans for an owner-occupied site-built home,
the mean APR spreads were about 5 percentage
points above the yields on comparable Treasury securities both for purchase loans and refinancings
(table 4). A similar pattern is found for conventional
junior-lien loans: They show a mean spread of about
7 percentage points whether they were used for home
purchase or refinancing.
As noted, loans backed by manufactured homes
were substantially more likely to be higher-priced
than loans backed by site-built properties. However,
for each of those two products, the mean spreads paid
by those with higher-priced loans were roughly the
same whether the loan was for home purchase or
refinancing.
As in 2004 and 2005, only a relatively small
proportion (about 10 percent) of first-lien loans in
2006 had very large spreads-7 percentage points or
more. Similarly, only a relatively small proportion of
junior-lien loans had spreads of 9 percentage points or
more.

Lenders and Higher-Priced Lending
The concentration of higher-priced lending among
institutions covered by HMDA fell somewhat in
2006, although it remained fairly high. About 5,000
of the nearly 8,900 lenders covered by HMDA in
2006 reported extending fewer than 10 higher-priced
loans (data not shown in tables). At the other end of
the spectrum, the roughly 1,250 lenders that reported
making at least 100 higher-priced loans in 2006
accounted for 97 percent of all such loans. The share
of such lending attributable to the lO lenders with the
largest volume of higher-priced loans dropped from
59 percent in 2005 to 35 percent in 2006.
Another aspect of concentration is the extent to
which institutions that extend higher-priced loans
may be considered to be "specialists" in that activity,
that is, to have a large proportion of their loans in the
higher-priced category. Such specialized institutions

The 2006 HMDA Data

A89

9. Higher-priced lending: Distribution by type of lender, and incidence at each type of lender, 2004-06
Percent
2004
Type of lender

Hjgher-priced loans
Distribution

Independent mortgage
company .............
Depository ................
Sub idiary of depository ...
Affiliate of depository .....
Total ........ ............

50.6
25.9
11.5
12.0
100

Incidence
25.5
8.0
9.0
18.6
14.0

2005

I All loans.
I distribution

Higher-priced loans

MEMO:

Distribution

27.8
45.2
17.9
9.1
100

52.0
22.8
13.0
12.2
100

Incidence
41.4
12.8
20.7
30.9
24.7

2006

I All loans,
I distribution
MEMO:

31.0
43.8
15.5
9.7
100

Hjgher-priced loans

Distribution

Incidence

45.7
28.5
12.4
13.4

41.5
18.7
22.9
37.9

100

28.4

ME to:
All loans,
distribution

31.2
43.4
15.4
10.1
100

NOTE: Conventional, first-lien mortgages for site-built properties.

can have a business orientation that is quite different
from that of other lenders. 27 Taking 60 percent of
loans as the criterion for defining higher-priced specialists, about 25 percent of the roughly 1,250 lenders
reporting at least 100 higher-priced loans were specialists, or about 4 percent of all reporting institutions. The HMDA data on pricing can only approximately indicate the extent to which a lender specializes
in subprime loans because some prime loans are
higher-priced, and some subprime loans are not.
Higher-priced lending activity may also be described by type of lender. Four groupings are provided here-depository institutions and three types of
mortgage company, namely, independents, direct subsidiaries of depository institutions, and affiliates of
depository institutions. Regarding conventional firstlien loans for site-built homes in both 2004 and 2005,
independent mortgage companies originated about
50 percent of the higher-priced loans and about
30 percent of all such loans; in contrast, depository
institutions originated about 25 percent of the higherpriced loans and about 45 percent of all such loans
(table 9).
The market hares for all types of home lending
were virtually unchanged from 2005 to 2006 across
the four categorie of lender. However, some changes
in market shares of higher-priced lending appeared
acros the four groups. Depository institutions increased their share of the higher-priced loan market
about 6 percentage points, while the market share of
independent mortgage companies fell about the same
number of percentage points. Notably, the incidence
of higher-priced lending for independent mortgage
companies was unchanged from 2005, which suggests that the increase in market share for depositories
was not caused by independent mortgage companies
abandoning that segment of the market.
27. For example. specialists in higher-priced lending may use
different marketing practices and may rely more heavily on the ability
to sell loans to secondary-market purchasers.

The recent turmoil in the subprime sector has
cau ed a number of lenders, primarily independent
mortgage companies, to cease operations, curtail their
activities, or transfer or sell their business to others.
As a consequence, the 2007 HMDA data may reveal a
notable change in the sources of higher-priced lending, likely with a diminished share coming from
independent mortgage companies.

Factors that Influence Higher-Priced
Lending
As described in our assessment of the 2005 data, three
basic factors may cause the higher-priced share of
lending that is reported under HMDA to change from
year to year: (l) changes in the interest rate environment, particularly increases in short-term interest
rates; (2) changes in the business practices of lenders,
particularly in the products offered and the willingness or ability of lenders to bear credit risk; and
(3) changes in the borrowing practices or credit-risk
profiles of consumers, Among the borrowing practices at issue are the relative preference for adjustablerate versus fixed-rate loans and for interest rate
reduction versus cash-out equity when refinancing; a
change in credit-risk profiles would include changes
in the distribution of credit scores among borrower,
in the down payments they make, and in their levels
of monthly mortgage payment relative to income. Our
previous analysis suggested that all three factors were
likely responsible for the very large increase from
2004 to 2005 in the reported incidence of higherpriced lending. Quantifying the precise contribution
of each of the e factors to the change in higher-priced
lending proved difficult, however, largely because of
a lack of available information within the HMDA
data. 28

28. LaCour-Little, "Economic Factors Affecting Home Mortgage
Disclosure Act Reporting."

A90

Federal Reserve Bulletin 0 December 2007

As noted, the incidence of higher-priced lending
increased about 2.5 percentage points overall from
2005 to 2006, but, by loan product, changes in the
incidence differed considerably over the two years.
The most notable changes were increases in the
incidence of higher-priced lending for conventional
first-lien refinancings on owner-occupied properties,
for home-improvement lending, and for lending on
non-owner-occupied homes. 29 The following sections
analyze those increases in the incidence of higherpriced lending from 2005 to 2006 in terms of the
three factors listed above.

Spread between interest rates on thirty-year and
five-year Treasury bonds, 1977-2006
Percentage points

2.0
1.5
1.0
-

.5
+

.5
1.0
1.5

The Changing Interest Rate Situation
II I I I I I I I I I I I I I I I I I I I I ! I I ! I I I I I I ! II

Regulation C directs lenders to determine whether a
loan is higher priced by comparing its APR with the
yield on a Treasury security that matches the stated
maturity of the loan (refer to notes 5 and 6). Thus, the
regulation effectively requires lenders to use longerterm interest rates to determine whether to report a
loan as higher priced because the stated maturity of
most home loans, particularly first-lien loans, typically exceeds twenty years. In contrast, because a
mortgage tends to be paid off before its stated maturity, lenders use relatively shorter-term interest rates
to help set mortgage rates. 30 Thus, a mismatch exists
between the longer-term yields used to determine
higher-priced lending under HMDA and the shorterterm yields used to set mortgage prices.
A yield curve shows the relationship between the
yield on a debt instrument and its term to maturity
(figure 1, and box "The Yield Curve"). A consequence
of the mismatch just described is that a change from
one year to the next in the relationship between shortand long-term rates-a change in the slope of the
yield curve--can cause a change in the proportion of
loans that are reported as higher priced, all other
things being equal. Most notably, if shorter-term
interest rates increase in a given year relative to
longer-term rates, both the number and proportion of
loans that exceed the HMDA price-reporting thresholds in that year will be higher than they would have
been in the absence of the change in rates even if
lender business practices and borrower behavior
remain the same.

29. The increase from 2005 to 2006 in the incidence of higherpriced lending for home-purchase loans on non-owner-occupied properties was notable-from 20.3 percent to 28.6 percent. In contrast, the
incidence for the purchase of owner-occupied properties increased
only slightly over the period, from 24.6 percent to 25.3 percent.
30. Most mortgages are paid off in a relatively short period
(typically well before the stated term of the loan is reached) because
the individual moves and prepays the loan, or refinances, or defaults.

1978

1982

1986

1990

1994

1998

2002

2006

NOTE: The data are monthly. After March 2002, the spread is between
twenty-year and five-year Treasury bonds.
SOURCE: Federal Financial Institutions Examination Council. "FFIEC Rate
Spread Calculator," www.ffiec.gov/ratespread/default.aspx.

Fixed-rate lending and the incidence ofhigher-priced
lending. The changing interest rate environment from
2005 through 2006 likely explains part of the increase
from 2005 in the share of reported loans that exceeded
the pricing thresholds established by Regulation C.
Throughout 2004 and 2005, long-term rates exceeded
short-term rates (the yield curve was upward sloping),
but the difference narrowed over this period as
shorter-term rates increased rather steadily (the slope
of the yield curve flattened). The yield curve continued to flatten over much of 2006 as shorter-term rates
increased, further narrowing the gap between shortand long-term rates.
Using the methodology similar to that described in
our analysis of the 2005 data, we estimate that, if all
loans were thirty-year fixed-rate loans, the flattening
of the yield curve would have made the 2005-06 rise
in the incidence of reported higher-priced lending
higher than it would have been in the absence of the
yield-curve flattening, as follows (data not shown in
tables): The flattening would have increased the rise
in higher-priced lending for conventional first-lien
home-purchase loans by 1.9 percentage points, and it
would have increased the rise for similar loans for
refinancings by about 2.3 percentage points,3l The
actual increase in incidence from 2005 to 2006 was
0.7 percentage point for those home-purchase loans
and 5.3 percentage points for those refinancings.
Those actual figures imply that if all of the loans
reported in HMDA were fixed-rate loans, the change
31. The methodology is described on pp. A 147-50 in Avery,
Brevoort, and Canner, "Higher-Priced Home Lending and the 2005
HMDA Data." Although the maturities of fixed-rate home loans vary
somewhat, the overwhelming majority of them are thirty-year loans.

The 2006 HMDA Data

The Yield Curve
The yield curve describes the relationship between
interest rates on financial instruments of different maturities (figure A).
The yield curve is typically upward sloping because
longer-term investments ordinarily involve greater risk
(credit risk, market interest rate risk, and inflation premium), and consequently investors require a higher return
to be willing to invest their funds for longer periods. Over
the past twenty years, longer-term interest rates (for
example, as represented by the annual yield on thirty-year
Treasury securities) have almost always exceeded shorterterm interest rates (for example, as represented by the
yield on five-year Treasury securities). Figure I, in the
main text, portrays this relationship with the spread, or
difference, between the yields on thirty-year and five-year
Treasuries. As shown in figure I (and as illustrated by the
selected dates shown in figure A), the yield curve was
especially steep in the 2002-04 period-when short-term
rates were quite low by historical standards-but has
become much flatter since then and has in fact inverted
for short periods.
A.

Yield curves on Treasury securities,
July 10,2003 and 2006
Percent

~---------July 10,2006

5.0
4.0
3.0
2.0

July 10.2003

1.0
,

1 I

15
20
Maturity (years)

NOTE: Smoothed yield curves estimated from off-the-run
Treasury coupon securities. Yields shown are those on notional par
Treasury securities with semiannual coupons.

between 2005 and 2006 in the incidence of higherpriced lending for first-lien home-purchase loans
would have been a modest decline of about 1.2 percentage points (0.7 less 1.9), as opposed to a modest
increase. The increase in the incidence for similar
refinancing loans would have been about half of the
actual reported increase in higher-priced lending (5.3
less 2.3). Overall, our estimate of the roughly 2 percentage point effect on fixed-rate loans between 2005
and 2006 is similar to our estimate of the corresponding effect between 2004 and 2005.

A91

Additional analysis suggests that another portion of
the increase in higher-priced lending arises from the
effects of the flattening of the yield curve on
adjustable-rate lending. Evidence provided below
suggests that the effects of the flattening of the yield
curve on adjustable-rate lending might be larger than
on the effect on fixed-rate lending.

Adjustable-rate lending and the incidence of higherpriced lending. A steeply upward sloping yield curve
suggests that the market expects short-term interest
rates to rise. Yet the method of calculation specified
under Regulation Z for deriving the APR for
adjustable-rate loans assumes that interest rates will
stay the same. Because of this regulatory construct,
an upward-sloping yield curve causes the APRs for
adjustable-rate loans to be below those for fixed-rate
loans of similar term and credit risk. Thus, the
flattening of the yield curve can have two effects.
First, it can narrow the gap between the longer-term
rates used for the HMDA reporting threshold for
higher-priced loans and the shorter-term rates used to
price loans in the marketplace. Second, a flattening of
the yield curve can narrow or even invert the APR
gap between adjustable- and fixed-rate loans because,
as short-term interest rates increase, the flattening
reduces the effect of the comparatively low APR
calculations for adjustable-rate loans. The APR gap
can be inverted because the expected durations of
adjustable- versus fixed-rate loans differ-adjustablerate loans are expected to be outstanding for shorter
periods of time. The APR calculations assume that the
durations are the same for both adjustable- and fixedrate loans and thus underweight the value to the
consumer of low teaser rates offered on many
adjustable-rate loans. For these reasons, a likely result
of a flattening (or inversion) of the yield curve is an
increase in the proportion of adjustable-rate loans that
exceed the HMDA price-reporting thresholds.
Figure 2 illustrates these effects of a flattening
yield curve. The bottom three lines of the figure
represent the differences (spreads) between the APRs
of three loan types (the top three lines) and the
HMDA reporting threshold. The APRs in the figure
are the average rates being offered for prime (best
credit-quality) loans for those periods as reported by
Freddie Mac. 32 The three loan types are all thirty-year
32. The rates are from Freddie Mac's Primary Mortgage Market
Survey for 2004-06. The Freddie Mac series for five-year adjustable
rates did not begin until January I, 2005. For 2004, we estimated
five-year adjustable rates from a statistical model using the one-year
adjustable rate and thirty-year fixed rate reported by Freddie Mac and
the one- and five-year rates for Treasury securities.

A92

Federal Reserve Bulletin D December 2007

APRs of three selected loan types, and the spread
between them and the HMDA price-reporting
threshold, 2004-06
Percentage points

9.0
8.0
7.0
6.0
APR, 5-year adjustable
5.0
4.0
3.0
2.0
1.0
+
0

I
2004

2005

2006

NOTE: The data are weekly. Threshold and annual percentage rates (APRs)
are for prime, conventional, first-lien mortgages amortized on thirty years.
For explanation of threshold, refer to text.
SOURCE: APRs are estimated from Freddie Mac, Primary Mortgage Mar-

kel Survey.

loans, but for one of them the interest rate is fixed for
the life of the loan whereas the rates for the other two
reset after one and five years respectively. As thirtyyear first-lien loans, they each have the same HMDA
higher-priced reporting threshold-3 percentage
points above the yield on the thirty-year Treasury
security. The gap between the APR of the typical
prime thirty-year fixed-rate loan and the reporting
threshold narrowed from 215 basis points at the
beginning of 2004 to 144 basis points at the beginning of 2006 and oscillated over the remainder of the
year, For prime one-year adjustable-rate loans, the
gap narrowed much more, from about 400 basis
points at the beginning of 2004 to 52 basis points at
the beginning of 2006, then declined further to end
the year at only 20 basis points. Thus, at the end of
2006, a one-year adjustable-rate mortgage with a
contract rate only 20 basis points above the rate for
prime loans as reported by Freddie Mac would have
been reported as higher-priced under the HMDA
reporting rules.
The differences between the APRs and the reporting threshold decreased for both the fixed-rate and
adjustable-rate loans, but the decrease for adjustable-

rate loans was much larger. Thus, the gap between the
APRs on fixed- and adjustable-rate loans, which was
substantial at the beginning of 2004, had been virtually eliminated by early 2005; then the relationship
between the two loan types inverted, with APRs on
adjustable-rate loans somewhat higher than those on
thirty-year fixed-rate loans during most of 2005 and
all of 2006. The finding suggests that, as an artifact of
regulation, geographic areas may have shown differing incidences of higher-priced lending over the past
three years merely because they had differing shares
of fixed-rate versus adjustable-rate loans. That is,
areas with larger shares of adjustable-rate loans likely
had fewer higher-priced loans than areas with larger
shares of fixed-rate loans in 2004. This effect should
have reversed over the course of 2005 and throughout
2006 as APRs on adjustable-rate loans moved above
those on fixed-rate loans.
In the analysis of the 2005 HMDA data, we used
information on the mix of adjustable- and fixed-rate
loans for each state to derive a rough approximation
of the differential effect of the flattening of the yield
curve on the proportion of adjustable-rate and fixedrate loans that exceeded the HMDA price-reporting
thresholds. 33 The analysis indicated that states with
higher levels of adjustable-rate lending had both
relatively low levels of higher-priced lending in 2004
and larger increases in such lending from 2004 to
2005, a pattern that would have been predicted from
the narrowing of the APR gap between adjustableand fixed-rate loans.
The data illustrated in figure 2 suggest that the mix
of adjustable- and fixed-rate mortgages should be
related to changes in the incidence of higher-priced
lending between 2005 and 2006, although the differences between these two years are substantially
smaller than those between 2004 and 2005. The data
support that inference for home-purchase loans, although the effects are very mild. States with the
highest proportion of adjustable-rate mortgages
showed a greater increase in the incidence of higherpriced home-purchase lending than other states
(table 10). The pattern for refinancings was not
consistent: The states with the largest share of
adjustable-rate mortgages showed about an average
increase in the incidence of higher-priced lending for
refinancings, which suggests that other factors, such
as opportunities to extract equity, played a more
dominant role in explaining differences between 2005

33. The mix of adjustable- and fixed-rate loans was derived from
data obtained from First American LoanPerformance, www.loanperformance.com.

The 2006 HMDA Data

A93

10. Incidence of higher-priced lending in states grouped by share of originated loans that had an adjustable rate, and the
change in incidence, by quintile and type of loan, 2006
Home purchase
Quintile of states
2006 (percent)
Lowest
Second lowest
Middle
Second highest
Highest

.
.
.
.
.

Refinance

Change, 2005--06
(percentage points)

19.0
20.6
23.6
21.6
26.4

.8
1.4
1.6
-.1
4.6

2006 (percent)
38.3
33.6
31.8
29.0
31.2

Change, 2005--06
(percentage points)

6.7
5.8
5.0

5.3
5.3

MEMO: California'

30.2

1.4

23.3

4.6

Total.

24.1

1.9

30.2

5.3

NOTE: Spreads are unadjusted. Quintiles based on share of loans originated
in 2006 that had an adjustable rate. For definition of higher-priced lending, refer to text.

I. California is shown separately because it accounts for a large number of
loans and has a high incidence of adjustable-rate lending.

and 2006 in the incidence of higher-priced lending for
refinancings. The role of these factors is discussed
below.
Above, we estimated that if all loans were fixed
rate, then the effects of the flattening of the yield
curve would have been to add approximately 2 percentage points to the reported incidence of higherpriced lending for first-lien loans in the 2006 HMDA
data. However, adjustable-rate first-lien mortgages
are not as homogenous as fixed-rate loans; substantial
proportions of the adjustable-rate loans have variously, for example, one-year, five-year, and sevenyear introductory (fixed-rate) periods. We estimate
that, if all loans had adjustable rates, the yield-curve
effect would have added on the order of 4 or 5 percentage points-depending on the mix of adjustment
terms-to the reported incidence of higher-priced
lending. Thus, depending on the overall mix of fixedand adjustable-rate loans and the mix of types among
loans with adjustable rates, the effect of the yield
curve flattening on the incidence of higher-priced
loans would have been to increase the incidence by an
amount somewhere between that for the all-fixed-rate
assumption and that for the all-adjustable-rate
assumption-that is, on the order of 3 or 4 percentage
points. That estimate implies that had there been no
yield-curve changes, the incidence of higher-priced
home-purchase loans would have fallen and the incidence for refinancings would have shown only a
modest increase.

lenders nor in the credit-risk profiles of consumers. 34
The importance of the latter two factors in explaining
changes in the "real" incidence of higher-priced
lending is difficult to gauge.
The housing market, and economic conditions
more generally, were favorable in the 2004-05 period.
Sales of both new and existing homes in 2005
eclipsed the historic highs reached in 2004. Housing
market conditions began moderating in 2006: For the
year, home prices rose more slowly in many areas and
declined in some others. Nationally, the median price
for existing homes increased throughout 2005, reached
a high in July 2006, and then declined over the
remainder of the year. Nonetheless, the overall median price of existing homes was higher at year-end
2006 than at year-end 2005. In addition, a steady
climb in short-term interest rates pushed up monthly
payments for some existing borrowers with adjustablerate loans and for those taking out new such loans. 35
Thus, nationally, housing affordability fell from 2005
to 2006, which suggests that more borrowers may
have had to stretch financially to purchase or refinance the mortgages on their homes. 36
Moreover, higher interest rates altered the mix of
individuals seeking to refinance their loans. Historically, individuals have refinanced their loans for one

Real Effects on the Incidence of Higher-Priced
Lending
To the extent that changes in the incidence of higherpriced lending are caused by yield-curve effects, they
are not a result of changes in the business practices of

34. As discussed in the preceding section, the yield-curve effects
are an artifact of the Regulation C definition of a higher-priced loan
and the specification in Regulation Z of the method of calculating
APRs (particularly for adjustable-rate loans).
35. Because many adjustable-rate loans have an initial period at a
fixed rate (often two or three years from loan origination), some
borrowers with such loans do not experience an immediate change in
their payments if interest rates increase. For new bon'owers, an
increa e in short-term rates generally results in a corresponding
increase in the initial rate on the loan.
36. Information on the sales, prices, and affordability of homes is in
U.S. Department of Housing and Urban Affairs, u.s. HOl/sing Market
Conditions, www.huduser.org/periodicals/ushmc.html.

A94

Federal Reserve Bulletin 0 December 2007

or both of the following reasons: to lower the interest
rate on the debt or to extract some of the accumulated
equity in their home. The latter purpose (sometimes
referred to as cash-out refinancing) is accomplished
by borrowing more than is needed to cover the
closing costs of the new loan plus the existing balance
of the old loan. Increases in interest rates during 2005
and the first part of 2006 reduced the opportunities for
individuals to benefit from rate-reduction refinancings, so the proportion of borrowers in the refinance
market who were seeking equity extraction likely
rose in 2006.37
The less-favorable conditions in the housing market and in the interest rate environment in' 2006
relative to 2005 undoubtedly account for much of the
decline in the number of mortgage originations
reported in the HMDA data for 2006, particularly
with regard to the sharp decline in refinancings (about
15 percent). It also likely explains the increase from
2005, apart from the effects of the yield-curve flattening, in the proportion of borrowers who obtained
higher-priced loans in the market for refinancings.
The rise in the incidence of higher-priced lending in
the refinance market (particularly when compared
with the home-purchase market) seems to have come
primarily from the aforementioned rise in the proportion of borrowers in the refinance market who were
seeking to raise cash-and equity extraction is a
major reason for borrowers in the higher-priced segment market to refinance. 38 In short, the increase in
the incidence of higher-priced lending in the refinance market, at least relative to the home-purchase
market, appears to have been driven mainly by a
decrease in the number of prime borrowers in this
market rather than by an increase in borrowers with
weaker credit profiles.
Industry data provide additional support for the
view that real credit quality declined from 2005 to
2006, albeit modestly. However, most of the change

37. Data published by Freddie Mac indicate that the share of
refinancings involving a cash-out rose steadily over the course of 2005
and through the third quarter of 2006 (www.freddiemac.comlnews/
finance/refi_archives.htm).
38. This conclusion follows from the belief that the credit profiles
of those extracting equity are, in general, worse than those that
refinance purely to benefit from interest rate reductions. Empirical
evidence on delinquency rates for refinancings involving equity
extraction is generally consistent with this belief. However, in areas
that have experienced exceptional increases in home values, the
expected credit profiles of those extracting equity may not be worse
than others because such borrowers may benefit from relatively low
loan-to-value ratios. That condition may explain, for example, the
relatively low incidence of higher-priced lending for refinancings in
California (table 10), a state with a high incidence of higher-priced
lending for home purchases. California was among the states with the
largest increases in home values in recent years.

in credit quality seems to have taken place in the
near-prime, or "alt-A," portion of the market. For
example, estimates show that from 2005 to 2006, the
subprime share of all mortgage originations held
steady at about 20 percent, whereas, over the same
period, the alt-A portion of the market rose from
12.2 percent to 1304 percent. 39

DIFFERENCES IN LENDING OUTCOMES BY
RACE, ETHNICITY, AND SEX OF BORROWER

One purpose of the HMDA data is to allow comparisons of lending outcomes across borrowers grouped
by their race, ethnicity, or sex. Three types of outcomes often assessed are the incidence of higherpriced lending (that is, the percentage of loans that
were higher priced), the price spreads on the higherpriced loans (that is, the amount by which the APRs
on those loans were above the HMDA reporting
threshold), and denial rates. Analysis of the 2004 and
2005 HMDA data found that differences across
groups in mean spreads paid by those with higherpriced loans were generally small. However, the
analysis revealed substantial differences across racial
and ethnic lines in the incidence of higher-priced
lending and in denial rates; further, it showed that
such differences could not be fully explained by
factors included in the HMDA data.
In examining 2006 lending outcomes by the race,
ethnicity, and sex of borrowers, the present analysis
focuses on home-purchase and refinancing loans that
are conventional first liens on owner-occupied, oneto four-family, site-built homes. Those types of homepurchase and refinancing loans together represent, by
far, the largest number of reported mortgages in the
HMDA data: For 2006, the home-purchase category
comprised 6.2 million applications and 3.9 million
loans; the refinancing category comprised lOA million applications and 4.3 million loans (table 4).
The HMDA data include only some of the many
factors directly considered by lenders in the process
of credit underwriting and pricing. Among the
borrower-related items in the HMDA data that are
likely related to the loan underwriting and pricing
process are property location, income relied on in
underwriting, loan amount, time of year when the
loan was made, and presence of a co-applicant.
Because of the focus here on specific loan product
categories, the analysis already accounts in broad

39. Estimate derived from Inside Mortgage Finance, The 2007
Mortgage Market Statistical Annual.

The 2006 HMDA Data

terms for loan type and purpose, type of property
securing the loan, lien status, and owner-occupancy
status.
In comparing lending outcomes across racial and
ethnic groups, one can match for the sex of the
applicant and co-applicant. Accounting for sex in the
analysis is intended to better distinguish pricing issues
related purely to the race or ethnicity of the borrower
from those that could be related to sex. In assessing
lending outcomes by sex, one can match for race and
ethnicity, once again to make comparisons as precise
as possible.
The pricing analysis here focuses on both the
incidence of higher-priced lending and the mean APR
spreads paid by borrowers with higher-priced loans.
Comparisons of these outcomes are made across
eleven groups-nine racial or ethnic groups and the
two sexes. Comparisons of average outcomes for
each group are made both before and after modifying
the results for (1) differences in the borrower-related
factors cited earlier and (2) differences in the borrowerrelated factors plus the speci fic lending institution
used by the borrower. 40 The method of controlling for
these factors is to gather borrower data into cells or
groupings; in each cell, borrowers are similar along
the dimensions considered. The methodology used
here is the same as that described in the previously
cited articles in the Federal Reserve Bulletin assessing the 2004 and 2005 HMDA data.
Comparisons for lending outcomes across groups
are of three types: gross ("unmodified"), modified to
account for borrower-related factors ("borrower modified"), and modified for borrower-related factors plus
lender ("borrower-plus-lender modified"). For purposes of presentation, the borrower-mod~fied and
borrower-plus-Iender-modified outcomes shown in
the tables are normalized so that, for the base comparison group (non-Hispanic whites in the case of
comparison by race and ethnicity, and males in the
case of comparison by sex), the mean at each modification level is the same as the gross mean. Consequently, the borrower-modified and borrower-pluslender-modi fied outcomes for any other group
represent the expected average outcome if the members of that group had the same distribution of control
factors as that of the base comparison group.

40. To recall, the borrower-related factors are income, loan amount,
metropolitan statistical area (MSA) of the property, presence of a
co-applicant, and (in the comparisons by race and ethnicity) sex.
Excluded from the pricing analysis are applicants residing outside the
fifty states and the District of Columbia and applications deemed to be
business related.

A95

Incidence of Higher-Priced Lending by Race
and Ethnicity
The 2006 HMDA data, like the 2004 and 2005 data,
indicate that black and Hispanic borrowers are more
likely, and Asians borrowers less likely, to obtain
loans with prices above the HMDA pricing reporting
thresholds than are non-Hispanic white borrowers.
These relationships are found for both home-purchase
loans and refinancings (table 11).41 Gross differences
in the incidence of higher-priced lending between
non-Hispanic whites, on the one hand, and blacks or
Hispanic whites, on the other, are large, but borrowerplus-lender-modified differences are substantially reduced. Most of the reduction in the difference in the
incidence across groups comes from adding the control for lender to the control for borrower-related
factors, an indication that the pricing differences in a
given lender's underwriting are typically smaller than
the differences among loans across lenders.
For home-purchase loans in 2006, the gross mean
incidence of higher-priced lending was 53.7 percent
for blacks and 17.7 percent for non-Hispanic whites,
a difference of 36.0 percentage points (table II, top
panel). Borrower-related factors included in the
HMDA data accounted for about one-sixth of the
unmodified difference. Controlling further for lender
reduces the remaining gap to 12.6 percentage points.
In comparison, in 2005, the unmodified mean incidence of higher-priced lending for such loans was
54.7 percent for blacks and 17.2 percent for nonHispanic whites, a difference of 37.5 percentage
points. For 2005, borrower-related factors accounted
for about one-fifth of the unmodified difference, and
controlling further for borrower and lender reduced
the remaining gap to 10 percentage points, a somewhat smaller "unexplained" difference than that found
in the 2006 data.
For refinancings in 2006, the difference between
blacks and non-Hispanic whites in the unmodified
mean incidence of higher-priced lending was 27.1 percentage points, and the borrower-plus-Iender-related
difference was 7.3 percentage points; once again,
most of the reduction in differences came from the
addition of the control for lender (table 11, bottom
41. Applicants are placed under only one category for race and
ethnicity, generally according to the race and ethnicity of the person
listed first on the application. However, under race, the application is
designated as joint if one applicant reported the single designation of
white and the other reported one or more minority races. If the
application is not joint but more than one race is reported, the
following designations are made: If at least two minority races are
reported, the application is designated as two or more minority races;
if the first person listed on an application reports two races, and one is
white, the application is categorized under the minority race.

A96

Federal Reserve Bulletin 0 December 2007

11. Incidence of higher-priced lending, unmodified and modified for borrower- and lender-related factors, for conventional
first liens on owner-occupied one- to four-family site-built homes, by type of loan and by race, ethnicity, and sex of
borrower, 2005 and 2006
Percent except as noted
2005
Race, ethnicity. and sex 1

Number of
loans

Unmodified
incidence

2006
Modified incidence, by
modification factor
Borrowerltd
re a e

I related plus
Borrower-

Number of
loans

Unmodified
incidence

lender

Modified incidence, by
modification factor
Borrowerltd
re a e

I related plus
Borrowerlender

Home purchase
Race olher Ihall while ollly
American Indian or Alaska Native
Asian ......... ............
Black or African American. .
. ......
Native Hawaiian or other Pacific Islander.
Two or more minority races
joint ............
Not available ..
. . . .. . . . . . .

While, by elhllicity
Hispanic white
Non-Hispanic white
Sex
One
One
Two
Two

...................

male ... ...........
female
males ..
females ....................

27,766
237,383
312,451
23,450
2,112
51,881
431,159

35.3
16.6
54.7
34.8
30.4
18.2
32.4

29.5
15.8
47.0
30.4
28.7
23.0
33.6

21.8
16.6
27.2
21.0
20.8
19.0
21.6

21,615
187,187
318,650
18.773
2,112
44,666
377,985

34.2
16.8
53.7
34.0
27.6
17.5
29.2

30.5
15.3
47.6
29.2
28.6
23.8
31.8

24.5
16.8
30.3
22.9
20.7
19.8
23.3

464,634
2,789,265

46.1
17.2

34.2
17.2

21.9
17.2

464.291
2,406,570

46.6
17.7

35.1
17.7

24.0
17.7

1,392,947
1,021,006
44,278
36,140

31.7
30.8
23.1
24.7

31.7
29.8
23.1
22.4

31.7
30.8
23.1
23.9

1,255,567
925.029
36,405
31,062

32.3
30.9
23.9
26.2

32.3
30.2
23.9
22.5

32.3
31.2
23.9
23.4

Refinance
Race olher Ihall while ollly
American Indian or Alaska Native
Asian ...............
Black or African American ..............
Native Hawaiian or other Pacific Islander.
Two or more minority races
joint ............
...............
Not available ...............
While, by elhllicity
Hispanic white ....
Non-Hispanic white

. . . ... . . .. .

Sex
One male ...........• ..................
One female
Two males . . . . . . . . . .
Two females
................

37,213
165,011
441,299
31,453
3,650
61,200
752,573

28.9
15.2
49.3
28.4
28.6
19.3
32.2

32.1
18.9
45.0
32.2
29.5
26.2
38.0

24.1
21.1
27.2
24.3
24.2
22.4
24.5

27,748
127,873
397.452
24;078
2,913
41,875
570,431

32.8
19.6
52.8
33.6
28.0
26.2
38.2

36.1
23.7
50.0
37.5
28.9
33.3
43.7

29.5
25.3
33.0
30.0
30.8
26.9
30.6

478.381
3,496,425

33.8
21.0

31.5
21.0

23.6
21.0

437.163
2,596;873

37.7
25.7

37.0
25.7

29.7
25.7

1,424,721
1,229,138
37,442
41,572

30.3
31.\
21.2
27.0

30.3
30.0
21.2
23.5

30.3
30.4
21.2
22.5

1,197,165
1,033,700
27,336
31.179

34.6
35.3
26.6
34.1

34.6
34.3
26.6
29.9

34.6
34.5
26.6
26.6

NOTE: Excludes transition-period loans (those for which the application was
submitted before 2004). For definition of higher-priced lending and explanations of spread adjustment and of modification factors, refer to text.
I. Categories for race and ethnicity reflect the revised standards established
in 1997 by the Office of Management and Budget. For method of allocation

panel). In comparison, in 2005, the unmodified difference in incidence between blacks and non-Hispanic
whites was 28.3 percentage points, and the borrowerplus-lender-related difference was 6.2 percentage
points. As in 2006, most of the reduction in 2005
came from the addition of the control for lender.
Relationships are similar for comparisons made between Hispanic whites and non-Hispanic whites, but
the unmodified difference in incidence between these
two groups (12 percentage points in 2006) is notably
smaller than that between blacks and non-Hispanic
whites, and much of the difference is attributable to
borrower-related factors and lender.

into racial and ethnic categories and definitions of categories, refer to text note

41. Loans taken out jointly by a male and female are not tabulated here because they would not be directly comparable with loans taken out by one borrower or by two borrowers of the same sex.

The situation for Asians differs greatly from that
for blacks or Hispanic whites: Compared with nonHispanic whites, Asians had a lower unmodified
mean incidence of higher-priced lending in 2006 for
home-purchase and refinance loans. Borrower-related
factors plus lender do not alter the gap in incidence
but narrow it for refinancings.

Rate Spreads by Race and Ethnicity
The 2006 data indicate that among borrowers with
higher-priced loans, the unmodified mean spread of
prices paid by black borrowers are moderately higher,

A97

The 2006 HMDA Data

12. Mean APR spreads, unmodified and modified for borrower- and lender-related factors, for higher-priced conventional first
liens on owner-occupied one- to four-family site-built homes, by type of loan and by race, ethnicity, and sex of borrower,
2005 and 2006
Percentage points except as noted
2005
Number of
Unmodified
higher-priced
mean spread
loans

Race, ethnicity, and sex

2006

Modified mean spread, by
modification factor

Borrowe~
ltd
re a e

I related plus
Borrowe~

Number of
Unmodified
higher-priced
mean spread
loans

lender

Modified mean spread, by
modification factor
Borrowerltd
re a e

I related plus
Borrowerlender

Home purchase

Race other than white onty
American Indian or Alaska Native.
Asian ..................
Black or African American. . . . . . .. . ...
Native Hawaiian or other Pacific Islander.
Two or more minority races
Joint ...
Not available ....

9,799
39,471
171,009
8,162
641
9,468
139,740

4.6
4.6
5.0
4.6
4.8
4.6
4.9

4.8
4.7
4.9
4.8
4.9
4.8
4.9

4.8
4.7
4.9
4.8
4.8
4.8
4.8

7,388
31,395
171,238
6,376
583
7,802
110,527

5.2
5.0
5.7
5.2
5.4
5.3
5.5

5.2
5.1
5.6
5.2
5.4
5.3
5.5

5.2
5.1
5.3
5.1
5.3
5.2
5.3

White. by ethnicity
Hispanic white
Non-Hispanic white

214,415
479,338

4.6
4.7

4.7
4.7

4.8
4.7

216.422
426,138

5.3
5.1

5.2
5.1

441,919
313,959
10,213
8,943

4.8
4.8
4.5
4.7

4.8
4.8
4.5
4.6

4.8
4.8
4.5
4.5

405,414
285.937
8.716
8,142

5.3
5.3
5.2
5.4

5.3
5.3
5.2
5.3

5.3
5.3
5.2
5.2

Sex
One
One
Two
Two

...........

male
................. . . . . . . . . . . .
female
...........
males .. ............................
..................
females

Refinance

Race other than white only
American Indian or Alaska Native
Asian ................
Black or African American
Native Hawaiian or other Pacific Islander ..
Two or more mi nority races
Joint .............
Not avai lable ......

10,770
25,119
217,351
8,945
1043
11,815
242.666

4.8
4.7
5.0
4.8
4.9
4.7
5.0

4.8
4.8
5.0
4.8
4.9
4.8
5.0

4.8
4.8
4.9
4.8
4.8
4.8
4.8

9,096
25,096
209,910
8,102
815
10,958
217,915

5.1
4.9
5.4
5.1
5.2
5.0
5.3

5.1
5.0
5.3
5.1
5.3
5.1
5.3

5.1
5.1
5.2
5.1
5.2
5.1
5.1

White, by ethnicity
Hispanic white .. . . . . . . . . . . . . . ...........
Non-Hispanic white

161,713
733,290

4.8
4.8

164,748
668,337

5.1
5.1

Sex
One
One
Two
Two

432,386
382,071
7,937
11,208

4.9
4.9
4.8
4.8

414,387
365,368
7,276
10,646

5.2
5.2
5.0
5.1

5.2
5.2
5.0
5.0

male
female
males
females ....

................
................

...........

. ...........

NOTE: Spread-unadjusted APR is the difference between the APR on the
loan and the yield on a comparable-maturity Treasury security. Spread-adjusted
APR is the difference between the APR on the loan and the estimated APR

reponed by Freddie Mac for a thiny-year fixed-rate loan in their Primary Mongage Market Survey. Excludes transition-period loans (those for which the application was submitted before 2004). Refer also to note I, table II.

and those paid by Hispanic white borrowers are
slightly higher, than those paid by non-Hispanic
white borrowers (table 12). The spread of prices paid
by Asian borrowers with higher-priced loans was
about the same, on average, as that by non-Hispanic
whites with higher-priced loans. These relationships
are generally consistent for both types of loan and are
little influenced by borrower-related factors or the
specific lender used by the borrowers.

have a slightly lower incidence of higher-priced
lending than sole male borrowers for home-purchase
loans both before and after accounting for borrowerrelated factors plus lender (table 11). Similarly, the
average spreads on prices paid by females with
higher-priced loans are virtually the same as those
paid by males after accounting for the presence or
absence of a co-borrower (table 12).

Denial Rates by Race, Ethnicity, and Sex
Pricing Differences by Sex
The HMDA data for 2006, like those for previous
years, reveal little difference in pricing outcomes by
sex. For example, sale female borrowers generally

Analyses of the HMDA data from earlier years has
consistently found that denial rates vary by applicant
race and ethnicity. For the 2006 home-purchase and
refinance loans examined here on an unmodified

A98

Federal Reserve Bulletin 0 December 2007

13. Denial rates on applications, unmodified and modified for borrower- and lender-related factors, for conventional first liens
on owner-occupied, one- to four-family, site-built homes, by type of loan and by race, ethnicity, and sex of applicant,
2006
Percent except as noted

Home purchase
Number of
applications
acted upon
by lender

Race, ethnicity, and sex

Race other than white only
American Indian or Alaska Nati ve ..
Asian .......................
Black or African American ......
Native Hawaiian or
... . ....
other Pacific Islander ....
Two or more minority races ..........
Joint ................................
Not available . . . . . . . . . . . . . . . . . . ....

Unmodified
denial rate

Refinance

Modified denial rate, by
modification factor

BO~o~r I r~I~7e~w~~s
re a e
lender

Number of
applications
acted upon
by lender

Unmodified
denial rate

Modified denial rate, by
modification factor
Borrowerltd
re a e

I related plus
Borrowerlender

34,646
264,397
553,168

25.9
17.0
31.6

22.2
14.5
27.7

18.2
14.8
21.5

63,757
215,172
883,842

44.7
27.7
44.9

44.8
33.2
46.2

37.7
34.6
38.7

29,104
3,139
57,781
611,069

23.4
20.2
13.6
24.2

20.3
18.0
17.0
23.7

17.4
17.2
14.9
18.1

47,437
5,878
74,030
1,448,614

36.4
40.5
34.0
48.0

41.8
42.9
40.3
49.6

37.5
37.3
34.4
38.3

White, by ethnicity ... .... .......
Hispanic white .... .................
Non-Hispanic white
.. - ..... ....

719,166
3,063,436

25.4
13.1

20.3
13.1

17.5
13.1

801,813
4,343,279

33.5
30.6

36.6
30.6

35.8
30.6

Sex
One male .. .... ... ..... ........
One female ······.e ..... .........
Two males .... ....... ....... . ....
Two females ......................

1.833,621
1,334,498
50,505
43,322

21.7
21.0
19.2
19.5

21.7
20.5
19.2
17.4

21.7
20.9
19.2
17.7

2,324,086
1,926,089
50,870
60,185

37.6
36.1
36.5
39.5

37.6
35.0
36.5
36.8

37.6
35.9
36.5
36.1

NOTE: Ineludes transition-period applications (those submitted before 2004).
For explanation of modification factors, refer to text. Refer also to note I, table
II.

basis, American Indians, blacks, and Hispanic whites
had higher denial rates than non-Hispank whites;
blacks had the highest rates; and Hispanic whites had
rates between those for blacks and those for nonHispanic whites. The pattern was less consistent for
Asians, who had higher denial rates than nonHispanic whites for home purchase but lower rates
for refinancings (table 13).
For home-purchase lending, controlling for
borrower-related factors in the HMDA data reduces
the differences in denial rates among racial and ethnic
groups. Accounting for the specific lender used by the
applicant almost always reduces differences further,
although unexplained differences remain between
non-Hispanic whites and other racial and ethnic
groups. For example, for home-purchase loans, the
gross mean denial rate was 31.6 percent for blacks
and 13.1 percent for non-Hispanic whites, a difference of 18.5 percentage points (table 13). Borrowerrelated factors reduce the difference to 14.6 percentage points, and lender adjustment further reduces it to
8.4 percentage points. The borrower-plus-Iendermodified differences for refinance loans are similar to
those for home purchase, although unmodified differences in denial rates tend to be smaller. The gross
difference between denial rates for blacks and nonHispanic whites for refinancings is 14.3 percentage
points, a difference cut about in half by borrowerplus-lender adjustment.

With regard to the sex of applicants, sale male
applicants have nearly the same denial rate as sole
females. For home-purchase loans, co-applicants,
whether male or female, have somewhat lower denial
rates than single individuals.

Limitations of the Data on Differences across
Groups
The 2006 HMDA data, like those for 2004 and 2005,
show that the incidence of higher-priced lending for
blacks and Hispanic white borrowers is notably
greater than for non-Hispanic whites and, for Asians,
that the incidence is fairly close to that for nonHispanic whites. The borrower-plus-lender adjustment, discussed above, is insufficient to account fully
for racial or ethnic differences in the incidence of
higher-priced lending; significant differences remain
unexplained. Similar patterns are shown in racial and
ethnk differences in denial rates. By contrast, only
small differences across groups were found in the
mean spreads paid by those receiving higher-priced
loans. Regarding the sex of borrowers, only small
differences were found in lending outcomes.
In our analysis of the 2005 HMDA data regarding
differences by race, ethnicity, and sex in the incidence
of higher-priced lending and in the spreads paid by
those with higher-priced loans, we presented differences both before and after adjusting the APRs to

The 2006 HMDA Data

remove the effects of the flattening of the yield curve.
Here, for 2006, we present only the differences before
making the APR adjustment; they are similar to the
differences remaining after that adjustment. But the
changes in group differences between 2005 and 2006
are narrowed by the APR adjustment. For example,
controlling for borrower-related factors plus lender,
the gap in the incidence of higher-priced lending
between black and non-Hispanic white homepurchase borrowers rose from 10.0 percentage points
to 12.6 percentage points between 2005 and 2006; the
comparable differences are 9.0 percentage points and
10.5 percentage points when adjusted APRs are used.
Thus, the APR adjustment narrowed the 2005-06 rise
in the gap from 2.6 percentage points to 1.5 percentage points. For refinancings, the unadjusted difference in the incidence of higher-priced lending between blacks and non-Hispanic whites rose from 6.2
to 7.3 percentage points, whereas the gap after the
APR adjustment was 5.6 percentage points in both
years. These results suggest that at least a portion of
the apparent widening of gaps in the incidence of
higher-priced lending across racial groups for homepurchase lending was due to the further flattening of
the yield curve during 2006. For refinancings, the
yield-curve effects may explain all of the changes.
The unexplained differences in the incidence of
higher-priced lending and in denial rates stem, at least
in part, from credit-related factors not available in the
HMDA data, such as measures of credit history
(including credit scores), LTV ratios, debt-to-income
(DTI) ratios, and differences in choice of loan product. Differential costs of loan origination and the
competitive environment also likely bear on the differences in pricing; so may differences in financial
literacy, which can lead to differences in creditshopping activities and negotiating. Differences in
pricing and underwriting outcomes may also reflect
discriminatory treatment of minorities or other actions
by lenders, including marketing practices. Further
research is needed to assess the extent to which
credit- or cost-related factors account for the unexplained differences in loan pricing and denial rates.

CREDIT SCORES BY AREA AND HIGHERPRICED LENDING

For some time, the staff of the Federal Reserve Board
has been using information on the credit experiences
of consumers as reflected in their credit records and
by their credit history scores to research related
public policy issues. Some of that research has

A99

focused on the utility of credit scoring and its effects
on credit availability and affordability for different
populations. 42 Other staff research has considered the
relationship between the accuracy of credit reporting
and access to credit. 43 Most of this research has been
undertaken using nationally representative samples of
the credit records of individuals (with no personally
identifiable information in the data). These data
include the full range of information contained in the
credit records of these individuals as assembled by
TransUnion, one of the three national credit-reporting
agencies. 44
A second type of credit-record-related information
has also been used in the Board staff's research:
summary statistics about the credit scores of individuals aggregated at the census-tract level. 45 These data,
also provided by TransUnion, include, for each census tract, information on the mean credit scores and
the distribution of credit scores for individuals with
an outstanding mortgage and for other individuals for
whom TransUnion could calculate a credit score. The
statistics were constructed by TransUnion using their
TransRisk Account Management Score (TransRisk
Score).46 The data also include the percentage of
individuals who have a credit record but could not be
scored at the time the data were assembled, most
often because their credit accounts were not sufficiently numerous or did not show enough recent
activity to calculate a TransRisk Score. The thresholds selected for the different segments of the credit
score distribution correspond roughly to the cutoffs
that, based on credit scores alone, would place individuals in the prime, near-prime, and subprime price
ranges. The census-tract credit-score data are constructed from the credit records of approximately
42. Board of Governors of the Federal Reserve System (2007),
Report 10 the Congress on Credit Scoring and Its Effects on the
Availability and Affordability of Credit (Washington: Board of Governors, August), www.federalreserve.govlboarddocs/RptCongress/
creditscore/creditscore.pdf.
43. For a discussion of credit-reporting accuracy and access to
credit and for references to research on this subject, refer to two 2004
articles by Robert B. Avery, Paul S. Calem, and Glenn B. Canner:
"Credit Report Accuracy and Access to Credit," Federal Reserve
Bulletin, vol. 90 (Summer), pp. 297-322; and "Consumer Credit
Scoring: Do Situational Circumstances Matter," Journal of Banking
and Finance, vol. 28 (April), pp. 835-56.
44. TransUnion LLC, www.transunion.com. The other two national
credit-reporting agencies are Equifax, www.equifax.com; and Experian, www.experian.com.
45. Refer to Avery, Brevoort, and Canner, "Higher-Priced Home
Lending and the 2005 HMDA Data."
46. The TransRisk Scores were generated by TransUnion using
their proprietary model for assessing the credit risk of existing credit
accounts. TransRisk Account Management Score is a registered trademark ofTransUnion LLC; other trademarks, service marks, and brands
referred to in this article are the property of their respective owners.

A LOO

Federal Reserve Bulletin 0 December 2007

14. Distribution of individuals, by characteristic of census tract and by type of credit record, borrower status, and credit score
range, 2005
Percent
Scorable
Mortgage borrowers
Census tract category
and subcategory

Income ratio (percent of
area median)4
Less than 50 ....
50-79 ....
80-119 .....
120 or more ...........
Total .....
Racial or ethnic composition
(mi norities as a
percentage of
population)
Less than 10 ...
10-49 .........
50-79 ........ .............
80-100 .....
.... - ......
Total .........•.........

Low
Percent
of census
tract subcategory'

Middle
Percent of
census tract
category"

Percent
of census
tract subcategory'

Percent of
census tract
category'

Total

MEMO:
Percent of
census tract
population
with a credit
record'

High

Percent of
census tract
category'

Percent
of census
tract subcategory'

24.9
18.1
11.2
5.5

2.9
21.1
56.7
19.3
100

16.4
14.4
10.8
7.0

2.0
17.3
56.0
24.8
100

58.7
67.5
78.1
87.5

0.9
10.0
50.4
38.7
100

100
100
100
100

4.7
10.7
20.6
28.9

8.5
9.4
15.3
21.9

34.1
42.2
12.4
11.3
100

8.9
9.6
13.1
15.9

36.6
44.0
10.9
8.4
100

82.6
81.0
71.6
62.1

42.3
46.2
7.4
4.1
100

100
100
100
100

25.9
20.3
12.5
8.7

MEMO:
Census tract unknown .......

11.1

10.7

78.2

100

10.2

Toml .......................

10.2

9.9

79.9

100

19.2

OTE. The credit score ranges are based on the TransRisk Account Manage.
ment Score (TransRisk Score) as of December 31. 2005. TransRisk Account
Management Score is a registered trademark of TransUnion LLC.
I. Distribution sums horizontally. For example. the first column, first row
shows that 24.9 percent of scorable mortgage borrowers in census tracts with
an income ratio of less than 50 percent had credit scores in the low range.

2. Distribution sums vertically. For example. the second column, first row
shows that 2.9 percent of scorable mortgage borrowers with credit scores in the
low range lived in a census tract with an income ratio of less than 50 percent.
3. Memo items sum horizontally.
4. The income ratio of a census tract is the median family income of the
tract relative to that of the area (MSA or statewide non-MSA) in which the
tract is located.
... Not applicable.

27 million anonymous individuals drawn from stratified, nationally representative random samples of all
the credit records maintained by TransUnion. 47
With the geographic identifiers included in each
data file, the census-tract credit score can be combined with the HMDA data and with information
from the 2000 decennial census. For the analysis
here, credit scores by census tract (not scores of
individuals separately) were obtained for two specific
dates: December 31,2004, and December 31,2005. 48
Given the large proportion of all outstanding mortgages originated in just the past few years, the
census-tract credit-score data for mortgage holders

are likely quite representative of the individuals who
received a mortgage over this period. 49

47. Information on census tract was not available for all individual .
48. The census-tract credit scores do not provide information about
the specific credit score that may have been used to assess the credit
ri k of any individual mortgage borrower included in the HMDA data;
that information is proprietary to the lender and is not reported under
HMDA. Also, the samples of credit records drawn in 2004 and 2005
were chosen randomly and do not necessarily include the same
individuals.

National Distribution of Credit Scores
The analysis here uses the 2005 file of credit scores
by census tract because its information is the nearest
in time to the 2006 HMDA data and because it is
likely a reasonable approximation of the credit scores
of individuals taking out mortgages during 2006.
Nationally, about 15 percent of individuals with a
credit record were unscorable; about 19 percent of
individuals had a mortgage, and 66 percent did not
(table 14, memo items).50 The distribution of credit
49. As of December 2006, according to data from First American
Loan Performance, about 80 percent of outstanding first-lien mortgages had been originated in 2003 or later (www.loanperformance
.com).
50. One difficulty reconciling these shares with other data sources
is that credit records are for individuals, whereas the household or
family is the unit of analysis typically used in statistics on homeownership and mortgage holding. Virtually everyone in the database who

The 2006 HMDA Data

AWl

14. Distribution of individuals, by characteristic of census tract and by type of credit record, borrower status, and credit score
range, 200S-Continued
Percent
Unscorable

Scorable
Others
Low
Percent
of census
tract subcategory!

Middle

Percent of
census tract
category2

Percent
of census
tract subcategory'

High

Percent of
census tract

categorf

Percent
of census
tract subcategory'

Percent of
census tract
category2

Total

MEMO:
Percent of
census tract
population
with a credit
record'

Percent of
census tract
category2

Incidence
of higherpriced

lending
I

49.8
38.8
26.4
16.6

6.9
28.3
49.7
15.1
100

14.8
14.3
12.0
9.5

4.7
23.9
51.8
19.6
100

35.4
46.8
61.6
73.9

2.2
15.4
52.3
30.2
100

100
100
100
100

67.1
68.1
66.4
61.9

28.1
21.2
13.0
9.2

9.6
31.5
43.8
15.1
100

46.5
38.8
27.7
18.3

19.9
26.2
37.1
45.2

24.1
43.0
16.1
16.8
100

10.1
11.9
14.2
15.6

28.1
44.6
14.1
13.2
100

70.0
61.9
48.7
39.2

28.1
44.6
14.1
13.2
100

100
100
100
100

64.4
65.8
67.1
67.7

9.7
13.9
20.4
23.6

20.7
42.2
18.2
19.0
100

21.7
24.8
36.3
46.6

32.7

13.0

54.3

100

66.7

23.2

26.9

27.5

12.0

60.5

100

65.8

15.0

27.0

scores differs for mortgage borrowers and others:
Overall, about 80 percent of individuals with a mortgage, but only about 61 percent of other individuals
with a credit score, had relatively high credit scores,
that is, scores that (everything else being equal)
would make them eligible for the most attractive
interest rates available for home loans. At the other
end of the spectrum, about 10 percent of mortgage
borrowers and 28 percent of other individuals who
could be scored had relatively low credit scores, that
is, scores that (everything else being equal) would be
consistent with placement in the subprime-Ioan
market.

Distribution of Credit Scores across Census
Tracts
The broad differences in the distribution of credit
scores for mortgage borrowers and other individuals,
noted above, hold across census tracts grouped along
a variety of socioeconomic dimensions. 51 However,
had a record of an out tanding mortgage had a credit score. However,
although some individuals with credit scores were likely unscorable at
the time they received their mortgage loan, they became scorable as
their credit records "thickened" with the reports of their periodic
payments on the debt. The proportion of individuals that are unscorable depends on the credit-scoring model. Model builders differ on the
criteria used to detemline scorability.
51. Census tracts differ along a range of socioeconomic metrics. In
part, these differences are by design, as one of the objectives in
defining census-tract boundaries is to group smaller geographic areas

the distributions of scores differ across census tracts
grouped by relative income and racial or ethnic
composition. Individuals in higher-income census
tracts (in which the median family income is 120 percent or more of the median for the broader area) tend
to have higher credit scores than individuals in other
areas. These patterns hold both for the population of
individuals with a mortgage and for others. For
example, on average, 88 percent of scorable individuals with a mortgage who resided in higher-income
census tracts had relatively high credit scores, as did
74 percent of other individuals. By comparison,
59 percent of the mortgage borrowers who could be
scored and who re ided in low-income census tracts
had relatively high credit scores, as did 35 percent of
other scorable individuals in low-income census
tracts. Also, the proportion of individuals in higherincome census tracts who were unscorable was notably smaller than that of individuals in low-income
areas-9 percent and 28 percent respectively.
The distribution of credit scores also differ across
census tracts sorted by the proportion of census-tract
population that is minority. In predominantly nonminority census tracts (less than 10 percent minority

that have similar population and economic circumstances. According
to the Census Bureau, census tracts usually have a population of
between 2,500 and 8,000 and, when first delineated, are designed to be
homogeneous with respect to population characteristics, economic
status, and living conditions (www.census.gov).

A102

Federal Reserve Bulletin 0 December 2007

population), about 83 percent of the mortgage borrowers and 70 percent of others with a credit score
had relatively high credit scores. In census tracts with
a minority population exceeding 80 percent, 62 percent of the mortgage borrowers and 39 percent of
others with a credit score had relatively high credit
scores. Once again, the percentage of individuals
without a credit score differs greatly across censustract groupings. In predominantly nonminority areas,
10 percent of the individuals could not be assigned a
credit score; in contrast, 24 percent of the individuals
in census tracts with more than 80 percent minority
individuals were unscorable.
Note that in considering differences in credit scores
across census tracts grouped by racial or ethnic
makeup, differences in score arise solely from differences in the content of credit records; so, for example,
two individuals with identical credit records will
receive identical credit scores regardless of any difference between them in racial or ethnic identity. No
information on location, race or ethnicity, sex, or
other personal demographic characteristic is used in
calculating generic credit history scores, such as the
TransRisk Score. 52

Distribution of Credit Scores across Counties
The data on credit scores by census tract can be
aggregated to broader geographic areas, including
counties, metropolitan statistical areas (MSAs), and
states. The South and Southwestern sections of the
country and portions of the Midwest stand out
because they have relatively low mean credit scores
(figure 3). By contrast, mean scores for mortgage
borrowers in the Northeast, in the upper Great Plains,
and on the West Coast have relatively high mean
scores.

Credit Scores and the Incidence of HigherPriced Lending
Individuals with lower credit scores are more likely to
receive higher-priced loans. 53 Likewise, the HMDA
data show that census tracts with larger shares of
individuals who have relatively low credit scores and
a mortgage also have larger shares of individuals who
received higher-priced loans (table 15). For example,
in census tracts in which more than 20 percent of the
mortgage borrowers had low credit scores as of the
52. Board of Governors of the Federal Reserve System, Report to
the Congress on Credit Scoring and Its Effects on the Availability and
Affordability ofCredit.
53. For example, refer to Board of Govemors of the Federal
Reserve System, Report to the Congress on Credit Scoring and Its
Effects on the Availability and AfjiJrdabiliry of Credit.

end of 2005, 45 percent of the homebuyers in 2006
using conventional first liens to purchase site-built
homes or to refinance such liens had higher-priced
loans; in census tracts in 'which the share of mortgage
borrowers with low credit scores was less than 3 percent, the incidence of higher-priced lending was only
14 percent.
Both the relative income of a census tract and the
minority percentage are associated with the incidence
of higher-priced lending (table 14). Further analysis
(not shown in tables) indicates that the incidence of
higher-priced lending across census tracts (after accounting for the income and racial or ethnic composition of the census tract) can be further explained by
census-tract data on mean credit scores and on the
proportion of individuals with credit scores in the
categories roughly corresponding to the near-prime
and subprime markets. For example, consider census
tracts arrayed into quintiles ranked by relative income
and, within each quintile, further subdivided by mean
credit score: The census tracts with lower mean credit
scores have a higher incidence of higher-priced lending in the 2006 data (by about 4 percentage points)
than census tracts with the same income level but
higher mean credit scores. A similar relationship is
found when census tracts are grouped by minority
percentage or when the analysis is restricted to nonHispanic whites.

LOAN PERFORMANCE AND THE HMDA DATA

As of this writing, conditions in the mortgage market
are the subject of considerable concern. Delinquency
and foreclosure rates have risen substantially, particularly in the higher-priced segment of the market, and
lax underwriting is widely believed to have contributed to the rise in defaults. Also, a significant share of
the higher-priced loans apparently involve adjustable
rates; such loans carry the potential to significantly
increase monthly payments and, hence, to place
greater burdens on many mortgage borrowers.
Although the HMDA data are limjted, they can be
combined with other data to better understand the
linkages between loan pricing, economic factors, and
mortgage loan performance. We pursue such an
analysis here, focusing on variations in rates of
serious delinquency (payment overdue for ninety
days or more) on mortgages across MSA counties.
Specifically, we examine the relationship between the
rates of serious delinquency on mortgages as of
March 31, 2007, and (1) the incidence of higherpriced lending (from the HMDA data) for 2005 and
2006 and (2) county-level economic indicators measured over the 2002-06 period.

3. Mean TransRisk Score quintiles of mortgage borrowers, by metropolitan statistical area county, December 31,2005

•
Percent
ofMSA
counties
~

0:,

<==

'DC\:)

... -

Source: TransRisk Account Management Score (TransRisk Score), from TransUnion LLC.

TransRisk
Score rank

c:=J Highest

2 0 " Fourth
20

c:=J Third

2 0 " Second
2 0 " Lowest

(I>

0
0

~
t:l

I:l

is'

;l>

.....

A I 04

Federal Reserve Bulletin 0 December 2007

15. Credit scores and the incidence of higher-priced
lending, 2006
Percent
Share of mortgage borrowers
in census tract who have low
credit scores
0--2.9
3--{j.9 .
7-9.9
.
10--14.9
15-19.9 ..
20 or more
All tracts ..

Share of mortgage loans
in census tract that are
higher priced
.
.

........•..

13.9
19.8
25.3
27.4
34.7
45.4
27.0

NOTE: Lending covers first-lien purchase or refinancing loans for site-built
homes. Refer also to general note to table 14.

The analysis employs a proprietary database, TrenData, that measures loan performance at a reasonably
disaggregated geographic level. 54 TrenData is based
on the credit records of individuals, which makes it
one of the most comprehensive databases on the
performance of mortgages. In particular, the information has been drawn from the credit records of a
geographically stratified random sample of about
30 million individuals for each calendar quarter since
1992. The data (available by county, MSA, and state
and for the nation as a whole) include more than 200
measures of credit use and loan performance, including the proportion of mortgage borrowers in a county
who are at least ninety days delinquent on their
mortgages. 55
Using TrenData, we created a map of the fifty
states showing mortgage delinquency rates by MSA
county (figure 4). MSA counties are grouped into
quintiles ranked by their rate of serious mortgage
delinquency as of March 31, 2007. The counties vary
considerably in the level of problem loans, but most
areas had rates of serious delinquency that are relatively low. About 35 percent of the MSA counties had
a serious delinquency rate below 1 percent, and only
5 percent had a serious delinquency rate greater than
3 percent. Areas of the country with the highest levels
of serious delinquency were in western Pennsylvania,
Ohio, Indiana, and Michigan; in the southeastern
states and along the rest of the Gulf Coast area; and in
Texas, Oklahoma, and Colorado.
We also mapped the 2006 HMDA data on the
incidence of higher-priced lending by MSA county
(figure 5). A comparison of figure 4 with figure 5 is
54. TrenData is a registered trademark of TransUnion LLC
(products.trendatatu.com/faqs.asp).
55. All lenders selling their loans to Fannie Mae or Freddie Mac
must report loan performance to the three national credit-reporting
agencies. Virtually all banking institutions also report loan performance on the loans they service or hold in portfolio. Other loans, such
as those from smaller lenders or seller financings, are less likely to be
reported.

revealing. For the most part, MSA counties with
elevated rates of higher-priced lending also had
elevated rates of serious mortgage delinquency. Notable exceptions in one direction are some MSA
counties in Florida, California, New York, Pennsylvania, and New Jersey that were in the top quintile of
the incidence of higher-priced lending but that had
relatively moderate levels of serious delinquency. 56
Notable exceptions in the other direction are many of
the MSA counties in Michigan, Indiana, Ohio, Colorado, western Pennsylvania, and the southeastern
states, which had high levels of mortgage delinquency but were not in the highest quintile of the
incidence of higher-priced lending.57
In general, we expect both loan pricing and delinquency to be driven by economic factors. Unfortunately, few high-frequency measures of economic
conditions are available at the county level. Available
items include the unemployment rate, per capita
income, house-price appreciation, and population
growth; credit scores and other information drawn
from credit records are also available. Each of these
factors may influence loan performance and the incidence of higher-priced lending, but no single factor
stands out. Consequently, for our analysis, we construct a composite of economic factors (by regressing
the TrenData delinquency measure of loan performance against several county-level indicators) as a
representative measure of economic circumstances. 58
The coefficient weights from this regression are
used to form the composite economic variable used
here. That variable can also be viewed as a predictorbased only on the economic factors described
above-of the rate of serious mortgage delinquency

56. Although these areas have average or lower levels of serious
delinquency, they are all in the top quintile when measured by the
increase in rates of serious delinquency from the last quarter of 2004
through the first quarter of 2007.
57. The delinquency rates presented here are as of only a single
date-March 31, 2007; some areas of the country that have had
relatively low rates of serious delinquency have been experiencing
sharp increases in those rates more recently.
58. The composite measure is constructed by regressing the TrenData delinquency measure of loan performance against the following
county-level economic factors: the unemployment rates in 2005 and
2006 and the change in the unemployment rate from 2002 to 2005; the
rates of house price appreciation from 200 I to 2004 and from 2004 to
2006; the level of per capita income in 2005 and the change in per
capita income from 2002 to 2005; the population growth rate from
2002 to 2005; and, as of the end of 2004, the mean credit score of
mortgage holders and the percentage of mortgage holders in the two
lowest score groupings as described earlier. We also include the
average share of HMDA loans secured by non-owner-occupied houses
in each county in 2005 and 2006 as a measure of the importance of
investor activity. Data on house-price appreciation are from the Office
of Federal Housing Enterprise Oversight (www.ofheo.gov); unemployment rates, from the Bureau of Labor Statistics (www.bls.gov); and per
capita income and population growth, from the Bureau of Economic
Analysis (www.bea.gov).

4. Quintiles of mortgages delinquent 90 days or more, by metropolitan statistical area county, March 31, 2007

Percent
of MSA
counties
20

~ ~ev
... ...

,pJ/'

Source: TrenData, from TransUnion LLC.

Actual
delinquency
rate (percent)

[:=J Less than 0.81

20 . . 0.82-1.13
20

c=J 1.14 - 1.45

20 . . 1.46 - 1.91
20 . . Greater than 1.92

;;2

'"
N

\::I

l:l

is"
;J>
,....

o
V1

5. Quintiles of incidence of higher-priced lending for first-lien, home-purchase or refinance loans on owner-occupied, site-built homes, by metropolitan
statistical area county, 2006

>
o

0\
'Tj

....
e:.
(D

:;0
(D
[J)

....
(D

,;J

t:C

S
CD

::s

D
t?
~

3
r::r
(D

....

Higher-priced
incidence
(percent)

'. -

"""

~0;,::)

c=J Less than 20.1

2 0 " 20.2-24.1
20

c=J 24.2 - 27.9

20 . . 28.0 - 32.6
20 . . Greaterthan32.7

The 2006 HMDA Data

A107

c
,,;

for the first quarter of 2007. As expected, each of the
factors included in the regression played a role in
predicting future mortgage loan performance. The
most important factor, however, was house-price
appreciation, particularly from 2004 to 2006. 59
Figure 6 shows counties grouped by our composite
economic variable. The MSA counties are grouped by
their expected level of delinquency, applying the
same cutoffs used for the actual delinquency rates in
figure 4. Not surprisingly, the patterns in figures 4 and
6 show a high degree of correlation. Notable divergences appear in Colorado, where most MSA counties had higher levels of actual serious mortgage
delinquency (figure 4) than would be expected on the
basis of economic factors as measured here (figure 6);
and in Florida, where the MSA counties generally had
expected rates of delinquency higher than the actual
rates.
FURTHER ANALYSIS RELATING HIGHERPRICED LENDING TO LOAN PERFORMANCE

The analysis in the previous section does not explicitly link the HMDA data on the incidence of higherpriced lending to mortgage loan performance. The
figures show similar patterns for the incidence of
higher-priced lending; the comparison of the results
from the economic composite variable and the mortgage delinquency rates are suggestive, but it does not
identify whether loan pricing data have additional
power in predicting delinquency once economic factors are taken into account. To focus on this issue, we
estimated a regression similar to that used to create
the economic composite described above. But we
added to the regression a variable reflecting the
average incidence of higher-priced lending for mortgage loans reported in the 2005 and 2006 HMDA data
for each MSA county. Other variables were added to
reflect, for each state, the percentage of subprime and
prime loans that had adjustable interest rates (as
derived from First American LoanPerformance data
on mortgages).
Results suggest that the incidence of higher-priced
lending has independent predictive value for loan
performance beyond that of the economic factors. All
else being equal, an increase in the incidence of
higher-priced lending of 1 percentage point implies
an increase in the March 2007 rate of serious mortgage delinquency of 0.03 percentage point in an MSA
county. Although the effect may seem small, it is, in
fact, fairly large given the relatively low level of
mortgage delinquency. For example, consider an
MSA county with the median level of serious delin59. The R-squared value for the regression was 0.40.

quency (1.27 percent): Holding economic factors
constant, an increase in the incidence of higher-priced
lending of 10 percentage points in that county would
raise its rate of serious mortgage delinquency 0.3 percentage point, to 1.57 percent---enough to move that
county into the next highest quintile of counties
ordered by serious loan delinquency (refer to rates of
actual serious delinquency by quintiles of counties,
shown in figure 4).
The relationship between the incidence of higherpriced lending and the rate of serious delinquency just
described (a 1 percentage point increase in the incidence of higher-priced lending implies an increase of
0.03 percentage point in the delinquency rate) is
robust and of a similar magnitude when the prediction
changes from the level of serious delinquency as of
March 2007 to the change in delinquency rates
between 2004 and 2007. Finally, some evidence
indicates that higher numbers of adjustable-rate mortgages are associated with higher rates of future
serious loan delinquency, but the effect is small and is
found only for prime mortgages. However, the data
available here cannot identify which types of mortgages within an area are delinquent. Adjustable-rate
mortgages may be more prone to delinquency, but
their delinquency status is not reflected in the aggregated data used in this study. Also, some evidence
indicates that delinquencies in adjustable-rate mortgages are a growing problem that may not be fully
reflected in the delinquency rates for March 2007.
The statistical relationship between the incidence
of higher-priced lending and future loan performance
could be caused by several factors. The relationship
may be direct: Perhaps the higher monthly payments
associated with higher-priced lending are a greater
burden on borrowers and lead to greater delinquency.
However, the statistical associations we measure may
also reflect the effects of other economic factors,
which we were not able to include in our model and
that are related both to higher rates of delinquency
and to higher-priced lending. 6o Such factors may
include expected changes in home prices, foreclosure
laws, the specific types of loans used to buy homes or
refinance, and other factors used in underwriting and
pricing loans.
Our analysis is largely suggestive and is relatively
parsimonious. However, it does suggest that the
pricing data in HMDA may be a useful source of
information in understanding and predicting loan
performance.
60. Additional analysis shows that the economic factor and the
incidence of higher-priced lending are highly correlated. A regression
relating the incidence of higher-priced lending in 2005 and 2006 with
the economic factors included in the economic composite variables
had an R-squared value of about 0,67.

o
00

6. Expected delinquency based on economic factors, by metropolitan statistical area county, March 31, 2007

"Ii

8..,
e:.
~

:;>::l
~
en

..,

t:l:l

&
o
::l

o
~

..,
~

Percent
of MSA
counties

-. -

11.3

~ ~<0

Expected
delinquency
rate (percent)

c=J Less than 0.81

18.2 . . 0.82 - 1.13
25.0

c=J 1.14 - 1.45

30.1 . . 1.46-1.91
15.4 . . Greater than 1.92

The 2006 HMDA Data

APPENDIX: REQUIREMENTS OF
REGULATION C
Under the Home Mortgage Disclosure Act (HMDA),
lenders use a "loan/application register" (HMDA/
LAR) to report information annually to their federal
supervisory agencies for each application and loan
acted on during the calendar year. Lenders must make
their HMDAILARs available to the public by March
31 following the year to which the data relate, and
they must remove the two date-related fields (date of
the loan application and date of the credit decision) to
help preserve applicants' privacy. Lenders must make
their date-modified register available to the public for
a period of three years.
Only lenders that have offices (or, for nondepository institutions, are deemed to have offices) in
metropolitan areas are required to report under
HMDA. However, if a lender is required to report, it
must report information on all of its home loan
applications and loans in all locations, including
nonmetropolitan areas.
The Federal Reserve Board's Regulation C requires
lenders to report the following information on homepurchase and home-improvement loans and on the
refinancing of such loans:

For each application or loan
• application date and the date an action was taken on
the application
• action taken on the application
- approved and originated
- approved but not accepted by the applicant
- denied (with the reasons for denial-voluntary
for some lenders)
- withdrawn by the applicant
- file closed for incompleteness
• pre-approval program used (for home-purchase
loans only)
• amount

A109

• type
- conventional
- insured by the Federal Housing Administration
- guaranteed by the Veterans Administration
- backed by the Farm Service Agency or Rural
Housing Service
• pre-approval status
• status
- first lien
- junior lien
- unsecured
• purpose
- home purchase
- refinance
- home improvement
• of purchaser (if the lender subsequently sold the
loan)

For each applicant or co-applicant
• ethnicity
• income relied on in credit decision

For each property
• location, by state, county, and census tract
• of structure
- one-to four-family dwelling
- manufactured home
- multifamily property (dwelling with five or more
units)
• occupancy status (owner occupied or non-owner
occupied)

For loans subject to price reporting
• spread above comparable Treasury security

For loans subject to HOEPA
• indicator of whether loan is subject to HOEPA
Institutions also report information on home loans
they purchased during the calendar year.

Reports on the Condition of the
US. Banking Industry

April 2007

Report on the Condition of the U.S. Banking
Industry: First Quarter, 2006
CHANGE IN REPORTING PANEL

This report presents aggregate time-series data drawn
primarily from the FR Y-9C (Consolidated Financial
Statements for Bank Holding Companies) and the FR
Y-9LP (Parent Company Only Financial Statements
for Large Bank Holding Companies) regulatory report
forms submitted to the Federal Reserve each quarter
by large bank holding companies (defined within this
report as "all reporting bank holding companies").
Beginning with the quarter ended March 31, 2006,
the Federal Reserve updated the filing requirements
for these reports. Most notably, it raised the asset
threshold at which bank holding companies are
required to file reports to $500 million from $150 million. 1 The changes to the filing requirements mitigated regulatory reporting burden because it substantially reduced the number of required respondents.
Compared with those that filed as of December 31,
2005, the number of top-tier bank holding companies
that filed these reports as of March 31, 2006, fell by
more than 1,200 companies. 2
Despite the large drop in the number of filers,
reporting bank holding companies still represented a
substantial majority of all bank holding company
assets. At quarter-end, 5,129 top-tier bank holding
companies held roughly $11.9 trillion in consolidated
assets. 3 Among these companies, 1,003 with aggregate consolidated assets of $11.4 trillion filed the FR
Y-9C, representing more than 95 percent of total bank
holding company assets. 4
Although the effect of the reporting change on the
volume of bank holding company assets included in
this report was relatively modest, the substantial
reduction in the number of filers enhanced, on the
1. In addition, certain lower tier bank holding companies that
formerly filed the FR Y-9C are no longer required to file this report.
2. Some bank holding companies with consolidated assets less than
the reporting threshold of $500 million continue to file the FR Y·9C
and the FR Y-9LP reports voluntarily or for supervisory purposes.
3. Consolidated assets for bank holding companies that do not file
the FR Y-9C are approximated using financial data for bank subsidiaries reported on the Call Report.
4. The remaining bank holding companies submit a semiannual FR
Y-9SP (Parent Company Only Financial Statements for Small Bank
Holding Companies) regulatory report.

aggregate, the already significant influence of the
largest companies, moving some measures included
on table 1, "Financial characteristics of all reporting
bank holding companies in the United States," closer
to the levels for the same measures at the fifty large
bank holding companies summarized in table 2. For
example, the capital ratios for all reporting bank
holding companies are slightly lower than they were
before the change in the reporting requirements, and
the loan to deposit ratio is higher. In addition, by
trimming the number of companies covered in the
reports by more than half, the numbers shown for
both domestic financial holding companies and bank
holding companies engaged in nonbanking activities
were reduced. (See table 4, "Nonfinancial characteristics of reporting bank holding companies.") Also,
the fifty large bank holding companies now account
for 79 percent of all reporting companies' assets, an
increase of nearly 3 percentage points.
The quarterly comparisons below focus on the
subset of bank holding companies that filed the FR
Y-9C as of March 31, 2006, and the accompanying
tables (except for the fifty large companies) append a
column of modified year-end financial statistics for
these first-quarter FR Y-9C respondents. It should be
noted that the December 31, 2005, data include the
results for a small number of top-tier FR Y-9C filers
that subsequently merged into top-tier bank holding
companies included in the March 31, 2006, fixed
panel. Including these companies in the December
2005 data improves the comparability of data for
these periods.

SUMMARY OF CURRENT DEVELOPMENTS FOR
THE FIXED PANEL OF REPORTERS

Assets of reporting bank holding companies increased
4.1 percent ($446 billion) over the first quarter, to
$11.4 trillion, mainly in money market assets and
loans. Net income rose sharply from the fourth quarter of 2005, owing to robust capital markets revenues
and exceptional credit quality, which allowed a sizable reduction in provisions for loan losses.

Federal Reserve Bulletin 0 April 2007

Growth in secunties and money market assets
generated more than half of the asset expansion, as
balances rose 7.0 percent ($280 billion), to $4.3 trillion, from year-end 2005. A $155 billion buildup in
federal funds sold and securities purchased under
agreements to resell, which was accompanied by a
corresponding rise in money market liabilities
($179 billion), contributed to most of this increase.
Investment securities expanded 4.0 percent ($71 billion), to $1.8 trillion.
Aggregate loans grew at a slower pace, rising
2.4 percent ($130 billion), to $5.6 trillion. Increases
in home equity loans and construction, land development, and other land loans were relatively strong.
Commercial and industrial loans also advanced substantially, increasing 4.4 percent ($43 billion). Unused
commitments to lend expanded 2.4 percent ($127 billion), to $5.5 trillion.
Deposits grew 2.3 percent (or $126 billion) at the
same time that customer sensitivity to the increased
yields available on time deposits caused a shift away
from transaction deposits. The growth in deposits
largely kept pace with loan expansion, but nondeposit
borrowings (including the $179 billion increase in
federal funds purchased and securities sold under
agreements to repurchase noted above) funded most
of the asset growth over the quarter, rising 7.2 percent
($257 billion), to $3.8 trillion.
Shareholders' equity at all reporting bank holding
companies rose 3.6 percent, to $930 billion. Merger
adjustments (related, in particular, to the combination
of Bank of America Corporation and MBNA Corporation) and, to a lesser extent, retained earnings
enlarged the equity base. Risk-based capital ratios,
which exclude goodwill from the capital base, remained largely stable. Compared with year-end 2005,

the total risk-based capital ratio edged down 1 basis
point, to 11.75 percent and the tier one capital ratio
decreased 2 basis points, to 8.96 percent. The leverage ratio dropped 5 basis points, to 6.33 percent.
First-quarter net income for reporting bank holding
companies climbed 7.0 percent, or $2.2 billion, from
the fourth quarter of 2005 to $34.3 billion in the first
quarter of 2006. The strong earnings growth boosted
returns on assets (up 4 basis points, to 1.21 percent)
and equity (up 34 basis points, to 14.88 percent).
Higher non-interest income (particularly trading revenues and net servicing fees) and lower provisions
(down 28 percent, or $2.6 billion) bolstered earnings
growth. In addition, reflecting significant realized
losses booked in the last quarter of 2005 in conjunction with efforts to restructure interest rate risk positions, lower realized securities losses contributed
almost $700 million of the improvement in quarterly
net income. However, elevated non-interest expenses,
related to incentive-based compensation, weighed on
earnings growth. Moreover, a still flatter term structure and growth in higher-cost certificates of deposit
exerted downward pressure on the aggregate net
interest margin (down 9 basis points, to 2.96 percent).
Nonperforming assets edged down 2 basis points,
to 0.67 percent of total loans and related assets.
Nonaccrualloans contracted 3.9 percent, or $1.2 billion (mostly in first-lien residential mortgages and
consumer loans), as inflows of nonperfonning loans
fell considerably. The ratio of net charge-offs to
average loans improved markedly, shrinking to a
historically low 0.45 percent from 0.74 percent in the
fourth quarter of 2005 when credit losses were
elevated by an increase in personal bankruptcy filings
related to a change in the bankruptcy law.

Report on the Condition of the U.S. Banking Industry: First Quarter, 2006

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 I,

2001

2002

2003

2004

2005

2005
Q4

2005'

2006

Balance sheet

Total assets ............. .... ...... 7,487,107

7,989,910

8,880,558 10,339,801 11,333,100 10,339,801 10,710,570 10,956,171 11,257,415 11,333,100 10,906,559 11,352,835

Loans ..... ' ...... ......... . ...... 3,835,237
Securities and money market .... ..... 2,563,779
-68,829
Allowance for loan losses .. .......
Other. ..... .... ...... . ... . .
1.156.920

4,083,169
2,858,856
-74,782
1.122.668

4,435,653
3,297.932
-73.817
1,220,790

5,109,493
3,804,003
-74,589
1,500,894

5,659,808
4,157,256
-73,031
1,589,068

5,109,493
3,804.003
-74.589
1,500.894

5,192,276
4,114,628
-73.378
1.477,045

Total liabilities ......... .. .. ....... 6,900,721

7,347,694

8,176,868

9,452,623 10,393,243

9,452,623

9,819,629 10,034,472 10,327,938 10,393,243 10,008,645 10,422,650

Deposits .......................... 4,026,460
801,756

4,356,585
2,242,717
748.392

4,705,045
2,629,293
842,531

5,249,494
3,157,578
1,045,552

5,700,850
3,586,922
1,105,471

5,249,494
3,157,578
1,045.552

5,349,427
3,424,013
\'046,189

5,448,059
3,525,137
1,061.277

5,563,636
3,667,710
1,096,593

5,700,850
3,586,922
1,105,471

5,427,593
3,568,417
1,012,636

5,553,762
3,825,102
1,043.787

586,386

642,216

703,6911

887,178

939,857

887,178

8911,941

921,699

929,477

939,857

897,914

930,185

Off-balance-sheet
Unused commiunents to lend 4 •••••••• 3,482,236
Securitizations outstanding 5 .•.•••.•••
276,717
Derivatives (notional value, billions) 6 ••
48,261

3,651,209
295,001
57,866

4,097,531
298,348
72,883

4,823,332
353,978
89,115

5,437,902
389,726
99,077

4,823,332
353,978
89,115

4.929,516
366,430
92,621

5,064,198
367,887
96,653

5,245,819
375,142
98,281

5,437,902
389,726
99,077

5,393,260
387,875
99,060

5,520,728
394,600
109.261

67,208
224.127
40,665
220,516
302,202

86,013
245,251
45,089
222,815
297,015

107,885
256.562
33,052
251,496
316,339

113.317
278,075
28,608
270,485
355,698

133,047
295,789
32,618
294,938
370,814

28.653
70,822
7,793
68,192
90,007

32,598
72,434
6,580
73,442
91,505

33,072
73,153
6,824
72,542
91,435

34,543
74,848
9,972
77,067
94,057

32,837
75.363
9,243
71,883
93.817

32,036
72,678
9,292
71,358
91,564

34.266
72,726
6,662
78,427
95,119

4,348

4,594

;,771

5,043

1,332

417

1,478

484

-1,047

-1.141

-474

11.98
.92
3.61
66.71

14.14
1.12
3.74
62.24

16.24
1.26
3.51
61.65

14.35
1.16
3.37
63.40

14.68
1.21
3.09
61.70

13.27
1.11
3.29
64.13

14.71
1.22
3.16
61.12

14.73
1.21
3.08
61.47

15.04
1.24
3.07
61.74

14.23
1.15
3.05
63.92

14.54
1.17
3.05
63.77

14.88
1.21
2.96
61.93

1.44
.91
95.25

1.44
1.04
93.72

1.15
.84
94.27

.82
.67
97.33

.69
.62
99.28

.82
.71
97.33

.76
.57
97.06

.71
.52
98.45

.70
.65
99.32

.69
.72
99.28

.69
.74
100.07

.67
.45
100.14

8.94
11.93
6.69

9.24
12.30
6.73

9.59
12.61
6.88

9.35
12.22
6.59

9.14
11.87
6.50

9.35
12.22
6.59

9.28
12.15
6.49

9.27
12.03
6.53

9.17
11.91
6.54

9.14
11.87
6.50

8.98
11.76
6.38

8.96
11.75
6.33

1,842

1,979

2,134

2,254

2,268

2,254

2,282

2,296

2,290

2,268

1,016

1,003

Borrowings ....

................... 2,072,505

Other' ...... .......... ..... .. ....
Total equity

.. .......

. ...... ...

Income statement
Net income 7 ••.••••••.•

"".

Net interest income ...... ... ......
Provision.s for loan losses .. ........
Non-interest income ..............
Non-interest expense
.......

......

5.363,646
4,143,955
-72,949
1,521.520

5,525,962
4,246,546
-74.097
1,559.005

5,659,808
4,157,256
-73,031
1,589,068

5,431,492
4,025,401
-70,146
1,519.813

5,561,703
4,305.752
-70544
1,555.924

MEMO

Realized securities gains or losses.

Ratios (percent)
Return on average equity ............
Return on average assets ...........
Net interest margin g ••••••••
Efficiency ratio 7 . • . • .
.. ....
Nonperforming assets to loans and
related assets ... ... ,
Net charge-offs to average loans ......
Loans to deposits .... ........ . .....

........

....

Regulatory capital ratios
TIer 1 risk-based .... ..... ..........

Total risk-based ......... .... .......
Leverage

.......... ........... ...

Number of bank holding
companies ..........

..........

Footnotes appear on p. B6.

Federal Reserve Bulletin 0 April 2007

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,

200t

2002

2003

2004

2005

2005
Q4

2006

Balance sheet

........

5,896,783

6,256,824

6,926,108

7,963,241

8,645,888

7,963,241

8,226,990

8,440,266

8,515,432

8,645,888

8,970,662

Loans .................... ......
Securities and money market .........
Allowance for loan losses ...........
Other ......... ...... ...
......

2,968.905
2,050,129
-56,737
934,487

3,153,028
2,276,872
-61,324
888,248

3,404,117
2,628,112
-59,548
953,428

3,945,799
2,913,583
-59.656
1,163,516

4,351,995
3,188,236
-57,219
1,162,877

3,945,799
2,913,583
-59,656
1.163,516

4,001,893
3,147,849
-58,287
1,135,535

4,121.526
3.210.407
-57,595
1,165.928

4,241,636
3,200,593
-58,368
1,131,572

4,351,995
3,188,236
-57,219
1.162,877

4,456,423
3,378,174
-57,413
1,193,478

Total liabilities ..

..... ....... ......

5,446,449

5,767,409

6,393,247

7,271,689

7,918,171

7,271,689

7,531,639

7,725,734

7,797,427

7,918,171

8,212,994

Deposits ........
Borrowings .....
Other' ...... ...

............ ...... 3,036,830
.... ......... ..... 1,875,435
.... ...... ......
534,184

3,273,801
2,037,450
456,158

3,531,832
2,358,631
502,784

3,967.576
2,712,748
591,365

4,297,653
3,077,129
543,390

3,967,576
2,712,748
591,365

4,038,580
2,896,505
596,555

4,102,410
3,024,117
599,207

4.172,538
3,097,466
527,423

4,297,653
3,077,129
543.390

4,402,954
3,248.232
561,808

Total assets ...............

....

.....

450,334

489,415

532,862

691,552

727,717

691,552

695,351

714,532

718,005

727,717

757,668

Off-balance-sheet
Unused commitments to lend 4 ••• .....
Securitizations outstanding 5 ..••.•••••
Derivatives (notional value, bilhons)6 ..

3,242,175
271,825
48,144

3,391,837
289,905
57,746

3,807,849
293,046
72,692

4,490.684
348,986
88.671

5,050,405
384,996
98,749

4,490,684
348,986
88,671

4,582,671
361.524
92,136

4,702,953
363,221
96.300

4,867,314
370,518
97,994

5,050,405
384,996
98,749

5,166,727
391,756
108.963

Income statement
Net income 7 •••. .................
Net interest income ......... ......
Provisions for loan losses .... ......
Non-interest income .. , ...... .....
Non-interest e;ll;pense .. ..... . .....

53,411
166,848
35,767
176,226
225,124

68.756
183,553
39,400
174,233
216,533

87,858
192,195
28,573
196,967
230,158

90,408
206,579
25.197
210,812
259.732

106,132
215,352
29,128
230,868
266,747

23,455
52,844
6,748
55,061
66,870

26.168
53.289
5,765
57,860
66,560

25.326
53,668
6,035
55,123
65,694

27,761
54,200
9,031
59,997
66,693

26,881
54,204
8,297
57,884
67.799

29.074
55,423
6,034
64,299
71.902

4.330

5,022

5,217

4,174

1.702

133

227

1.426

469

-420

-117

12.38
.93
3.39
64.36

14.74
1.13
3.56
59.40

17.43
1.31
3.36
58.63

14.83
1.19
3.21
60.57

15.05
1.25
2.92
58.70

13.90
1.18
3.17
61.39

15.10
1.28
3.01
58.Q3

14.46
1.20
2.91
58.81

1557
1.30
2.89
58.28

15.04
1.24
2.86
61.29

15.51
1.30
2.83
59.28

1.56
1.03
97.76

1.55
1.20
96.31

1.21
.97
96.38

.84
.79
99.45

.70
.74
101.26

.84
.83
99.45

.78
.69
99.09

.72
.62
100.47

.71
.78
101.66

.70
.86
101.26

.68
.53
101.21

8.26
11.61
6.26

855
11.98
6.28

8.83
12.21
6.38

8.59
11.86
6.18

8.45
11.56
6.16

8.59
11.86
6.18

8,54
11.81
6.10

8.48
11.61
6.08

8.48
11.62
6.17

8.45
11.56
6.16

8.43
11.55
6.10

Total equity .................

MEMO

Realized security gains or losses ....

Ratios (percent)
Return on average equity .. ..... .....
Return on average assets
......
Net interest margin 8 •.••••••.•••.•••
Efficiency ratio 7 ••.••. ........ ....
Nonperfonning assets to loans and
related assets .............. ....
Net charge-offs to average loans ......
Loans to deposits .............. ....
Regulatory capital ratios
Tier 1 risk-based ....... ...... ......

.....

Total risk-based ..
........ . ....
Leverage ...... ...................

Footnotes appear on p. B6.

Report on the Condition of the U.S. Banking Industry: First Quarter, 2006 B5

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

AccountL 10

2001

2002

2003

2004

2005'

2006

2005

2005
Q4

Balance sheet

Total assets .

......

. ......

1,277,090

1,401,227

1,527,308

l.686,798

1,846,496

1.686,798

1,717,675

1,767,744

1,816,198

1,846.496

1,512,393

1.533,908

812,179
357.366
-11,727
119,273

875.986
406,771
-13,021
131,491

952,217
446,237
-13,852
142.706

1,081,393
470,040
-14,533
149,898

l.222,260
465,922
-15,343
173.656

1,081,393
470,040
-14,533
149,898

1,108,765
468,314
-14.654
155,251

1,155.948
463,460
-14.901
163,236

1,194,967
467.758
-15,253
168,725

1.222.260
465,922
-15.343
173,656

996,041
383,635
-12,526
145,242

1,015,838
386,457
-12,704
144,318

Total liabilities ..... ........ .. .... 1,162,232

1,271,919

1,387,290

1,531,062

1,678,565

1,531,062

1,562,077

1,606,086

1,651,157

1,678,565

1,374,465

1,393,756

Deposits ..
Borrowings
Other 3 •.•.

..... ... ......
...
.......
.. . ......
....... ... ..... .... . ...

975,514
161,450
25,267

1,064,802
176,225
30,892

1,150.648
202,893
33,748

1,262,006
228,755
40.302

1,396,880
235,401
46,284

1,262,006
228.755
40,302

l.291,162
228,424
42,491

1,325,494
238,313
42.280

1,370.318
234,934
45,905

1,396,880
235,401
46,284

1.124,004
210,170
40,291

1,143,429
206.535
43,792

Total equity

Loans ........ ........ . ...........
Securities and money market .........
Allowance for loan losses .......
Other ... .... ...... ..... . .....

...

...... ....... . .... . ...

114,859

129,308

140,018

155,737

167,930

155,737

155,597

161,658

165.040

167,930

137,928

140,152

Off·balance-sheet
Unused commitments to lend 4 •.••. ...
Securitizations outstanding 5 .•••. .....
Derivatives <notional value. billions) 6 •.

229,887
4,567
89

247,466
4,358
88

276,769
4.159
94

319,277
2.877
144

367,264
2.885
103

319.277
2.877
144

332,445
2.792
98

345,663
2.667
99

359,746
2.697
100

367,264
2.885
103

323,206
2.878
101

329,823
2.844
86

Income statement
Net income 7 •. ... .................
Net interest income .. ........ .....
Provisions for loan losses .. ... .....
Non-interest income ...... ........
Non~interest expense ......... ....

13.659
45,676
4.461
22,118
43,828

16,469
50,475
5.058
24.282
46.390

17.626
52.266
4,262
27.311
50,672

19,244
56.545
3,179
25.934
52.661

21.306
62.698
3.191
26.410
56,323

4,831
14.723
763
6.299
13,681

5,154
15,049
684
6.569
13.783

5,433
15,484
735
6.646
13.845

5.617
16,116
892
6.930
14,325

5,102
16.049
881
6.264
14.369

4,426
13.897
947
5,972
12.680

4,472
13,294
578
6.063
12.252

727

651

962

531

-3

-190

-177

12.54
1.13
4.20
63.75

13.55
1.25
4.25
61.05

13.08
1.20
3.97
62.93

13.16
1.20
3.93
62.68

13.24
1.21
3.97
61.89

12.60
1.16
3.94
64.01

13.25
1.22
3.97
62.59

13.70
1.25
3.98
61.76

13.74
1.26
4.00
61.54

12.29
1.12
3.93
62.74

12.99
1.19
4.16
62.20

12.91
1.19
3.94
61.98

.99
.44
83.26

1.04
.46
82.27

.99
.39
82.75

.77
.25
85.69

.69
.20
87.50

.77
.30
85.69

.75
.17
85.87

.71
.19
87.21

.69
.21
87,20

.69
.24
87.50

.67
.27
88.62

.67
.15
88.84

Regulatory capital ratios
Tier 1 risk-based .... ......... ... ...
Total risk-based. , . , . ......... ..
Leverage ........... .......... ....

....

12.24
13.80
8.78

12.47
14.08
8,91

12.61
14.30
9.07

12.45
14.07
9.15

12.17
13.72
9.19

12.45
14.07
9.15

12.32
13.92
9.12

12.16
13.72
9.12

12.12
13.67
9.15

12.17
13.72
9.19

11.92
13.51
9.09

11.93
13.50
9.17

Number of otber reporting bank holdiog
companies ............. ......

1,777

1.914

2,069

2,197

2.213

2.197

2.225

2.239

2.233

2.213

962

950

MEMO

Realized security gains or losses ..
Ratios (percent)
Return on average equity ........ ...
Return on average assets ....... .....
...
Net interest margin 8 .... ......
...... ....
Efficiency ratio 7 •••••
Nonperfonning assets to loans and
related assets .... ........
Net charge-offs to average loans
Loans to deposits .. ' " ....... .....

......

Footnotes appear on p. B6.

Federal Reserve Bulletin D April 2007

Nonfinancial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2004
2001

Account

2002

2003

2004

2005

2005
Q4

2005'

2006

Bank holding companies that qualify as
financial holding companies 11, 12

Domestic

Number ....... ... , ....... .....
388
Total assets ... ... ... ...... ...... 5.436.743
Foreign-owned 13
Number ..... ....... ..... . ......
10
. ..... 621,442
Total assets .... .. ....

434
5.917,109

451
6,605.686

472
7,456,569

461
8,184.677

472
7.456,569

470
7,643,649

468
7,898.330

471
8,068.742

461
8,184.677

288
8,136,643

289
8,468,806

11
616,254

12
710.441

14
1.376,333

14
1,561,S80

14
1,376.333

15
1,526,168

15
1.516.408

15
1.625.281

14
1,561,580

13
1.460,245

14
1,689,001

6,416,080

6,897,215

7,397,903

8,207,714

8,994,064

8,207,714

8,544,414

8,676,294

8,857,369

8,994,066

8,994,059

9,286,846

Reporting bank holding companies .. 5,942.670
230.467
Other bank holding companies .....
242.944
Independent banks ...............

6,429,231
227,016
240.968

6,941,106
219,222
237,575

7,785.988
209,115
212,611

8.439,788
220.133
334.143

7.785.988
209,115
212,611

8.011.264
204,891
328,259

8.138,007
206.367
331,920

8.312.461
211,840
333,067

8.439,915
220.140
334,011

8.416,815
243.101
334,142

8,341,350
602,912
342,584

Assets associated with nonbanking
activities l2, 15
Insurance .........................
426,462
n.a.
Securities broker-dealers ... ..... ....
91,170
Thrift institutions ..................
138,977
Foreign nonbank institutions .........
Other nonbank institutions ..... ...... 1.674,267

372.405
630,851
107,422
145,344
561,710

437,503
656.775
133.056
170,630
678,086

579.111
892,571
191,201
216,758
954,845

602.258
1,170.659
220,819
242,408
969,255

579,111
892,571
191,201
216,758
954,845

587.000
1,168.482
194,267
219,829
886,022

598,669
1,165.688
201,317
231,566
910,770

601,076
1.231.410
210,811
242,333
954.085

602.258
1,170,659
220,819
242,408
969.255

512.058
1.170,639
220,709
236,225
962,883

527,193
1,314,092
231,207
268,848
927.934

Total U.s. commercial bank
asse~ 14 ••••

....... ..... . ....

By ownership

Number of bank holding companies
engaged in nonbanking activities 12. 15
Insurance ........... ...........
Securities broker-dealers ...... .....
Thrift institutions ............. .....
Foreign nonbank institutions " ......
Other nonbank institutions .. .........

143
n.a.
38
32
743

96
47
32
37
880

102
50
27
42
1,042

97
44
27
39
1,026

97
46
26
35
845

97
44
27
39
1,026

97
43
27
38
926

99
45
27
37
885

98
46
25
38
875

97
46
26
35
845

83
43
23
33
515

81
41
22
33
509

Foreign-owned bank holding
companies 13
Number ..........................
Total assets ......... ......... .....

23
764,411

26
762,901

27
934,085

29
1.537,208

29
1,747,797

29
1.537,208

29
1.690.119

30
1.698,197

30
1.811,451

29
1.747,797

28
1.646,462

24
1,822,367

1,985,981

1,992,559

2,034,358

2,162,179

2,24\,112

2,162,179

2,168,165

2,199.910

2,221,004

2,241,112

2,122,810

2,150,153

Assets of fifty large bank holding
companies 9. 16
Fixed panel (from table 2) . .... .... 5.896,783
Fifty large as of reporting date ...... 5,732,621
Percent of all reporting
bank holding companies .. ......
76.60

6.256,824
6,032,000

6,926.108
6,666.488

7.963,241
7.940,955

8,645.888
8,631.229

7.963,241
7.940.955

8,226.990
8,206,462

8,440.266
8,417,847

8,515,432
8,489,633

8,645.888
8,631,229

8,645,879
8,631,229

8,970.662
8,970,662

75,50

75.10

76.80

76.20

76.80

76.60

76.80

75.40

76.20

79.10

79.00

Employees of reporting bank holding
companies (full·time equivalent)

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.
I. For quarters beginning on or after March 31, 2006. this report covers top-tier bank
holding companies with consolidated assets of at least $500 million and some smaller toptier finns that filed the FR Y-9C as required by Federal ReselVe Banks for supelVisory purposes or on a voluntary basis. Before March 31. 2006, aggregate data refer to top-tier bank
holding companies with consolidated assets of at least $150 mUlion and smaller multibank:
holding companies with debt outstanding to the general public or 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 selVicing the underlying assets. Securitization data were first collected on the FR Y-9C repon for
Jone 2001.
6. The notional value of a derivative is the reference amount of an asset on which an interest rate or price differential is applied when calculating the contractual payments. 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 a<;sociated 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 1arg< 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. Exdudes 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. Excludes qualifying institutions that are not reporting bank holding companies.
l2. 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 GrammLeacb-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 reponed in the commercial bank Call Report (FFIEC 031 or 041, Reports of Condition and Income). Exclodes
data for a small number of commercial bank.<; owned by other commercial banks that file
separate call reports yet are also covered by the reports filed by their parent banks. Also exdudes 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 Grarnm-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 scbedule HC-I of the FR Y-9C report.
Beginning in 2002:Q l, insurance totals exclude intercompany transactions and sub·
sidiaries 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. 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 ReselVe Reports FRY-9C and FR Y-9LP. Federal Reserve National Information Center, and published financial reports.

June 2007

Report on the Condition of the U.S. Banking
Industry: Second Quarter, 2006
Total assets of reporting bank holding companies rose
2.7 percent ($304 billion) over the second quarter, to
$11.7 trillion.! Robust loan growth, concentrated in
real estate, generated most of the increase. Earnings
were dampened by continued pressure on net interest
margins and modest growth in fee income, but benefited from loan expansion, reduced operating expenses, and securities gains. Credit quality remained
excellent.
Loans expanded at a vigorous pace, rising 3.1 percent ($172 billion) for the quarter. Lending activity
was particularly strong in the residential mortgage
segment, which grew 3.7 percent ($71 billion) and
accounted for more than 40 percent of loan growth.
On balance sheet, commercial real estate loansprimarily loans secured by nonfarm, nonresidential
properties and construction, land development, and
other land loans-also continued to grow rapidly,
rising 3.4 percent ($39 billion). Unused commitments
to lend expanded 4.2 percent, to $5.8 trillion, with
more than half of the increase driven by credit card
lines.
Securities and money market assets (up 1.7 percent, or $73 billion) increased more slowly than
loans. Growth was constrained by a substantial reduction ($48 billion) in money market holdings-with a
fully offsetting decline in money market liabilities-at
one bank holding company in which operations are
predominantly concentrated at its securities brokerdealer subsidiary. Excluding this company, securities
and money market assets increased 3 percent, slightly
outpacing asset growth overall. Aggregate trading
I. This report presents aggregate time-series data drawn primarily
from the FR Y-9C and FR Y-9LP regulatory report forms submitted to
the Federal Reserve each quarter by large bank holding companies
(defined within the report as "all reporting bank holding companies").
Beginning with the quarter ended March 31, 2006, the Federal Reserve
updated the filing requirements for these reports. Most notably, it
raised the asset threshold requiring the filing of the reports to
$500 million from $150 million. The changes to the filing requirements mitigated regulatory reporting burden by reducing the number
of required respondents substantially. Despite the large drop in the
number of filers, reporting bank holding companies still represent a
substantial majority of all bank holding company assets (when assets
of nonreporting bank holding companies are approximated using data
for bank subsidiary assets).

assets jumped 8.2 percent ($91 billion), mainly
among the largest companies.
Deposit growth at 2.8 percent ($153 billion) kept
pace with balance sheet expansion. Most growth was
concentrated in foreign and time deposits, rates on
which moved up. Core deposits-which exclude time
deposits in denominations higher than $100,000, brokered deposits, and deposits booked in foreign
offices-stayed roughly flat, with a rise in small time
deposits partly offset by further declines in transaction accounts. While deposits funded more than half
of asset growth, borrowings also advanced 2.6 percent ($98 billion).
Higher dividend payouts by larger companies and
increases in unrealized losses in available-for-sale
investment account securities that reduced the accumulated other comprehensive income component
restrained equity growth for the quarter. Equity was
up just 1 percent (roughly $9 billion). Given the more
rapid advance in bank holding company assets, the
equity to assets ratio dropped slightly from 8.19 percent to 8.06 percent. The tier 1 leverage, tier 1
risk-based, and total risk-based capital ratios, which
do not reflect the unrealized losses on available-forsale securities, also declined slightly, but remained
sound at 6.28 percent, 8.94 percent, and 11.73 percent
respectively.
Profitability remained strong in the quarter. Return
on equity increased 26 basis points from the first
quarter, to 15.17 percent, while the return on assets
leveled off (up one basis point) to 1.22 percent. Net
income improved 2.6 percent, to $35 billion. Reduced
noninterest expenses, due to lower incentive-based
compensation at the largest companies, and increased
realized gains on securities sales (from a $474 million
loss in the first quarter) bolstered earnings. Fee
income also contributed to growth in earnings, benefiting from stronger mortgage-related and investment banking businesses, but was held back by
declines in equity trading at the largest institutions.
Despite further margin compression, net interest
income grew 1.4 percent ($1 billion) on a larger
average earning assets base. The net interest margin
fell 7 basis points, to 2.89 percent, owing to a higher

Federal Reserve Bulletin 0 June 2007

cost of deposit funding, a competitive lending environment, and a flattened yield curve. Although 60 percent of the companies reduced provisioning, aggregate provisions for loan losses increased $144 million
(2.2 percent).
Nonperforming assets inched up from a low level,
but the ratio of nonperforming assets to loans and

related assets dropped slightly from 0.67 percent to
0.65 percent as loans expanded briskly. Net chargeoffs increased as the moderating effect of last year's
reform of the bankruptcy code on credit card losses
continued to wane, but remained near historic lows at
0.48 percent of average loans.
0

Report on the Condition of the U.S. Banking Industry: Second Quarter; 2006 B9

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 l ,

2001

2002

2003

2004

2005

2005
Q4

2006

Balance sheet

Total assets . . . . . . . . . . . . . . . . . . . . . .. 7,487,107

7,989,910

8,880,558 10,339,801 11,333,100 10,339,801 10,710,570 10,956,171 11,257,415 11,333,100 11,352,835 11,656,441

Loans
Securities and money market
Allowance for loan losses

. 3,835.237
. 2,563.779
-68.829
.

Other

. 1.156.920

4,083,169
2,858.856
-74,782
1,122.668

4,435,653
3.297,932
-73.817
1.220.790

5,109,493
3,804.003
-74,589
1.500.894

5,659.808
4,157.256
-73.031
1.589,068

5,109,493
3.804.003
-74.589
1.500.894

5.192.276
4,114.628
-73,378
1.477.045

. 6,900,721

7,347,694

8,176,868

9,452,623 10,393,243

9,452,623

9,819,629 10,034,472 10,327,938 10,393,243 10,422,650 10,717,404

4,026,460
2.072.505
801.756

4.356.585
2.242.717
748.392

4.705,045
2.629.293
842.531

5,249,494
3.157,578
1,045.552

5.700.850
3.586,922
1.105,471

5.249,494
3,157.578
1,045.552

5,349,427
3,424,013
1,046,189

5,448.059
3.525,137
1,061.277

5.563.636
3.667.710
1,096.593

5.700,850
3.586.922
1,105,471

5.553.762
3,825,102
1,043.787

5.707.211
3.922.825
1,087,367

586,386

642,216

703,690

887,178

939,857

887,178

890,941

921,699

929,477

939,857

930,185

939,037

3,482,236
276.717
48.261

3,651.209
295.001
57.866

4.097.531
298,348
72,883

4,823,332
353,978
89,115

5,437.902
389.726
99,077

4.823,332
353,978
89,115

4,929,516
92.621

5,064,198
367,887
96,653

5,245,819
375.142
98.281

5,437.902
389.726
99.077

5,520,728
394.600
109,261

5.754,362
388.744
117.992

.
.
.
.

67.208
224,127
40,665
220.516
302,202

86.013
245.251
45.089
222.815
297.015

107.885
256.562
33.052
251.496
316.339

113.317
278,075
270,485
355.698

133,047
295.789
32,618
294,938
370.814

28,653
70.822
7,793
68.192
90.007

32.598
72.434
6.580
73,442
91.505

33,072
73.153
6,824
72,542
91.435

34.543
74.848
9,972
77,067
94.057

32.837
75,363
9.243
71.883
93.817

34,266
72.726
6,662
78,427
95,119

35,148
73.737
6.806
79.409
94,182

Realized securities gains or losses ...

4.348

4,594

5.771

5,043

1.332

417

1,478

484

-1,047

-474

11.98
.92
3.61
66.71

14.14
1.12
3.74
62.24

16.24
1.26
3.51
61.65

14.35
1.16
3.37
63.40

14.68
1.21
3.09
61.70

13.27
1.11
3.29
64.13

14.71
1.22
3.16
61.12

14.73
1.21
3.08
61.47

15.04
1.24
3.07
61.74

14.23
1.15
3.05
63.92

14.91
1.21
2.96
61.93

15,17
1.22
2.89
61.37

.
.

1.44
.91
95.25

1.44
1.04
93.72

1.15
.84
94.27

.82
.67
97.33

.69
.62
99.28

.82
.71
97.33

.76
.57
97.06

.71
.52
98.45

.70
.65
99.32

.69
.72
99.28

.67
.45
100.14

.65
.48
100.46

.
.
.

8.94
11.93
6.69

9.24
12.30
6.73

9.59
12.61
6.88

9.35
12.22
6.59

9.14
11.87
6.50

9.35
12.22
6.59

9.28
12.15
6.49

9.27
12.03
6.53

9.17
11.91
6.54

9.14
11.87
6.50

8.96
11.75
6.33

8.94
11.73
6.28

1.842

1.979

2.134

2,254

2.268

2.254

2,282

2.296

2.290

2,268

1.003

995

Total liabilities
Deposits
Borrowings

.
.

Other 3
Total equity
Off-balance-sheet
Unused commiunents to lend 4
Securitizations outstanding 5
Derivatives (notional value. biHions) 6
Income statement
Net income 7
Net interest income
Provisions for loan losses
Non-interest income
Non-interest expense

28,608

366,430

5.363,646
4,143,955
-72.949
1.521.520

5,525,962
4,246.546
-74.097
1,559.005

5,659,808
4,157.256
-73,031
1,589,068

5.561.703
4.305,752
-70.544
1.555.924

5.733,310
4.378.775
-70.759
1,615.116

MEMO

Ratios (percent)
Return on average equity
Return on average assets
Net interest margin 8
Efficiency ratio 7
NonpeJfonning assets to loans and
related assets . . . . .
.
Net charge-offs to average loans
Loans to deposits

.
.

Regulatory capital ratios
TIer 1 risk-based.. . . . .. .
Total risk-based
I..everage

Number of bank bolding
companies
Footnotes appear on p. B 12.

BlO

Federal Reserve Bulletin 0 June 2007

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,

2001

2002

2003

2004

2005

8,645,888

7,963,241

8,226,990

4,351,995
3,188,236
-57,219
1,162,877

3,945,799
2.913,583
-59,656
1,163,516

4,001,893
3,147,849
-58,287
1.135,535

2006

8.515,432

8,645,888

8,970,662

9,282,941

4,121.526
3,210.407
-57.595
1,165,928

4,241.636
3,200,593
-58,368
1,131.572

4,351,995
3,188,236
-57,219
1,162,877

4,456.423
3,378,174
-57.413
1,193,478

4.598,577
3,505,834
-57.432
1,235,963

Balance sheet
Total assets ...

.....

. ..... ..,

Loans ........ ...... ..... . .....

5,896,783

7,963,241

6,256,824

6,926,108

3,945,799
2,913,583
-59,656
1,163,516

8,440,z66

2,968,905
2,050,129
-56,737
934.487

3,153,028
2.276,872
-61,324
888,248

3,404,117
2,628,112
-59,548
953.428

Total liabilities

...... ..... ..... ..
.. ...... ...............
...... .......... . ....

5,446,449

5,767,409

6,393,247

7,271,689

7,918,171

7,271,689

7,531,639

7,725,734

7,797,427

7,918,171

8,212,994

8,518,106

Deposits ...
Borrowings ..
Other)

3,036,830
1.875,435
534,184

3,273,801
2,037.450
456,158

3,531,832
2,358,631
502,784

3,967,576
2,712,748
591,365

4,297,653
3,077.129
543.390

3,967,576
2,712,748
591,365

4,038.580
2,896,505
596,555

4,102,410
3,024,117
599,207

4,172.538
3,097.466
527,423

4,297.653
3,077,129
543,390

4.402,954
3,248,232
561.808

4,540,867
3,379,098
598,141

................ .....

450,334

489,415

532,862

691,552

727,717

691,552

695,351

714,532

718,005

727,717

757,668

764,835

3,242,175
271,825
48,144

3,391.837
289,905
57,746

3,807,849
293,046
72.692

4,490,684
348,986
88,671

5,050,405
384,996
98,749

4,490,684
348,986
88,671

4,582,671
361,524
92,136

4,702.953
363.221
96,300

4,867,314
370.518
97,994

5,050,405
384,996
98,749

5,166,727
391.756
108,963

5,387,508
385,937
117,631

53.411
166,848
35,767
176,226
225,124

68,756
183.553
39,400
174,233
216,533

87,858
192,195
28,573
196,967
230,158

90,408
206,579
25,197
210,812
259,732

106,132
215,352
29,128
230,868
266,747

23.455
52,844
6,748
55,061
66,870

26,168
53,289
5,765
57,860
66,560

25,326
53,668
6.035
55,123
65,694

27,761
54,200
9,031
59,997
66,693

26.881
54,204
8,297
57,884
67,799

29,074
55,423
6,034
64,299
71,902

29,689
56,645
6,141
65,147
71,201

4,330

5,022

5,217

4,174

1,702

133

227

1,426

469

-420

-1l7

374

12.38
.93
3.39
64.36

14.74
1.13
3.56
59.40

17.43
1.31
3.36
58.63

14.83
1.19
3.21
60.57

15.05
1.25
2.92
58.70

13.90
1.18
3.17
61.39

15.10
1.28
3.01
58.03

14.46
1.20
2.91
58.81

15.57
1.30
2.89
58.28

15.04
1.24
2.86
61.29

15.51
1.30
2.83
59.28

15.60
1.27
2.76
58.55

1.56
1.03
97.76

1.55
1.20
96.31

1.21
.97
96.38

.84
.79
99.45

.70
.74
101.26

.84
.83
99.45

.78
.69
99.09

.72
.62
100.47

.71
.78
101.66

.70
.86
101.26

.68
.53
101.21

.66
.56
101.27

8.26
11.61
6.26

8.55
11.98
6.28

8.83
12.21
6.38

8.59
11.86
6.18

8.45
11.56
6.16

8.59
11,86
6.18

8.54
11.81
6.10

8.48
11.61
6.08

8.48
11.62
6.17

8.45
11.56
6.16

8.43
11.55
6.10

8.42
11,56
6.03

Securities and money market .... .....
.....
Allowance for Joan losses
Other ................. ........ ..

.....

Total equity

Off-balance-sheet
Unused commiunents to lend 4
Securitizations outstanding 5
Derivatives (notional value. billions) 6
Income statement
Net income 7 .
Net interest income ...............
Provisions for loan losses ...... ....

Non-interest income ..............
.............

Non-interest expense
MEMO

Realized securities gains or losses ...
Ratios (percent)
Return on average equity ........ ....
Return on average assets ....... .....
Net interest margin 8
Efficiency ratio 7
Nonperforming assets to loans and
related assets ............ .. ...
Net charge-offs to average loans ......
Loans to deposits ....... ..... . .....
Regulatory capital ratios
Tier 1 risk-based ........ ..... ......
Total risk-based ............. ......
Leverage .................... .....

Footnotes appear on p. B 12.

Report on the Condition of the U.S. Banking Industry: Second Quarter; 2006

B 11

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

Account 1,10

2001

2002

2003

2004

2005

2005
Q4

2006

Balance sheet

.............. .........

1,277,090

1,401,227

1,527,308

1,686,798

1,846,496

1,686,798

1,717,675

1,767,744

1,816,198

1,846,496

1,533,908

1,559,106

Loans .................... .......

812,179
357,366
-11,727
119,273

875,986
406,771
-13,021
131,491

952,217
446.237
-13.852
142,706

1,081.393
470,040
-14,533
149.898

1,222,260
465,922
-t5,343
173.656

1.081,393
470.040
-14,533
149.898

1.108,765
468,314
-14.654
155,251

1,155,948
463,460
-14.901
163.236

1,194,967
467.758
-15.253
168.725

1,222,260
465,922
-15.343
173,656

1,015.838
386,457
-12,704
144.318

1,044.850
375.857
-12.897
151,296

Total liabilities ......... ... .. ... ... 1,162,232

1,271,919

1,387,290

1,531,062

1,678,565

1,531,062

1,562,077

1,606,086

1,651,157

1,678,565

1,393,756

1,416,917

Deposits .............. .. .... .... ..
Borrowings ........... ... ........

975,514
161,450
25,267

1,064,802
176,225
30,892

1,150,648
202,893
33.748

1.262.006
228,755
40,302

1.396,880
235,401
46,284

1.262.006
228,755
40,302

1.291,162
228,424
42,491

1,325,494
238,313
42,280

1,370,318
234.934
45.905

1,396,880
235,401
46,284

1,143,429
206,535
43,792

1.158.982
213.895
44,040

.. . ......

114,859

129,308

140,018

155,737

167,930

155,737

155,597

161,658

165,040

167,930

140,152

142,189

229.887
4.567
89

247,466
4,358
88

276,769
4.159
94

319,277
2.877
144

367,264
2.885
103

319,277
2,877
144

332.445
2,792
98

345.663
2.667
99

359,746
2.697
100

367.264
2,885
103

329,823
2,844
86

336,227
2,806
88

13.659
45.676
4,461
22,118
43,828

16,469
50,475
5.058
24,282
46,390

17.626
52,266
4,262
27,311
50.672

19,244
56.545
3,179
25,934
52,661

21,306
62,698
3,191
26,410
56.323

4.831
14,723
763
6,299
13,681

5,154
15,049
684
6.569
13,783

5,433
15,484
735
6,646
13,845

5.617
16,116
892
6.930
14.325

5.102
16,049
881
6,264
14,369

4,472
13.294
578
6,063
12,252

4,774
13.443
631
6,224
12,241

727

651

962

531

-3

-190

12.54
1.13
4.20
63.75

13.55
1.25
4.25
61.05

13.08
1.20
3.97
62.93

13.16
1.20
3.93
62.68

13.24
1.21
3.97
61.89

12.60
1.16
3.94
64.01

13.25
1.22
3.97
62.59

13.70
1.25
3.98
61.76

13.74
1.26
4.00
61.54

12.29
1.12
3.93
62.74

12.91
1.19
3.94
61.98

13.52
1.24
3.89
61.54

.99
.44
83.26

1.04
.46
82.27

.99
.39
82.75

.77
.25
85.69

.69
.20
87.50

.77
.30
85.69

.75
.17
85.87

.71
.19
87.21

.69
.21
87.20

.69
.24
87.50

.67
.15
88.84

.65
.18
90.15

Regulatory capital ratios
TIer 1 risk-based .......... .........
Total risk-based ........... .........
Leverage ...... ..... . ........ .....

12.24
13.80
8.78

12.47
14.08
8.91

12.61
14.30
9.07

12.45
14.07
9.15

12.17
13.72
9.19

12.45
14.07
9.15

12.32
13.92
9.12

12.16
13.72
9.12

12.12
13.67
9.15

12.17
13.72
9.19

11.93
13.50
9.17

11.83
13.42
9.16

Number of other reporting bank holding
companies .............

1,777

1,914

2,069

2.197

2,225

2.233

2,213

950

942

Total assets

Securities and money market ... ......
Allowance for loan losses ... .... ....

Other. .....

.. .., . .....

. ...

Other 3

Total equity ........ .....

Off·balance-sheet
Unused commitments to lend 4
Securitizations outstanding 5
Derivatives (notional value, billions) 6
Income stafemrnt

Net income 7
Net interest income ....... ........
Provisions for loan losses .... .....
Non-interest income ........... ...
Non-interest expense .............
MEMO

Realized securities gains or losses ...

Ratios (percent)
Return on average equity ............
Return on average assets .........
Net interest margin 8
Efficiency ratio 7
Nonperfonning assets to loans and
related assets ......... .........
Net charge-offs to average loans ......
Loans to deposits ...... ... .........

...

.......

Footnotes appear on p. B 12.

2.213

2,239

B12

Federal Reserve Bulletin 0 June 2007

Nonfinancial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2004
2001

Account

2002

2003

2004

2005

2005
Q4

Bank holding companies that qualify as
financial holding companies 11, 12
Domestic
Number ........ .. ... .........
388
Total assets
.- ..... - .. ...... . . 5,436.743

2006

434
5.917,109

451
6,605.686

472
7,456,569

461
8,184,677

472
7,456,569

470
7,643,649

468
7,898,330

471
8.068,742

461
8,184,677

289
8,468,806

288
8,721,000

10
621.442

II
616,254

12
710,441

14
1,376,333

14
1.561,580

14
1,376.333

15
1.526,168

15
1,516,408

15
1.625,281

14
1.561,580

14
1,689,001

14
1.710,637

Foreign-owned 13

Number .... ............. ......
Total assets ...... ' " ..... ....

Total U.S. commercial bank

asseu. 14

6,416,080

6,897,215

7,397,903

8,207,714

8,994,064

8,207,714

8,544,414

8,676,294

8,857,369

8,994,071

9,286,848

9,554,923

By ownership
5,942,670
Reporting bank holding companies
Other bank holding companies .....
230.467
242,944
Independent banks ..............

6,429,231
227,016
240,968

6,941,106
219,222
237,575

7,785,988
209,115
212,611

8,439.788
220,133
334,143

7,785,988
209,115
212,611

8,011,264
204,891
328,259

8.138,007
206,367
331,920

8,312.461
211,840
333,067

8,439,915
220,143
334,013

8,203,720
740.544
342,584

8,595,385
609,203
350,335

Assets associated with nonbanking
activities 12" 15
426,462
Insurance ................. ......
Securities broker-dealers .... ......
n.a.
Thrift institutions ........ .... ......
91.170
Foreign nonbank institutions
138,977
Other nonbank institutions ... ...... 1,674,267

372,405
630.851
107,422
145,344
561,710

437,503
656,775
133.056
170,630
678,086

579,lll
892,571
191,201
216,758
954,845

602,258
J.J70.659
220,819
242,408
969,255

579,111
892.571
191,201
216,758
954.845

587,000
J.J68,482
194,267
219,829
886,022

598,669
J.J65,688
201,317
231,566
910,770

601,076
1,231,410
210,811
242,333
954,085

602,258
1.170.659
220,819
242,408
969,255

527,193
1,314.092
231,207
268,848
927,934

528,828
1,298.790
243,863
267,345
1,018,219

Number of bank holding companies
engaged in nonbanking activities 12, 15
Insurance ...... ..... ......... . ...
Securities broker--dealers ............
Thrift institutions ......... ... ......
Foreign nonbank institutions .... .....
Other nonbank institutions ..... ......

143
O.a.
38
32
743

47
32
37
880

102
50
27
42
1.042

97
44
27
39
1,026

97
46
26
35
845

97
44
27
39
1,026

97
43
27
38
926

99
45
27
37
885

98
46
25
38
875

97
46
26
35
845

81
41
22
33
509

82
41
24
34
496

Foreign·owned bank holding
companies 13
Number ..........................
Total assets ..... ..................

23
764,411

26
762,901

27
934,085

29
1,537,208

29
1,747,797

29
1,537,208

29
1,690,119

30
1,698,197

30
1,811,451

29
1,747.797

24
1,822,367

24
1,847,094

1,985.981

1,992,559

2.034,358

2,162,179

2,241,112

2,162,179

2,168,165

2,199,910

2,221,004

2,241,112

2,150,153

2,173,503

Assets of fifty large bank holding
companies 9, 16
Fixed panel (from table 2) .. _. ...... 5,896,783
Fifty large as of reporting date .....
5,732,621
Percent of all reporting
bank holding companies .. ......
77

6.256.824
6,032,000

6,926.108
6,666,488

7,963,241
7,940,955

8,645,888
8,631.229

7.963,241
7,940,955

8,226.990
8,206,462

8,440,266
8,417,847

8.515,432
8,489,633

8.645,888
8,631.229

8,970,662
8.970,662

9,282,941
9,282,941

Employees of reporting bank holding
companies (full-time equivalent)

NOTE: All data are as of the most recent period shown. The historical figures may not
match tho~e 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. For quarters beginning on or after March 31, 2006, this report covers top-tier bank:
holding companies with consolidaled assets of at least $500 million and some smaller toptier finns that filed the FR Y-9C as required by Federal Reserve Banks for supervisory porposes or on a voluntary basis. Before March 31, 2006. aggregate data refer to top-tier bank
holding companies with consolidated assets of at least $150 million and smaller multibank
holding companies with debt outstanding to the general public or engaged in certain nonbanking activities.
2. Data for all reporting bank holding companies and the fifty large bank holding compa·
nies 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 iofonnation
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 applied when calculating the contractual payments. The wtal 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 fraclion 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 efTlciency 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 bolding
companies. because commercial banking operations represent only a small part of their consolidated operations.
11. Excludes 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 GrammLeacb-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 wp-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--<iealer subsidiaries engaged in activities pursuant to the Gramm~Leach-Bliley Act, as reported on schedule HC-M of the
FR Y-9C repon. Data for insurance activities are all insurance-related assets held by the
bank bolding 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 in~
surance activities under the Gramm-Leach~Bliley Act.
16. 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 Repons FRY-9C and FR Y-9LP. Federal Reserve National Information Center. and published financial reports.

Legal Developments

March 2007

Legal Developments: Fourth Quarter, 2006
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY ACT

AFNB Holdings, Inc.
Houston, Texas
Order Approving the Formation of a Bank
Holding Company
AFNB Holdings, Inc. ("Holdings") has requested the
Board's approval under section 3 of the Bank Holding
Company Act ("BHC Act")1 to become a bank holding
company and acquire all the voting shares of American
First National Bank ("AFNB"), also of Houston.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(71 Federal Register 57,511 (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.
Holdings is a newly organized corporation formed to
acquire AFNB. AFNB, with total assets of approximately
$355 million, is the 102nd largest insured depository
institution in Texas, controlling deposits of approximately
$313 million, which represent less than I percent of the
total amount of deposits of insured depository institutions
in the state. 2
COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving any proposal that would result in a monopoly or
that 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
anticompetitive effects of the proposal are clearly out1. 12 V.S.c. § 1842.
2. Asset data are as of September 30, 2006. Deposit data and state
rankings are as of June 20, 2006, and reflect merger activity through
December 6, 2006. In this context. insured depository institutions
include commercial banks, savings banks, and savings associations.

weighed in the public interest by its probable effect in
meeting the convenience and needs of the community to be
served. 3
Holdings does not currently control a depository institution. Based on all the facts of record, the Board concludes
that consummation of the proposal would have no significantly adverse effect on competition or on the concentration of banking resources in any relevant 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
companies and depository institutions involved in a 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
confidential supervisory information from the Office of the
Comptroller of the Currency ("OCC"), the primary federal
supervisor of AFNB, publicly reported and other financial
information, information provided by Holdings, and public
comments received on the proposal.
In evaluating financial factors in proposals involving
newly formed bank holding companies, the Board reviews
the financial condition of both the applicant and the target
depository institution. 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.
The Board has carefully considered the financial factors
of the proposal. AFNB currently is well capitalized and
would remain so on consummation of the proposal. The
proposed transaction is structured as a share exchange.
Based on its review of the record, the Board finds that
Holdings has sufficient financial resources to effect the
proposal.
The Board also has considered the managerial resources
of the organizations involved. 4 The Board has reviewed the
3. See 12 V.S.c. § 1842(c)(l).
4. Three commenters, including two minority shareholders of
AFNB, questioned the competence and integrity of the current chairman of the board of AFNB, who also would serve as chairman of
Holdings on consummation of the proposal. These commenters alleged
that the chairman previously demonstrated poor performance and
breached fiduciary duties while serving as chairman and chief executive officer of Texas First National Bank ("TFNB"), Houston. The
Board has carefully reviewed publicly available information as well as

Federal Reserve Bulletin 0 March 2007

examination record of AFNB, including assessments of its
management, risk-management systems, and operations. In
addition, the Board has considered its supervisory experiences and those of the OCC with AFNB and its record of
compliance with applicable banking laws and anti-moneylaundering laws. The Board has also considered the supervisory experiences of the OCC with TFNB, which was
previously headed by members of the current management
of AFNB. In addition, the Board has considered Holdings'
plans for implementing the proposal, including the proposed management after consummation. 5
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.

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 Dallas, acting
pursuant to delegated authority.
By order of the Board of Governors, effective December 18, 2006.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Bies, Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on proposals under section 3 of the BHC Act, the
Board must also 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"). 6 The Board has considered carefully all the
facts of record, including reports of examination of the
CRA record of AFNB, information provided by Holdings,
and confidential supervisory information. AFNB received a
"Satisfactory" rating at its most recent CRA performance
evaluation by the OCC, as of January 20, 2004. Based on
all the facts of record, the Board concludes that considerations relating to the convenience and needs factor and the
CRA performance record of AFNB are consistent with
approval.

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act and other
applicable statutes. The Board's approval is specifically
conditioned on compliance by Holdings with the conditions
in this order and the commitments made to the Board in
confidential supervisory infonnation about AFNB and TFNB in assessing the financial and managerial resources of AFNB and Holdings. In
addition, the Board has consulted with the OCC, also the primary
federal supervisor of TFNB, about the record of the current chairman
of AFNB, including his service as chairman and chief executive officer
ofTFNB.
5. Two commenters expressed concern that the bylaws of Holdings
would not permit cumulative voting and would thereby reduce the
ability of AFNB's minority shareholders to elect directors and exert
influence on the management or policies of AFNB. The Board notes
that changes in the powers of common stock 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).
6.12 U.S.C. §2901 et seq.

Deputy Secretary of the Board

Capital One Financial Corporation
McLean, Virginia
Order Approving the Merger of Bank
Holding Companies
Capital One Financial Corporation ("Capital One"), a
financial holding company within the meaning of the Bank
Holding Company Act ("BHC Act"), has requested the
Board's approval under section 3 of the BHC Act! to merge
with North Fork Bancorporation, Inc. ("North Fork"),
Melville, New York, and acquire its subsidiary banks,
North Fork Bank ("NF Bank"), Mattituck, New York, and
Superior Savings of New England, National Association
("Superior Savings"), Branford, Connecticut,2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(71 Federal Register 29,627 (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. 3
Capital One, with total consolidated assets of approximately $89.5 billion, is the 36th largest depository organization in the United States,4 controlling deposits of approximately $32.6 billion, which represent less than 1 percent of
the total amount of deposits of insured depository institutions in the United States. Capital One owns three subsidI. 12 U.S.c. § 1842. Capital One and North Fork also have
requested the Board's approval to hold and exercise options to
purchase up to 19.9 percent of each other's common stock. Both
options would expire on consummation of the proposal.
2. North Fork engages in asset management, securities brokerage,
and the sale of investment products through its nonbank subsidiaries.
Capital One proposes to acquire those nonbank subsidiaries in accordance with section 4(k) of the BHC Act.
3. The Board received four comments expressing concerns about
various aspects of the proposal.
4. Asset and national ranking and deposit data are as of June 30,
2006.

Legal Developments: Fourth Quarter, 2006

iary depository institutions that operate in Louisiana, Texas,
and Virginia5 and engages in numerous nonbanking activities that are permissible under the BRC Act.
North Fork, with total consolidated assets of approximately $59.4 billion, is the 41st largest depository organization in the United States, controlling deposits of $37.2 billion. North Fork owns two subsidiary depository institutions
that operate in New York, New Jersey, and Connecticut. In
New York, North Fork is the fifth largest depository
organization, controlling deposits of $33.2 billion. North
Fork is the 15th largest depository organization in Connecticut, controlling deposits of $799.9 million, and the
13th largest depository organization in New Jersey, controlling deposits of $3.2 billion. 6
On consummation of this proposal, Capital One would
become the 24th largest depository organization in the
United States, with total consolidated assets of approximately $154 billion (including pro forma accounting adjustments). Capital One would control deposits of approximately $69.8 billion, which represent less than 2 percent of
the total amount of deposits of insured depository institutions in the United States.

INTERSTATE ANALYSIS
Section 3(d) of the BRC 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 BRC Act, the home state of
Capital One is Virginia,? and North Fork is located in
New York, New Jersey, and Connecticut. 8
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 BRC Act are met in this case. 9 In light of all
5. Capital One owns Capital One Bank, Glen Allen, and Capital
One, F.S.B. ("Capital One FSB"). McLean, both in Virginia. Capital
One also owns Capital One, National Association ("CONA"), New Orleans, Louisiana, fonnedy known as Hibernia National Bank, which
Capital One acquired in connection with its merger with Hibernia
Corporation in 2005 ("Hibernia Proposal"). See Capital One Financial
Corporation, 91 Federal Reserve Bulletin 512 (2005) ("Hibernia
Order").
6. State ranking and deposit data are as of June 30, 2006, and reflect
merger activity through July 7, 2006. In this context, insured depository institutions include 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 I, 1966, or the date on which the company became a bank
holding company, whichever is later (12 V.S.c. § I 841(0)(4)(C).
8. 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 V.S.c. §§ 1841(0)(4)-(7) and I 842(d)(1)(A) and
(d)(2)(B».
9. 12 V.S.c. §§ 1842(d)(1)(A) and (B), 1842(d)(2)(A) and (B).
Capital One is adequately capitalized and adequately managed, as
defined by applicable law. NF Bank and Superior Savings have been in
existence and operated for the minimum period of time required by
applicable state law (five years). On consummation of the proposal,
Capital One would control less than 10 percent of the total amount of

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

COMPETITIVE CONSIDERATIONS
Section 3 of the BRC 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
BRC Act also prohibits the Board from approving a
proposed bank acquisition that would substantially lessen
competition in any relevant banking market, unless the
anticompetitive effects of the proposal are clearly outweighed in the public interest by its probable effect in
meeting the convenience and needs of the community to be
served. 10
Capital One and North Fork do not compete directly in
any relevant banking market. Based on all the facts of
record, the Board concludes that consummation of the
proposal would have no significantly adverse effect on
competition or on the concentration of banking resources in
any relevant banking market. Accordingly, the Board has
determined that competitive factors are consistent with
approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERA TIONS
Section 3 of the BRC Act requires the Board to consider the
financial and managerial resources and future prospects of
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 from the primary federal and state
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, information provided by Capital One, 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 depository institutions and significant
nonbanking operations. I I In this evaluation, the Board
deposits of insured depository institutions in the Vnited States and less
than 30 percent of the total amount of deposits of insured depository
institutions in New York, New Jersey, and Connecticut. All other
requirements of section 3(d) of the BHC Act would be met on
consummation of the proposal.
10. 12 V.S.C. § I 842(c)(l).
II. Two commenters criticized the relationships of Capital One and
North Fork with 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. The
Board considered the relationships of Capital One and Hibernia
National Bank (now CONA) with these types of providers in the
Hibernia Order and hereby readopts and reaffinns those findings and
decisions herein. Capital One represented that it has made no significant changes to the manner in which Capital One and its affiliates

Federal Reserve Bulletin 0 March 2007

considers a variety of infonnation, including capital adequacy, asset quality, and earnings perfonnance. 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
of the proposal. Capital One, all its subsidiary depository
institutions, and all the subsidiary depository institutions of
North Fork currently are well capitalized and would remain
so on consummation of the proposal. Based on its review of
the record, the Board also finds that Capital One has
sufficient financial resources to effect the proposal.I 2 The
proposed transaction is structured as a partial share exchange and partial cash purchase of shares. Capital One
will use existing resources and the proceeds of long-term
debt to fund the cash purchase of shares.
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 Capital One, North Fork, 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 agencies with
the organizations and their records of compliance with
applicable banking law, including anti-money-Iaundering
laws. l3 The Board also has considered Capital One's plans
conduct their lending relationships with such providers since the
Hibernia Proposal. According to Capital One, NF Bank's MiddleMarket Lending Group provides banking services to licensed checkcashing businesses in New York and New Jersey, and NF Bank's Small
Business Financial Services Group extends a small number of loans to
nontraditional providers of financial services. Capital One represented
that NF Bank does not play any role in the lending practices or
credit-review processes of these firms. In addition, North Fork owns a
check-cashing business licensed by and operated exclusively in
New York. The Board has consulted with the New York State Banking
Department on this check-cashing business.
12. A commenter requested that, in light of the compensation to be
received by certain North Fork executives in connection with the
proposal, the Board consider whether it has authority to evaluate the
appropriateness of compensation arrangements for executive officers
in connection with merger and acquisition transactions subject to the
BHC Act. The Board has taken the compensation arrangements for
North Fork's executives into account in evaluating this proposal under
the financial and managerial factors. As noted, Capital One and North
Fork would remain well capitalized on consummation of the proposal.
In addition, information about these arrangements was disclosed to the
shareholders of Capital One and North Fork, and they approved the
proposed transactions.
13. One commenter opposed the proposal in part based on a lawsuit
and investigations undertaken by the Attorneys General of Minnesota
and West Virginia in their respective states relating to Capital One's
marketing of its credit cards. The Board considered this matter in the
Hibernia Order and has reviewed additional information with respect
to these actions, including information provided by Capital One and
confidential supervisory information. The Board notes that in February
2006, Capital One and the state of Minnesota entered into a Consent
Judgment, which by its terms constituted a full and final resolution of
all claims brought by the state and was not deemed an admission of

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 must also 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").14 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.1 5
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of the subsidiary-insured depository institutions of Capital One and North Fork, data reported by
Capital One and North Fork under the Home Mortgage
Disclosure Act ("HMDA"),16 other infonnation provided
by Capital One, confidential supervisory infonnation, and
public comments received on the proposal.
Two commenters opposed the proposal or expressed
concern based on the levels of lending by the subsidiary
depository institutions of Capital One and North Fork to
LMI communities and the institutions' records of serving
those communities through community development grants
and loans. One of these commenters was particularly
concerned that the acquisition of North Fork would adversely affect LMI residents in New York City if North
Fork's current CRA programs were altered. 17 The comliability by Capital One. According to the terms of the Consent
Judgment, Capital One agreed not to distribute certain advertisements
in Minnesota for a period of 18 months after the date of the Consent
Judgment and to pay a total of $749,999, to be divided equally among
Minnesota-based chapters of the Legal Aid Society, the Minnesota
Association of Community Organizations for Reform Now, and the
state of Minnesota. The Board will continue to monitor the investigation by the Attorney General of West Virginia and notes that neither
Board action on this proposal nor any supervisory action by the Board
under the BHC Act would interfere with the Attorney General's review
or with the ability of a court to resolve any litigation pertaining to this
matter.
14. 12 U.S.c. § 2901 et seq.
15.12 U.S.c. §2903.
16.12 U.S.C. §2801 et seq.
17. The commenter made specific recommendations for community
development programs for Capital One and its subsidiary bank after
consummation of this merger that were modeled on pledges previously
made by North Fork. Another commenter expressed concern that
Capital One had not made community development lending commit-

Legal Developments: Fourth Quarter, 2006

menters also alleged, based primarily on 2004 and 2005
HMDA data, that Capital One and North Fork engaged in
discriminatory treatment of minority individuals in the
home mortgage lending operations of their subsidiary
depository institutions.

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 of both organizations. An institution's most recent
CRA performance evaluation is a particularly important
consideration in the applications process because it represents a detailed, on-site evaluation of the institution's
overall record of performance under the CRA by its
appropriate federal supervisor. 18
CONA, Capital One's largest subsidiary depository institution as measured by total deposits, received a "satisfactory" rating at its most recent CRA performance evaluation
by the Office of the Comptroller of the Currency ("OCC"),
as of January 12, 2004. Capital One FSB and Capital One
Bank both received "outstanding" ratings at their most
recent CRA performance evaluations. 19 NF Bank received
an "outstanding" rating from the Federal Deposit Insurance
Corporation ("FDIC"), as of August 19,2002, and Superior
Savings received a "satisfactory" rating from the OCC, as
of August 1, 2005. Capital One has indicated that it does
not expect the proposed merger to result in the discontinuation of any products or services offered by North Fork,
except to the extent that Capital One offers a comparable
product or service. 20

ments specific to New Jersey and to specific types of organizations.
The Board notes that the CRA does not require depository institutions
to engage in particular kinds of lending or in lending to specific types
of organizations. Moreover, the Board views the enforceability of
third-party pledges, initiatives, and agreements as matters outside the
CRA. The Board has explained that an applicant must demonstrate a
satisfactory record of performance under the CRA without reliance on
plans or commitments for future action. In addition, the Board has
consistently found that neither the CRA nor the federal banking
agencies' CRA regulations require depository institutions to make
pledges or enter into commitments or agreements with any organization. See, e.g., Wachovia Corporation, 91 Federal Reserve Bulletin 77
(2005). 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.
18. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,640 (2001).
19. Capital One FSB's and Capital One Bank's most recent evaluations were both as of July 18,2005, by the Office of Thrift Supervision

("OTS") and the Federal Reserve Bank of Richmond ("Reserve
Bank"), respectively.
20. A commenter expressed concern that Capital One has limited
experience in branch services and mortgage lending. As noted above,
Capital One intends to maintain the current services provided by North
Fork. In addition, Capital One stated that it intends to retain key
management personnel at North Fork's branches.

B. CRA Performance of Capital One
1. CONA. CONA received an overall "satisfactory" CRA
performance rating at its January 2004 evaluation. 21 The
Board previously considered the CRA performance of
CONA in the Hibernia Order and hereby reaffirms and
readopts its findings and decisions herein. Capital One
represented that it has retained or expanded all CRA
programs in place at CONA since it acquired the bank. As
noted in the Hibernia Order, examiners commended CONA's
responsiveness to the credit needs of its assessment areas,
particularly in providing loan products to small businesses.
Examiners noted CONA's good overall distribution of
loans to borrowers of different income levels, adequate
levels of community development lending and investment,
and accessible service-delivery systems in its assessment
areas. Examiners also commended its excellent community
development services.
Since the 2004 CRA evaluation, Capital One represented
that CONA has originated more than $300 million in
community development loans, made or committed to
make qualified investments totaling $34 million, and provided $1.8 million in community development grants. 22

2. Capital One FSB. As noted, Capital One FSB received
an overall "outstanding" CRA performance rating at its
July 2005 evaluation. 23 The institution received a "high
satisfactory" rating under the lending and services tests and
an "outstanding" rating under the investment test in this
evaluation.
Examiners noted that Capital One FSB's geographic
distribution of consumer loans was reasonable in relation to
the demographic characteristics of its assessment area and
that the geographic distribution of mortgage loans and
small loans to businesses was commensurate with both
demographic and peer lending data. According to examiners, the percentage of consumer installment loans made to
LMI borrowers in the institution's assessment area exceeded the percentage of LMI families residing in that area.
Capital One FSB's distribution of consumer credit cards to
borrowers of different income levels also was reasonable
compared with the demographic data. In addition, examiners noted favorably the institution's special installmentloan product that was primarily used by LMI borrowers. 24
21. The evaluation period was from October 18, 1999, through
January 12, 2004, except for the lending test, which was evaluated
from January 1,2000, through December 31, 2002.
22. These amounts were provided from January 31, 2004, through
March 31, 2006. In addition, CONA provided special assistance to the
communities affected by Hurricane Katrina through charitable donations, fundraising coordination, grants of payment deferrals for business and individual customers, and extensions of lines of credit on
favorable terms.
23. The evaluation period was from April I, 2003, through June 30,
2005, except for the review of retail lending, which was evaluated
from January 1,2003, through March 31,2005. Capital One FSB is a
nationwide provider of consumer and commercial lending and offers
consumer deposit products.
24. This product featured a low minimum loan amount of $1,000
and flexible underwriting requirements.

Federal Reserve Bulletin 0 March 2007

Examiners commended Capital One FSB for increasing
its community development lending, which totaled approximately $15.8 million during the most recent evaluation
period. Examiners also noted the innovative nature of
Capital One FSB's lending arrangements with community
development fund initiatives, affordable housing organizations, and other nonprofit organizations that served LMI
individuals.
During the evaluation period, Capital One FSB's qualified investments totaled approximately $119.4 million and
included purchases of qualified mortgage-backed securities
and low-income-housing tax credits, investments in small
business investment corporations, and deposits in community development fund initiatives. In addition, examiners
noted that Capital One FSB provided approximately
$8.6 million in financial grants during the assessment
period.
Although Capital One FSB has no public offices, examiners noted that it provided customer-service call centers
with extended hours and issued ATM cards to customers to
allow them access to their money market accounts. Examiners also commended Capital One FSB for the technical
assistance and financial advice it provided to a variety of
nonprofit organizations in its assessment area and other
communities in which Capital One FSB operated.

3. Capital One Bank. Capital One Bank is engaged primarily in credit card operations and has been designated as a
limited-purpose bank, which is evaluated under the community development test for CRA performance. 25 In assigning
a rating to a limited-purpose bank, examiners may consider
the bank's community development loans, investments, and
services nationwide rather than only in the bank's assessment area. In rating Capital One Bank "outstanding" at its
July 2005 evaluation, Reserve Bank examiners noted that
Capital One Bank's nationwide qualified investments increased from $82 million to $128 million during the
evaluation period. 26 These investments included investments in low-income-housing tax credit projects, entities
that support microenterprise development, and bonds issued
by the Virginia Housing Development Authority.
During the evaluation period, Capital One Bank contributed more than $6.5 million to a variety of organizations
that primarily assist LMI individuals or areas or support
microenterprise development. Examiners also noted that
Capital One Bank provided technical assistance and financial expertise to organizations dedicated to community
development, including affordable housing, social services,
and small business development.

25. See 12 CFR 228.25(a).
26. The evaluation period was from April 28, 2003, through
June 30, 2005.

C. CRA Performance of North Fork
1. NF Bank. As noted, NF Bank received an overall
"outstanding" rating in its August 2002 CRA evaluation. 27
Under the lending test, NF Bank received a rating of
"outstanding," and examiners commended the bank's level
of lending activity as reflecting an excellent responsiveness
to the credit needs of its assessment area. Examiners found
NF Bank's overall distribution of loans to borrowers of
different income levels to be very good, particularly its
home purchase loans. During the evaluation period, NF
Bank's percentages of home purchase loans exceeded the
percentages for lenders in the aggregate ("aggregate lenders").28 Similarly, the percentage of its home purchase
loans to LMI geographies exceeded the percentages for
aggregate lenders during the evaluation period. Examiners
also noted that the geographic distribution of the bank's
loans to small businesses was excellent.29
Since its most recent evaluation, NF Bank has remained
an active mortgage lender in its assessment area. For
example, Capital One represented that NF Bank and its
mortgage subsidiary, GreenPoint Mortgage Funding, Inc.
("GreenPoint"), Novato, California, closed more than
$525 million of multifamily housing loans in its assessment
area in 2004 and $534 million of such loans in 2005.
Capital One also represented that NF Bank's percentages of
home purchase loans and refinance loans originated in LMI
geographies in New Jersey exceeded the percentages for
aggregate lenders in 2004 and 2005. In addition, Capital
One stated that NF Bank and GreenPoint, on a combined
basis, made more than $1.3 billion in small business loans
in the New York and New Jersey assessment area in 2004.
Examiners commended NF Bank's leadership role in
making community development loans that respond to the
credit needs of economically disadvantaged areas, individuals, and small businesses through its community investment efforts and innovative and flexible loan practices.
During the evaluation period, NF Bank made community
development loans totaling $83.4 million to affordable
housing projects, nursing homes serving elderly residents
in LMI neighborhoods, and other community development
groups. NF Bank also originated or purchased $345 million
in affordable multifamily housing loans for properties in
LMI neighborhoods.
NF Bank has continued its community development
lending since its most recent evaluation. 30 Capital One

27. The evaluation period was October 1, 1999, through June 30,
2002, with the exception of the lending test, for which the evaluation
period was January 1, 2000, through June 3D, 2002.
28. The lending data of the aggregate lenders represent the cumulative lending for all financial institutions that reported HMDA data in a
given market.
29. For purposes of the evaluation, small businesses are businesses
with gross annual revenues of $1 million or less.
30. One commenter expressed concern about NF Bank's CRA
programs in New Jersey. NF Bank entered the New Jersey market by
acquiring The Trust Company of New Jersey ("Trust Company") in
May 2004. NF Bank's CRA performance has not been evaluated since

Legal Developments: Fourth Quarter, 2006

stated that NF Bank provided $650 million in general
community development loans and $450 million in affordable multifamily housing loans in 2004 and 2005. Capital
One also represented that NF Bank has approved more than
$6.8 million in financing for affordable housing in New Jersey since 2004.
In the 2002 CRA evaluation, NF Bank received an
"outstanding" rating under the investment test, and examiners commended NF Bank for taking a leadership role in
investing in innovative and complex qualified investments
in its assessment area. Examiners reported that during the
evaluation period, NF Bank made community development
investments in its New York assessment area totaling
$66.1 million, primarily in affordable housing initiatives.
NF Bank also donated $1.2 million to numerous community development organizations engaged in affordable housing development, social services, and neighborhood revitalization efforts in its assessment area.
Capital One represented that NF Bank made $86.3 million in qualified community development investments, and
that NF Bank and GreenPoint also made approximately
$5 million in community development grants on a combined basis, in 2004 and 2005. 31 These community development investments and grants aided a broad range of
community and housing development groups in its assessment area, including a $10 million investment in housing
revenue bonds issued by the New Jersey State Housing
Mortgage Finance Agency for development of affordable
housing for LMI families in the state.
In the 2002 CRA evaluation, NF Bank also received an
"outstanding" rating for the service test. Examiners noted
that NF Bank's service-delivery systems were accessible to
geographies and individuals of different income levels
throughout its assessment areas and that its branch network
was well-dispersed geographically and conducive to banking by LMI individuals. 32 In addition, examiners commended the bank for having an "excellent" level of innovative community development services. Examiners also
noted that the bank's outreach efforts included extensive
financial literacy programs in LMI areas and small business
seminars providing financial and technical assistance.
the acquisition. Capital One represented that since North Fork acquired
Trust Company, North Fork has assigned employees familiar with
community development lending to identify and underwrite those
types of loans in New Jersey, and North Fork staff has participated in
outreach efforts designed to promote homeownership opportunities for
LMI borrowers and in LMI communities.
31. A commenter expressed concern that NF Bank engaged in less
philanthropic activities than other local financial institutions and that
such activities were not focused on community priorities. The Board
notes that neither the CRA nor the federal banking agencies' implementing rules require that institutions make charitable donations.
32. Capital One also stated that North Fork has hired New Jerseybased employees and senior executive officers with substantial experience in the New Jersey market to manage the bank's retail and lending
operations in the state and that, based on reviews conducted by
independent companies of customer service in those branches, NF
Bank's New Jersey branches consistently have received excellent
reports for branch service.

2. Superior Savings. Superior Savings received an overall
"satisfactory" rating in its August 2005 evaluation. 33 Examiners concluded that the bank had an adequate level of
community development lending, services, and qualified
investments in its assessment areas and an adequate responsiveness to the credit and community development needs in
its assessment areas.
During the 2002 evaluation period, Superior Savings
extended $13.7 million in community development loans
and $14.7 million in qualified community investments that
were primarily related to affordable housing and neighborhood revitalization initiatives in LMI areas. Superior Savings engaged in various community development programs
in its assessment areas, particularly in the Bronx borough
of New York City, including financial literacy seminars
provided by Superior Savings' staff at local charitable
institutions and schools. Although Superior Savings employed a telemarketing business strategy, examiners noted
that it maintained one of its two branches in the East
Tremont neighborhood, an underserved LMI area of the
Bronx.
D. HMDA and Fair Lending Record
The Board has carefully considered the lending records of
Capital One and North Fork in light of public comment
received on the proposal. A commenter alleged, based on
2004 HMDA data, that Capital One FSB had made highercost loans 34 more frequently to African Americans and
Hispanics than to nonminority borrowers nationwide. 35
Another commenter asserted, based on 2005 HMDA data,
that a relatively high percentage of Capital One FSB's
home mortgage loans to African Americans were highercost loans. In addition, the commenter alleged that GreenPoint, a mortgage subsidiary of North Fork, made highercost loans nationwide more frequently to African Americans
than to nonminorities. 36 Further, the commenter asserted
that on a combined basis in the New York City Metropolitan Statistical Area ("MSA"), GreenPoint and NF Bank
made higher-cost loans more frequently to African Ameri-

33. The evaluation period was from September 30, 2002, through
July 31, 2005. Superior Savings focuses on offering its services
primarily through telemarketing and has been designated a wholesale
institution by the OCC for CRA purposes. Superior Savings does not
originate small business loans.
34. Beginning January I, 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).
35. The commenter also alleged, on the basis of 2005 HMDA data,
that GreenPoint made a high percentage of higher-cost loans to
African-American borrowers in Newark, New Jersey.
36. The commenter also contended that NF Bank extended an
insufficient number of home mortgage loans to African-American and
Hispanic borrowers in light of the demographic profile of its lending
areas.

Federal Reserve Bulletin 0 March 2007

cans than to nonminorities. 37 The Board has reviewed
HMDA data reported by Capital One FSB, NF Bank, and
GreenPoint. 38
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials among members of different racial and ethnic
groups in certain local areas, HDMA data provide an
insufficient basis by themselves on which to conclude
whether or not Capital One's subsidiary depository institutions, NF Bank, or GreenPoint are excluding or imposing
higher credit costs on any 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. 39 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 or ethnicity. 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 an on-site
evaluation of compliance with fair lending laws by Capital
One, North Fork, and their subsidiaries. The Board also has
consulted with the Reserve Bank, the OTS, the OCC, and
the FDIC about the fair-lending compliance records of
Capital One Bank, Capital One FSB, CONA, and NF Bank,
respectively.
The record, including confidential supervisory information, indicates that Capital One and North Fork have taken
steps to help ensure compliance with fair lending laws and
other consumer protection laws. eONA, NF Bank, and
GreenPoint each has a fair lending compliance program
that includes a second review of all loans marked for denial
and an annual fair-lending review of its mortgage portfolio
to determine whether there are any race- or ethnicityrelated disparities in loan underwriting. Throughout both
the Capital One and North Fork organizations, employees
are required to attend annual fair-lending training sessions.
In addition, Capital One stated that it intends to assimilate
North Fork's consumer compliance operations into its
37. The Board notes that NF Bank reported no higher-cost loans in
2005.
38. The Board has focused its analysis on the 2005 HMDA data
reported nationwide by Capital One FSB, NF Bank, and GreenPoint
and by GreenPoint in the New York City and Newark, New Jersey
MSAs.
39. 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 real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

consolidated compliance function and that the resultant
organization will use best practices from both Capital One
and North Fork to ensure that it maintains sound internal
controls to promote compliance. As part of this integration,
Capital One intends to provide ongoing role-based training
to all its employees to ensure that they are well prepared to
carry out their individual responsibilities in accordance
with applicable consumer protection laws and regulations.
The Board also has considered the HMDA data in light
of other information, including the programs described
above and the overall performance records of the subsidiary banks of Capital One and North Fork under the CRA.
These established efforts demonstrate that the institutions
are active in helping to meet the credit needs of their entire
communities.
E. Conclusion on Convenience and Needs and CRA
Performance
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 the applicant, comments received on the proposal, and confidential
supervisory information. Capital One represented that its
national presence and financial and managerial resources
will enhance the ability of NF Bank and Superior Savings
to serve their customers and broaden their geographic reach
and that the branch networks of NF Bank and Superior
Savings will allow Capital One to offer a broader variety of
products and services to its customers. 4O 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. 41 In reaching its conclusion, the Board
40. One commenter expressed concern that Capital One would
reduce or change the products and services it currently offers to
customers in New Jersey. Capital One represented that it intends to
continue offering NF Bank's current products and services to New Jersey customers and that it may offer additional products not currently
offered by NF Bank.
41. 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 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 provide an opportunity for
testimony or other presentations (12 CFR 225.16(e), 262.3(i)(2),
262.25(d)). 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

Legal Developments: Fourth Quarter; 2006

has considered all the facts of record in light of the factors
that it is required to consider under the BRC Act and other
applicable statutes. The Board's approval is specifically
conditioned on compliance by Capital One with the conditions in this order and the commitments made to the Board
in connection with the application. 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 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 Reserve Bank, acting pursuant to
delegated authority.
By order of the Board of Governors, effective November 8,2006.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Bies, Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

Citizens Banking Corporation
Flint, Michigan
Order Approving the Acquisition of a Bank
Holding Company
Citizens Banking Corporation ("Citizens"), a bank holding
company within the meaning of the Bank Rolding Company Act ("BRC Act"), has requested the Board's approval
under section 3 of the BRC Act! to acquire Republic
Bancorp Inc. ("Republic"), Owosso, and its subsidiary
bank, Republic Bank, Lansing, both of Michigan.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 54,992 (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 BRC Act.
Citizens, with total consolidated assets of approximately
$7.8 billion, operates two subsidiary-insured depository
institutions with branches in Iowa, Michigan, and Wisconsin. Citizens' subsidiary banks are Citizens Bank, Flint,
Michigan, and F&M Bank-Iowa, Marshalltown, Iowa.
Citizens is the ninth largest depository organization in
considered carefully in acting on the proposal. The 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 is denied.
1. 12 U.S.C. § 1842.

Michigan, controlling deposits of $4.3 billion, which represent 2.8 percent of total deposits of insured depository
institutions in Michigan ("state deposits").2
Republic, with total consolidated assets of approximately $6.2 billion, operates one insured depository institution with branches in Michigan and Ohio. Republic is the
12th largest depository organization in Michigan, controlling deposits of approximately $2.7 billion, which represent
1.8 percent of state deposits.
On consummation of this proposal, and after accounting
for the proposed divestiture, Citizens would become the
seventh largest depository organization in Michigan, controlling deposits of approximately $6.8 billion, which represent 4.6 percent of state deposits.

COMPETITIVE CONSIDERATIONS
Section 3 of the BRC 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
2. Asset data are as of September 30, 2006; statewide deposit and
ranking data are as of June 30, 2006, and reflect merger activity
through October 18, 2006. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.
3. 12 U.S.C. § 1842.
4. 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. § I841(0)(4)(C)).
5. For purposes of section 3(d), the Board considers a bank to be
located in states in which the bank is chartered, headquartered, or
operates a branch. See 12 U.S.c. §§ 1841(0)(4)-(7), 1842(d)(1)(A),
and 1842 (d)(2)(B).
6. See 12 U.S.c. §§ 1842(d)(1)(A)-(B), (d)(2)(A)-(B). Citizens is
adequately capitalized and adequately managed, as defined by applicable law. Ohio does not require a bank to be in existence for a
minimum period of time before its acquisition. On consummation of
the proposal, Citizens 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 total deposits held in Ohio by
insured depository institutions. See Ohio Rev. Code 1115.05(B)(1)(a)
(30 percent limit on statewide deposits). All other requirements
pursuant to section 3(d) of the BHC Act would be met on consummation of the proposal.

CIO

Federal Reserve Bulletin 0 March 2007

business of banking in any relevant banking market. The
BHC Act 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.?
Citizens and Republic have subsidiary depository institutions that compete directly in six markets in Michigan:
Ann Arbor, Detroit, Flint, Jackson, Lansing, and Traverse
City. 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 banking markets, the relative shares of total deposits in
depository institutions in the markets ("market deposits")
controlled by Citizens and Republic,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 by Citizens to divest certain branches of
Republic in the Flint banking market.

A. Two Banking Markets Warranting Special
Scrutiny
Citizens and Republic compete directly in two banking
markets that warrant a detailed review: Flint and Jackson.
As discussed below, the post-consummation concentration
levels in the Flint market (after accounting for the proposed
divestiture) would exceed the thresholds of the DO} Guidelines, and Citizens' resulting market share in the market
would exceed 35 percent. The post-consummation concentration level in the Jackson market would exceed the DO}
Guidelines' thresholds.
The Board has considered carefully whether other factors either mitigate the competitive effects of the proposal
7. 12 U.S.c. § I842(c)(l).
8. Deposit and market-share data are as of June 30, 2006, adjusted to
reflect subsequent mergers and acquisitions through October 18, 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 001 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 ("001") 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.

or indicate that the proposal would have a significantly
adverse effect on competition in each market. The number
and strength of factors necessary to mitigate the competitive effects of a proposal depend on the size of the increase
and the resulting level of concentration in a banking
market. lO In both markets, the record indicates that the
proposal would not have a significantly adverse affect on
competition.
Flint Banking Market. In the Flint banking market,11
Citizens' subsidiary, Citizens Bank ("Citizens Bank"),
Flint, is the largest depository institution in the market,
controlling deposits of approximately $1.5 billion, which
represent approximately 35 percent of market deposits.
Republic Bank is the third largest depository institution in
the market, controlling deposits of approximately
$436.9 million, which represent approximately 10 percent
of market deposits.
To reduce the potential adverse effects on competition in
the Flint banking market, Citizens has committed to divest
seven branches of Republic, with at least $210 million in
deposits, to an out-of-market insured depository organization. 12 On consummation of the proposed merger, and after
accounting for the proposed divestiture, Citizens would
remain the largest depository institution in the market,
controlling deposits of approximately $1.8 billion, which
would represent 41 percent of market deposits. The HHI
would increase 350 points to 2502.
Several factors indicate that the increase in concentration in the Flint banking market, as measured by the HHI
and Citizens' market share, overstates the potential adverse
competitive effects of the proposal in the market. After
consummation, and taking into account the proposed divestiture, at least 17 other insured depository institutions
would continue to operate in the market. In addition,
community credit unions exert an important competitive
influence in the Flint banking market. 13 Eight community
10. See NationsBank Corp., 84 Federal Reserve Bulletin 129
(1998).
II. The Flint banking market is defined as Genesee County;
Hazelton, Venice, Vernon, and Bums townships in Shiawassee County;
Maple Grove, Taymouth, and Birch Run townships in Saginaw
County; and Arbela and Millington townships in Tuscola County, all in
Michigan.
12. Citizens has committed that, before consummation of the
proposed merger, it will execute an agreement for the proposed
divestiture in the Flint banking market with a purchaser that the Board
determines to be competitively suitable. Citizens also has committed
to complete the divestiture within 180 days after consummation of the
proposed merger. In addition, Citizens has committed that, if it is
unsuccessful in completing the proposed divestiture within that time
period, it will transfer the unsold branch(es) to an independent trustee
who will be instructed to sell the branch(es) 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
acceptable by the Board. See BankAmerica Corporation, 78 Federal
Reserve Bulletin 338 (1992); United New Mexico Financial Corporation, 77 Federal Reserve Bulletin 484 (1991).
13. The Board previously has considered the competitiveness of
certain active credit unions as a mitigating factor. See, e.g., Regions
Financial Corporation, 93 Federal Reserve Bulletin C16 (2007);
Wachovia Corporation, 92 Federal Reserve Bulletin CI83 (2006);
F.N.B. Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway

Legal Developments: Fourth Quarter, 2006

credit unions control approximately $887.5 million in
deposits in the market, which represent approximately
9 percent of market deposits on a 50 percent weighted
basis. Accounting for the revised weightings of these
deposits, Citizens would control approximately 37 percent
of market deposits on consummation of the proposal, and
the HHI would increase 288 points to 2077. 14
Moreover, the record of recent entry into the Flint
banking market evidences the market's attractiveness for
entry. Within the past five years, six de novo bank branches
and one credit union have opened in the Flint market, and
all remain operational. Other factors indicate that the Flint
banking market remains attractive for entry. For example,
from 2002 to 2005, the market's average annualized deposit
growth exceeded the average annualized deposit growth for
all metropolitan areas in Michigan.
Jackson Banking Market. In the Jackson banking market,15 Citizens Bank is the third largest depository institution, controlling deposits of $275.7 million, which represent 19 percent of market deposits. Republic Bank is the
fourth largest depository institution in the market, controlling deposits of $172 million, which represent 12 percent of
market deposits. On consummation of the proposal, Citizens Bank would become the largest depository institution
in the market, controlling deposits of approximately
$447.8 million. The HHI in this market would increase 459
points to 1974, and the pro forma market share of the
combined entity would be 31 percent.
Several factors indicate that the proposal would not have
a significantly adverse effect on concentration in the Jackson banking market. On consummation of the proposal, at
least 12 other insured depository institutions would continue to operate in the market. The Board also has evaluated
the competitive influence of five active community credit
unions in this market. These credit unions control approximately $192.4 million in deposits in the market, which
represent approximately 6 percent of market deposits on a
50 percent weighted basis. Accounting for the revised
weightings of these deposits, Citizens would control approximately 29 percent of market deposits on consummation of the proposal, and the HHI would increase 403 points
to 1747. 16

Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004). In the Flint

and Jackson banking markets, several credit unions offer a wide range
of consumer products, operate street-level branches, and have memberships open to almost all the residents in the applicable market. The
Board has concluded that the activities of such credit unions in these
two markets exert sufficient competitive influence to mitigate, in part,
the potential adverse competitive effects of the proposal.
14. With the deposits ofthese credit unions weighted at 50 percent,
Citizens would be the largest depository institution in the market, with
approximately 32 percent of market deposits, and Republic would be
the third largest depository institution in the market, controlling
approximately 9 percent of market deposits.
15. The Jackson banking market is defined as Jackson County and
the eastern two tiers of townships in Calhoun County, including Lee,
Clarence, Marengo, Sheridan, Eckford, Albion, Clarendon, and Homer
townships, all in Michigan.
16. With the deposits of these credit unions weighted at 50 percent,
Citizens would be the third largest depository institution in the market,

Cl1

In addition, the record of recent entry into the Jackson
banking market evidences the market's attractiveness for
entry. Within the past five years, three de novo bank
branches have opened in the Jackson market, and all
remain operational. Other factors indicate that the Jackson
banking market continues to be attractive for entry. From
2002 to 2005, the market's annualized population growth
exceeded the average annualized population growth for all
metropolitan areas and nonmetropolitan counties in Michigan. Furthermore, the market's annualized income growth
exceeded the average annualized income growth for all
metropolitan areas in Michigan during the same period.
B. Banking Markets within Established Guidelines
Consummation of the proposal without divestitures would
be consistent with Board precedent and within the thresholds of the DOJ Guidelines in the other four banking
markets: Ann Arbor, Detroit, Lansing, and Traverse City.J7
On consummation of the proposal, the Ann Arbor banking
market would remain unconcentrated, the Detroit and
Traverse City banking markets would remain moderately
concentrated, and the Lansing banking market would
become moderately concentrated, as measured by the HHI.
Numerous competitors would remain in each of the four
banking markets.

C. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOJ also conducted a detailed review of the potential
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 competitive effects of 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 Citizens
and Republic compete directly 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
with approximately 18 percent of market deposits, and Republic
would be the fourth largest depository institution in the market,
controlling approximately 11 percent of market deposits.
17. The effects of the proposal on the concentration of banking
resources in these markets are described in the appendix.

el2

Federal Reserve Bulletin 0 March 2007

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, and
information provided by Citizens.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved both on a parentonly and on a 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 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 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 financial factors
of the proposal. Citizens, all its subsidiary depository
institutions, and Republic Bank currently are well capitalized and would remain so on consummation of the proposal. Based on its review of the record, the Board also
finds that Citizens has sufficient financial resources to
effect the proposal. The proposed transaction is structured
as a share exchange and cash payment. The cash portion
would be funded from the proceeds of an issuance of trust
preferred securities and cash on hand.
The Board also has considered the managerial resources
of Citizens, Republic, and their subsidiary banks. The
Board has reviewed the examination records of these
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 laws and with anti-money-laundering laws.
Citizens, Republic, and their subsidiary depository institutions are considered well managed. The Board also has
considered Citizens' plans for implementing the proposal,
including the proposed management after consummation,
and has consulted with the other relevant supervisory
agencies for Republic Bank concerning those plans.
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 BRC Act.

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 Citizens Bank and F&M Bank-Iowa received "outstanding" and "satisfactory" ratings at their
most recent CRA performance evaluations by the Federal
Reserve Bank of Chicago, as of July 18,2005, and July 17,
2006, respectively. Republic Bank received a "satisfactory"
rating at its most recent CRA performance evaluation by
the Federal Insurance Deposit Corporation, as of August 12, 2002. After consummation of the proposal, Citizens plans to implement its CRA policies at Republic Bank.
Citizens has represented that the proposal will provide
greater convenience to customers through a larger network
of branches and ATMs and a broader range of financial
products and services over an expanded geographic area.
Based on all the facts of record, the Board concludes that
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.

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 BRC Act. The
Board's approval is specifically conditioned on compliance
by Citizens 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 Chicago, acting
pursuant to delegated authority.
By order of the Board of Governors, effective December 12, 2006.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Bies, Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BRC Act, the
Board also must consider the effects of the proposal on the

18.12 U.S.c. §2901 et seq.; 12 U.S.c. § 1842(c)(2).

Legal Developments: Fourth Quarter, 2006

C13

Appendix
CITIZENS AND REPUBLIC BANKING MARKETS IN MICHIGAN CONSISTENT WITH BOARD
PRECEDENT AND DOl GUIDELINES WITHOUT DIVESTITURES
Market
deposit
shares
(percent)

Bank

Rank

Amount
of deposits
(dollars)

Ann Arbor-Washtenaw County,
excluding Salem township; and
Putnam, Hamburg, and Unadilla
townships in Livingston County
Citizens Pre-Consummation ...............
Republic .......................................
Citizens Post-Consummation ..............

13
11
7

137.5 mil.
154.7 mil.
292.1 mil.

2.7
3.0
5.7

905
905
905

16
16
16

20
20
20

Detroit-Oakland, Macomb, and Wayne
Counties; Hadley, Metamora, Dryden,
and Almont townships in Lapeer
County; Berlin, Riley, Columbus, Saint
Clair, Casco, China, East China, Ira,
Cottrellville, and Clay townships in
Saint Clair County; Tyrone, Howell,
Oceola, Hartland, Iosco, Marion,
Genoa, Brighton, and Green Oak
townships in Livingston County; Salem
township in Washtenaw County; and
Ash and Berlin townships in Monroe
County
Citizens Pre-Consummation ...............
Republic .......................................
Citizens Post-Consummation ..............

16
12
9

423.5 mil.
530.1 mil.
953.6 mil.

.5
.7
1.2

1,562
1,562
1,562

1
1
I

49
49
49

Lansing-Clinton, Eaton, and Ingham
Counties; Portland and Danby
townships in Ionia County; Handy,
Conway, Cohoctah, and Deerfield
townships in Livingston County; and
Woodland and Castleton townships in
Barry County
Citizens Pre-Consummation ...............
Republic .......................................
Citizens Post-Consummation ..............

5
2
1

362.6 mil.
823.7 mil.
1.2 bil.

6.7
15.1
21.8

1,090
1,090
1,090

200
200
200

25
25
25

45.7 mil.
24.7 mil.
70.4 mil.

2.0
1.1
3.1

1,428
1,428
1,428

4
4
4

15
15
15

Traverse City-Antrim County,
excluding Banks township; and Benzie,
Grand Traverse, Kalkaska, and
Leelanau Counties
Citizens Pre-Consummation ...............
Republic .......................................
Citizens Post-Consummation ..............

12
11

NOTE: Data are as of June 30, 2006. All rankings, market deposit
shares, and HHIs are based on thrift deposits weighted at 50 percent.

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

C14

Federal Reserve Bulletin 0 March 2007

Grupo Financiero Banorte, S.A. de C. V.
Monterrey, Nuevo Leon, Mexico
Banco Mercantil del Norte, SA.,
Institucion de Banca Multiple, Grupo
Financiero Banorte
Monterrey, Nuevo Leon, Mexico
Banorte USA Corporation
Wilmington, Delaware
Order Approving the Formation of Bank
Holding Companies and Acquisition of a
Bank
Grupo Financiero Banorte, S.A. de C.V. ("GF Norte"),
Banco Mercantil del Norte, S.A., Instituci6n de Banca
Multiple, Grupo Financiero Banorte ("Banorte"), and Banorte USA Corporation ("Banorte USA")I (collectively,
"Applicants") have requested the Board's approval under
section 3 of the Bank Holding Company Act ("BHC Act")2
to become bank holding companies and to acquire 70 percent of the voting securities of INB Financial Corporation
("INB Financial"), McAllen, Texas, and thereby acquire
control of its subsidiaries, INB Delaware Corporation
("INB Delaware"), Wilmington, Delaware, and Inter National Bank, McAllen, Texas. 3 GF Norte, Banorte, Banorte
USA, INB Financial, and INB Delaware (jointly, "FHC
electors") have also filed with the Board elections to
become financial holding companies on consummation of
the proposal pursuant to section 4(k) and (1) of the BHC Act
and section 225.82 of the Board's Regulation y'4
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 14,894 (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.

1. GF Norte has represented that Banorte USA would be formed
before consummation of the transaction.
2. 12 U.S.C. § 1842.
3. Banorte USA will have an option to acquire the remaining
30 percent of INB Financial's voting securities at specified intervals
during the next five years.
4. See 12 U.S.c. § 1843(k) and (I); 12 CFR 225.82. FHC electors
have certified that Inter National Bank is well capitalized and well
managed and 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 financial holding companies will become
effective on consummation of the proposal, if on that date Inter
National Bank remains well capitalized and well managed, and if it has
received a rating of at least "satisfactory" at its most recent performance evaluation under the Community Reinvestment Act ("CRA")
(12 U.S.c. § 2901 et seq).

Banorte, with total consolidated assets of approximately
$15.1 billion, is the fifth largest bank in Mexico. 5 Banorte is
a subsidiary of and represents more than 90 percent of the
assets of GF Norte, a financial services holding company
that owns 96 percent of the shares of Banorte. GF Norte
currently has no banking operations in the United States;
however, it engages through subsidiaries in investment
advisory and securities brokerage activities in the United
States.
INB Financial, with total consolidated assets of approximately $1.2 billion, controls one insured depository institution, Inter National Bank, in Texas. INB Financial is the
41st largest insured depository organization in the state,
controlling deposits of approximately $862 million, which
represent less than 1 percent of the total amount of deposits
of insured depository institutions in the state. 6

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has carefully considered these factors in light of all the
facts of record, including confidential supervisory and
examination information from the various U.S. banking
supervisors of the institutions involved, publicly reported
and other financial information, and information provided
by the Applicants. The Board also has consulted with the
National Banking and Securities Commission ("CNBV"),
an agency of the Mexican Ministry of Finance and Public
Credit that is responsible for the supervision and regulation
of Mexican banks and financial services holding companies, such as GF Norte.
In evaluating the financial factors in proposals involving
the formation of new bank holding companies, the Board
reviews the financial condition of 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.
The Board has carefully considered the financial factors
of the proposal. Mexico's risk-based capital standards are
consistent with those established by the Basel Capital
Accord. The capital ratios of Banorte 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. Furthermore, INB Financial and Inter National Bank
are well capitalized and would remain so on consummation
5. Mexican asset and ranking data are as of December 31, 2004, and
are based on the exchange rate then in effect. Domestic assets are as of
June 30, 2006, and deposit data and rankings are as of June 30, 2005.
6. In this context, depository institutions include commercial banks,
savings banks, and savings associations.

Legal Developments: Fourth Quarter, 2006

of the proposal. The Board also has considered the financial
resources of GF Norte and Banorte USA. Based on its
review of these factors, the Board finds that Applicants
have sufficient financial resources to effect the proposal.
The proposed transaction is structured as a share purchase
to be funded with available cash 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 INB Financial and Inter National Bank, including assessments of their management, risk-management
systems, and operations. In addition, the Board has consulted with the CNBV about Applicants' managerial resources to implement the proposal, including compliance
of GF Norte and Banorte with applicable laws and regulations. The Board also has considered its supervisory experiences and those of the other relevant banking supervisory
agencies with the U.S. organizations and their records of
compliance with applicable banking laws and with anti-.
money-laundering laws. INB Financial and Inter National
Bank 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.
Section 3 of the BHC Act also provides that the Board
may not approve an application involving a foreign bank
unless the bank is subject to comprehensive supervision or
regulation on a consolidated basis by the appropriate
authorities in the bank's home country.7 As noted, the
CNBV is the primary supervisor of Mexican banks, including Banorte. The Board has previously determined, in an
application under the International Banking Act involving
BBVA Bancomer, S.A. ("Bancomer"), Mexico City, Mexico,
that Bancomer was subject to home country supervision on
a consolidated basis. 8 In this case, the Board has determined that Banorte is supervised on substantially the same
terms and conditions as Bancomer. Based on all the facts of
record, the Board has concluded that Banorte is subject to
comprehensive supervision and regulation on a consolidated basis by its home country supervisor. 9
7. See 12 U.S.C. § I 842(c)(3)(B). As provided in Regulation Y, the
Board detennines whether a foreign bank is subject to consolidated
home country supervision under the standards set forth in Regulation K. See 12 CFR 225.l3(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 CFR 211.24(c)(I).
8. See BBVA Bancomer, 89 Federal Reserve Bulletin 146 (2003);
Grupo Financiero Banamex Accival, 82 Federal Reserve Bulletin
1047 (1996).
9. The CNBV has supervisory authority over GF Norte. In addition,
the CNBV has supervisory authority, with other agencies of the

CIS

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.IO The Board has
reviewed the restrictions on disclosure in the relevant
jurisdictions in which GF Norte and Banorte operate and
has communicated with relevant government authorities
concerning access to information.
In addition, GF Norte and Banorte 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. GF Norte and Banorte 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 GF Norte and Banorte 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.

Mexican Ministry of Finance and Public Credit, over the nonbanking
subsidiaries of GF Norte. The CNBV has the authority to require GF
Norte to submit reports about its operations on a consolidated basis
and to conduct inspections of GF Norte's primary nonbanking subsidiaries. The CNBV also has authority to impose restrictions on transactions between Banorte and related parties. including GF Norte and its
subsidiaries.
10. See 12 U.S.C. § 1842 (c)(3)(A).
II. 12 U.S.c. § I842(c)(I).

C16

Federal Reserve Bulletin 0 March 2007

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 CRA. An institution's
most recent CRA performance evaluation is a particularly
important consideration in the applications process because
it represents a detailed, on-site evaluation of the institution's overall record of performance under the CRA by its
appropriate federal supervisor.!2
The Board has carefully considered the convenience and
needs factor and the CRA performance record of Inter
National Bank 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 Inter National Bank. The bank received a "satisfactory" rating at its most recent CRA performance evaluation by the Office of the Comptroller of the Currency, as of
April 14, 2003.
Applicants have represented that they intend to maintain
Inter National Bank's CRA program. Applicants expect that
the proposal will enhance the ability of Inter National
Bank's customers to conduct cross-border financial transactions and business.
In light of all the facts of record, the Board has concluded that considerations relating to the convenience and
needs factor, including the performance record of Inter
National Bank, are consistent with approval of this proposal.

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. 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. 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.
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 Dallas, acting
pursuant to delegated authority.
By order of the Board of Governors, effective October 13,2006.
12. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620,36,640 (2001).

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

Deputy Secretary of the Board

Regions Financial Corporation
Birmingham, Alabama
Regions Bank
Birmingham, Alabama
Order Approving the Merger of Bank
Holding Companies, the Merger of Banks,
and the Establishment of Branches
Regions Financial Corporation ("Regions"), a financial
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act! to merge with
AmSouth Bancorporation ("Amsouth") and acquire its
subsidiary bank, AmSouth Bank, both of Birmingham. 2 In
addition, Regions' subsidiary state member bank, Regions
Bank, also of Birmingham, has requested the Board's
approval under section 18(c) of the Federal Deposit Insurance AcP ("Bank Merger Act") to merge with AmSouth
Bank, with Regions Bank as the surviving entity. Regions
Bank also has applied under section 9 of the Federal
Reserve Act ("FRA") to retain and operate branches at the
locations of AmSouth Bank's main office and branches. 4 In
addition, Regions has provided notice under section 25 of
the Federal Reserve Act and section 211.5 of the Board's
Regulation K5 of its intention to acquire Cahaba International, Inc., also of Birmingham, an agreement corporation
subsidiary of AmSouth Bank. 6
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 47,812 (2006» and
in local publications in accordance with the relevant statutes and the Board's Rules of Procedure'? As required by
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
1. 12 U.S.C. § 1842.
2. In addition, Regions and AmSouth each has requested the Board's
approval to exercise an option to purchase up to 19.9 percent of the
other institution's stock on the occurrence of certain circumstances.
The options would terminate on consummation of Regions' merger
with AmSouth.
3. 12 U.S.c. § 1828(c).
4. 12 U.S.c. § 321.
5.12 U.S.C. §601 et seq.; 12 CPR 211.5.
6. Regions proposes to acquire the shares of the nonbanking
subsidiaries of AmSouth 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 CPR 225.87).
7. 12 CPR 262.3(b).

Legal Developments: Fourth Quarter, 2006

time for filing comments has expired, and the Board has
considered the applications, notice, 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.8
Regions, with total consolidated assets of approximately
$86.1 billion, is the 21 st largest depository organization in
the United States, controlling domestic deposits of approximately $57.2 billion, which represent less than 1 percent of
the total amount of deposits of insured depository institutions in the United States.9 Regions operates one subsidiary
depository institution, Regions Bank, with branches in 16
states,1O and engages in numerous nonbanking activities
that are permissible under the BHC Act.
AmSouth, with total consolidated assets of approximately $53.9 billion, is the 27th largest depository organization in the United States, controlling domestic deposits of
approximately $35.8 billion. AmSouth operates one subsidiary depository institution, AmSouth Bank, with branches
in seven states. 11
On consummation of this proposal, and after accounting
for all proposed divestitures, Regions would become the
13th largest depository organization in the United States,
with total consolidated assets of approximately $142.4 billion. Regions would control domestic deposits of approximately $90.6 billion, which represent less than 2 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. 12 For purposes of section 3(d) of the BHC Act, the
home state of Regions is Alabama,13 and AmSouth Bank is
located in Alabama, Florida, Georgia, Louisiana, Mississippi, Tennessee, and Virginia. 14
8. The Board received 132 comments that supported the transaction
and 18 comments that either opposed or expressed concern about
various aspects of the proposal.
9. Nationwide asset data are as of June 30, 2006. Nationwide
deposit and ranking data are as of, and reflect merger activity through,
June 30, 2006. In this context, insured depository institutions include
insured commercial banks, savings banks, and savings associations.
10. Regions Bank operates branches in Alabama, Arkansas, Florida,
Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi,
Missouri, North Carolina, South Carolina, Tennessee, Texas, and
Virginia.
II. AmSouth Bank operates branches in Alabama, Florida, Georgia,
Louisiana, Mississippi, Tennessee, and Virginia.
12. 12 U.S.C. § 1842.
13. 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 I, 1966, or the date on
which the company became a bank holding company, whichever is
later (12 U.S.C. § 1841(0)(4)(C)).
14. For purposes of section 3(d), the Board considers a bank to be
located in states in which the bank is chartered, headquartered, or
operates a branch. See 12 U.S.C. §§ 1841(0)(4H7), I842(d)(1)(A),
and 1842(d)(2)(B).

C17

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. 15 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
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. 16
Regions and AmSouth have subsidiary depository institutions that compete directly in 67 banking markets in
Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, and Tennessee. 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 and public
comments on the proposal.J7 In particular, the Board has
considered the number of competitors that would remain in
the banking markets, the relative shares of total deposits in
depository institutions ("market deposits") controlled by
Regions and AmSouth in those markets,18 the concentration
levels of market deposits and the increases in these levels,
IS. See 12 U.S.c. § 1842(d)(I)(AHB), (d)(2)(AHB). Regions is
adequately capitalized and adequately managed, a~ defined by applicable law. AmSouth Bank has been in existence and operated for the
minimum period of time required by applicable law. See Fla. Stat.
Ann. §658.2953 (three years); Ga. Code §7-1-622(b)(1) (three years);
La. Rev. Stat. Ann. § 538 (five years); Miss. Code. Ann. § 81-23-9 (five
years); Tenn. Code. Ann. §45-2-1403 (three years); and Va. Code Ann.
§ 6.1-44.20 (no minimum period). On consummation of the proposal,
Regions would control less than 10 percent of the total amount of
deposits of insured depository institutions in the United States and,
after accounting for all proposed divestitures, less than 30 percent, or
the applicable percentage established by state law, of total deposits
held in each relevant state by insured depository institutions. All other
requirements pursuant to section 3(d) of the BHC Act would be met on
consummation of the proposal.
16. 12 U.S.C. § 1842(c)(l); 12 U.S.c. § 1828(c)(5).
17. Several commenters expressed general concerns about the
competitive effects of this proposal, including that consummation of
the proposal would violate antitrust law. These concerns were carefully considered as part of the analysis described above.
18. Deposit and market share data are based on data reported by
insured depository institutions in the summary of deposits data as of
June 30, 2005, adjusted to reflect mergers and acquisitions through
August 3, 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 marketshare calculation on a 50 percent weighted basis. See. e.g., First
Hawaiian. Inc., 77 Federal Reserve Bulletin 52 (1991).

Cl8

Federal Reserve Bulletin 0 March 2007

as measured by the Herfindahl-Hirschman Index ("HHI")
under the Department of Justice Merger Guidelines ("DOJ
Guidelines"),19 and other characteristics of the markets. In
addition, the Board has considered commitments made by
Regions to the Board to reduce the potential that the
proposal would have adverse effects on competition by
divesting 52AmSouth branches (the "divestiture branches"),
which account for approximately $2.7 billion in deposits,20
in 17 banking markets (the "divestiture markets").21 Regions has proposed to transfer all but one of the branches to
be divested to out-of-market competitors. 22

A. Banking Markets within Established Guidelines
Consummation of the proposal without divestitures would
be consistent with Board precedent and within the thresholds in the DOJ Guidelines in 42 banking markets. 23 On
consummation of the proposal, two of these banking markets would remain unconcentrated; 32 banking markets
would remain moderately concentrated; and eight banking
markets would remain highly concentrated, with only
moderate increases in market concentration, as measured
by the HHL Numerous competitors would remain in each
of the 42 banking markets.

19. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is less than 1000, moderately concentrated if the post-merger HUI 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 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.
20. Regions proposes to divest 39 AmSouth branches with approximately $2 billion in deposits in Alabama, six AmSouth branches with
approximately $304.6 million in deposits in Mississippi, and seven
AmSouth branches with approximately $408.3 million in deposits in
Tennessee.
21. Regions has committed that, before consummating the proposed
merger, it will execute an agreement for the proposed divestures in
each divestiture market with a purchaser that the Board determines to
be competitively suitable. Regions also has committed to divest total
deposits in each divestiture market of at least the amount specified in
the commitment and discussed in this order and to complete divestitures within 180 days of consummation of the proposed merger. In
addition, Regions has committed that, if it is unsuccessful in completing the proposed divestiture within this time period, it will transfer the
unsold branches to an independent trustee that will be instructed to sell
such branches to an alternate purchaser or purchasers, without regard
to price. Both the trustee and any alternate purchaser must be
acceptable to the Board. See BankAmerica Corp., 78 Federal Reserve
Bulletin 338 (1992); United New Mexico Financial Corp., 77 Federal
Reserve Bulletin 484 (1991).
22. Regions proposes to sell the only AmSouth branch in the Paris,
Tennessee, banking market to a commercial banking organization that
currently operates in that banking market. Regions may divest not less
than $46.9 million in deposit liabilities to an in-market depository
institution with no more than 8 percent of market deposits.
23. These markets, and the effects of the proposal on the concentration of banking resources in these markets, are described in
Appendix A.

B. Certain Banking Markets with Divestitures
After accounting for the divestitures Regions has proposed,
consummation of the merger would be consistent with the
DOJ Guidelines and Board precedent in 12 banking markets. 24 In nine of these markets, Regions proposes to divest
all branches to be acquired from AmSouth and, therefore,
the levels of concentration as measured by the HHI would
not materially increase on consummation of the merger and
the proposed divestitures. 25 In the other three markets, the
HHI would not exceed the DOJ Guidelines and Board
precedent on consummation of the merger and the proposed divestitures. 26 Numerous competitors would remain
in these three banking markets. After accounting for the
proposed divestitures, two banking markets would remain
moderately concentrated, and ten banking markets would
remain highly concentrated on consummation of the
proposal.
C. Thirteen Banking Markets Warranting Special
Scrutiny
Regions and AmSouth compete directly in 13 banking
markets that warrant a detailed review: Anniston Area,
Decatur Area, Etowah County, Gulf Shores Area, Mobile
Area, Montgomery Area, and Tuscaloosa Area, all of
Alabama; Panama City Area, Florida; Shreveport-Bossier
City, Louisiana; Jackson Area, Lauderdale County, and
Starkville, all of Mississippi; and McComb Area, of Mississippi and Louisiana. In each of these markets, including
five with proposed divestitures and eight without proposed
divestitures, the concentration levels on consummation of
the proposal would exceed the threshold levels in the DOJ
Guidelines, or the resulting market share of Regions would
exceed 35 percent.
For each of these markets, the Board has carefully
considered whether other factors either mitigate the competitive effects of the proposal or indicate that the proposal
would have a significantly adverse effect on competition in
the market. 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 a banking market.27 In each of these markets, the Board
has identified factors that indicate the proposal would not
have a significantly adverse impact on competition, despite
the post-consummation increase in the HHI and market
share.

24. These markets, and the effects of the proposal on the concentration of banking resources in these markets, are described in
Appendix B.
25. The nine markets are: Dallas County, Alabama; Clarksdale and
Greenwood, both of Mississippi; and Bedford County, Cannon
County, DeKalb County, Fayetteville, Paris, and Rhea County, all of
Tennessee.
26. The three markets are: Huntsville Area, Alabama; Cumberland
County, Tennessee; and Greenville, Mississippi.
27. See NationsBank Corporation, 84 Federal Reserve Bulletin
129 (1998).

Legal Developments: Fourth Quarter, 2006

Among the factors reviewed, the Board has considered
the competitive influence of community credit unions in
these banking markets. In 11 of the markets, certain credit
unions offer a wide range of consumer products, operate
street-level branches, and have membership open to almost
all the residents in the applicable market. The Board has
concluded that the activities of such credit unions in those
II markets exert competitive influence that mitigates, in
part, the potential competitive effects of the proposal. 28

1. Banking Markets in Alabama
Anniston Area. In the Anniston Area banking market,29
Regions is the fourth largest depository organization, controlling deposits of approximately $199.5 million, which
represent approximately 13 percent of market deposits.
AmSouth is the second largest depository organization in
the market, controlling deposits of approximately
$267.1 million, which represent approximately 18 percent
of market deposits. On consummation of the proposal,
Regions would become the largest depository organization
in the market, controlling deposits of approximately
$466.7 million, which represent approximately 31 percent
of market deposits. The HHI would increase 478 points to
1960.
Several factors indicate that the increase in concentration in the Anniston Area banking market, as measured by
the HHI, overstates the potential anticompetitive effects of
the proposal in the market. After consummation of the
proposal, nine other commercial banking competitors would
remain in the market, some with a significant presence in
the market. The second and third largest bank competitors
in the market would control approximately 21 and 17 percent, respectively, of market deposits.
In addition, the Board has evaluated the competitive
influence of five active community credit unions in this
market. These credit unions control approximately
$137.6 million in deposits in the market, which, on a
50 percent weighted basis, represent approximately 4 percent of market deposits. Accounting for the revised weightings of these deposits, Regions would control approximately 30 percent of market deposits, and the HHI would
increase 437 points to 1795. 30
Furthermore, the record of recent entry into the Anniston
Area banking market evidences the market's attractiveness
for entry. Three depository institutions have entered the
market de novo since 200 1. Other factors indicate that the

28. The Board previously has considered the competitiveness of
certain active credit unions as a mitigating factor. See. e.g.• Wachovia,
Cl83 (2006); F.N.B. Corporation, 90 Federal Reserve Bulletin 481
(2004); Gateway Bank & Trust Co., 90 Federal Reserve Bulletin 547
(2004).

29. The Anniston Area banking market in Alabama is defined as
Calhoun County and the city of Heflin in Cleburne County.
30. With the deposits of these credit unions weighted at 50 percent,
Regions would be the fourth largest depository organization in the
market, with approximately I3 percent of market deposits, and
AmSouth would be the second largest depository institution in the
market, controlling approximately 17 percent of market deposits.

CI9

market remains attractive for entry. From 2001 to 2004, the
market's annualized income growth exceeded the average
annualized income growth for metropolitan counties in
Alabama.
Decatur Area. In the Decatur Area banking market,31
Regions is the largest depository organization in the market, controlling deposits of approximately $332.3 million,
which represent approximately 24 percent of market deposits. AmSouth is the fourth largest depository organization in
the market, controlling deposits of approximately $183 million, which represent 13 percent of market deposits. To
reduce the potential for adverse effects on competition in
the Decatur Area banking market, Regions has proposed to
divest one of AmSouth's branches with at least $45.3 million in deposits to an out-of-market depository organization. On consummation of the merger and after accounting
for the proposed divestiture, Regions would remain the
largest depository organization in the market, controlling
deposits of approximately $470 million, which represent
33 percent of market deposits. The HHI would increase not
more than 401 points and would not exceed 1853.
Several factors indicate that the proposal is not likely to
have a significantly adverse effect on competition in the
Decatur Area market. After consummation of the merger
and taking into account the proposed divestiture, II other
commercial banking competitors would remain in the
market, some with a significant presence in the market.
Four bank competitors in the market each would control
more than 10 percent of market deposits.
Furthermore, the Board has evaluated the competitive
influence of one active community credit union in this
market. This credit union controls approximately
$102.9 million in deposits in the market, which, on a
50 percent weighted basis, represent approximately 4 percent of market deposits. Accounting for the revised weightings of these deposits, Regions would control approximately 32 percent of market deposits, and the HHI would
increase 373 points to 1737. 32
In addition, the record of recent entry into the Decatur
Area banking market evidences the market's attractiveness
for entry. The Board notes that three depository institutions
have entered the market de novo since 2001.
Etowah County. In the Etowah County banking market,33 Regions is the fifth largest depository organization in
the market, controlling deposits of approximately
$110.6 million, which represent II percent of market
deposits. AmSouth is the second largest depository organization in the market, controlling deposits of approximately
$191.8 million, which represent 18 percent of market
31. The Decatur Area banking market in Alabama is defined as
Morgan County and the portion of the city of Decatur in Limestone
County.
32. With the deposits of this credit union weighted at 50 percent,
Regions would be the largest depository organization in the market,
with approximately 23 percent of market deposits, and AmSouth
would be the fourth largest depository organization in the market, with
approximately 13 percent of market deposits.
33. The Etowah County banking market is defined as Etowah
County. Alabama.

C20

Federal Reserve Bulletin D March 2007

deposits. On consummation of the proposal, Regions would
become the largest depository organization in the market,
controlling deposits of approximately $302.4 million,
which represent approximately 29 percent of market deposits. The HHI would increase 385 points to 1997.
Several factors indicate that the increase in concentration in the Etowah County banking market, as measured by
the HHI, overstates the potential anticompetitive effects of
the proposal in the market. After consummation of the
proposal, eight other commercial banking competitors
would remain in the market, some with a significant
presence in the market. The second largest bank competitor
in the market would control 24 percent of market deposits,
and two other bank competitors in the market each would
control more than 10 percent of market deposits.
In addition, the Board has evaluated the competitive
influence of three active community credit unions in this
market. These credit unions control approximately $145 million in deposits in the market, which, on a 50 percent
weighted basis, represent approximately 7 percent of market deposits. Accounting for the revised weightings of these
deposits, Regions would control approximately 27 percent
of market deposits, and the HHI would increase 337 points
to 1764. 34
Moreover, the record of recent entry into the Etowah
County banking market evidences the market's attractiveness for entry. The Board notes that one depository institution has entered the market de novo since 2001. Other
factors indicate that the market remains attractive for entry.
From 2001 to 2004, the market's annualized income growth
exceeded the average annualized income growth for metropolitan counties in Alabama.
Gulf Shores Area. In the Gulf Shores Area banking
market,35 Regions is the largest depository organization in
the market, controlling deposits of approximately
$309.7 million, which represent approximately 21 percent
of market deposits. AmSouth is the fifth largest depository
organization in the market, controlling deposits of approximately $147.9 million, which represent approximately
10 percent of market deposits. On consummation of the
merger, Regions would remain the largest depository organization in the market, controlling approximately
$457.7 million in deposits, which represent 31 percent of
market deposits. The HHI would increase 409 points to
1849.
Several factors indicate that the increase in concentration in the Gulf Shores Area banking market, as measured
by the HHI, overstates the potential anticompetitive effects
of the proposal in the market. After consummation of the
proposal, 11 other commercial banking and thrift competi-

tors would remain in the market. The Board notes that there
are other competitors with a significant presence in the
market. The second largest bank competitor in the market
would control approximately 19 percent of market deposits, and two other bank competitors in the market each
would control more than 10 percent of market deposits.
In addition, the Board has evaluated the competitive
influence of two active community credit unions in this
market. These credit unions control approximately
$48.4 million in deposits in the market, which, on a
50 percent weighted basis, represent approximately 2 percent of market deposits. Accounting for the revised weightings of these deposits, Regions would control approximately 30 percent of market deposits, and the HHI would
increase 396 points to 1792. 36
Furthermore, the record of recent entry into the Gulf
Shores Area banking market evidences the market's attractiveness for entry. The Board notes that two depository
institutions have entered the market de novo since 2001.
Other factors indicate that the Gulf Shores Area banking
market remains attractive for entry. From 2002 to 2004, the
market's annualized deposit growth was more than four
times the average annualized deposit growth for nonmetropolitan counties in Alabama. From 2001 to 2004, the
market's annualized population growth and income growth
exceeded the average annualized population and income
growth for nonmetropolitan counties in Alabama.
Mobile Area. In the Mobile Area banking market,3?
Regions is the largest depository organization in the market, controlling deposits of approximately $2.5 billion,
which represent approximately 36 percent of market deposits. AmSouth is the second largest depository organization
in the market, controlling deposits of approximately $1.4 billion, which represent approximately 20 percent of market
deposits. To reduce the potential for adverse effects on
competition in the Mobile Area banking market, Regions
has proposed to divest 22 of AmSouth's branches, with at
least $887.6 million in deposits, to an out-of-market depository organization. On consummation of the merger and
after accounting for the proposed divestiture, Regions
would remain the largest depository organization in the
market, controlling deposits of approximately $3 billion,
which represent 44 percent of market deposits. The HHI
would increase not more than 343 points and would not
exceed 2440.
One thrift institution operating in the market serves as a
significant source of commercial loans and provides a
broad range of consumer, mortgage, and other banking
products. Competition from this thrift institution closely
approximates competition from a commercial bank. Accord-

34. With the deposits of these credit unions weighted at SO percent,
Regions would be the fifth largest depository organization in the
market, with approximately 10 percent of market deposits, and
AmSouth would be the second largest depository organization in the
market, with approximately 17 percent of market deposits.
35. The Gulf Shores Area banking market in Alabama is defined as
the towns of Elberta, Foley, Gulf Shores, Lillian, Magnolia Springs,
and Orange Beach in Baldwin County.

36. With the deposits of these credit unions weighted at SO percent,
Regions would be the largest depository organization in the market,
with approximately 20 percent of market deposits, and AmSouth
would be the fifth largest depository organization in the market, with
approximately 10 percent of market deposits.
37. The Mobile Area banking market in Alabama is defined as
Mobile County, and the towns of Bay Minette, Daphne, Fairhope,
Loxley, Point Clear, Robertsdale, Silverhill, Spanish Fort, and Summerdale in Baldwin County.

Legal Developments: Fourth Quarter, 2006

ingly, the Board has concluded that deposits controlled by
this institution should be weighted at 100 percent in
market-share calculations. 38 Accounting for the revised
weighting of these deposits, Regions would control approximately 44 percent of market deposits on consummation of
the proposal, and the HHI would increase 342 points to
2434.
Several factors indicate that the increase in concentration in the Mobile Area banking market, as measured by the
HHI and Regions' market share, overstates the potential
competitive effects of the proposal in the market. After
consummation of the proposal, 17 other commercial banking and thrift competitors would remain in the market. The
Board notes that there are other competitors with a significant presence in the market. Two bank competitors each
would control approximately 12 percent of the market.
In addition, the Board has evaluated the competitive
influence of one active community credit union in this
market. This credit union controls approximately $66.4 million in deposits in the market, which, on a 50 percent
weighted basis, represent approximately 1 percent of market deposits. Accounting for the revised weightings of these
deposits, Regions would control approximately 44 percent
of market deposits, and the HHI would increase 339 points
to 2410. 39
In addition, the record of recent entry into the Mobile
Area banking market evidences the market's attractiveness
for entry. The Board notes that two depository institutions
have entered the market de novo since 200 I. Other factors
indicate that the market remains attractive for entry. From
2002 to 2005, the market's annualized deposit growth was
more than twice the average annualized deposit growth for
metropolitan counties in Alabama. From 2001 to 2004, the
market's annualized population growth exceeded the average annualized population growth for metropolitan counties in Alabama.
Montgomery Area. In the Montgomery Area banking
market,40 Regions is the largest depository organization in
the market, controlling deposits of approximately $1.5 billion, which represent approximately 27 percent of market
deposits. AmSouth is the second largest depository organization in the market, controlling deposits of approximately
$750.1 million, which represent approximately 14 percent
of market deposits. To reduce the potential for adverse
38. The Board previously has indicated that it may consider the
competitiveness of a thrift institution at a level greater than 50 percent
of its deposits when appropriate. See, e.g., Banknorth Group, Inc.,
75 Federal Reserve Bulletin 703 (1989). The thrift in the Mobile Area
banking market has a ratio of commercial and industrial loans to assets
of approximately 10 percent, which is comparable to the national
average for all commercial banks. See First Union Corporation,
84 Federal Reserve Bulletin 489 (1998).
39. With the deposits of this credit union weighted at 50 percent,
Regions would be the largest depository organization in the market,
with approximately 36 percent of market deposits, and AmSouth
would be the second largest depository organization in the market,
controlling approximately 20 percent of market deposits.
40. The Montgomery Area banking market in Alabama is defined as
Autauga, Elmore, Lowndes, and Montgomery counties, and the towns
of Tallassee and East Tallassee in Tallapoosa County.

e21

effects on competition in the Montgomery Area banking
market, Regions has proposed to divest six of AmSouth's
branches, with at least $183.9 million in deposits, to an
out-of-market depository organization. On consummation
of the merger and after accounting for the proposed divestiture, Regions would remain the largest depository organization in the market, controlling deposits of approximately
$2 billion, which represent approximately 38 percent of
market deposits. The HHI would increase not more than
508 points and would not exceed 1886.
Several factors indicate that the increase in concentration in the Montgomery Area banking market, as measured
by the HHI and Regions' market share, overstates the
potential anticompetitive effects of the proposal in the
market. After consummation of the proposal, 19 other
commercial banking competitors would remain in the
market.
The Board also has evaluated the competitive influence
of five active community credit unions in this market.
These credit unions control approximately $408.1 million
in deposits in the market, which, on a 50 percent weighted
basis, represent approximately 7 percent of market deposits. Accounting for the revised weightings of these deposits,
Regions would control less than 35 percent of market
deposits, and the HHI would increase 438 points to 1652. 41
In addition, the record of recent entry into the Montgomery Area banking market evidences the market's attractiveness for entry. The Board notes that three depository
institutions have entered the market de novo since 2001.
Other factors indicate that the market remains attractive for
entry. From 2002 to 2005, the market's annualized deposit
growth substantially exceeded the average annualized
deposit growth for metropolitan counties in Alabama.
Tuscaloosa Area. In the Tuscaloosa Area banking market,42 Regions is the largest depository organization in the
market, controlling deposits of approximately $766.5 million, which represent approximately 34 percent of market
deposits. AmSouth is the second largest depository organization in the market, controlling deposits of approximately
$466 million, which represent approximately 20.8 percent
of market deposits. To reduce the potential for adverse
effects on competition in the Tuscaloosa Area banking
market, Regions proposed to divest four of AmSouth's
branches, with at least $361.3 million in deposits, to an
out-of-market depository organization. On consummation
of the merger and after accounting for the proposed divestiture, Regions would remain the largest depository organization in the market, controlling deposits of approximately
$871 million, which represent approximately 39 percent of
market deposits. The HHI would increase not more than
168 points and would not exceed 2069.

41. With the deposits of these credit unions weighted at 50 percent,
Regions would be the largest depository organization in the market,
with approximately 25 percent of market deposits, and AmSouth
would be the eighth largest depository organization in the market,
controlling approximately 10 percent of market deposits.
42. The Tuscaloosa Area banking market in Alabama is defined as
Tuscaloosa County, and the city of Moundville in Hale County.

C22

Federal Reserve Bulletin 0 March 2oo7

One thrift institution operating in the market serves as a
significant source of commercial loans and provides a
broad range of consumer, mortgage, and other banking
products. Competition from this thrift institution closely
approximates competition from a commercial bank. Accordingly, the Board has concluded that deposits controlled by
this institution should be weighted at 100 percent in
market-share calculations. 43 Accounting for the revised
weighting of these deposits, Regions would control 38 percent of market deposits on consummation of the proposal,
and the HHI would increase 164 points to 2020.
Several factors indicate that the proposal would not have
a significantly adverse effect on concentration in the Tuscaloosa Area banking market. After consummation of the
proposal, 14 other commercial banking and thrift competitors would remain in the market.
In addition, the Board has evaluated the competitive
influence of five active community credit unions in this
market. These credit unions control approximately
$216.5 million in deposits in the market, which, on a
50 percent weighted basis, represent approximately 9 percent of market deposits. Accounting for the revised weightings of these deposits, Regions would control less than
35 percent of market deposits, and the HHI would increase
137 points to 1714.44
In addition, the record of recent entry into the Tuscaloosa Area banking market evidences the market's attractiveness for entry. The Board notes that two depository
institutions have entered the market de novo since 2001.
Other factors indicate that the market remains attractive for
entry. For example, from 2000 through 2005, the market's
annualized deposit growth exceeded the average annualized deposit growth for metropolitan counties in Alabama.

which represent 36 percent of market deposits. The HHI
would increase 614 points to 1792.
Several factors indicate that the increase in Region's
market share in the Panama City Area banking market
would not have a significant adverse effect on competition
in the market. On consummation of the proposal, 15 other
commercial banking and thrift competitors would remain in
the market, some with a significant presence in the market.
The second largest bank competitor in the market would
control II percent of market deposits, and two other bank
competitors in the market each would control slightly less
than 10 percent of market deposits.
Furthermore, the Board has evaluated the competitive
influence of four active community credit unions in this
market. These credit unions control approximately
$568.4 million in deposits in the market, which, on a
50 percent weighted basis, represent approximately II percent of market deposits. Accounting for the revised weightings of these deposits, Regions would control approximately 32 percent of market deposits, and the HHI would
increase 486 points to 1475. 46
In addition, the record of extensive recent entry into the
Panama City Area banking market evidences the market's
attractiveness for entry. The Board notes that six depository
institutions have entered the market de novo since 2001.
Other factors indicate that the Panama City Area banking
market remains attractive for entry. From 2002 through
2005, the market's annualized deposit growth substantially
exceeded the average annualized deposit growth for metropolitan counties in Florida. In addition, the market's annualized income growth from 2001 through 2004 exceeded
the average annualized income growth for metropolitan
counties in Florida.

2. Banking Market in Florida

3. Banking Market in Louisiana

Panama City Area. In the Panama City Area banking
market,45 Regions is the largest depository organization in
the market, controlling deposits of approximately
$500.1 million, which represent 22 percent of market
deposits. AmSouth is the second largest depository organization in the market, controlling deposits of approximately
$327.4 million, which represent 14 percent of market
deposits. On consummation of the merger, Regions would
remain the largest depository organization in the market,
controlling deposits of approximately $827.5 million,

Shrevepon-Bossier City. In the Shreveport-Bossier City
banking market,47 Regions is the fourth largest depository
organization in the market, controlling deposits of approximately $491.5 million, which represent 11 percent of
market deposits. AmSouth is the third largest depository
organization in the market, controlling deposits of approximately $768 million, which represent 17 percent of market
deposits. On consummation of the proposal, Regions would
become the largest depository organization in the market,
controlling deposits of approximately $1.3 billion, which
represent 28 percent of market deposits. The HHI would
increase 379 points to 1952.
In addition, one thrift institution operating in the market
serves as a significant source of commercial loans and
provides a broad range of consumer, mortgage, and other

43. This thrift institution has a ratio of commercial and industrial
loans to assets of approximately 16 percent, which is comparable to
the national average for all commercial banks. See First Union
Corporation, 84 Federal Reserve Bulletin 489 (1998).
44. With the deposits of these credit unions weighted at 50 percent,
Regions would be the largest depository organization in the market,
with approximately 31 percent of market deposits, and AmSouth
would be the second largest depository organization in the market,
controlling approximately 17 percent of market deposits.
45. The Panama City Area banking market in Florida is defined as
Bay County and the southern half of Washington County, including the
towns of Vernon and Wausau.

46. With the deposits of these credit unions weighted at 50 percent,
Regions would be the largest depository organization in the market,
with approximately 19 percent of market deposits, and AmSouth
would be the second largest depository organization in the market,
controlling approximately 13 percent of market deposits.
47. The Shreveport-Bossier City banking market in Louisiana is
defined as Bossier, Caddo, DeSoto, and Webster Parishes.

Legal Developments: Fourth Quarter; 2006

banking products. Competition from this thrift institution
closely approximates competition from a commercial bank.
Accordingly, the Board has concluded that deposits controlled by this institution should be weighted at 100 percent
in market-share calculations. 48 Accounting for the revised
weighting of these deposits, Regions would control approximately 27 percent of market deposits on consummation of
the proposal, and the HHI would increase 353 points to
1914.
Several factors indicate that the increase in concentration in the Shreveport-Bossier City banking market, as
measured by the Hill, overstates the potential anticompetitive effects of the proposal in the market. After consummation of the proposal, 21 other commercial banking and
thrift competitors would remain in the market. The Board
notes that there are other competitors with a significant
presence in the market. The second and third largest bank
competitors in the market would control 25 percent and
18 percent, respectively, of market deposits.
In addition, the Board has evaluated the competitive
influence of five active community credit unions in this
market. These credit unions control approximately
$505.9 million in deposits in the market, which, on a
50 percent weighted basis, represent approximately 5 percent of market deposits. Accounting for the revised weightings of these deposits, Regions would control approximately 27 percent of market deposits, and the HHI would
increase 334 points to 1736. 49
Furthermore, the record of recent entry into the
Shreveport-Bossier City banking market evidences the
market's attractiveness for entry. The Board notes that three
depository institutions have entered the market de novo
since 200 1. Other factors indicate that the market remains
attractive for entry. From 2001 to 2004, the market's
annualized income growth exceeded the average annualized income growth for metropolitan counties in Louisiana.

4. Banking Markets in Mississippi
Jackson Area. In the Jackson Area banking market,50
Regions is the fifth largest depository organization in the
market, controlling deposits of $440.5 million, which represent approximately 6 percent of market deposits. AmSouth is the second largest depository organization in the
market, controlling deposits of approximately $1.5 billion,
which represent approximately 20 percent of market deposits. On consummation of the proposal, Regions would
48. This thrift institution has a ratio of commercial and industrial
loans to assets of approximately 9 percent, which is comparable to the
national average for all commercial banks. See First Union Corporation, 84 Federal Reserve Bulletin 489 (1998).
49. With the deposits of these credit unions weighted at 50 percent,
Regions would be the fourth largest depository organization in the
market, with approximately 10 percent of market deposits, and
AmSouth would be the third largest depository organization in the
market, controlling approximately 16 percent of market deposits.
50. The Jackson Area banking market in Mississippi is defined as
Hinds, Madison, and Rankin counties; Copiah County, excluding the
town of Wesson; and the town of Mendenhall in Simpson County.

C23

become the second largest depository organization in the
market, controlling deposits of approximately $1.9 billion,
which represent 26 percent of market deposits. The HHI
would increase 246 points to 2240.
A number of factors indicate that the increase in concentration in the Jackson Area banking market, as measured by
the HHI, overstates the potential anticompetitive effects of
the proposal in the market. After consummation of the
proposal, 21 other commercial banking and thrift competitors would remain in the market. The Board notes that there
are other competitors with a significant presence in the
market. The largest depository organization in the market
would control 37 percent of market deposits, and two other
bank competitors in the market each would control slightly
more than 5 percent of market deposits.
In addition, the Board has evaluated the competitive
influence of three active community credit unions in this
market. These credit unions control approximately
$117.2 million in deposits in the market, which, on a
50 percent weighted basis, represent less than 1 percent of
market deposits. Accounting for the revised weightings of
these deposits, Regions would control approximately 26 percent of market deposits, and the HHI would increase 242
points to 2205.5l
In addition, the record of significant recent entry into the
Jackson Area banking market evidences the market's attractiveness for entry. The Board notes that five depository
institutions have entered the market de novo since 2001.
Other factors indicate that the market remains attractive for
entry. For example, the market's annualized deposit growth
from 2002 to 2005 exceeded the average annualized deposit
growth for metropolitan counties in Mississippi, and in
2004 the market's per capita income exceeded the per
capita income for metropolitan counties in Mississippi.
Lauderdale County. In the Lauderdale County banking
market,52 Regions is the sixth largest depository organization in the market, controlling deposits of approximately
$76.3 million, which represent approximately 8 percent of
market deposits. AmSouth is the fourth largest depository
organization in the market, controlling deposits of approximately $120.3 million, which represent approximately
13 percent of market deposits. On consummation of the
merger, Regions would become the second largest depository organization in the market, controlling deposits of
approximately $196.7 million, which represent approximately 21 percent of market deposits. The HHI would
increase 208 points to 1959.
Several factors indicate that the increase in concentration in the Lauderdale County banking market, as measured
by the HHI, overstates the potential anticompetitive effects
of the proposal in the market. After consummation of the

51. With the deposits of these credit unions weighted at 50 percent,
Regions would be the fifth largest depository organization in the
market, with approximately 6 percent of market deposits, and AmSouth would be the second largest depository organization in the
market, controlling approximately 20 percent of market deposits.
52. The Lauderdale County banking market is defined as Lauderdale
County, Mississippi.

C24

Federal Reserve Bulletin 0 March 2007

proposal, seven other commercial banking competitors
would remain in the market. The Board notes that there are
other competitors with a significant presence in the market.
The largest depository organization in the market would
control 30 percent of market deposits, and two other bank
competitors in the market each would control more than
10 percent of market deposits.
In addition, the Board has evaluated the competitive
influence of three active community credit unions in this
market. These credit unions control approximately
$62.7 million in deposits in the market, which, on a
50 percent weighted basis, represent approximately 3 percent of market deposits. Accounting for the revised weightings of these deposits, Regions would control approximately 20 percent of market deposits, and the HHI would
increase 195 points to 1838. 53
Furthermore, the record of recent entry into the Lauderdale County banking market evidences the market's attractiveness for entry. The Board notes that one depository
institution has entered the market de novo since 2001.
Other factors indicate that the market remains attractive for
entry. From 2002 to 2005, the market's annualized deposit
growth exceeded the average annualized deposit growth for
nonmetropolitan counties in Mississippi, and in 2004 the
market area's per capita income exceeded the per capita
income for nonmetropolitan counties in Mississippi. Furthermore, from 1999 to 2004, the market's annualized
population growth exceeded the average annualized population growth for nonmetropolitan counties in Mississippi.
Starkville. In the Starkville banking market, 54 Regions is
the fourth largest depository organization in the market,
controlling deposits of approximately $115.4 million,
which represent 14 percent of market deposits. AmSouth is
the second largest depository organization in the market,
controlling deposits of approximately $180 million, which
represent 22 percent of market deposits. To reduce the
potential for adverse effects on competition in the Starkville
banking market, Regions has proposed to divest three of
AmSouth's branches, with at least $50 million in deposits,
to an out-of-market depository organization. On consummation of the merger and after accounting for the proposed
divestiture, Regions would become the second largest
depository organization in the market, controlling deposits
of approximately $245.4 million, which represent 30 percent of market deposits. The HHI would increase not more
than 249 points and would not exceed 2231.
Several factors indicate that the proposal would not have
significantly adverse competitive effects in the Starkville
banking market. After consummation of the proposal, six
other commercial banking and thrift competitors would
remain in the market. The Board notes that there are other

53. With the deposits of these credit unions weighted at 50 percent,
Regions would be the sixth largest depository organization in the
market, with approximately 8 percent of market deposits, and AmSouth would be the fourth largest depository organization in the
market, controlling approximately 12 percent of market deposits.
54. The Starkville banking market in Mississippi is defined as
Choctaw, Oktibbeha, and Webster counties.

competitors with a significant presence in the market. The
largest bank competitor in the market would control 30 percent of market deposits, and two other bank competitors in
the market each would control 9 percent or more of market
deposits.
In addition, the market appears to be attractive for entry.
From 2002 to 2005, the market's annualized deposit growth
exceeded the average annualized deposit growth for nonmetropolitan counties in Mississippi. For example, the
market's annualized income growth from 1999 to 2004
exceeded the average annualized income growth for nonmetropolitan counties in Mississippi.
5. Banking Market in Mississippi and Louisiana
McComb Area. In the McComb Area banking market, 55 the
HHI would slightly exceed the DOJ Guidelines on consummation of the proposal. Regions is the fifth largest depository organization in the market, controlling deposits of
approximately $30.2 million, which represent 5 percent of
market deposits. AmSouth is the second largest depository
organization in the market, controlling deposits of approximately $141.3 million, which represent approximately
22 percent of market deposits. On consummation of the
merger, Regions would become the second largest depository organization in the market, controlling deposits of
$171.5 million, which represent approximately 27 percent
of market deposits. The HID would increase 201 points to
1934.
Several factors indicate that the increase in concentration in the McComb Area banking market, as measured by
the HHI, overstates the potential anticompetitive effects of
the proposal in the market. After consummation of the
proposal, nine other commercial banking competitors would
remain in the market. The Board notes that there are other
competitors with a significant presence in the market. The
largest bank competitor in the market would control 27 percent of market deposits, and two other bank competitors in
the market each would control 15 percent of market
deposits. In addition, the market appears to be moderately
attractive for entry. For example, from 2001 to 2004, the
market's annualized population growth exceeded the average annualized population growth for nonmetropolitan
counties in Mississippi.

D. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOJ has conducted a detailed review of the potential
competitive effects of the proposal and has advised the
Board that, in light of the proposed divestitures, consummation of the proposal would not likely have a significantly
adverse effect on competition in any relevant banking
market. In addition, the appropriate banking agencies have
55. The McComb Area banking market is defined as Pike County
and the portion of Amite County east of the West Fork of the Amite
River, all in Mississippi, and the town of Kentwood in Tangipahoa
Parish, Louisiana.

Legal Developments: Fourth Quarter, 2006 C25

been afforded an opportunity to comment and have not
objected to the proposal.
Based on these and all other facts of record, the Board
concludes that consummation of the proposal would not
have a significantly adverse effect on competition or on the
concentration of resources in any of the 67 banking markets
where Regions and AmSouth compete directly or in any
other relevant banking market. Accordingly, based on all
the facts of record and subject to completion of the
proposed divestitures, the Board has determined that competitive considerations are consistent with approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BRe Act and the Bank Merger Act require
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 Regions
and AmSouth, and public comments on the proposa1.56
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 depository institutions and the organizations' 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 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
of the proposal. Regions, AmSouth, 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 also finds that Regions has
56. Two commenters expressed concern about Regions' and AmSouth's relationships with unaffiliated retail check cashers, pawn
shops, and other nontraditional providers of financial services. In
approving Regions' application to acquire Union Planters Corporation,
Memphis, Tennessee, the Board considered this concern and reviewed
Regions' relationships with nontraditional providers of financial services. Regions FiTUlncial Corporation, 90 Federal Reserve Bulletin
389 (2004) ("Union Planters Order"). Regions represented that there
have been no material changes in the way Regions conducts such
relationships since it acquired Union Planters. With regard to AmSouth, Regions represented that AmSouth plays no role in the lending
practices or credit review processes of such firms. As noted in the
Union Planters Order, the activities of the consumer finance businesses
identified by the commenters are permissible, and the businesses are
licensed by the states where they operate.

sufficient financial resources to effect the proposal. The
proposed transaction is structured as a share exchange.57
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. 58 The Board has reviewed the examination
records of Regions, AmSouth, and their subsidiary depository institutions, including assessments of their management,59 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 and with anti-moneylaundering laws. 60 Regions, AmSouth, and their subsidiary
depository institutions are considered to be well managed. 61 The Board also has considered Regions' plans for

57. Regions will use existing resources to fund the cash purchase of
fractional shares.
58. One commenter expressed generalized concerns about the
management and customer service at a branch of AmSouth Bank.
Another commenter expressed concern about a press report that
Regions and the Internal Revenue Service ("IRS") are currently
litigating the extent of the IRS's ability to access the tax accrual
working papers of Regions' outside accounting firm. The federal
courts, and not the Board, have jurisdiction to adjudicate disputes
between the IRS and Regions.
59. Several commenters asserted that the boards of directors and
management of Regions, AmSouth, and their subsidiary banks lack
ethnic diversity. One commenter suggested that both Regions and
AmSouth should implement supplier diversity programs. The Board
notes that the racial, ethnic, or gender composition of a banking
organization's management and suppliers are not factors the Board is
permitted to consider under the BHC Act. See Western Bancshares,
Inc. v. Board of Governors, 480 F.2d 749 (10th Cir. 1973); Deutsche
Bank AG, 86 Federal Reserve Bulletin 509, 513 (1999).
60. Two commenters expressed concern about AmSouth's record of
compliance with anti-money-Iaundering laws in light of past enforcement actions taken against the organization. In October 2004, AmSouth and AmSouth Bank consented to a cease and desist order issued
by the Board and the Alabama Department of Banking to address
deficiencies in the bank's anti-money-Iaundering program (the "C&D
Order"). Simultaneous with the C&D Order, AmSouth and AmSouth
Bank: (I) consented to an order issued by the Board, and the bank
consented to an order issued by the U.S. Department of the Treasury's
Financial Crimes Enforcement Network, that assessed concurrent
$10 million civil money penalties (the "CMP Orders"); and (2) entered
into a deferred-prosecution agreement (the "Agreement") with the
U.S. Attorney for the Southern District of Mississippi that included a
$40 million penalty to be paid to the U.S. Department of the Treasury.
AmSouth and AmSouth Bank have fully complied with the requirements of the C&D Order, the CMP Orders, and the Agreement. The
C&D Order was terminated as of April 2006, and the criminal
complaint filed against AmSouth and AmSouth Bank as part of the
Agreement was dismissed in October 2005.
61. One commenter expressed concern about investigations by
regulatory agencies of Morgan Keegan & Company, Inc. ("Morgan
Keegan"), Memphis, Tennessee, a subsidiary of Regions that engages
in securities brokerage and investment banking activities. The commenter also expressed concern about an investigation by the Securities
and Exchange Commission ("SEC") of AmSouth's mutual fund unit in
connection with its investigation of an unaffiliated third party provider
of administrative support to AmSouth funds. The Board is aware of
public settlements entered into by Morgan Keegan and the SEC on
February 8 and May 31, 2006, respectively, relating to late trades in
mutual funds and to inadequate disclosure to investors of certain
auction-rate securities practices. The Board also is aware that Morgan
Keegan has publicly disclosed that it may be under investigation by

C26

Federal Reserve Bulletin D March 2007

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 the Board must consider 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 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").62 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 ("LMI") neighborhoods, in evaluating bank expansionary proposals.63
In response to the Board's request for public comment
on this proposal, several commenters expressed concern
about Regions' and AmSouth's records of lending to LMI
or minority individuals or in LMI communities and to small
businesses. Some commenters who opposed the proposal
criticized the adequacy and enforceability of a lending and
investment plan announced in July by Regions and AmSouth in connection with the proposal. In addition, several
commenters questioned the sufficiency of assistance that
Regions and AmSouth provided to individuals and communities affected by Hurricanes Katrina and Rita. Some
commenters also expressed concern that the proposal would
result in possible branch closings. A significant number of
commenters also expressed support for the services of
Regions and AmSouth and for the merger.
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of Regions Bank and AmSouth Bank, data reported
under the Home Mortgage Disclosure Act ("HMDA")64 by
the subsidiaries of Regions and AmSouth that engage in
home mortgage lending, other information provided by
Regions, confidential supervisory information, and public
comments received on the proposal.

various state and federal regulators. The Board has consulted with the
SEC about these matters and notes that AmSouth sold its mutual fund
services unit, as of September 2005. As part of its ongoing supervision
of Regions and AmSouth, the Board monitors the status of publicly
disclosed investigations and consults as needed with relevant regulatory authorities.
62.12 U.S.C. §2901 et seq.
63. 12 U.S.c. § 2903.
64. 12 U.S.c. § 2801 et seq.

A. CRA Performance Evaluations
As provided in the CRA, the Board has reviewed 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. 65
Regions Bank received a "satisfactory" rating from the
Federal Reserve Bank of Atlanta ("Reserve Bank") at its
most recent CRA performance evaluation, as of October 20, 2003. AmSouth Bank received an "outstanding"
rating at its most recent CRA performance evaluation by
the Reserve Bank, as of July 12,2004. 66 Regions expects to
continue the existing CRA programs of Regions Bank and
AmSouth Bank, but the combined institution's community
development program would be modeled on AmSouth's
program.
eRA Performance of Regions Bank. In addition to the
overall "satisfactory" rating that Regions Bank received at
its most recent CRA performance evaluation,67 the bank
received separate overall "outstanding" or "satisfactory"
ratings68 in all but one of the MSAs and states reviewed. 69
65. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36,640 (2001).
66. One comrnenter requested that the Board postpone consideration of the proposal until after completion of a new CRA performance
evaluation for AmSouth Bank. The Board must take into account the
actual records of the relevant insured depository institutions under the
CRA as of the time of the proposal in acting on proposals under
section 3 of the BHC Act and the Bank Merger Act. Neither these acts
nor the CRA require the initiation of new performance evaluations in
connection with such proposals. Moreover, the BHC Act, the Bank
Merger Act, and Regulation Y require the Board to act on proposals
submitted under those provisions within certain time periods.
67. The evaluation period was July 1,2001, through June 30, 2003,
and the review included data from Regions Mortgage, Inc., Montgomery, Alabama. and EquiFirst Corporation ("EquiFirst"), Charlotte,
North Carolina, which were both wholly owned subsidiaries of
Regions Bank during the evaluation period.
68. Full-scope evaluations were conducted in Regions Bank's
assessment areas in the Augusta-Aiken (GA-SC), Chattanooga (TNGA), Columbus (GA-AL), Memphis (TN-AR-MS), Texarkana (TXAR) multistate metropolitan statistical areas ("MSAs"). Full-scope
evaluations were also conducted in other select MSAs in Alabama,
Arkansas, Rorida, Georgia, Louisiana, North Carolina, South Carolina, Tennessee, and Texas. Limited-scope evaluations were conducted
in other relevant MSAs in those states.
69. Several comrnenters expressed concern about the less-thansatisfactory ratings the bank received for its CRA performance in some
of its assessment areas. The bank received an overall rating of "needs
to improve" in the Chattanooga multistate metropolitan area, and
received "low satisfactory" ratings under the lending test for Louisiana
and the Augusta and Texarkana multistate metropolitan areas. In each
of these assessment areas, examiners noted that there are a relatively
high proportion of families below the poverty level and that these
families may not qualify for residential real estate loans because of
their lower capacity for debt repayment. Examiners indicated that
these conditions may have hindered the bank's efforts to lend to LMI
individuals in these assessment areas. The bank received higher ratings
under the lending and other tests in other areas, and examiners con-

Legal Developments: Fourth Quarter, 2006

Examiners reported that the bank's lending levels reflected
excellent responsiveness to community credit needs and
that the bank had an excellent level of qualified community
development investments and grants.
Examiners rated Regions Bank's performance under the
lending test as "outstanding," "high satisfactory," or "low
satisfactory" in all MSAs and states reviewed, based on a
review of the bank's housing-related loans reported under
HMDA, small loans to businesses,7o and qualified community development loans. Examiners stated that the bank's
distribution of loans to geographies and borrowers of
different income levels was good. 71 They noted that
Regions Bank offered affordable housing loan programs,
and made more than 357 loans totaling $10.6 million
during the evaluation period using flexible lending products.
Examiners generally characterized Regions Bank's distribution of small loans to businesses in each of the MSAs
or states reviewed as good or adequate. They reported that
the bank made 72,657 small loans to businesses during the
evaluation period, totaling $7.6 billion, and that 18 percent
of those loans by dollar volume were to businesses located
in LMI census tracts. Examiners also concluded that
Regions Bank's distribution of loans to businesses of
different sizes was good. In addition, examiners reported
that the bank's community development lending total of
$294.7 million during the review period was a relatively
high level of community development lending.
Examiners rated Regions Bank's performance under the
investment test as "outstanding" or "high satisfactory" in
most of the MSAs and states reviewed. They reported that
the bank often exercised leadership by making investments
and grants not routinely provided by private investors.
During the evaluation period, the bank's qualified investments totaled more than $161 million, and it contributed
more than $1.9 million to charities with community development purposes.
Examiners rated Regions Bank's performance under the
service test as "high satisfactory" or "low satisfactory" in
most of the MSAs and states reviewed. They concluded
that the bank's distribution of branch offices and ATMs
generally was accessible to all portions of the bank's

cluded that the bank's record of CRA performance during the review
period, when viewed as whole, merited a rating of "satisfactory."
70. "Small loans to businesses" are loans with original amounts of
$1 million or less that are either secured by nonfarm, nonresidential
properties or classified as commercial and industrial loans.
71. Several commenters specifically criticized Regions Bank's
levels of lending to small businesses in LMI areas in the Birmingham,
Alabama, and Jackson, Tennessee MSAs. In the most recent CRA
performance evaluation for Regions Bank, examiners stated that the
bank had an adequate distribution of small business loans to businesses in LMI areas in the Birmingham assessment area. In addition,
Regions made 1,589 small loans to businesses in the Birmingham
MSA in 2005, and more than 25 percent of those loans by number
were to businesses located in LMI census tracts. Regions entered the
Jackson MSA in July 2004, on consummation of its acquisition of
Union Planters Corporation. In 2005, Regions made 97 small loans to
businesses in the Jackson MSA, and more than 15 percent of those
loans by number were to businesses in LMI census tracts.

C27

assessment areas and that services offered generally did not
vary in any way that inconvenienced any portion of the
bank's assessment areas. In addition, examiners concluded
that the bank's community development services were
responsive to affordable housing needs in the bank's assessment areas, and that the bank exhibited a reasonable level
of community development services to assist small business owners.
In 2005, Regions originated housing-related loans reported under HMDA in its assessment areas totaling more
than $6.7 billion. Of this amount, 10.2 percent by dollar
volume was loaned to borrowers in LMI census tracts, and
18.6 percent to LMI borrowers. In addition, Regions represented that, in 2005, Regions Bank made approximately
$316 million in qualified community development loans
and approximately $232 million in qualified investments
and grants in its assessment areas.
eRA Performance of AmSouth Bank. In addition to the
overall "outstanding" rating that AmSouth Bank received at
its most recent CRA performance evaluation,72 the bank
received separate overall "outstanding" or "satisfactory"
ratings in all the MSAs and states reviewed. 73 Examiners
reported that the bank's levels of lending demonstrated
excellent responsiveness to community credit needs. They
also concluded that the bank had an excellent level of
qualified community development investments and grants.
Examiners rated AmSouth Bank "outstanding" or "high
satisfactory" under the lending test in all MSAs and states
reviewed, based on a review of the bank's housing-related
loans reported under HMDA, small loans to businesses,
and qualified community development loans. They reported
that the bank's overall distribution of lending within geographies of different income levels was adequate, and its
distribution of loans to borrowers of different income levels
was good. In addition, examiners reported that AmSouth
Bank made use of flexible lending practices to serve
community credit needs and made more than 2,300 loans,
totaling approximately $188 million, under these programs
during the evaluation period. Examiners also reported that
AmSouth Bank made $1.7 billion of community development loans during the evaluation period, a level which the
examiners characterized as relatively high.
Examiners generally characterized AmSouth Bank's distribution of small loans to businesses among geographies of
differing income levels and to businesses in LMI areas as
good in the MSAs and states reviewed. 74 They reported that

72. The evaluation period was January 1, 2002, through December 31,2003.
73. Full-scope evaluations were conducted in AmSouth Bank's
assessment areas in the Chattanooga (TN-GA), Johnson CityKingsport-Bristol (TN-VA), and Memphis (TN-AR-MS) MSAs. Fullscope evaluations were conducted in other select MSAs in Alabama,
Florida, Louisiana, Mississippi, and Tennessee, and limited-scope
evaluations were conducted in other relevant MSAs in those states. In
addition, a full-scope evaluation was conducted in the bank's assessment areas in Georgia.
74. One commenter criticized the levels of participation of both
AmSouth Bank and Regions Bank in Small Business Administration
("SBA") loan programs. Regions represented that Regions Bank is an

C28

Federal Reserve Bulletin D March 2007

the bank made more than 84,000 small loans to businesses,
totaling approximately $7.4 billion, during the evaluation
period. Examiners also concluded that the bank's distribution of loans to businesses of different sizes was good or
excellent in the MSAs and states reviewed.
Under the investment test, examiners rated AmSouth
Bank "outstanding" for all the MSAs and states reviewed.
They stated the bank was often in a leadership position with
regard to investments and grants not routinely provided by
private investors. During the evaluation period, the bank's
qualified community development investments totaled more
than $234 million, and the bank contributed approximately
$7.4 million to organizations with community development
purposes.
Examiners rated AmSouth Bank "outstanding" or "high
satisfactory" under the service test for all the MSAs and
states reviewed. 75 They concluded that the bank's ATMs
and branch locations were readily accessible to all portions
of the bank's assessment areas and that services offered
generally did not vary in any way that inconvenienced any
portion of the bank's assessment areas. Examiners commended the bank for being a leader in providing community development services, and noted that the services
provided are responsive to affordable housing needs and
assist small business owners in the bank's assessment
areas.

B. Assistance to Communities Affected by
Hurricane Katrina
Several commenters asserted that Regions and AmSouth
should demonstrate greater support for recovery and reconstruction efforts in areas affected by Hurricane Katrina, and
should detail plans for financing the rebuilding efforts and
working with borrowers with mortgage loans at risk of
default due to the hurricane.
Regions represented that it and AmSouth originated
more than 23,000 HMDA-reportable mortgage loans, totaling approximately $3.8 billion, in 2005 in portions of their
assessment areas affected by Hurricane Katrina. The banks
also originated approximately $2.3 billion in small loans to
businesses in 2005 in those areas. Moreover, Regions is
involved in programs created under the Gulf Opportunity
Zone Act ("GO Zone") to support housing and small
business lending in areas affected by Hurricane Katrina and

SBA Preferred Lender and currently offers several SBA loan programs, including SBAExpress loans. The bank also offers other loan
programs targeted to small businesses, including the Right Business
Line of Credit, which provides revolving lines of credit of up to
$250,000 to small businesses. Regions also represented that AmSouth
Bank also offers other loan programs targeted to small businesses,
such as the Flexline product, under which small businesses may
borrow up to $100,000 on an unsecured basis and can apply on a
one-page application.
75. Several commenters criticized the levels of service of both
AmSouth Bank and Regions Bank to LMI individuals.

has represented that it has closed on $26.6 million of those
loans, as of July 31, 2006. 76
Regions also indicated that it expects to have made
approximately $70 million in community development
loans in parts of Mississippi in the GO Zone by the end of
2006. For example, Regions stated that it is providing
construction and permanent financing to a low-income
housing tax credit project in New Orleans that will result in
the construction of 29 housing units. AmSouth indicated
that it has provided $3.5 million of financing in the parts of
Mississippi affected by Hurricane Katrina to rebuild a
senior citizens complex and to build 71 new affordable
homes, and that it has committed more than $25 million to
purchase and rehabilitate a 307-unit senior citizens apartment complex in New Orleans.
Regions also represented that it and AmSouth continue
to work with affected residential mortgage loan customers,
and that assistance provided to these borrowers has included modifying mortgages, providing forbearance relief,
and suspending credit bureau reporting. Regions represented that Regions Mortgage has modified more than
2,800 of the approximately 54,000 residential mortgage
loans it serviced in FEMA-declared disaster areas at the
time of Katrina's landfall, and has itself absorbed the
$800,000 cost of these modifications. AmSouth indicated
that only ten of the nearly 3,300 mortgage loans it held in
the affected areas at the time of landfall are currently in
foreclosure, six of which were delinquent before Hurricane
Katrina. In addition, Regions has stated that it is involved
with state programs in Louisiana and Mississippi to provide
grants to homeowners in affected areas.

C. Branch Closings
Two commenters expressed concern about the proposal's
possible effect on branch closings. Regions has represented
that it and AmSouth have identified specific branches in
overlapping markets as candidates for closure, relocation,
or consolidation, but they have not made final decisions on
closures. Regions has stated that, on consummation of the
proposal, it expects that the combined institution's branch
closing policy would likely closely resemble AmSouth's
current branch closing policy.
The Board has considered carefully Regions' and AmSouth's branch closing policies and the banks' records of
opening and closing branches. AmSouth's branch closing
policy requires the bank to make every effort to minimize
the customer impact within the local market and to provide
a reasonable alternative for customers to acquire similar
76. One commenter criticized the level of Region Bank's investments in nonprofit organizations involved in microenterprise lending
and providing affordable housing in the Gulf Coast region. As noted,
Regions Bank represented that it has made a number of investments to
construct or rehabilitate affordable housing in the region. The eRA
does not require banks to provide any particular type of qualified CRA
investments in its efforts to meet the credit needs of their communities.

Legal Developments: Fourth Quarter, 2006

services. The policy requires that, before a final decision is
made to close a branch, management consult with members
of the community in an effort to minimize the impact of the
closing. In the most recent CRA performance examinations, examiners found that the banks' records of opening
or closing branches had not adversely affected the accessibility of delivery systems, particularly to LMI geographies
and to LMI individuals.
The Board also has considered that federal banking law
provides a specific mechanism for addressing branch closings.?7 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 Reserve Bank will
continue to review the branch closing record of Regions
Bank in the course of conducting CRA performance evaluations.
D. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of Regions and AmSouth Bank in light of
public comments received on the proposal. Commenters
alleged, based on 2004 and 2005 HMDA data, that Regions
made higher-cost loans 78 in various states more frequently
to African-American borrowers than to nonminority borrowers, and made a disproportionate share of its subprime
loans in certain MSAs to African Americans. 79 Commenters also alleged that Regions denied the home mortgage
loan applications of African-American borrowers more
frequently than those of nonminority applicants in various
states and MSAs, and that the amount of Regions' and
AmSouth's mortgage lending to African Americans in the
Birmingham MSA lagged behind the performance of the
aggregate of lenders. 8o The Board focused its analysis on

C29

the 2005 HMDA data reported by Regions Bank, EquiFirst,
and AmSouth Bank. 81
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
Regions or AmSouth Bank 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. 82 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 or ethnicity.83 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 Regions and
AmSouth Bank with fair lending laws.
In the fair lending review conducted in conjunction with
the most recent CRA performance evaluation of AmSouth
Bank, examiners found no substantive violations of applicable fair lending laws. Moreover, the record indicates that
both Regions and AmSouth have taken steps to ensure
compliance with fair lending and other consumer protection laws. Regions monitors Regions Bank's and EquiFirst's
compliance with fair lending laws through internal audits
that include comparative file analyses, and through selfassessments that include pricing, underwriting, and regression analysis of HMDA data. 84 In addition, Regions

77. Section 42 of the Federal Deposit Insurance Act (12 U.S.C.
§ 183Ir-I), 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.
78. Beginning January I, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate 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).
79. As the Board previously has noted, subprime lending is a
pennissible activity that provides needed credit to consumers who
have difficulty meeting conventional underwriting criteria. See Royal
Bank of Canada, 88 Federal Reserve Bulletin 385, 388 n. 18 (2002).
The Board continues to expect all bank holding companies and their
affiliates to conduct their subprime lending operations without any
abusive lending practices and in compliance with all applicable laws.
80. The lending data of the aggregate of lenders represent the
cumulative lending for all financial institutions that have reported
HMDA data in a given market.

81. The Board reviewed the HMDA data for Regions and AmSouth
Bank in various markets of concern to the commenters, in the
combined CRA assessment areas for each bank, and on a nationwide
basis.
82. 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.
83. One commenter complained that AmSouth provided HMDA
data of AmSouth Bank on paper rather than electronically in the
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.
Moreover, HMDA data may be obtained electronically via the HMDA
web site maintained by the Federal Financial Institutions Examination
Council.
84. In the fair lending review conducted in conjunction with
Regions Bank's 2003 CRA performance evaluation, examiners cited
failures to comply with the Board's Regulation B (Equal Credit

C30

Federal Reserve Bulletin 0 March 2007

employs a second-review process under which applications
that have been preliminarily denied are reviewed by a
second credit officer. Regions also requires all new employees to complete fair lending training during the first six
months of their tenure and to take annual refresher courses.
AmSouth employs similar compliance techniques, such as
self-assessments, a second-review process, and annual fair
lending training. AmSouth also employs an independent
consultant to conduct internal audits that include comparative file reviews. Regions represented that it is reviewing
the compliance programs of both organizations and that the
combined organization will adopt the best practices of both
Regions and AmSouth.
The Board also has considered the HMDA data in light
of other information, including the CRA performance
records of Regions Bank and AmSouth Bank discussed
above. 85 Based on all the facts of record, the Board
concludes that Regions' and AmSouth's established efforts
and record demonstrate that they are active in helping to
meet the credit needs of their entire communities. 86

E. Community Development Plan
In connection with the proposed transaction, Regions and
AmSouth announced a plan to invest at least $1 DO billion
over seven years across the Southeast, Midwest, and Texas
to support community development, small business lending, and mortgage lending for low-income communities
and borrowers. Several commenters expressed concerns
about the plan, arguing that it lacked sufficient detail or did
not represent increases over the organizations' current
lending levels. 87 Commenters also requested that the plan's

goals be made enforceable by the Board, or that the plan be
embodied in an agreement with one or more community
groupS.88
The Board views the enforceability of pledges, initiatives, and agreements with third parties as matters outside
the scope of the CRA.89 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 action. 90 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.
In this case, as in past cases, the Board instead has
focused on the demonstrated CRA performance record of
the applicant and the programs that the applicant has in
place to serve the credit needs of its CRA assessment areas.

F. Conclusion on Convenience and Needs Factor
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 Regions,
comments received on the proposal, and confidential supervisory information. 91 Regions represented that the proposal
would provide customers of both organizations with increased credit availability and expanded access to products
and services. Based on a review of the entire record and for
the reasons discussed above, the Board has concluded that
considerations relating to the convenience and needs factor
and the CRA performance records of the relevant depository institutions are consistent with approval.

ESTABLISHMENT OF BRANCHES
Opportunity Act) in a nonmortgage lending program. The Board has
considered that the failure was discovered by the bank and the bank
took immediate corrective action. The Board also notes that the
compliance failure was limited to one product line and the bank no
longer offers that product line.
85. One commenter speculated about the Board's analysis of 2004
HMDA data for Regions and AmSouth Bank. The Board uses HMDA
data as a screen to identify institutions with application denial rates or
pricing patterns that appear to differ significantly based on borrower
ethnicity or sex. Examiners typically review loan files and other
information from institutions identified by the screen, and an array of
supervisory actions can be taken if no credible nondiscriminatory
explanation can be found for the disparities. See Robert B. Avery,
et al., "New Information Reported under HMDA and Its Application in
Fair Lending Enforcement," 91 Federal Reserve Bulletin 344 (2005).
Such matters are handled in the regular course of the examination and
supervision process.
86. One commenter noted press reports about litigation against
Regions by several immigrant chicken farmers who alleged that
Regions Bank made loans to them knowing that they could not afford
repayment. Because these matters are unresolved, they do not provide
a factual basis for Board consideration. The courts, and not the Board,
have jurisdiction to adjudicate the legal claims of these plaintiffs
against Regions. Board action on the proposal would not interfere with
the ability of the courts to resolve any litigation pertaining to these
matters.
87. One commenter specifically alleged that the small business
component of the pledge does not represent any increase over the two
organizations' current small business lending levels.

As previously noted, Regions Bank has also applied under
section 9 of the FRA to establish branches at the locations
of AmSouth Bank's main office and branches. The Board
has assessed the factors it is required to consider when
reviewing an application under section 9 of the FRA and
88. One commenter expressed concern that Regions' acquisition of
Union Planters Corporation in 2004 did not include a community
development plan that was the subject of an agreement between
Regions and one or more community groups.
89. See. e.g.• Bank of America Corporation, 90 Federal Reserve
Bulletin 217, 233 (2004); Citigroup Inc., 88 Federal Reserve Bulletin
485,488 n.18 (2002).
90. See Wachovia Corporation, 91 Federal Reserve Bulletin 77
(2005); l.P. Morgan Chase & Co., 90 Federal Reserve Bulletin 352
(2004); Bank of America Corporation, 90 Federal Reserve Bulletin
217 (2004); NationsBank Corporation, 84 Federal Reserve Bulletin
858 (1998).
91. One commenter 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).

Legal Developments: Fourth Quarter, 2006

the Board's Regulation R and finds those factors to be
consistent with approval. 92

FOREIGN ACTNITIES
As noted above, Regions also proposes to acquire Cahaba
International, Inc., the agreement corporation subsidiary of
AmSouth Bank. The Board has concluded that all the
factors required to be considered under section 25 of the
Federal Reserve Act and section 211.5 of Regulation K are
consistent with approva1.93

CONCLUSION
Based on the foregoing and all facts of record, the Board has
determined that the applications should be, and hereby are,
approved. 94 In reaching its conclusion, the Board has con92.12 U.S.C. §322; 12 CFR 208.6(b).
93.12 CFR 211.5.
94. Several commenters requested that the Board hold a public
meeting or hearing on the proposal. Section 3 of the BRC 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
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 provide an opportunity for testimony or other presentations (12 CFR 262.3(i)(2), 262.25(d)). 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.
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

C31

sidered all the facts of record in light of the factors that it is
required to consider under the BRC Act, the Bank Merger
Act, and the FRA.95 The Board's approval is specifically
conditioned on compliance by Regions and Regions Bank
with the conditions imposed in this order, the commitments
made to the Board in connectiOil 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 banking acquisitions 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 October 20, 2006.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Bies, Warsh, Kroszner, and Mishkin.
JENNIFER J. JOHNSON

Secretary of the Board
warranted in this case. Accordingly, the requests for a public hearing
or meeting on the proposal are denied.
95. Several commenters also requested that the Board extend the
comment period or 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 comments. As noted, the commenters have had ample opportunity to submit their views and, in fact, have
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
necessary.

C32

Federal Reserve Bulletin 0 March 2007

Appendix A
REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO]
GUIDEliNES WITHOUT DNESTITURES

Bank

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

8
4
3

63.9 mil.
104.5 mil.
168.4 mil.

4.7
7.7
12.4

1,695
1,695
1,695

72
72
72

10
10
10

4
1
1

2.5 bil.
3.9 bil.
6.3 bil.

12.8
20.3
33.0

1,600
1,600
1,600

517
517
517

40
40
40

5
7
1

123.9 mil.
78.0 mil.
201.9 mil.

11.6
7.3
18.9

1,207
1,207
1,207

169
169
169

9
9
9

8
1
1

32.2 mil.
134.3 mil.
166.5 mil.

5.2
21.6
26.7

1,394
1,394
1,394

222
222
222

10
10
10

2
3
1

347.1 mil.
149.1 mil.
496.2 mil.

17.7
7.6
25.3

1,462
1,462
1,462

269
269
269

15
15
15

5
8
3

139.9 mil.
129.3 mil.
269.2 mil.

7.1
6.6
13.6

1,554
1,554
1,554

93
93
93

10
10
10

4
1
1

151.7 mil.
214.7 mil.
366.4 mil.

11.6
16.4
28.0

1,506
1,506
1,506

382
382
382

12
12
12

5
7
4

175.3 mil.
144.0 mil.
319.3 mil.

8.7
7.2
15.9

1,478
1,478
1,478

125
125
125

11
11
11

Change in
HHI

Remaining
number of
competitors

ALABAMA BANKING MARKETS

Auburn and Opelika-Lee County,
excluding that portion of the county
that is within 12 road miles of Phenix
City, Alabama or Columbus, Georgia
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

Birmingham-Bibb, Blount, Chilton,
Jefferson, St. Clair, Shelby, and Walker
Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

Cullman-Cullman County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

DeKalb-DeKalb County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

Dothan-Houston and Henry Counties;
Midland City and Newton in Dale
County; and Hartford and Slocomb in
Geneva County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

Florence-Colbert and Lauderdale
Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

Marshall-Marshall County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............
FLORIDA BANKING MARKETS

Beverly Hills-Citrus County, excluding
the city of Citrus Springs
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

Legal Developments: Fourth Quarter, 2006

C33

Appendix A-Continued
REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl
GUIDELINES WITHOUT DIVESTITURES-Continued
Market
deposit
shares
(percent)

Resulting
HHI

Remaining
number of
competitors

Bank

Rank

Amount
of deposits
(dollars)

Brevard-Brevard County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

14
8
7

89.2 mil.
172.5 mil.
261.7 mil.

1.4
2.6
4.0

1,559
1,559
1,559

7
7
7

19
19
19

Daytona Beach-Flagler County; the
towns of Allandale, Daytona Beach,
Daytona Beach Shores, Edgewater,
Holly Hill, New Smyrna Beach,
Ormond Beach, Ormond-by-the-Sea,
Pierson, Port Orange, and South
Daytona in Volusia County; and the
town of Astor in Lake County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

5
19
5

398.7 mil.
n.a.!
398.7 mil.

5.7
n.a.!
5.7

1,667
1,667
1,667

!
!
!

22
22
22

Fort Walton Beach-Okaloosa and
Walton Counties, and the city of Ponce
de Leon in Holmes County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

4
1
1

334.4 mil.
595.9 mil.
930.4 mil.

7.8
13.8
21.6

999
999
999

214
214
214

22
22
22

Ocala-Marion County, and the town
of Citrus Springs in Citrus County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

13
4
4

62.2 mil.
574.5 mil.
636.6 mil.

1.4
13.4
14.8

1,463
1,463
1,463

39
39
39

20
20
20

Orlando-Orange, Osceola, and
Seminole Counties; the western half of
Volusia County; and Clermont and
Groveland in Lake County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

17
6
5

291.9 mil.
926.5 mil.
1.2 hil.

1.1

3.4
4.5

1,354
1,354
1,354

7
7
7

47
47
47

Pensacola-Escambia and Santa Rosa
Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

6
1
1

405.9 mil.
978.2 mil.
1.4 bil.

7.8
18.8
26.5

1,359
1,359
1,359

292
292
292

18
18
18

Change in
HHI

C34

Federal Reserve Bulletin 0 March 2007

Appendix A-Continued
REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO]
GUIDELINES WITHOUT DNESTITURES-Continued

Bank

Sarasota-Manatee and Sarasota
Counties, excluding that portion of
Sarasota County that is both east of the
Myakka River and south of Interstate
75 (currently the towns of Northport
and Port Charlotte); the peninsular
portion of Charlotte County west of the
Myakka River (currently the towns of
Englewood, Englewood Beach, New
Point Comfort, Grove City, Cape Haze,
Rotonda, Rotonda West, and Placida);
and Gasparilla Island (the town of
Boca Grande) in Lee County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

162.3 mil.
261.2 mil.
423.5 mil.

1.0
1.6
2.7

1,305
1,305
1,305

3
3
3

43
43
43

Tallahassee-Leon County, and the
towns of Quincy and Havana in the
eastern half of Gadsden County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

14
5
5

6.7 mil.
360.1 mil.
366.8 mil.

.2
9.1
9.2

1,221
1,221
1,221

3
3
3

12
12
12

Tampa Bay-Hernando, Hillsborough,
Pinellas, and Pasco Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

15
4
4

325.0 mil.
3.2 bil.
3.5 bil.

.8
7.9
8.7

1,540
1,540
1,540

13
13
13

64
64
64

Dalton-Murray and Whitfield Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

4
12
3

164.4 mil.
19.4 mil.
183.8 mil.

9.5
1.1
10.7

1,512
1,512
1,512

22
22
22

12
12
12

Gordon-Gordon County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

7
5
5

10.0 mil.
44.6 mil.
54.6 mil.

1.6
6.9
8.5

2,948
2,948
2,948

21
21
21

5
5
5

Rome-Floyd and Polk Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

3
8
2

192.4 mil.
73.7 mil.
266.1 mil.

12.4
4.8
17.2

1,411
1,411
1,411

119
119
119

GEORGIA BANKING MARKETS

11
11

Legal Developments: Fourth Quarter, 2006

C35

Appendix A-Continued
REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO]
GUIDELINES WITHOUT DIVESTITURES-Continued

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Baton Rouge-Ascension, East Baton
Rouge, lberville, Livingston, and West
Baton Rouge Parishes; the northern
half of Assumption Parish, including
the towns of Napoleonville, Pierre Part,
and Plattenville; and the town of Union
in St. James Parish
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

3
6
3

1.0 bil.
228.1 mil.
1.3 bil.

11.9
2.6
14.5

1,852
1,852
1,852

62
62
62

37
37
37

Monroe-Caldwell, Ouachita, and
Union Parishes
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

4
9
2

211.8 mil.
102.8 mil.
314.6 mil.

9.8
4.7
14.5

1,134
1,134
1,134

92
92

15
15
15

New Orleans-Jefferson, Orleans,
Plaquemines, Saint Bernard, Saint
Charles, Saint John the Baptist, and
Saint Tammany Parishes; and Saint
James Parish excluding the town of
Union
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

4
5
4

1.5 bil.
516.6 mil.
2.0 bil.

7.6
2.7
10.3

1,577
1,577
1,577

40
40
40

Biloxi-Hancock County, Harrison
County, and the City of Ocean Springs
in Jackson County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

6
9
4

158.5 mil.
31.5 mil.
190.0 mil.

5.2
1.0
6.2

2,965
2,965
2,965

11
11
11

Columbus-Lowndes County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

7
3
2

21.8 mil.
117.5 mil.
139.4 mil.

3.2
17.2
20.4

2,245
2,245
2,245

110
110
110

6
6
6

Hattiesburg-Lamar and Forrest
Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

2
5
2

245.6 mil.
117.9 mil.
363.5 mil.

15.1
7.2
22.3

1,780
1,780
1,780

218
218
218

13
13
13

Jones-Jones County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

8
5
4

39.4 mil.
76.1 mil.
115.5 mil.

4.5
8.6
13.1

1,738
1,738
1,738

77
77
77

7
7
7

Bank

Change in
HHI

Remaining
number of
competitors

LOUISIANA BANKING MARKETS

MISSISSIPPI BANKING MARKETS

C36

Federal Reserve Bulletin 0 March 2007

Appendix A-Continued
REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl
GUIDELINES WITHOUT DIVESTITURES-Continued
Market
deposit
shares
(percent)

Resulting
HHI

Remaining
number of
competitors

Bank

Rank

Amount
of deposits
(dollars)

O;iford-Lafayette and Yalobusha
Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

2
10
2

120.2 mil.
n.a. 2
120.2 miL

15.3
n.a. 2
15.3

1,547
1,547
1,547

Tupelo-Chickasaw, Itawamba, Lee,
Pontotoc, Prentiss, and Union Counties
in Mississippi; and the portion of
Monroe County, Mississippi, north of
u.s. Highway 278 and State Route 41,
including the cities of Amory, Quincy,
and Greenwood Springs
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

4
8
3

212.0 miL
116.4 miL
328.4 miL

6.7
3.7
10.4

1,908
1,908
1,908

49
49
49

13
13
13

8
3
3

51.9 miL
114.5 miL
166.4 miL

4.3
9.5
13.7

1,479
1,479
1,479

81
81
81

13
13
13

9
3
3

15.5 mil.
193.1 mil.
208.6 mil.

1.2

14.4
15.6

1,650
1,650
1,650

34
34
34

8
8
8

5
4
1

145.1 mil.
164.7 mil.
309.8 mil.

9.7
ILl
20.8

1,315
1,315
1,315

215
215
215

12
12
12

Dickson-Dickson County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

9
3
2

16.3 miL
74.7 mil.
91.0 mil.

3.3
15.3
18.6

1,710
1,710
1,710

102
102
102

7
7
7

Jackson-includes all of Crockett and
Madison Counties; Chester County,
excluding the city of Enville;
Henderson County, excluding the
Sardis census county division; and the
Humboldt, Gibson, Medina, and Milan
census county divisions in southern
Gibson County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

2
4
1

445.6 mil.
270.1 mil.
715.8 mil.

18.4
11.2
29.6

1,663
1,663
1,663

411
411
411

18
18
18

Change in
HHI

2
2

9
9
9

TENNESSEE BANKING MARKETS

Athens-McMinn, Meigs, and Monroe
Counties plus the town of Delano in
Polk County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............
Cleveland-Bradley County plus the
towns of Benton and Ocoee in Polk
County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............
Cookeville-Jackson, Overton, and
Putnam Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

Legal Developments: Fourth Quarter, 2006

C37

Appendix A-Continued
REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl
GUIDELINES WITHOUT DIVESTITURES-Continued
Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

Bank

Rank

Amount
of deposits
(dollars)

Knoxville-Anderson, Knox, Loudon,
Roane, and Union Counties; the
portion of Blount County northwest of
Chilhowee Mountain; the towns of
Chestnut Hill, Danridge, 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
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

6
3
2

462.4 mil.
1.6 bil.
2.1 bil.

4.9
17.0
21.9

1,441
1,441
1,441

167
167
167

35
35
35

Maury-Maury County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

5
3
3

46.8 mil.
163.4 mil.
210.2 mil.

4.4
15.2
19.5

2,496
2,496
2,496

132
132
132

9
9
9

McMinnville-Warren County, and the
town of Altamont in Grundy County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

2
6
2

139.6 mil.
21.5 mil.
161.1 mil.

24.7
3.8
28.5

2,708
2,708
2,708

188
188
188

6
6
6

Morristown-Newport Area-Cocke,
Grainger, and Hamblen Counties,
excluding the towns of Blaine, Buffalo
Springs, Joppa, Lea Springs, and
Powder Spring in Grainger County; the
towns of Baneberry, Jefferson City,
Jefferson Estates, Leadvale, Talbot, and
White Pine in Jefferson County
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

5
8
2

no. 1 mil.
83.2 mil.
193.3 mil.

7.9
5.9
13.8

1,008
1,008
1,008

93
93
93

15
15
15

Nashville-Cheatham, Davidson,
Robertson, Rutheiford, Sumner,
Williamson, and Wilson Counties
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

4
2
1

1.6 bil.
4.3 bil.
5.8 bil.

6.7
18.2
24.9

1,404
1,404
1,404

243
243
243

45
45
45

C38

Federal Reserve Bulletin 0 March 2007

Appendix A-Continued
REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO]
GUIDELINES WITHOUT DIVESTITURES-Continued

Bank

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting

Change in

HHI

Remaining
number of
competitors

BANKING MARKET IN ARKANSAS,
MISSISSIPPI, AND TENNESSEE

Memphis Area-Fayette, Shelby, and
Tipton Counties in Tennessee; the city
of Grand Junction in Tennessee;
Crittenden County in Arkansas; Benton,
De Soto, Marshall, Tate, and Tunica
Counties in Mississippi; the northern
part of Coahoma County, Mississippi,
including the cities of Friars Point,
Coahoma, Lula, and Jonestown; the
portion of Panola County, Mississippi,
north of State Route 315 east to Sardis
Lake, including the city of Sardis; and
the portion of Quitman County,
Mississippi, north of State Route 315,
including the cities of Birdie and
Sledge
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

2
6
2

2.9 bil.
647.5 mil.
3.5 bil.

10.6
2.4
13.1

3,351
3,351
3,351

52
52
52

57
57
57

8
3
3

206.4 mil.
1.1 bil.
1.3 biI.

3.2
17.0
20.1

1,460
1,460
1,460

108
108
108

22
22
22

16
3
2

39.2 mil.
226.0 mil.
265.1 mil.

1.7
9.7
11.4

823
823
823

15
15
15

BANKING MARKET IN
GEORGIA AND TENNESSEE

Chattanooga Area-Hamilton and
Marion Counties in Tennessee,
excluding the portion of the town of
Monteagle that lies in Marion County;
Catoosa, Dade, and Walker Counties in
Georgia
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............
BANKING MARKET IN
TENNESSEE AND KENTUCKY

Clarksville and Hopkinsville AreaChristian, Todd, and Trigg Counties in
Kentucky; Montgomery and Stewart
Counties in Tennessee
Regions Pre-Consummation ...............
AmSouth .......................................
Regions Post-Consummation ..............

NOTE: Data are as of June 30, 2005. All amounts of deposits are
unweighted. All rankings, market deposit shares, and HHIs are based
on thrift deposits weighted at 50 percent.

33
33

1. AmSouth recently entered the Daytona Beach market with a
de novo branch. Accordingly, June 30, 2005, figures are unavailable.
2. AmSouth recently entered the Oxford market with a de novo
branch. Accordingly, June 30, 2005, figures are unavailable.

Legal Developments: Fourth Quarter, 2006

C39

Appendix B
REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl
GUIDELINES AFTER DIVESTITURES

Bank

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

2
4
1

141.8 mil.
61.8 mil.
203.5 mil.

28.7
12.5
41.2

3,656
3,656
3,656

717
717
717

2
2
2

141.8 mil.

29.9

2,983

Remaining
number of
competitors

ALABAMA BANKING MARKETS
REQUIRING DIVESTITURE

Dallas-Dallas County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................

55.6 miLl

11.3

2,983

1
2
1

1.1 bil.
789.0 mil.
1.9 bil.

23.5
16.6
40.0

2,141
2,141
2,141

777
777
777

15
15
15

1.6 bil.

34.6

1,765

402

ALABAMA BANKING MARKETS
REQUIRING DIVESTITURE

Huntsville Area-Madison County;
Limestone County, excluding both the
town of Ardmore and the portion of the
city of Decatur located in Limestone
County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................

258.4 mil. 2

5.4

1,765

402

4
2
2

66.0 mil.
81.2 mil.
147.2 mil.

15.7
19.3
34.9

3,283
3,283
3,283

604
604
604

3
3
3

66.0 mil.

17.6

2,672

-7

73.1 miLl

17.4

2,672

-7

17.1
14.0

2,394
2,394
2,394

478
478
478

5
5
5

MISSISSIPPI BANKING MARKETS
REQUIRING DIVESTITURE

Clarksdale-Coahoma County,
excluding the northern part of the
county that includes the cities of Friars
Point, Coahoma, Lula, and Jonestown
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................

Greenville-Washington County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........

3
5
3

110.3 mil.
90.6 mil.
201.0 mil.

31.1

C40

Federal Reserve Bulletin D March 2007

Appendix

B-Continued

REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl
GUIDELINES AFTER DIVESTITURES-Continued

Bank

Greenville-Washington CountyContinued
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................
Greenwood-Carroll and Leflore
Counties
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

133.5 mil.

21.7

1,986

Change in
HHI

Remaining
number of
competitors

60.8 mil.)

9.4

1,986

4
2
1

53.6 mil.
99.4 mil.
153.0 mil.

10.5
19.5
30.0

2,035
2,035
2,035

409
409
409

6
6
6

53.6 mil.

12.5

1,598

-28

89.5 mil. l

17.5

1,598

-28

2
3
2

97.6 mil.
67.3 mil.
164.9 mil.

21.8
15.0
36.8

3,005
3,005
3,005

653
653
653

4
4
4

97.6 mil.

23.3

2,377

60.5 miL)

13.5

2,377

1
3
1

52.3 mil.
38.0 mil.
90.3 mil.

39.3
28.5
67.8

5,634
5,634
5,634

2,240
2,240
2,240

1
1
1

52.3 mil.

42.2

3,471

34.2 miL)

25.7

3,471

1
2
1

156.7 mil.
149.9 mil.
306.6 mil.

24.8
23.7
48.6

3,189
3,189
3,189

1,179
1,179
1,179

5
5
5

199.3 mil.

33.3

2,171

161

15.3

2,171

161

TENNESSEE BANKING MARKETS
REQUIRING DIVESTITURE

Bedford-Bedford County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................
Cannon-Cannon County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................
Cumberland-Cumberland County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................

96.6 mil.)

Legal Developments: Fourth Quarter; 2006

Appendix

C41

B-Continued

REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl
GUIDELINES AFTER DIVESTITURES-Continued

Bank

DeKalb-DeKalb County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................
Fayetteville-Lincoln County, excluding
the portion of the town of Petersburg
that lies in Lincoln County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................
Paris-Henry County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to In-Market
Purchaser ................................
Rhea-Rhea County
Pre-Divestiture
Regions Pre-Consummation ............
AmSouth ....................................
Regions Post-Consummation ..........
Post-Divestiture
Regions Post-Consummation ..........
Branches Divested to Out-ofMarket Purchaser ......................

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

3
2
1

62.8 mil.
64.4 mil.
127.2 mil.

21.8
22.4
44.2

3,667
3,667
3,667

975
975
975

2
2
2

62.8 mil.

24.0

2,699

58.0 miL!

20.1

2,699

2
4
1

97.8 mil.
43.2 mil.
141.0 mil.

23.0
10.2
33.2

2,477
2,477
2,477

467
467
467

6
6
6

97.8 mil.

24.0

2,038

38.9 miL!

9.1

2,038

3
4
3

54.3 mil.
52.1 mil.
106.5 mil.

12.1
11.6
23.7

2,809
2,809
2,809

282
282
282

6
6
6

54.3 mil.

13.3

2,531

46.9 miL!

10.5

2,531

4
3
1

39.4 mil.
56.6 mil.
96.0 mil.

13.6
19.6
33.2

2,840
2,840
2,840

533
533
533

3
3
3

39.4 mil.

14.9

2,288

32.3 mil. l ,3

11.2

2,288

NOTE: Data are as of June 30, 2005. All amounls of deposits are
unweighted. All rankings, market deposit shares, and HHls are based
on thrift deposits weighted at 50 percent. Amounts of deposits for
branches divested to purchasers take into account potential deposit
runoff of up to 10 percent.

1. One branch.
2. Five branches.
3. On September 29,2006, prior to the merger, AmSouth sold one
branch with deposits of $20.7 million to SouthEast Bank and Trust, a
market competitor. Those deposits are therefore not reflected in the
post-divestiture amount.

C42

Federal Reserve Bulletin 0 March 2007

Sky Financial Group, Inc.
Bowling Green, Ohio
Order Approving Acquisition 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
under section 3 of the BHC Act! to acquire Wells River
Bancorp, Inc. ("Wells River") and its subsidiary bank,
Perpetual Savings Bank ("Perpetual"), both of Wellsville,
Ohio. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 47,226 (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.
Sky, with total consolidated assets of $15 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 $8.1 billion, which represent 4 percent of
total deposits of insured depository institutions in Ohio
("state deposits"). 4
Wells River, a small bank holding company with banking assets of approximately $72.6 million, operates one
insured depository institution, Perpetual, in Ohio. Perpetual
is the 179th largest depository institution in the state,
controlling deposits of approximately $57.4 million. On
consummation of this proposal, Sky would remain the
eighth largest depository organization in Ohio, controlling
deposits of approximately $8.2 billion, which represent
approximately 4 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
1. 12 U.S.c. § 1842.
2. In other pending applications, Perpetual has applied to state
authorities to convert to a state-chartered commercial bank and to the
Board to become a state member bank. Sky plans subsequently to
merge Perpetual with Sky Bank, with Perpetual as the surviving entity,
and to operate Sky Bank's offices as branches of Perpetual pursuant to
section 18(c) of the Federal Deposit Insurance Act and section 9 of the
Federal Reserve Act (12 U.S.c. § 1828(c); 12 U.S.c. § 321). Sky
intends to change the name of Perpetual to Sky Bank and to move its
headquarters to Salineville.
3. Sky also controls Sky Trust, National Association, Pepper Pike,
Ohio ("Sky Trust"), a limited-purpose bank that provides only trust
services.
4. Asset and deposit data are as of June 30, 2006, and statewide
deposit and ranking data are adjusted for subsequent acquisitions
through September 12, 2006. In this context, insured depository
institutions include commercial banks, savings banks, and savings
associations.

BHC Act 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. 5
The Board has carefully considered the competitive effects
of the proposal in light of all the facts of record.
Sky and Wells River compete directly in the YoungstownWarren, Ohio 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. 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 Sky and Wells River,? 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 ("DOl Guidelines"),8 and other characteristics of the
market.
In the Youngstown-Warren banking market, Sky is the
largest depository organization, controlling deposits of
$2.5 billion, which represent 35.5 percent of market deposits. Perpetual is the 17th largest depository institution in the
market, controlling deposits of $57.4 million, which represent less than I percent of market deposits. On consummation, Sky would remain the largest depository organization
in the market, controlling deposits of approximately $2.5 billion, which represent 36.2 percent of market deposits. The
HHI would increase 44 points to 1809.
The proposal would be consistent with DOl Guidelines
in the Youngstown-Warren banking market. Although the
market would become highly concentrated as measured by
5. 12 U.S.c. § 1842(c)(I).
6. The Youngstown-Warren banking market is defined as Mahoning
County, excluding Smith township; Trumbell County, excluding
Brookfield and Hartford townships; and Columbiana County, all in
Ohio; and the Grant District in Hancock County, West Virginia.
7. Deposit and market data are as of June 30, 2006, reflect merger
activity through September 12, 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 market share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve
Bulletin 52, 55 (1991).
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 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.

Legal Developments: Fourth Quarter, 2006

the HHI, the increase in the HHI would be small. As noted,
Sky currently controls 35.5 percent of the market, and on
consummation of the proposal, Sky's market share would
increase less than I percent. Furthermore, 16 insured
depository institutions other than Sky would continue to
operate in the market, including two institutions, each with
more than 10 percent of market deposits, and three other
institutions, each with more than 5 percent of market
deposits. These factors, therefore, indicate that the proposal
is not likely to have a significantly adverse competitive
effect in the Youngstown-Warren banking market.
The DOJ also has conducted a detailed review of the
potential 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 Youngstown-Warren banking market, where Sky and Wells River compete directly, or in any
other relevant banking market. Accordingly, the Board has
determined that competitive considerations are consistent
with approval.

C43

The Board has considered carefully the financial factors
of the proposal. Sky, Sky Bank, and Perpetual are well
capitalized and would remain so on consummation of the
proposal. Based on its review of the record, the Board also
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.
The Board also has considered the managerial resources
of Sky, Wells River, and their subsidiary banks. The Board
has reviewed the examination records of these institutions,
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 and anti-money-laundering laws. Sky, Wells
River, and their subsidiary depository institutions 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
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 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 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 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. 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.

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").9 Sky Bank received a "satisfactory" rating at
its most recent CRA performance evaluation by the Federal
Reserve Bank of Cleveland, as of October 14, 2004.
Perpetual also received a "satisfactory" rating at its most
recent CRA performance evaluation by the Federal Deposit
Insurance Corporation, as of July 1,2005. After consummation of the proposal, Sky plans to implement its CRA
policies at Perpetual. The proposal would result in efficiencies that would allow Sky to better serve the customers of
Sky Bank and Perpetual and would expand the products
and services available to Perpetual customers. Based on all
the facts of record, 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 this conclusion, the Board
has considered all the facts of record in light of the factors
9. 12 U.S.c. §2901 et seq.; 12 U.S.c. § 1842(c)(2).

Federal Reserve Bulletin 0 March 2007

that it is required to consider under the BHC Act. 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 Federal Reserve Bank of Cleveland, acting
pursuant to delegated authority.
By order of the Board of Governors, effective October 6,
2006.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner. and Mishkin. Absent and not voting:
Governor Bies.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

ORDERS ISSUED UNDER SECTION 4 OF
THE BANK HOLDING COMPANY ACT

National City Corporation
Cleveland, Ohio
Order Approving the Acquisition of a
Savings Association and a Notice to Engage
in Nonbanking Activities
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 sections 4(c)(8) and 4(j) of the BHC Act
and section 225.24 of the Board's Regulation yl to acquire
Harbor Federal Savings Bank ("Harbor FSB"), a savings
association, by merging with its holding company, Harbor
Florida Bancshares, Inc. ("Harbor"), both of Fort Pierce,
Florida. National City also has requested the Board's
approval under those provisions to acquire Appraisal
Analysis, Inc. ("Appraisal Analysis"), Fort Pierce, a subsidiary of Harbor, and thereby provide appraisal services for
real estate and personal property in accordance with section 225.28(b)(6) of the Board's Regulation y'2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 41,219 (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 4 of the BHC Act.
National City, with total consolidated assets of
$141.5 billion, is the 13th largest depository organization in
the United States, controlling deposits of approximately
$83.2 billion, which represent approximately I percent of
the total amount of deposits of insured depository institutions in the United States. 3 National City operates one
insured depository institution, National City Bank, Cleveland, Ohio, with branches in seven states. 4 Harbor, with
total consolidated assets of approximately $3.2 billion,
operates one insured depository institution, Harbor FSB,
with branches only in Florida. Harbor is the II th largest
depository organization in Florida, controlling deposits of
approximately $2.2 billion, which represent approximately
2 percent of the total amount of deposits of insured
depository institutions in the state.
On consummation of the proposal, National City would
remain the 13th largest insured depository organization in
the United States, with total consolidated assets of approximately $145.4 billion. National City would control deposits
of approximately $85 billion, representing I percent of the
total amount deposits of insured depository institutions in
the United States.
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. s 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. 6 National City has committed to conform all the
activities of Harbor FSB to those permissible under section 4(c)(8) of the BHC Act and Regulation Y. In addition,
the Board has determined that appraising real estate and
personal property is closely related to banking.? National
City has committed to conduct this activity in accordance
with the Board's regulations and orders.
Section 4(j)(2)(A) of the BHC Act requires the Board to
determine that the proposed acquisition of Harbor FSB and
Appraisal Analysis "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 under these public
interest factors, the Board reviews the financial and managerial resources of the companies involved, the effect of the
proposal on competition in the relevant markets, and the

3. Asset, deposit, and ranking data are as of June 30, 2006. In this
context, insured depository institutions include commercial banks,
savings banks, and savings associations.
4. National City Bank operates in Illinois, Indiana, Kentucky,
Michigan, Missouri, Ohio, and Pennsylvania.
5. 12 CFR 225.28(b)(4)(ii).
6./d.

1. 12 U.S.c. §§ 1843(c)(8) and G); 12 CFR 225.24.
2. 12 CPR 225.28(b)(6).

7.12 CFR 225.28(b)(2)(i).
8. 12 U.S.C. § 1843G)(2)(A).

Legal Developments: Fourth Quarter, 2006

public benefits of the proposal. 9 In acting on a notice 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").l0 The Board has considered the proposal under
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.!!

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 proposed
acquisition of Harbor FSB in light of all the facts of record.
National City and Harbor 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 not result in any significantly adverse effect on
competition in any relevant banking marketP
The Board has considered the effects of the proposed
transaction on competition for appraisal services. Harbor
and National City do not compete directly in providing the
proposed appraisal services. Moreover, the markets for
these nonbanking activities are local or regional in scope
and are unconcentrated. The record in this case indicates
that there are numerous providers of these services. Based
on all the facts of record, the Board concludes that consummation of the proposal would have a de minimis effect on
competition among providers of appraisal services.

FINANCIAL AND MANAGERIAL RESOURCES
In reviewing the proposal under section 4 of the BHC Act,
the Board has carefully considered the financial and mana9. See 12 CFR 225.26; see, e.g., BancOne Corporation, 83 Federal
Reserve Bulletin 602 (1997).

10.12 U.S.C. §2901 et seq.
II. One of the two commenters on the proposal expressed concern
that National City's acquisition of Appraisal Analysis could erode the
separation between appraisers and the loan-production and credit
decision-making processes. National City has committed that it will
conduct all appraisal services in compliance with applicable federal
regulations and guidance requiring functional separation of appraisals
from credit-solicitation and decision-making processes.
12. Another commenter expressed concern about the existing concentration levels of market deposits in markets where Harbor FSB has
offices. Because National City Bank currently does not have branches
in any of these banking markets, the proposal would not increase the
concentration levels of deposits in Harbor FSB's banking markets.
Furthermore, the Board reviewed the concentration levels in the Indian
River County, Rorida banking market, one of the markets where
Harbor FSB has branches, in its recent review of the proposed
acquisition of Golden West Financial Corporation, Oakland, California, by Wachovia Corporation, Charlotte, North Carolina. The Board
found no adverse competitive impact in the market as a result of that
transaction. See Wachovia Corporation, 92 Federal Reserve Bulletin
CI83 (2006).

C45

gerial resources of National City, Harbor, 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
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, information provided by National City, and public comments
received on the proposal.
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 information, 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 proposal under
the financial factors. National City, Harbor, 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 finds that National
City 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
records of National City, Harbor, 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 and with anti-moneylaundering laws. National City, Harbor, 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.!3
Based on all the facts of record, the Board has concluded
that the financial and managerial resources of the organiza-

13. A commenter expressed concern about National City's relationships with unaffiliated pawn shops, cash-advance lenders, 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. National City has stated that it does not pursue
such nontraditional providers as a line of business. National City also
has represented that it does not play any role in the lending practices,
credit review, or other business practices of those firms.

C46

Federal Reserve Bulletin 0 March 2007

tions involved in the proposal are consistent with approval
under section 4 of the BHC Act.
eRA 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 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.1 4
The Board received a comment related to the CRA
performance record of National City. The commenter
alleged, based primarily on data reported under the Home
Mortgage Disclosure Act ("HMDA"),15 that National City
extended a disproportionately high number of subprime
mortgage loans in the Cincinnati area, particularly to LMI
borrowers, as compared to its lending outside Cincinnati. 16
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. 17
National City Bank received an "outstanding" rating at
its most recent CRA performance evaluation by the Office
of the Comptroller of the Currency ("OCC"), as of February 22, 2000.1 8 Harbor FSB received an "outstanding"
14.12 U.S.c. §2903.
15. 12 U.S.c. § 2801 et seq.
16. As the Board has previously noted, subprime lending is a
permissible activity that provides needed credit to consumers who
have difficulty meeting conventional underwriting criteria. The Board
continues to expect all bank holding companies and their affiliates to
conduct their lending operations without any abusive lending practices. See. e.g., Royal Bank of Canada, 88 Federal Reserve Bulletin
385, 388 (2002). The Board notes that on September 5, 2006, National
City signed an agreement to sell its principal subsidiary that originates
subprime mortgage loans, First Franklin Financial Corporation ("First
Franklin"), San Jose, California, to Merrill Lynch & Co., New York,
New York, and also announced its intention to sell to Merrill Lynch
$5.6 billion of loans originated by First Franklin.
17. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36,640 (2001).
18. On July 22, 2006, National City consolidated five other subsidiary banks into National City Bank: National City Bank of Indiana.
Indianapolis, Indiana; National City Bank of Kentucky, Louisville,
Kentucky; National City Bank of Pennsylvania, Pittsburgh, Pennsylvania; National City Bank of Southern Indiana, New Albany, Indiana;
and National City Bank of the Midwest, Bannockburn, Illinois. On
August 19, 2006, National City also consolidated Pioneer Bank and

rating at its most recent CRA performance evaluation by
the Office of Thrift Supervision, as of September 30,2005.
National City has indicated that its CRA program would be
implemented at Harbor FSB on consummation of the
proposal.
In connection with previous applications by National
City, the Board has reviewed the CRA performance records
of National City's subsidiary-insured depository institutions. 19 A summary of the most recent CRA evaluations of
National City Bank was included in the Allegiant Order.
Based on its review of the record in this case, the Board
hereby reaffirms and adopts the facts and findings detailed
in the Allegiant Order. The Board also has consulted with
the OCC concerning the CRA performance of National
City Bank since its last CRA evaluation.
As discussed in the Allegiant Order, the most recent
CRA evaluation of National City Bank characterized the
bank's overall record of home mortgage and small business
lending as excellent and commended its level of community development lending. 20 Examiners noted favorably the
use of several flexible lending products designed to address
the affordable housing needs of LMI individuals and the
bank's level of qualified investments. In addition, examiners reported that National City Bank's community development services were excellent and commended the geographic distribution of the bank's branches.
In 2004 and 2005, National City originated housingrelated loans reported under HMDA totaling more than
$11.6 billion. Of this amount, 13 percent was lent to
borrowers in LMI census tracts and 26 percent to LMI
borrowers. National City represented that, in 2004 and
2005, its subsidiary banks also made approximately
$977 million in qualified community development loans
and approximately $235 million in qualified investments
and grants in their assessment areas, including significant
investments in the Cincinnati area.
In the most recent CRA performance evaluation of
Harbor FSB, examiners reported that the savings association's overall lending to LMI borrowers exceeded that of all
other lenders in its assessment areas during the evaluation
period (January 1,2003, to December 31,2(04). In addiTrust Company, Maplewood, Missouri, into National City Bank. Each
of these banks received either an "outstanding" or a "satisfactory"
rating al its most recent CRA evaluation, as have the other insured
depository institutions that, since the most recent CRA performance
evaluation of National City Bank, have been consolidated into
National City Bank.
19. National City Corporation, 92 Federal Reserve Bulletin C84
(2006); National City Corporation, 90 Federal Reserve Bulletin 519
(2004); National City Corporation, 90 Federal Reserve Bulletin 236
(2004) ("Allegiant Order"); and National City Corporation, 90 Federal Reserve Bulletin 382 (2004) ("Provident Order").
20. See Allegiant and Provident Orders. In evaluating the records of
performance under the CRA of National City Bank, examiners considered home mortgage loans by certain affiliates in the bank's assessment areas. The loans reviewed by examiners included loans reported
by National City Mortgage Corporation, Miamisburg, Ohio (then a
subsidiary of National City Bank of Indiana); National City Mortgage
Services, Kalamazoo, Michigan (then a subsidiary of National City
Bank of the Midwest); and other bank and nonbank affiliates of
National City Bank.

Legal Developments: Fourth Quarter, 2006

tion, examiners characterized Harbor FSB's level of community development lending in the combined assessment
area as strong. Examiners also commended Harbor FSB for
supporting a wide variety of nonprofit civic organizations
in its assessment areas and noted that the savings association offered a high level of banking services, including
several products that were beneficial to LMI individuals.
Based on a review of the entire record, and for the
reasons discussed above, the Board has concluded that
considerations relating to the CRA performance records of
the relevant depository institutions are consistent with
approval.

OTHER CONSIDERATIONS
In light of public comments on the proposal, the Board also
has carefully considered the fair lending record and HMDA
data reported by subsidiaries of National City in its evaluation of the public interest factors. A commenter opposed
the proposal and alleged, based on 2005 HMDA data, that
National City made higher-cost loans to African Americans
and Hispanics more frequently than to nonrninorities. 21 The
Board has analyzed 2004 and 2005 HMDA data reported
by subsidiaries of National City in its banks' primary
assessment areas, including the Metropolitan Statistical
Areas ("MSA") of Cleveland, Cincinnati, and Indianapolis,
and statewide in the states where those banks operated
branches.
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 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 10ans. 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
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 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CPR 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.

C47

sound lending but also equal access to credit by creditworthy applicants regardless of their race or ethnicity. 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, examiners noted no
substantive violations of applicable fair lending laws. The
Board has also forwarded the commenter's submissions to,
and consulted with, the acc about the fair-lending and
consumer-protection compliance records of National City
Bank, including the records of First Franklin, which is a
subsidiary of the bank.
The record also indicates that National City has taken
steps to ensure compliance with fair lending and other
consumer protection laws. National City represents 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 states that it performs fair
lending analysis using regression modeling and benchmarking and monitors adherence to credit policies using monthly
reporting and quality control reviews. National City also
represents that its fair lending policies include 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 LMl areas. National City
intends to implement its consumer compliance and fair
lending programs at Harbor FSB after consummation of the
proposal.
In addition, the Board has considered the HMDA data in
light of other information, including the CRA performance
records of National City Bank and Harbor FSB. Based on
all the facts of record, the Board has concluded that
considerations relating to the fair lending record and
HMDA data of National City Bank and Harbor FSB are
consistent with approval under section 4 of the BHC Act.

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 Harbor. National City has
represented that the proposed transaction would provide
Harbor's customers with expanded products and services,
including expanded commercial lending products, cash
management and international trade services, and fiduciary
and trust services. In addition, National City has represented that its acquisition of Appraisal Analysis would
increase competition for appraisal services in Florida by
increasing the availability of such services.

C48

Federal Reserve Bulletin 0 March 2007

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 concentrations 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 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.

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the proposal should be, and
hereby is, approved. 23 In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
23. A commenter 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 or other presentations. See 12 CFR 262.3(i)(2), 262.25(d).
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

that it is required to consider under the BHC Act. The
Board's approval is specifically conditioned on compliance
by National City and Harbor 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),24 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 Cleveland, acting pursuant to
delegated authority.
By order of the Board of Governors, effective October 13, 2006.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Kroszner and Mishkin. Absent and not voting: Governors Bies and Warsh.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

required or warranted in this case. Accordingly, the request for a public
hearing or meeting on the proposal is denied.
24. 12 CFR 225.7 and 225.25(c).

C49

June 2007

Legal Developments: First Quarter, 2007
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY ACT

Bank, with branches in 11 states and the District of
Columbia. U.S. Trust 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 $1.5 trillion.

INTERSTATE AND DEPOSIT CAP ANALYSIS

Bank of America Corporation
Charlotte, North Carolina
Order Approving the Acquisition of a Bank
Holding Company
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 Act l to
acquire U.S. Trust Corporation ("U.S. Trust") and its
subsidiary bank, United States Trust Company, National
Association ("U.S. Trust Bank"), both of New York,
NewYork. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(72 Federal Register 132 (2007)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the BHC Act. 3
Bank of America, with total consolidated assets of
approximately $1.5 trillion, is the second largest depository
organization in the United States. 4 Bank of America operates six insured depository institutions 5 that operate in 30
states and the District of Columbia, and it engages nationwide in numerous nonbanking activities that are permissible under the BHC Act.
U.S. Trust, with total banking assets of approximately
$11.1 billion, controls one depository institution, U.S. Trust
1. 12 U.S.c. § 1842.
2. U.S. Trust is a wholly owned subsidiary of The Charles Schwab
Corporation ("Charles Schwab"), San Francisco, California. Bank of
America proposes to acquire all the outstanding common stock of U.S.
Trust from Charles Schwab. In addition, Bank of America proposes to
acquire the nonbanking subsidiaries of U.S. Trust in accordance with
section 4(k) of the BHC Act, 12 U.S.c. § 1843(k).
3. Three commenters expressed concerns on various aspects of the
proposal.
4. Asset data are as of December 31, 2006.
5. In this context, insured depository institutions include corrunercial banks, savings banks, and savings associations.

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,6 and U.S. Trust Bank is
located in California, Connecticut, the District of Columbia, Florida, Massachusetts, Minnesota, New Jersey,
New York, North Carolina, Oregon, Pennsylvania, and
Texas.?
The Board may not approve an interstate acquisition
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").8 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 institutions9 in the United States. In
6. See 12 U.S.c. § I842(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 I, 1966, or the date on which
the company became a bank holding company, whichever is later.
7. 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(0)(4}-(7)
and I 842(d)(l )(A) and (d)(2)(B).
8. One commenter expressed general concerns about the proposal's
consistency with the nationwide deposit cap.
9. The BHe 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 FDl 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 FDl 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).

C50

Federal Reserve Bulletin D June 2007

analyzing this matter, 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 consummation of the proposal would
control, in the same manner as described in the Board's
2004 order approving Bank of America's acquisition of
FleetBoston Financial Corporation.!O These calculations
are based on the definition of "deposit" in the FDI Act, 11
the deposit data collected in reports filed by all insured
depository institutions,!2 and the methods and adjustments
used by the FDIC to compute total insured deposits.
Based on the latest available deposit data reported by all
depository institutions, the total amount of deposits of
insured depository institutions in the United States is
approximately $6.757 trillion as of December 31, 2006.
Also based on the latest Call Report, Bank of America
(including all its insured depository institution affiliates)
controls deposits of approximately $612.0 billion, and U.S.
Trust controls deposits of approximately $9.4 billion. Bank
of America, therefore, currently controls approximately
9.1 percent of total U.S. deposits. On consummation of the
proposed transaction, Bank of America would control
approximately 9.2 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 ("state deposit cap").13 On consummation of the proposal, Bank of America would control
less than 30 percent of the total amount of deposits of
insured depository institutions in California, Connecticut,
the District of Columbia, Florida, Massachusetts, New Jersey, New York, North Carolina, Oregon, Pennsylvania, and

10. Bank of America Corporation, 90 Federal Reserve Bulletin
217, 219 (2004) ("BOA/Fleet Order"); see also Bank of America
Corporation, 92 Federal Reserve Bulletin C5 (2006) (order approving
Bank of America's merger with MBNA Corporation, Wilmington,
Delaware ("BOAIMBNA Order"».
II. Section 3(d) of the BHC Act 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(1».
12. 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"). Each insured savings association similarly must report its total deposits on the institution's Thrift
Financial Report. 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. These data are reported quarterly to the FDIC and are
publicly available.
13. 12 U.S.c. § 1842(d)(2)(B)-(D).

Texas, and would not hold deposits in excess of any
applicable state deposit caps.
All other requirements of section 3(d) of the BHC Act
also would be met on consummation of the proposal.1 4
Based on all the facts of record, the Board is permitted to
approve the proposal under section 3(d) of the BHC Act.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
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
Bank of America and U.S. Trust have subsidiary depository institutions that compete directly in 16 banking markets throughout the United States. 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 Bank of America and
U.S. Trust,!6 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"),!? and other characteristics of the markets.
14. Bank of America is adequately capitalized and adequately
managed as defined by applicable law (12 U.S.c. § 1842(d)(I)(A).
U.S. Trust Bank has been in existence and operated for the minimum
period of time required by applicable state law. See 12 U.S.C.
§ I842(d)(1 )(B). The other requirements in section 3(d) of the BHC
Act also would be met on consummation of the proposal.
15. 12 U.S.C. § I842(c)(1).
16. Deposit and market share data are as of June 30, 2006, adjusted
to reflect mergers and acquisitions through February 20, 2007, 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., 77 Federal
Reserve Bulletin 52, 55 (1991).
17. Under the DOJ Guidelines, a market is considered unconcenlrated 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 ("001") 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 limited-purpose and
other nondepository financial entities.

Legal Developments: First Quarter. 2007 C51

A. Banking Markets within Established Guidelines
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOl
Guidelines in 15 of the 16 banking markets. ls On consummation of the proposal, three of these markets would
remain unconcentrated, eleven markets would remain moderately concentrated, and one market would remain highly
concentrated, as measured by the HHI. The change in the
HHI measure of concentration in each of these markets
would be very small. Moreover, numerous competitors
would remain in each of the 15 banking markets.
B. Banking Market Warranting Special Scrutiny
Bank of America and U.S. Trust compete directly in one
banking market, Hartford, Connecticut,19 that warrants a
detailed review because the post-consummation market
share of Bank of America in that market would exceed
35 percent. In the Hartford banking market, Bank of
America is the largest depository organization, controlling
deposits of approximately $10.3 billion, which represent
approximately 40.5 percent of market deposits. U.S. Trust
is the 25th largest depository organization in the market,
controlling deposits of $50.6 million, which represent less
than 1 percent of market deposits. On consummation of the
proposal, Bank of America would remain the largest
depository organization in the market, controlling deposits
of approximately $10.3 billion, which represent approximately 40.7 percent of market deposits. Bank of America's
market share would increase by less than I percent, and the
HHI would increase by only 16 points to 2142, which is
consistent with the DOl Guidelines.
The Board has considered carefully whether other factors either mitigate the competitive effects of the proposal
or indicate that the proposal would have a significantly
adverse effect on competition in the market. The number
and strength of factors necessary to mitigate the competitive effects of a proposal depend on the size of the increase
and the resulting level of concentration in a banking
market. 20
Several factors indicate that the proposal would not have
a significantly adverse effect on concentration in the Hartford banking market. Although the market is highly concentrated, as measured by the HHI, the change in market share
and market structure would be de minimis, and 32 other
depository organizations would continue to operate in the
market. In addition, the record of entry into the Hartford
banking market evidences the market's attractiveness for
entry. Eight depository institutions have entered the market
de novo since 2001.

18. These markets, and the effects of the proposal on the concentration of banking resources in these markets, are described in the
appendix.
19. The Hartford banking market is defined as the HartfordNew Britain Ranally Metropolitan Area.
20. See NationsBank Corporation, 84 Federal Reserve Bulletin 129
(1998).

C. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOl has conducted a detailed review of the potential
competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the 16 banking markets where
Bank of America and U.S. Trust compete directly 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 relevant
federal and state supervisors of the organizations involved
in the proposal, publicly reported and other financial information, including information provided by Bank ofAmerica.
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
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. Bank of America, all its subsidiary
banks, and U.S. Trust Bank currently are well capitalized
and would remain so on consummation of the proposal.
Based on its review of the record, the Board finds that Bank
of America has sufficient financial resources to effect the
proposal. The proposed transaction is structured as a cash
purchase of shares, and Bank of America will use existing
resources to fund the 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 Bank of America and U.S. Trust, and their

C52

Federal Reserve Bulletin 0 June 2007

subsidiary banks, including assessments of their management, risk-management systems, and operations. 21 In addition, the Board has considered its supervisory experiences
and those of the other relevant bank supervisory agencies
with the organizations and their records of compliance with
applicable banking law, including anti-money-Iaundering
laws. 22 The Board also has considered Bank of America'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,23
21. The Board has considered that Bank of America recently
entered into agreements with the Internal Revenue Service ("IRS")
and the DOJ with respect to ongoing industrywide investigations being
conducted by the DOJ, the IRS, and the Securities and Exchange
Commission ("SEC") related to certain practices in the municipal
bond industry. Bank of America has voluntarily provided information
and continues to work with the three agencies on this matter. The
Board has also considered that this month Bank of America settled an
SEC enforcement action against Bank of America's subsidiary, Bane
of America Securities LLC, related to its research reports. Consistent
with the provisions of section 5 of the BHC Act, as amended by the
Gramrn-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999),
the Board has relied on examination and other supervisory information
provided by the SEC and other appropriate functional regulators about
functionally regulated subsidiaries. The Board also has consulted with
the SEC about its review of the efforts of Bank of America to comply
with federal securities laws. The Board also has considered the
willingness and efforts undertaken by Bank of America's management
to ensure compliance with all applicable state and federal law and to
improve compliance programs and policies in light of these investigations.
22. As part of its consideration of managerial factors, the Board
reviewed confidential supervisory information on the policies, procedures, and practices of Bank of America and its subsidiary banks for
complying with the Bank Secrecy Act and consulted with the Office of
the Comptroller of the Currency ("OCC"). The Board also considered
the result of investigations by other authorities concerning anti-moneylaundering matters involving Bank of America, which related to
deficiencies in handling money transfers through Bank of America's
New York branch and to certain deficiencies in customer due diligence
and suspicious activity reporting at a subsidiary of Bank of America,
Banc of America Investment Services, Inc. These investigations have
recently been settled, and Bank of America has taken appropriate steps
to revise its anti-money-laundering policies, systems, and controls.
23. One commenter reiterated concerns he had expressed previously about Bank of America's relations with unaffiliated third parties
engaged in subprime lending, including OwnIt Mortgage ("OwnIt"),
formerly Oakmont Mortgage Company, Woodland Hills, California.
Bank of America represented that its investment in OwnIt was a
passive, noncontroIling investment and that Ownit recently terminated
its operations. Bank of America provides warehouse lines-of-credit to
subprime lenders and other consumer finance companies, purchases
subprime mortgage loans from unaffiliated lenders, and securitizes
pools of subprime mortgage loans. 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. See BOA/Fleet Order 217, at 223 n.29 (2004). Moreover, the
commenter provided no evidence that Bank of America has originated,
purchased, or securitized "predatory" loans or otherwise engaged in
abusive lending practices. Bank of America has policies and proce-

eRA 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
dures to help ensure that the subprime loans it purchases and securitizes are in compliance with applicable state and federal consumer
protection laws.
24.12 U.S.c. §2901 et seq.; 12 U.S.C. § I842(c)(2).
25. 12 U.S.C. § 2903.
26. 12 U.S.c. § 2801 et seq.
27. The commenter also requested that Bank of America implement
a number of CRA-related recommendations set forth in the comment
letter. 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 BONFleet 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.

Legal Developments: First Quarter; 2007

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
Bank of America's lead bank, Bank of America, National
Association ("BA Bank"), Charlotte, North Carolina,
received an "outstanding" rating at its most recent CRA
performance evaluation by the acc, as of December 31,
2001 ("2001 Evaluation").29 The only other subsidiary
bank of Bank of America subject to the CRA, FIA Card
Services, N.A., Wilmington, Delaware,3o also received an
"outstanding" rating at its most recent CRA performance
evaluation by the acc, as of April 4, 2005. U.S. Trust
Bank was formed in 2006 by the conversion of United
States Trust Company of New York ("USTC New York"),
New York, New York, to a national bank charter and its
subsequent merger with U.S. Trust Company, National
Association ("USTC Los Angeles"), Los Angeles, California. Both banks were subsidiaries of U.S. Trust and had
"outstanding" CRA performance ratings by the Board and
the acc, respectively, before the merger. 31 Bank of
America has represented that it would work to combine the
community development and community investment activities of BA Bank and U.S. Trust Bank to strengthen and
meet the banking needs of the communities in which they
operate.
eRA Performance of BA Bank. The 2001 Evaluation of
BA Bank was discussed in the BOA/Fleet Order. 32 The
Board also considered BA Bank's CRA performance in the
BOA/MBNA Order. Based on a review of the record in this
case, the Board hereby reaffirms and adopts the facts and
findings detailed in those two orders concerning BA Bank's
CRA performance record. Bank of America also provided
the Board with additional information about its CRA
performance since the Board last reviewed such matters in
the BOA/MBNA Order. 33 The Board also consulted with the
acc with respect to BA Bank's CRA performance since
the BOA/MBNA Order.
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 dif28. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
29. The evaluation period for the 2001 Evaluation was January I,
2000, through December 31, 2001.
30. FIA Card Services was formerly known as MBNA America
Bank, National Association, Wilmington. Delaware, and was renamed
in June 2006.
31. USTC New York received an overall "outstanding" CRA
performance rating from the Board, as of March IS, 2004, and USTC
Los Angeles received an overall "outstanding" CRA performance
rating from the OCC, as of October IS, 2002. The OCC has not yet
evaluated U.S. Trust Bank's CRA performance.
32. BOAIFleet Order at 225-229.
33. Bank of America has provided detailed information about its
community development activities in New York City in response to a
commenter's concerns about its record of serving the credit needs of
the city's residents.

C53

ferent 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
of BA Bank's assessment areas. 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. 34 In addition, examiners noted in the
2001 Evaluation that BA Bank's level of community
development lending was excellent.
Since the 2001 Evaluation, BA Bank has maintained a
substantial level of home mortgage, small business, and
community development lending. The bank originated
more than 376,000 HMDA-reportable home mortgage
loans totaling approximately $80 billion throughout its
assessment areas in 2005. 35 More than 75,000 of those
loans totaling more than $8 billion were originated to LMI
individuals. In 2006, BA Bank was recognized by the U.S.
Small Business Administration ("SBA") for the ninth
consecutive year as the leading small business lender in the
country, based on its origination of approximately 13,000
SBA loans totaling more than $405 million. Bank of
America represented that BA Bank's community development lending during 2005 and 2006 totaled approximately
$5.8 billion. 36
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.J7
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 activities in community development investment in
its assessment areas. Bank of America represented that BA
Bank's qualifying community development investments
during 2005 and 2006 totaled approximately $3.6 billion
and that BA Bank's subsidiary community development

34. 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 borrowers in
the United States.
35. BA Bank originated more than 5,400 HMDA-reportable home
mortgage loans totaling approximately $1.6 billion in the New York
MSA in 2005, including 785 loans totaling approximately $188 million to LMI individuals.
36. Bank of America advised that information for 2006 is based on
preliminary data, which have not been finalized and may be incomplete.
37. 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 small as
$500 and promote SBA programs.

C54

Federal Reserve Bulletin 0 June 2007

corporation had helped develop more than 6,200 housing
units in LMI census tracts or for LMI individuals since
2003. 38
Examiners commended BA Bank's service performance
throughout its assessment areas in the 2001 Evaluation.
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. 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. 39
eRA Perfonnance of u.s. Trust Bank. As noted, U.S.
Trust Bank received an overall "outstanding" rating in its
March 2004 evaluation. 40 U.S. Trust Bank provides investment management, private banking, and fiduciary services
to high-net-worth individuals and institutions and is designated as a wholesale bank for purposes of evaluating its
eRA 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. 41
With respect to community development lending, examiners commended U.S. Trust Bank's responsiveness to the
credit needs of its assessment area. Examiners noted that
during the evaluation period, U.S. Trust Bank made more
than $44 million in qualified community development
investments, including a number of low-income housing
tax credit investments, which helped meet the assessment
area's critical needs for affordable housing.

B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of Bank of America in light of public
comments received on the proposal. Two commenters
alleged, based on 2005 and 2006 HMDA data, that Bank of
America had denied the home mortgage loan applications
of African-American and Hispanic borrowers more frequently than those of nonminority applicants in various
metropolitan statistical areas ("MSAs") and nationwide.
The commenters also alleged that Bank of America and its
subsidiaries made higher-cost loans more frequently to
African-American and Hispanic borrowers than to nonmi38. Bank of America also has represented that, during 2005 and
2006, BA Bank's qualifying community development investments in
New York City totaled approximately $170 million and qualified
community development lending in New York City totaled approximately $700 million.
39. One commenter asserted that Bank of America should ensure
that certain banking products and services are made available to LMI
customers in New York City. 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.
40. The evaluation period was from March 16, 2002, through
December 31, 2003.
41. See 12 CFR 25.25.

nority borrowers. 42 The Board has focused its analysis on
the 2005 HMDA data reported by Bank of America and its
subsidiary banks. 43
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials 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 Bank of
America is excluding or imposing higher costs on any
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 10ans.44 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 or ethnicity.
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
Bank of America and its subsidiaries. The Board also has
consulted with the acc, the primary federal supervisor of
Bank of America's subsidiary banks.
The record, including confidential supervisory information, indicates that Bank of America has taken steps to
ensure compliance with fair lending and other consumer
protection laws. Bank of America has corporate wide
policies and procedures to help ensure compliance with all
fair lending and other consumer protection laws and regulations. Bank of America's compliance program includes
fair lending policy and product guides, compliance file
reviews, testing of HMDA data integrity, and other qualityassurance measures. In addition, Bank of America represented that it provides annual fair lending training to ensure
that Bank of America's associates understand their respon-

42. 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 or
more for first-lien mortgages and 5 percentage points or more for
second-lien mortgages (12 CFR 203.4).
43. The Board reviewed HMDA data for BA Bank nationwide and
in MSAs and states where the bank's primary assessment areas are
located. The Board notes that 2006 HMDA data are preliminary and
that final data will not be available for analysis until fall 2007.
44. 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: First Quarter, 2007

sibilities for complying with the fair lending policy and
how to employ fair lending "best practices" in all aspects
of the lending process. 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 and make
appropriate modifications to the fair lending policies that
would apply to U.S. Trust Bank's operations after consummation of the proposal.
The Board also has considered the HMDA data in light
of other information, including the programs described
above and the overall performance records of the subsidiary banks of Bank of America under the CRA. These
established efforts and record of performance demonstrate
that the institutions are active in helping to meet the credit
needs of their entire communities.

C. Conclusion on Convenience and Needs and
eRA Performance
The Board has considered carefully all of the facts of
record, including reports of examination of the CRA
records of the institutions involved, information provided
by Bank of America, comments received on the proposal,
and confidential supervisory information. Bank of America
represented that the proposal will result in greater convenience for Bank of America and U.S. Trust customers
through expanded delivery channels and a broader range of
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 record of the
relevant insured depository institutions 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
should be, and hereby is, approved. 45 In reaching its
45. One 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

C55

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 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.
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 March 27,
2007.
Voting for this action: Chairman Bemanke, Vice Chairman Kohn,
and Governors Bies, Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

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
necessary or appropriate to clarify factual issues related to the
application and to provide an opportunity for testimony (12 CFR
225.l6(e), 262.3(i)(2), 262.25(d». 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 his
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 written comments do not present his
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.

C56

Federal Reserve Bulletin 0 June 2007

Appendix
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES

Bank

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

1
26
1

30.0 bil.
445.7 mil.
30.4 bil.

23.17
.34
23.51

1,231
1,231
1,231

16
16
16

161
161
161

2
38
2

21.8 bil.
8.7 mil.
21.8 bil.

23.27
.01
23.28

4,741
4,741
4,741

0
0
0

49
49
49

2
75
2

18.9 biL
52.5 mil.
18.9 biL

24.50
.07
24.57

1,726
1,726
1,726

3
3
3

114
114
114

3
27
3

1 bil.
3.6 miL
1 biL

9.03
.03
9.07

1,179
1,179
1,179

0
0
0

27
27
27

BOSTON BANKING MARKET IN
MASSACHUSETTS AND NEW HAMPSHIRE

Boston-the Boston Ranally Metropolitan
Area (RMA) and the town of Lyndeboro in
Hillsborough County, New Hampshire
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....
CHARLOTTE-RocK HILL BANKING
MARKET IN NORTH CAROLINA
AND SOUTH CAROLINA

Charlotte-Rock Hill-the Charlotte RMA
and the non-RMA portion of Cabarrus
County, North Carolina
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....
DALLAS BANKING MARKET IN TEXAS

Dallas-Dallas County; the southeastern
quadrant of Denton County (including the
cities of Denton and Lewisville); the
southwestern quadrant of Collin County
(including the cities of McKinney and
Plano); Rockwall County; the communities
of Forney and Terrell in Kaufman County;
and the cities of Midlothian, Waxahachie,
and Ferris in Ellis County
Bank of America Pre-Consummation ......
U.S. Trust ._ ......................................
Bank of America Post-Consummation .....
GREENSBORO-HIGH POINT BANKING
MARKET IN NORTH CAROLINA

Greensboro-High Point-the Greensboro
RMA and the non-RMA portions of
Davidson (excluding the Winston-Salem
RMA portion) and Randolph counties
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....

Legal Developments: First Quarter, 2007

C57

Appendix-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued

Bank

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

HOUSTON BANKING MARKET IN TEXAS

Houston-the Houston-Sugar LandBaytown Metropolitan Statistical Area,
consisting of Austin, Brazoria, Chambers,
Fort Bend, Galveston, Harris, Liberty,
Montgomery, San Jacinto, and Waller
counties
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....

2
70
2

9.1 bit
26.2 mil.
9.1 bil.

11.17
.03
11.20

1,406
1,406
1,406

1
1
1

84
84
84

1
58
1

56.4 bil.
268.5 mil.
56.6 bil.

21.24
21.34

814
814
814

5
5
5

166
166
166

2
98
2

20.1 bit
0.0 mil.
20.1 bit

20.12
.00
20.12

990
990
990

0
0
0

99
99
99

2
29
2

1.8 bil.
24.7 mil.
1.8 bit

17.89
.25
18.14

1,150
1,150
1,150

9
9
9

36
36
36

3
20
3

56.2 bit
5.7 bit
62 bit

6.57
.67
7.24

1,246
1,246
1,246

9
9
9

285
285
285

Los ANGELES BANKING MARKET
IN CALIFORNIA

Los Angeles-the Los Angeles RMA and
the towns of Acton and Rosamond
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....

.10

MIAMI-FORT LAUDERDALE BANKING
MARKET IN FLORIDA

Miami-Fort Lauderdale-Broward and
Dade counties
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....
NAPLES BANKING MARKET IN FLORIDA

Naples-Collier County, excluding the
town of Immokalee
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....
NEW YORK BANKING MARKET IN
NEW YORK, NEW JERSEY,
PENNSYLVANIA, AND CONNECTICUT

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, 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
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....

C58

Federal Reserve Bulletin 0 June 2007

Appendix-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued

Bank

Rank

Amount
of deposits
(dollars)

5
109
5

6.4 bil.
9.2 mil.
6.4 bil.

2
32
2

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

6.09
.01
6.10

1,003
1,003
1,003

0
0
0

123
123
123

4.1 bil.
22.3 mil.
4.1 bil.

16.96
.09
17.05

1,438
1,438
1,438

4
4
4

42
42
42

6
28
6

1.1 bil.
1.8 mil.
1.1 bil.

7.01
.01
7.02

1,538
1,538
1,538

1
1
1

31
31
31

1
73
1

56.2 bil.
56.9 mil.
56.2 bil.

27.03
.03
27.06

1,349
1,349
1,349

1
1
1

101
101
101

PHILADELPHIA BANKING MARKET IN
NEW JERSEY AND PENNSYLVANIA

Philadelphia-Bucks, Chester, DeLaware,
Montgomery, and PhiladeLphia counties in
PennsyLvania; and Burlington, Camden,
Cumberland, Gloucester, and Salem
counties in New Jersey
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....
PORTLAND BANKING MARKET IN
OREGON AND WASHINGTON

Portland-the Portland RMA; the towns of
Banks, Molalla, Mount Angel, North
PLains, Saint Helens, Scappoose, Vernonia,
and Woodburn, Oregon; and Yacolt,
Washington
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....
RALEIGH BANKING MARKET
IN NORTH CAROLINA

Raleigh-the Raleigh RMA and the nonRMA portions of FrankLin, Harnett
(excluding the Fayetteville RMA portion),
Johnston, and Wake counties
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....
SAN FRANCISCO-OAKLAND-SAN JOSE
BANKING MARKET IN CALIFORNIA

San Francisco-OakLand-San Jose-the
San Francisco-OakLand-San Jose RMA
and the towns of Byron, Hollister, San
Juan Bautista, Pescadero, and Point Reyes
Station
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....

Legal Developments: First Quarter, 2007

C59

Appendix-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued

Bank

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HBI

Change in
HHI

Remaining
number of
competitors

WASHINGTON BANKING MARKET IN THE
DISTRICT OF COLUMBIA, MARYLAND,
VIRGINIA, AND WEST VIRGINIA

Washington-the Washington RMA, the
non-RMA portions of Calvert, Charles,
Frederick, Prince George's, and St.
Mary's counties in Maryland; Fauquier
and Loudoun counties in Virginia;
Jefferson County in West Virginia; and the
independent cities of Alexandria, Fairfax,
Falls Church, and Manassas in Virginia
PNC Pre-Consummation ......................
Mercantile ........................................
PNC Post-Consummation .....................

2
80
2

14.8 bil.
16.9 mil.
14.8 bil.

11.76
.01
11.77

842
842
842

1
1
1

91
91
91

2
32
2

5.9 bil.
115.4 mil.
6 bil.

18.39
.36
18.75

1,520
1,520
1,520

13
13
13

62
62
62

WEST PALM BEACH BANKING
MARKET IN FLORIDA

West Palm Beach-Palm Beach County
east of Loxahatchee and the towns of
Indiantown and Hobe Sound in Martin
County
Bank of America Pre-Consummation ......
U.S. Trust .........................................
Bank of America Post-Consummation .....

NOTE: Data are as of June 30, 2006. All amounts of deposits are unweighted. All rankings. market deposit shares, and HHls are based on
thrift deposits weighted at 50 percent.

Community Bankshares, Inc.
Greenwood Village, Colorado
Order Approving the Acquisition of a Bank
Holding Company
Community Bankshares, Inc. ("Community"), 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 l to acquire
Citizens Financial Corporation ("Citizens") and its subsidiary bank, The Citizens State Bank of Cortez ("Citizens
State Bank"), both of Cortez, Colorado.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 68,817 (2006)). The
time for filing comments has expired, and the Board has
I. 12

usc.

§ 1842.

considered the application and all comments received in
light of the factors set forth in section 3 of the BHC Act.
Community, with total consolidated assets of approximately $1.4 billion, operates the following subsidiary
insured depository institutions in California and Colorado:
Community Banks of Northern California, Tracy, California; and Community Banks of Colorado ("Community
Bank"), Greenwood Village, Colorado. Community is the
17th largest depository organization in Colorado, controlling deposits of $981.1 million, which represent 1.3 percent
of total deposits of insured depository institutions in Colorado ("state deposits").2
Citizens, with total banking assets of approximately
$78 million, operates one insured depository institution
with branches only in Colorado. Citizens is the 103rd
largest depository organization in Colorado, controlling
2. Data are as of June 30, 2006. In this context, insured depository
institutions include commercial banks, savings banks, and savings
associations.

C60

Federal Reserve Bulletin 0 June 2007

deposits of approximately $65 million, which represent less
than 1 percent of state deposits.
On consummation of this proposal, Community would
remain the 17th largest depository organization in Colorado, controlling deposits of approximately $1 billion,
which represent 1.4 percent of state deposits.

A. Geographic Banking Market
Community and Citizens compete directly in the Cortez,
Colorado banking market ("Cortez banking market").
Community contends that the Cortez banking market, as
delineated by the Federal Reserve Bank of Kansas City
("Reserve Bank"),4 does not reflect the true nature of
banking competition in Cortez and that the relevant geographic market for analysis should be expanded to include
La Plata County, where the city of Durango is located.
Community bases its contention on the commuting patterns
between Montezuma and La Plata counties. 5
In defining a geographic market, the Board and the
courts have consistently found that the relevant geographic
market for analyzing the competitive effects of a proposal
must reflect commercial and banking realities and should
consist of the local area where customers can practicably
turn for alternatives. 6 In reviewing Community's conten3. 12 U.S.c. § 1842(c)(1).
4. The Cortez banking market is defined as Dolores and Montezuma counties, Colorado.
5. Community argues that approximately 7 percent of workers in
Montezuma County, where Cortez is located, commute to La Plata
County for employment, and that the absolute number of commuters
traveling from Montezuma County to La Plata County exceeds the
absolute number of commuters traveling to Montezuma County from
Dolores County (the other county in the Cortez banking market).
Community also notes that the only banking institution in Dolores
County is 35 road miles from Cortez and that Durango, where most
La Plata County banking institutions are located, is only 45 road miles
from Cortez.
6. See United States v. Phillipsburg National Bank, 399 U.S. 350
(1970); United States v. Philadelphia National Bank, 374 U.S. 321,
357 (1963); Brown Shoe Co. v. United States, 370 U.S. 294, 336-337
(1962). See also First York Ban Corp, 88 Federal Reserve Bulletin 251
(2002); First Union Corporation, 84 Federal Reserve Bulletin 489

tion, the Board has considered a number of factors to
identify the economically integrated area that represents the
appropriate local geographic banking market encompassing Cortez for purposes of analyzing the proposal's competitive effects. 7
The Board reviewed the proximity of Cortez and Durango and the commuting data between their respective
counties. A mountain pass between Cortez and Durango
reportedly makes commuting and other travel between
these cities difficult at times during the winter months. The
rate of commuting between Montezuma and La Plata
counties remains low at approximately 7 percent of residents despite some increase during the past decade. Other
indicators of economic integration, such as entertainment,
restaurant, and shopping opportunities available in one
market but not in the other, are insufficient to suggest that
the low commuting rate understates the economic integration of the counties. Both cities have large discount retail
stores and supermarkets.
Banking data also support the Reserve Bank's definition
of the Cortez banking market as the relevant geographic
market. Interviews by the Reserve Bank with bankers in
Cortez and Durango indicate that most, if not all, of the
local banks view the two cities as separate markets. Banks
in each city generally have few customers from the other
city, do not solicit or advertise for business in the other city,
and do not monitor the loan or deposit rates of banks in the
other city. 8
Based on the foregoing and a careful review of all the
facts of record, including information provided by local
banks, the state of Colorado, and other publicly available
information, the Board reaffirms that the relevant geographic market within which to evaluate the competitive
effects of this proposal is the Cortez banking market, as
currently defined by the Reserve Bank.
B. Competitive Effects in the Banking Market
The Board has reviewed carefully the competitive effects of
the proposal in the Cortez 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
(1998); First Union Corporation, 83 Federal Reserve Bulletin 1012,
1013-14 (1997); Chemical Banking Corporation, 82 Federal Reserve
Bulletin 239, 241 (1996); and "yoming Bancorporation, 68 Federal
Reserve Bulletin 313, 314 (1982).
7. In delineating the relevant geographic market in which to assess
the competitive effects of a bank merger or acquisition, the Board
reviews population density; worker commuting patterns; the usage and
availability of banking products; advertising patterns of financial
institutions; the presence of shopping, employment, and other necessities; and other indicia of economic integration and transmission of
competitive forces among banks. See, e.g., First Security Corporation,
86 Federal Reserve Bulletin 122 (2000); Pennbancorp, 69 Federal
Reserve Bulletin 548 (1983).
8. One exception is a bank in the town of Mancos, Colorado, that
has attracted depositors from both cities. Mancos is in Montezuma
County between Cortez and Durango.

Legal Developments: First Quarter, 2007 C61

market, the relative shares of total deposits in depository
institutions in the market ("market deposits") controlled
by Community and Citizens,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 market.
In the Cortez banking market, the concentration levels
on consummation of the proposal would exceed the threshold levels in the DOJ Guidelines. Community's subsidiary,
Community Bank, is the fifth largest depository institution
in the market, controlling deposits of approximately
$51.8 million, which represent approximately 13.4 percent
of market deposits. Citizens' subsidiary, Citizens State
Bank, is the third largest depository institution in the
market, controlling deposits of approximately $65.1 million, which represent approximately 16.8 percent of market
deposits. On consummation of the proposal, Community
Bank would become the largest depository institution in the
market, controlling deposits of approximately $116.9 million, which would represent 30.2 percent of market deposits. The HHI would increase 449 points to 2192.
The Board has considered carefully whether other factors either mitigate the competitive effects of the proposal
or indicate that the proposal would have a significantly
adverse effect on competition in the market. The number
and strength of factors necessary to mitigate the competitive effects of a proposal depend on the size of the increase
in and the resulting level of concentration in a banking
market. ll
Several factors indicate that the increase in concentration in the Cortez banking market, as measured by increases
in the HHI and Community Bank's market share, overstates the potential competitive effects of the proposal.
After consummation, five insured depository institutions
would continue to operate in the market, which is an
average number of competitors for sparsely populated rural
banking markets like the Cortez market. The relative share
of market deposits held by each depository institution
indicates there is active competition in the market. Each of
the four remaining institutions that directly compete with
Community Bank will have a market share of between
12 percent and 22 percent on consummation of the pro9. Deposit and market share data are as of June 30, 2006, adjusted
to reflect subsequent mergers and acquisitions through February 12,
2007. No savings associations operate in the market.
10. 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 ("001") 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 limited-purpose and
other nondepository financial entities.
II. See NarionsBank Corp., 84 Federal Reserve Bulletin 129
(1998).

posal. Moreover, the market concentration as measured by
the HHI has decreased 624 poinls during the last decade,
from 2367 in 199612 to 1743 in 2006, evidencing significant and effective competition by market participants during this period.
In addition, actions by competitors to enter the market in
2007 demonstrate that the market is attractive for entry.
Although no depository institutions have entered the market in recent years, two institutions have taken steps within
the past year that will lead to entry into the market in 2007
through de novo branches. One bank established a loan
production office ("LPO") in Cortez in 2006 and has
purchased a building as part of its plans to convert the LPO
into a full-service branch in 2007. Another bank plans to
open a de novo branch in the market in the near future and
has taken significant actions to implement that plan. The
Board previously has considered such prospective entry
into a market by competitors as evidence of a market's
attractiveness for entry.13

C. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOJ also conducted a detailed review of the potential
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 the
Cortez banking market. In addition, the appropriate banking agencies were 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 Cortez banking market or in any
other relevant banking market. Accordingly, the Board has
determined that competitive considerations are consistent
with approval.

C62

Federal Reserve Bulletin 0 June 2007

only and on a 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 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 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 financial factors
of the proposal. Community, all its subsidiary depository
institutions, and Citizens Bank currently are well capitalized and would remain so on consummation of the proposal. Based on its review of the record, the Board also
finds that Community has sufficient financial resources to
effect the proposal. The proposed transaction is structured
as a cash purchase. The purchase would be funded from the
proceeds of an issuance of trust preferred securities and
debt.
The Board also has considered the managerial resources
of Community, Citizens, and their subsidiary depository
institutions. The Board has reviewed the examination
records of these 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 laws, including antimoney-laundering laws. The Board also has considered
Community'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.

represented that the proposal will provide greater convenience to customers through a larger network of branches
and automated teller machines and a broader range of
financial products and services over an expanded geographic area. Based on all the facts of record, the Board
concludes that 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.

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. The
Board's approval is specifically conditioned on compliance
by Community 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 March 1,
2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Bies, Warsh, and Kroszner. Absent and not voting:
Governor Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

The Industrial Bank of Taiwan Co., Ltd.
Taipei, Taiwan
IBT Holdings Corp.
Cerritos, California
Order Approving the Formation of a Bank
Holding Company
The Industrial Bank of Taiwan Co., Ltd. ("IBT") and its
wholly owned subsidiary, IBT Holdings Corp., have requested the Board's approval under section 3 of the Bank
Holding Company Act ("BHC Act")! to become bank

1. 12 U.S.c. § 1842.

Legal Developments: First Quarter, 2007

holding companies and to acquire EverTrust Bank ("EverTrust"), City of Industry, California.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 46,230 (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 BRC Act.
IBT, with total consolidated assets of approximately
$4 billion, is the 37th largest bank in Taiwan. 2 IBT
currently has no banking operations in the United States.
EverTrust, with total consolidated assets of approximately
$308 million, is the l22nd largest depository institution in
California, controlling deposits of approximately
$293.6 million, which represent less than 1 percent of the
total amount of deposits of insured depository institutions
in the state. 3

COMPETITIVE CONSIDERATIONS
Section 3 of the BRC 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
BRC 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
As noted, IBT does not control a U.S. depository
institution, and the proposal would not result in an expansion of EverTrust. Based on all the facts of record, the
Board concludes that consummation of the proposal would
not have a significantly adverse effect on competition or on
the concentration of resources in any relevant banking
market. Accordingly, based on all the facts of record, the
Board has determined that competitive considerations are
consistent with approval.

C63

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 EverTrust, publicly reported and
other financial information, information provided by IBT,
and public comments received on the proposal. The Board
has also consulted with the Financial Supervisory Commission ("FSC"), the primary home-country supervisor of
IBT.5
In evaluating the financial factors in proposals involving
the formation of new bank holding companies, the Board
reviews the financial condition of the applicant and the
target depository institutions. The Board also evaluates the
financial position of the pro forma organization, 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
of the proposal. Taiwan's risk-based capital standards are
consistent with those established by the Basel Capital
Accord (the "Accord"). On consummation, the capital
ratios of IBT 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. Furthermore, EverTrust is well
capitalized and would remain so on consummation of the
proposal. Based on its review of these factors, the Board
finds that IBT has sufficient financial resources to effect the
proposal. The proposed transaction is structured as a cash
purchase.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed supervisory information provided by the FSC and information provided by IBT,
including information about compliance with anti-moneylaundering laws. 6 In addition, the Board has reviewed the
examination records of EverTrust, including assessments of
its management, risk-management systems, and operations.
The Board has also considered the supervisory experiences
of relevant federal and state banking supervisory agencies
with EverTrust and the bank's record of compliance with
applicable banking law and anti-money-Iaundering laws.

5. The FSC has confirmed that IBT is in good standing and has not
objected to the proposal.
6. A commenter expressed concern about alleged money laundering and governmental corruption in Taiwan and the possible impact of
these allegations could have on banking in the Asian-American
community. The Board has taken into consideration Taiwan's laws and
regnlations, as well as IBT's and EverTrust's policies and procedures,
on anti-money-laundering. Taiwan has enacted laws and regulations to
deter money laundering that are consistent with Financial Action Task
Force recommendations. Money laundering is a criminal offense in
Taiwan, and financial institutions are required to establish internal
policies, procedures, and systems for the detection and prevention of
money laundering throughout their worldwide operations. IBT, a
private sector bank, has policies and procedures that are monitored by
its audit division and by governmental entities responsible for antimoney-laundering compliance. IBT has confirmed that it will maintain
EverTrust's compliance policies and procedures, which are considered
satisfactory by its regulators, and that it will conform them to IBT's
policies and procedures if those policies are the more stringent.

Federal Reserve Bulletin 0 June 2007

Moreover, the Board has considered lBT's plans for implementing the proposal, including the proposed management
after consummation.
Based on all the facts of record, the Board has concluded
that the financial and managerial resources 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 its home-country
supervisor.? As noted, the FSC is the primary supervisor of
commercial and industrial banks in Taiwan, including IBT.
The Board has previously determined, in connection with
applications involving other banks in Taiwan, that those
banks were subject to home-country supervision on a
consolidated basis. 8 In this case, the Board has determined
that IBT is supervised by the FSC on substantially the same
terms and conditions as those other banks. Based on all the
facts of record, the Board has concluded that IBT is subject
to comprehensive supervision and regulation on a consolidated basis by its home-country supervisor.
The BHC Act also 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. 9 The Board has reviewed the
restrictions on disclosures in jurisdictions where IBT would
have material operations and has communicated with the
relevant government authorities concerning access to information. IBT has committed that it will make available to
the Board such information on its operations and the
operations of any of its affiliates that the Board deems
necessary to determine and enforce compliance with the
BHC Act, the International Banking Act, and other applicable federal law. IBT also has committed to cooperate

7. 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.l3(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 relationships to any affiliate, to assess the
bank's overall financial condition and its compliance with laws and
regulations. See 12 CFR 211.24(c)(1).
8. See International Commercial Bank of China Co.. Ltd., 92 Federal Reserve Bulletin C199 (2006); Taiwan Cooperative Bank, 92 Federal Reserve Bulletin C201 (2006); SinoPac Holdings, 88 Federal
Reserve Bulletin 307 (2002); Chinatrust Financial Holding Company.
Ltd., 88 Federal Reserve Bulletin 303 (2002); E. Sun Commercial
Bank Limited, 86 Federal Reserve Bulletin 238 (2000); Chinatrust
Commercial Bank, Ltd., 84 Federal Reserve Bulletin 1121 (1998);
Land Bank ofTaiwan, 83 Federal Reserve Bulletin 336 (1997); Taiwan
Business Bank, 81 Federal Reserve Bulletin 746 (1995); Farmers
Bank of China, 81 Federal Reserve Bulletin 620 (1995). The supervision of industrial banks and commercial banks in Taiwan is substantially the same.
9. See 12 U.S.C. § 1842(c)(3)(A).

with the Board to obtain any waivers or exemptions that
may be necessary to enable it to make such information
available to the Board. In light of the commitments provided by IBT and other facts of record, the Board has
concluded that IBT has provided adequate assurances of
access to any necessary information the Board may request.
For these reasons, and based on all the facts of record, the
Board has concluded that the supervisory factors it is
required to consider under section 3(c)(3) of the BHC Act
are consistent with approval.

CONCLUSION
Based on the foregoing and 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 IBT
with the conditions imposed in this order, the commitments
made to the Board in connection with the application, and
receipt of all other regulatory approvals. l1 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.
10. 12 U.S.c. § 2901 et seq.; 12 U.S.c. § 1842(c)(2).
11. IBT also has committed that its subsidiaries will conform their
existing direct and indirect nonbanking activities and investments,
including by divestiture if necessary, to the requirements of the BHC
Act within two years of its acquisition of EverTrust. This conformance
period may, in the discretion of the Board, be extended by up to three
one-year extensions, taking into consideration the factors set forth in
section 4(a)(2) of the BHC Act (12 U.S.c. § 1843(a)(2». IBT also has
committed to ensure that, after consummating its acquisition of
EverTrust, neither IBT nor its subsidiaries, directly or indirectly, will
engage in new activities or new lines of business or make additional
investments in or acquire entities that are inconsistent with the
requirements of the BHC Act.

Legal Developments: First Quarter, 2007

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 March 9,
2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Bies, Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

The PNC Financial Services Group, Inc.
Pittsburgh, Pennsylvania
Order Approving the Merger of Bank
Holding Companies
The PNC Financial Services Group, Inc. ("PNC"), a
financial holding company within the meaning of the Bank
Holding Company Act ("BHC Act"), has requested the
Board's approval under section 3 of the BHC Act! to merge
with Mercantile Bankshares Corporation ("Mercantile"),
Baltimore, Maryland, and acquire Mercantile's 11 subsidiary banks. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 69,132 (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.
PNC, with total consolidated assets of approximately
$98 billion, is the 21st largest depository organization in
the United States, controlling deposits of approximately
$63.5 billion, which represent less than 1 percent of the
total amount of deposits of depository institutions in the
United States. 3 PNC owns two subsidiary insured deposi1. 12 U.S.c. § 1842. PNC proposes to acquire the nonbanking
subsidiaries of Mercantile in accordance with section 4(k) of the BHC
Act, 12 U.S.C. § l843(k).
2. Mercantile's largest subsidiary bank, as measured by both assets
and deposits. is Mercantile-Safe Deposit and Trust Company ("Mercantile Lead Bank"), Baltimore, Maryland. Mercantile's other subsidiary banks in Maryland are: Annapolis Bank and Trust Company,
Annapolis; Citizens National Bank, Laurel; Farmers & Mechanics
Bank, Frederick; Mercantile County Bank, Elkton; Mercantile Eastern
Shore Bank, Chestertown; Mercantile Southern Maryland Bank,
Leonardtown; and Westminster Union Bank, Westminster. Mercantile's subsidiary banks in Virginia are Marshall National Bank and
Trust Company, Marshall, and the National Bank of Fredericksburg,
Fredericksburg. Its subsidiary bank in Delaware is Mercantile Peninsula Bank, Selbyville.
3. Nationwide asset data are as of September 30, 2006. Nationwide
deposit and ranking data are as of June 30, 2006, and reflect merger
activity through November 14, 2006. In this context, insured depository institutions include commercial banks, savings banks, and savings
associations.

C65

tory institutions that operate in nine states and the District
of Columbia,4 and engages in numerous nonbanking activities that are permissible under the BHC Act. PNC is the
22nd largest depository organization in Maryland, controlling deposits of approximately $313.8 million.
Mercantile's subsidiary banks operate in Delaware,
Maryland, Pennsylvania, Virginia, and the District of
Columbia. In Maryland, Mercantile is the second largest
depository organization, controlling deposits of approximately $11.1 billion.
On consummation of the proposal, PNC would become
the 18th largest depository institution in the United States,
with total consolidated assets of approximately $116 billion. PNC would control deposits of approximately $75 billion, which represent approximately 1.15 percent of the
total amount of deposits of insured depository institutions
in the United States. In Maryland, PNC would become the
second largest depository organization, controlling deposits
of approximately $11.4 billion, which represent approximately 12.3 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. For purposes of the BHC Act, the home state of PNC
is Pennsylvania,S and Mercantile is located in Delaware,
the District of Columbia, Maryland, Pennsylvania, and
Virginia. 6
Based on a review of all the facts of record, including
relevant state and District of Columbia statutes, the Board
finds that the conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met in this
case.? In light of all the facts of record, the Board is
permitted to approve the proposal under section 3(d) of the
BHCAct.
4. PNC's largest subsidiary bank, as measured by total deposits, is
PNC Bank, National Association ("PNC Lead Bank"), Pittsburgh,
Pennsylvania, which operates in Florida, Indiana, Kentucky, Maryland, New Jersey, Ohio, Pennsylvania, Virginia, and the District of
Columbia. PNC s other subsidiary bank, PNC Bank, Delaware ("PNC
Delaware Bank"), Wilmington, Delaware, has branches in Delaware
and Pennsylvania.
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 I, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.C. § I 841(0)(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(0)(4)--(7) and 1842(d)(I)(A) and
(d)(2)(B».
7. 12 U.S.c. §§ 1842(d)(l)(A)--(B) and I842(d)(2)(A)-(B). PNC is
adequately capitalized and adequately managed, as defined by applicable law. All of Mercantile's subsidiary banks have been in existence
and operated for the minimum period of time required by applicable
state and District of Columbia laws. On consummation of the proposal, PNC 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

C66

Federal Reserve Bulletin 0 June 2007

A. Banking Markets within Established Guidelines
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
institutions in Delaware, Maryland, Pennsylvania, Virginia, and the
District of Columbia. 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)(1).
9. Deposit and market share data are as of June 30, 2006, adjusted
to reflect mergers and acquisitions through January 19,2007, 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., 77 Federal
Reserve Bulletin 52, 55 (1991).
10. 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.

Guidelines in three of the four banking markets. II On
consummation of the proposal, the Washington market and
the York market would remain moderately concentrated,
and the Wilmington market would remain highly concentrated, as measured by the HHI. The changes in the HHI
measure of concentration in each of these markets are
small. Moreover, numerous competitors would remain in
each of the three banking markets.

B. Banking Market Warranting Special Scrutiny
PNC and Mercantile compete directly in one banking
market that warrants a detailed review, Sussex County,
Delaware,12 because the post-consummation concentration
level would exceed the thresholds of the DOJ Guidelines.
In the Sussex County banking market, PNC is the fourth
largest depository organization, controlling deposits of
approximately $257.3 million, which represent approximately 9.8 percent of market deposits. Mercantile is the
second largest depository organization in the market, controlling deposits of $426.3 million, which represent approximately 16.2 percent of market deposits. On consummation
of the proposal, PNC would become the second largest
depository organization in the market, controlling deposits
of approximately $683.6 million, which represent approximately 26.0 percent of market deposits. The HHI would
increase 317 points to 2010. 13
The Board has considered carefully whether other factors either mitigate the competitive effects of the proposal
or indicate that the proposal would have a significantly
adverse effect on competition in the market. The number
and strength of factors necessary to mitigate the competitive effects of a proposal depend on the size of the increase
and the resulting level of concentration in a banking
market. 14
Several factors indicate that the increase in concentration, as measured by the HHI, overstates the potential
II. These markets, and the effects of the proposal on the concentration of banking resources in these markets, are described in
AppendixA.
12. The Sussex County banking market is defined as Sussex
County, Delaware, excluding the city of Milford.
13. These market concentration and market share calculations
include the weighting of deposits controlled by three thrift institutions
in the market at 100 percent. The Board previously has indicated that it
may consider the competitiveness of a thrift institution at a level
greater than 50 percent of its deposits when appropriate if competition
from the institution closely approximates competition from a commercial bank. See, e.g., Banknorth Group, Inc., 75 Federal Reserve
Bulletin 703 (1989). The thrift institutions in the Sussex County
banking market serve as significant sources of commercial loans and
provide a broad range of consumer, mortgage, and other banking
products. These thrift institutions have ratios of commercial and
industrial loans to assets of approximately 14.9 percent, 7 percent, and
5.5 percent, which are comparable to the national average for all
commercial banks. Competition from these thrift institutions, therefore, closely approximates competition from commercial banks. See
First Union Corporation, 84 Federal Reserve Bulletin 489 (1998).
14. See NationsBank Corporation, 84 Federal Reserve Bulletin 129
(1998).

Legal Developments: First Quarter, 2007

anticompetitive effect of the proposal in the Sussex County
market. After consummation of the proposal, 16 other
depository organizations would continue to operate in the
market.
In addition, the Board has concluded that the activities
of two community credit unions in the market exert sufficient competitive influence to mitigate, in part, the potential
adverse competitive effects of the proposal. Both credit
unions offer a wide range of consumer products, operate
street-level branches, and have membership open to almost
all the residents in the market. 15 These active community
credit unions control approximately $185.3 million of
deposits in the market, which represent approximately
3.4 percent of market deposits on a 50 percent weighted
basis. If these credit unions were factored into the market
calculations on a 50 percent weighted basis, PNC would
control approximately 25.2 percent of market deposits on
consummation of the proposal, and the HHI would increase
296 points to 1885. 16
Moreover, the record of entry into the Sussex County
banking market evidences its attractiveness for entry. The
Board notes that three depository institutions have entered
the market de novo since 2003. Other factors indicate that
the market remains attractive for entry. From 1999 to 2004,
the market's annualized population growth substantially
exceeded the annualized population growth for Delaware
as a whole, and the market's annualized income growth
also exceeded the annualized income growth for the entire
state.

C. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOJ has conducted a detailed review of the potential
competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the four banking markets where
PNC and Mercantile compete directly or in any other
relevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with
approval.
15. The Board previously has considered the competitiveness of
similarly active credit unions as a mitigating factor. See, e.g., Wachovia Corporatien, 92 Federal Reserve Bulletin CI83 (2006); F.N.B.
Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway Bank
& Trust Co., 90 Federal Reserve Bulletin 547 (2004).
16. Before consummation of the proposal, with deposits of these
credit unions weighted at 50 percent, PNC would be the fourth largest
depository organization in the market, with approximately 9.5 percent
of market deposits, and Mercantile would be the second largest
depository organization in the market, controlling approximately
15.7 percent of market deposits.

C67

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 in the
proposal, publicly reported and other financial information,
information provided by PNC, and public comments received on the proposa1.l 7
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
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. PNC, all its subsidiary banks, and all
Mercantile's subsidiary banks currently are well capitalized
and would remain so on consummation of the proposal.
Based on its review of the record, the Board finds that PNC
has sufficient financial resources to effect the proposal. The
proposed transaction is structured as a partial share exchange and partial cash purchase of shares. PNC will use
existing resources and the proceeds of a trust preferred
securities issuance and long-term debt to fund the cash
purchase of the shares.
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 PNC, Mercantile, 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, including anti-money-

17. One commenter expressed concern about press reports regarding the theft of a laptop computer containing data about some of
Mercantile Lead Bank's customers. In response to the security breach,
Mercantile Lead Bank notified potentially affected customers, monitored customer accounts for suspicious activities, and offered customers credit-monitoring services at bank expense. Mercantile and PNC
have policies and procedures in place to address data protection and
data breaches, as well as to safeguard customer information.

C68

Federal Reserve Bulletin 0 June 2007

laundering laws. 18 The Board also has considered PNC'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").19 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 neighborhoods, in evaluating bank expansionary
proposals. 20
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of the subsidiary banks ofPNC and Mercantile, data reported by PNC and Mercantile under the Home
Mortgage Disclosure Act ("HMDA"),21 other information
provided by PNC, confidential supervisory information,
and public comments received on the proposal. A commenter alleged, based primarily on 2005 HMDA data, that
PNC and Mercantile engaged in discriminatory treatment
of minority individuals in the home mortgage lending
operations of their subsidiary depository institutions.

18. A commenter reiterated its past criticism of PNC's acquisition
of Riggs National Corporation ("Riggs"), Washington, D.C., in 2005,
without providing any new information. The commenter previously
submitted extensive comments on PNC's application to acquire Riggs,
and the Board considered those comments in acting on that proposal.
See The PNC Financial Services Group, Inc., 91 Federal Reserve
Bulletin 424 (2005).
19. 12 U.S.c. § 2901 et seq.; 12 U.S.C. § 1842(c)(2).
20. 12 U.S.c. §2903.
21. 12 U.S.c. § 2801 et seq.

detailed, on-site evaluation of the institution's overall
record of performance under the CRA by its appropriate
federal supervisor. 22
PNC Lead Bank received an "outstanding" rating at its
most recent CRA performance evaluation by the Office of
the Comptroller of the Currency ("OCC"), as of April 15,
2002. PNC Delaware Bank also received an "outstanding"
rating at its most recent CRA evaluation by the Federal
Deposit Insurance Corporation ("FDIC"), as of January 21, 2003. Mercantile Lead Bank received a "satisfactory" rating at its most recent CRA performance evaluation
by the FDIC, as of April 19, 2004. Each of Mercantile's
other subsidiary banks received a "satisfactory" rating at
its most recent CRA performance evaluation. 23 PNC has
represented that it plans to implement its current CRA
program at Mercantile's subsidiary banks.
B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of PNC and Mercantile in light of public
comments received on the proposal. A commenter alleged,
based on 2005 HMDA data, that PNC denied the home
mortgage loan applications of African-American borrowers
more frequently than those of nonminority applicants in
various metropolitan statistical areas ("MSAs"). The commenter also alleged that Mercantile denied the home mortgage loan applications of African-American and Hispanic
borrowers more frequently than those of nonminority applicants in various states and made inadequate numbers of
loans to African Americans and Hispanics. The Board has
focused its analysis on the 2005 HMDA data reported by
PNC Lead Bank and by each of Mercantile's subsidiary
banks. 24
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials 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 PNC or
Mercantile are excluding or imposing higher costs on any
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
22. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36,640 (2001).
23. Appendix B lists the most recent CRA performance ratings of
these banks.
24. The Board reviewed the HMDA data for PNC Lead Bank in
the Washington-Arlington-Alexandria, DC-VA-MD-WV MSA; in the
Pittsburgh, Pennsylvania, MSA; and in its CRA assessment areas. In
addition, the Board reviewed the HMDA data reported by each of
Mercantile's subsidiary banks in its respective CRA assessment
areas.
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

Legal Developments: First Quarter; 2007

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 or ethnicity.
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
PNC, Mercantile, and their slolbsidiaries. The Board also has
consulted with the acc and FDIC, respectively, about the
fair-lending compliance records of PNC Lead Bank and
Mercantile Lead Bank.
The record, including confidential supervisory information, indicates that PNC and Mercantile have taken steps to
ensure compliance with fair lending and other consumer
protection laws. PNC and Mercantile each has a fairlending compliance program that includes a second review
process, and periodic self-assessments utilizing comparative file reviews to identify any discriminatory practices
with respect to the companies' home mortgage lending. In
addition, PNC and Mercantile each has a process for
resolving fair lending complaints, and each conducts periodic internal audits of its fair lending program. Both
companies also require employees to complete fair-lending
training sessions. PNC has represented that Mercantile's
current fair-lending compliance program initially would
remain in place at Mercantile's subsidiary banks after
consummation of the proposal, but it would be replaced by
PNC's fair-lending compliance program later in 2007 after
Mercantile's subsidiary banks are merged into PNC's
subsidiary banks.
The Board also has considered the HMDA data in light
of other information, including the programs described
above and the overall performance records of the subsidiary banks of PNC and Mercantile under the eRA. These
established efforts and records demonstrate that the institutions are active in helping to meet the credit needs of their
entire communities.

C69

customers through a larger branch network and a broader
variety of 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 insured 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. 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
Board's approval is specifically conditioned on compliance
by PNC 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 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 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 February 15, 2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Bies, Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

26. 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 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 appropriate supervisory authority. Under its rules, the Board 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 provide an opportunity for testimony or other presentations (12 CFR 225.l6(e), 262.3(i)(2),
262.25(d». 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
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 is denied.

C70

Federal Reserve Bulletin 0 June 2007

Appendix A
PNC AND MERCANTILE BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO]
GUIDEliNES

Bank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

2
7
2

1,790,381
344,617
2,134,998

8
7
6

10
17
10

Rank

Remaining
number of
competitors

Resulting

Change in

HHI

13.3
2.6
15.8

2,616
2,616
2,616

68
68
68

21
21
21

2,943,750
4,616,421
7,560,171

2.8
4.5
7.3

1,026
1,026
1,026

25
25
25

83
83
83

279,184
6,973
286,157

4.5
0.1
4.6

1,036
1,036
1,036

1
1
1

15
15
15

WILMINGTON BANKING MARKET IN
DELAWARE AND MARYLAND

Wilmington-includes New Castle County,
Delaware, and Cecil County, Maryland
PNC Pre-Consummation ......................
Mercantile ........................................
PNC Post-Consummation .....................
WASHINGTON BANKING MARKET IN THE
DISTRICT OF COLUMBIA, MARYLAND,
VIRGINIA, AND WEST VIRGINIA

Washington-includes the Ranally Metro
Area (RMA) of Washington, DC-MD-VAWV,' the non-RMA portions of Calvert,
Charles, Frederick, and St. Mary's
counties in Maryland and Fauquier and
Loudon counties in Virginia; Jefferson
County, West Virginia; and the Virginia
independent cities of Alexandria, Fairfax,
Falls Church, and Manassas
PNC Pre-Consummation ......................
Mercantile ........................................
PNC Post-Consummation .....................
YORK BANKING MARKET
IN PENNSYLVANIA

York-includes Adams and York counties
PNC Pre-Consummation ......................
Mercantile ........................................
PNC Post-Consummation .....................

NOTE: Data are as of June 30, 2006, and adjusted to reflect mergers
and acquisitions through January 19, 2007. All deposit amounts are in
thousands of dollars. All rankings, market deposit shares, and HHIs are
based on thrift deposits weighted at 50 percent.

Legal Developments: First Quarter, 2007

C71

Appendix B
CRA PERFORMANCE EVALUATIONS OF MERCANTILE BANKSHARES CORPORATION'S OTHER BANKS
Bank

1. Citizens National Bank,
Laurel, Maryland .......................
2. National Bank of Fredericksburg,
Fredericksburg, Virginia ..............
3. Marshall National Bank and Trust
Company,
Marshall, Virginia ......................
4. Mercantile Peninsula Bank,
Selbyville, Delaware ...................
5. Mercantile Southern Maryland Bank,
Leonardtown, Maryland ..............
6. Westminster Union Bank,
Westminster, Maryland ................
7. Mercantile County Bank,
Elkton, Maryland .......................
8. Mercantile Eastern Shore Bank,
Chestertown, Maryland ...............
9. Farmers & Mechanics Bank,
Frederick, Maryland ...................
10. Annapolis Bank and Trust Company,
Annapolis, Maryland ..................

CRA Rating

Date

Supervisor

Satisfactory

February 2005

OCC

Satisfactory

September 2002

OCC

Satisfactory

April 2005

OCC

Satisfactory

June 2005

FDIC

Satisfactory

January 2005

FDIC

Satisfactory

March 2004

FDIC

Satisfactory

May 2005

FDIC

Satisfactory

October 2004

FDIC

Satisfactory

November 2005

FRB

Satisfactory

April 2005

FRB

ORDERS ISSUED UNDER
INTERNATIONAL BANKING ACT

Banco Santander Totta, S.A.
Lisbon, Portugal
Order Approving Establishment of a
Representative Office
Banco Santander Totta, S.A. ("Bank") (formerly known as
Banco Totta & Arrores, S.A. ("Arrores"», Lisbon, Portugal,
a foreign bank within the meaning of the International
Banking Act ("rnA"), has applied under section lO(a) of
the rnAI to retain a representative office in Mineola,
New York. 2 The Foreign Bank Supervision Enhancement
Act of 1991, which amended the rnA, provides that a
foreign bank must obtain the approval of the Board to
establish a representative office in the United States.

1. 12 U.S.C. § 3107(a).
2. Acores operated the representative office in Mineola. The Acores
banking organization was reorganized effective December 16, 2004. In
connection with the reorganization, a new holding company, Santander
Totta SGPS, S.A., was created, and ACores merged with ACores' two
subsidiary banks, Companhia Geral de Credito Predial Portugues, S.A.
("Credito") and Banco Santander Portugal, SA, with Crectito as the
survivor. Credito then changed its name to Banco Santander Totta,
SA

Notice of the application, affording interested persons an
opportunity to comment, has been published in a newspaper of general circulation in Mineola (Newsday, Inc.,
May 19, 2006). The time for filing comments has expired,
and all comments have been considered.
Bank, with total consolidated assets of approximately
$44.6 billion,3 is the third largest privately owned banking
organization in Portugal. Bank provides a broad range of
banking, financial, and other services to corporate and retail
clients primarily in Portugal. Outside Portugal, Bank operates a subsidiary bank in Angola; branches in the United
Kingdom, Luxembourg, Puerto Rico, and Madeira; and
representative offices in Germany, Canada, Switzerland,
Venezuela, France, and South Africa. In the United States,
Bank has one nonbank subsidiary, Totta & Arrores, Newark,
New Jersey, that engages in money-remittance services in
Connecticut, New Jersey, New York, and Massachusetts.
Bank is a subsidiary of Banco Santander Central Hispano, S.A. ("Santander"), Madrid, Spain. 4 Through its
offices and subsidiaries, Santander offers banking, financial, and other services worldwide. In the United States,
Santander indirectly controls two U.S. insured depository
institutions 5 and owns several U.S. subsidiaries that engage

3. Asset data are as of September 3D, 2006.
4. Santander indirectly controls approximately 99.6 percent of
Bank's voting shares.
5. Santander controls Banco Santander Puerto Rico, San Juan,
Puerto Rico. a state-chartered bank with offices only in Puerto Rico;

Federal Reserve Bulletin D June 2007

in nonbanking activities. Santander and its foreign bank
subsidiaries operate a number of direct offices in the United
States.
Bank assumed the existing operations of A<;ores in
connection with a corporate reorganization. No changes in
the activities of Bank's representative office have occurred
as a result of the reorganization. That office acts as a liaison
between Bank and its existing and potential customers. The
office's activities include soliciting new business, conducting research, marketing various services, and receiving
applications for extensions of credit and executing loan
documents on behalf of Bank.
Under the IBA and Regulation K, in acting on an
application by a foreign bank to establish a representative
office, the Board must consider whether (l) 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 homecountry supervisors. 6 The Board also considers additional
standards as set forth in the IBA and Regulation K.7
As noted above, Bank and Santander 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.
With respect to supervision by home-country authorities,
the Board previously has determined, in connection with
applications involving other banks in Portugal, that those
banks were subject to home-country supervision on a
consolidated basis. 8 Bank is supervised by the Bank of
Portugal on substantially the same terms and conditions as
those other banks. With respect to Bank's parent, the Board
previously has determined that Santander is subject to
comprehensive supervision on a consolidated basis by the
and Sovereign Bank, Wyomissing, Pennsylvania, a savings association
with offices in Connecticut, Delaware, Maryland, Massachusetts,
New Hampshire, New Jersey, New York, Pennsylvania, and Rhode
Island.
6. 12 U.S.C. § 3107(a)(2); 12 CFR 211.24(d)(2). 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.
7. 12 U.S.c. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3).
8. See, e.g.. Caixa Economica Montepio Geral, 86 Federal Reserve
Bulletin 700 (2000); Banco Comercial Portugues, SA, 86 Federal
Reserve Bulletin 613 (2000); Banco Espfrito Santo, SA, et aI.,
86 Federal Reserve Bulletin 418 (2000); Caixa Geral de Depositos
SA, 85 Federal Reserve Bulletin 774 (1999).

Bank of Spain. 9 Based on all the facts of record, including
the above information, it has been determined that Bank
and Santander are subject to comprehensive supervision on
a consolidated basis by their home-country supervisors.
The Board also has taken into account the additional
standards set forth in section 7 of the IBA and Regulation K.ID The Bank of Portugal and the Bank of Spain have
no objection to Bank's retention of the 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 Bank's
retention of the representative office. Bank appears to have
the experience and capacity to support the representative
office and has established controls and procedures for the
representative office to ensure compliance with U.S. law, as
well as controls and procedures for its worldwide operations generally.
Portugal 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, Portugal has enacted laws and created legislative and regulatory standards to deter money laundering.
Money laundering is a criminal offense in Portugal, 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 and Santander
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 Santander have
committed to cooperate with the Board to obtain any
necessary consents or waivers that might be required from
9. See e.g., Banco Santander, SA, 85 Federal Reserve Bulletin 441
(1999).
10. See 12 U.S.C. § 3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3). The
additional standards set forth in section 7 of the lBA and Regulation K
include the following: whether the bank's home-country supervisor
has consented to the establishment of the office; the financial and
managerial resources of the bank; whether the bank has procedures to
combat money laundering, whether there is a legal regime in place in
the horne country to address money laundering, and whether the horne
country is participating in multilateral efforts to combat money
laundering; whether the appropriate supervisors in the horne country
may share information on the bank's operations with the Board;
whether the bank and its U.S. affiliates are in compliance with U.S.
law; the needs of the community; and the bank's record of operation.

Legal Developments: First Quarter, 2007

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 and Santander have 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 Santander, as well as the
terms and conditions set forth in this order, Bank's application to retain the representative office in Mineola, New York,
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. II Should any restrictions on access to information on the operations or activities of Bank and its affiliates
subsequently interfere with the Board's ability to obtain
information to determine and enforce compliance by Bank
or its affiliates with applicable federal statutes, the Board
may require termination of any of Bank's direct or indirect
activities in the United States. Approval of this application
also is specifically conditioned on compliance by Bank and
Santander with the commitments made in connection with
this application and with the conditions in this order. 12 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 16,2007.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

The Bank of Nova Scotia
Toronto, Canada
Order Approving Establishment of a Branch
The Bank of Nova Scotia ("Bank"), Toronto, Canada, a
foreign bank within the meaning of the International Banking Act ("IBA"), has applied under section 7(d) of the
IBA I to establish a branch in Houston, Texas. The Foreign
Bank Supervision Enhancement Act of 1991, which
amended the IBA, provides that a foreign bank must obtain
the approval of the Board to establish a branch in the
United States.
Notice of the application, affording interested persons an
opportunity to comment, has been published in a newspa-

11. See 12 CFR 265.7(d)(12).
12. The Board's authority to approve the retention of the 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 New York State
Banking Department to license the representative office in accordance
with any terms or conditions that it may impose.

1. 12 U.S.C. §3105(d).

C73

per of general circulation in Houston (The Houston
Chronicle, November 20, 2006). The time for filing comments has expired, and all comments received have been
considered.
Bank, with total assets of $338 billion, is the third largest
commercial bank in Canada. 2 It provides a variety of
banking services to retail and corporate customers through
more than 950 branches in Canada. It also provides stock
brokerage, insurance brokerage, fund management, and
financial advisory services through subsidiaries.
In the United States, Bank operates branches in Portland,
Oregon, and New York, New York; and agencies in Atlanta,
Georgia, and San Francisco, California. 3 Bank also engages
in financing, investment advisory, securities, fiduciary and
custody, and money transmission activities through subsidiaries.
The proposed branch would replace Bank's existing
representative office in Houston. It would engage in a
wholesale banking business, offering corporate investment,
lending, and cash management services to existing and
prospective customers. Bank is a qualifying foreign banking organization under Regulation K.4
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. 5 The Board also may
consider additional standards set forth in the IBA and
Regulation K. 6
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
2. Asset data are as of October 31, 2006.
3. In connection with this proposal, Bank has filed notice under
section 211.22(b)(1) of Regulation K (12 CFR 211.22(b)(1» to change
its home state from New York to Texas. Bank's branch in Portland was
established before the enactment of the IBA in 1978. See 12 U.S.c.
§ 3103(b). Bank's New York office is currently licensed as an agency
by the state of New York. Because the office accepts largedenomination deposits from U.S. residents, it is treated as a branch for
purposes of the IBA. As a consequence of Bank's change of home
state. Bank's branch in New York must limit its deposit taking to that
permitted to an agency under the IBA and Regulation K.
4. 12 CFR 211.23(b).
5. 12 U.S.c. § 3105(d)(2); 12 CFR 211.24(c)(l). 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.
6. 12 U.S.C. §3105(d)(3H4); 12 CFR 211.24(c)(2H3).

C74

Federal Reserve Bulletin 0 June 2007

the Board with infonnation necessary to assess the application through submissions that address the relevant issues.
With respect to supervision by home-country authorities,
the Board previously has detennined, in connection with
applications involving other banks in Canada, that those
banks were subject to home-country supervision on a
consolidated basis by their home-country supervisor, the
Office of the Superintendent of Financial Institutions
("OSH").? Bank is supervised by the OSH on substantially the same tenns and conditions as those other banks.
Based on all the facts of record, it has been detennined 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 have also been taken into account. 8 The
OSH has no objection to the establishment of the proposed
branch.
Canada's risk-based capital standards are consistent with
those established by the Basel Capital Accord ("Accord").
Bank's capital is in excess of the minimum levels that
would be required by the Accord and is considered equivalent to capital that would be required of a U.S. banking
organization. Managerial and other financial resources of
Bank also are considered consistent with approval, and
Bank appears to have the experience and capacity to
support the proposed branch. Bank has established controls
and procedures for the proposed branch to ensure compliance with U.S. law and for its operations in general.
Canada is a member of the Financial Action Task Force
and subscribes to its recommendations on measures to
combat money laundering and terrorist financing. In accordance with those recommendations, Canada has enacted
laws and adopted regulations to deter money laundering
and terrorist financing. Money laundering is a criminal
offense in Canada, and financial institutions are required to
establish internal policies, procedures, and systems for the
detection and prevention of money laundering and terrorist
financing throughout their worldwide operations. Bank has
policies and procedures to comply with these laws and

7. See Toronto-Dominion Bank, 92 Federal Reserve Bulletin ClOO
(2006); Bank of Montreal, 92 Federal Reserve Bulletin C14 (2006).
See also Toronto-Dominion Bank, 82 Federal Reserve Bulletin 1052
(1996); Bank of Montreal, 80 Federal Reserve Bulletin 925 (1994).
8. See 12 U.S.C. § 3105(d)(3)-(4); 12 CFR 2l1.24(c)(2)-(3). These
standards include (i) whether the bank's home-country supervisor has
consented to the establishment of the office; (ii) the financial and
managerial resources of the bank; (iii) whether the bank has procedures to combat money laundering, whether there is a legal regime in
place in the home country to address money laundering, and whether
the home country is participating in multilateral efforts to combat
money laundering; (iv) whether the appropriate supervisors in the
home country may share information on the bank's operations with the
Board; (v) whether the bank and its U.S. affiliates are in compliance
with U.S. law; (vi) the needs of the community; and (vii) the bank's
record of operation.

regulations, and its compliance with applicable laws and
regulations is monitored by the bank's auditors and the
OSH.
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 infonnation. 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
infonnation. In addition, subject to certain conditions, the
OSH 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 branch is hereby approved. 9 Should any restrictions on access to infonnation
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 conditions imposed in this order and the commitments made to the Board in connection with this application. lO 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 March 13,2007.
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 branch parallels the continuing authority of the state of Texas
to license offices of a foreign bank. The Board's approval of this
application does not supplant the authority of the state of Texas to
license the proposed office of Bank in accordance with any terms or
conditions that it may impose.

Legal Developments: First Quarter, 2007

FINAL ENFORCEMENT DECISIONS
ISSUED BY THE BOARD

THE MATTER OF

Seresa T. Morgan
A Former Institution-Affiliated Party of
Civitas BankGroup, Inc.
Franklin, Tennessee
Docket No. 06-020-E-I
Order of Prohibition Issued Upon Consent Pursuant to
Section 8(e) of the Federal Deposit Insurance Act, as
Amended WHEREAS, pursuant to sections 8(e) and (i)(3)
of the Federal Deposit Insurance Act, as amended (the
"FDI Act") (12 U.S.c. §§ 1818(e) and (i)(3», the Board of
Governors of the Federal Reserve System (the "Board of
Governors") issues this consent Order of Prohibition (the
"Order") against Seresa T. Morgan ("Morgan"), a former
institution-affiliated party, as defined in sections 3(u) and
8(b)(3) of the FDI Act (12 U.S.C. §§ 1813(u) and
1818(b)(3», of Civitas BankGroup, Inc., Franklin, Tennessee, previously known as Cumberland Bancorp, Inc., a
registered bank holding company ("Civitas");
WHEREAS, on January 5, 2007, the Board of Governors issued a Notice of Intent to Prohibit Issued Pursuant to
Section 8(e) of the Federal Deposit Insurance Act, as
amended (the "Notice") against Morgan alleging that
when Morgan was employed by Civitas, she allegedly
participated in violations of law, unsafe or unsound practices, and breaches of fiduciary duty in connection with the
embezzlement of over $197,000 from Civitas, and falsification of its books and records; that she was thereafter
terminated from her position as an employee of Civitas;
and that she had executed a promissory note requiring her
to make repayment to Civitas;
WHEREAS, on January 12, 2007, Morgan filed an
answer to the Notice; and
WHEREAS, this Order resolves the proceeding initiated
by issuance of the Notice; and
WHEREAS, by affixing her signature hereunder, Morgan has consented to the issuance of this Order by the
Board of Governors and has agreed to comply with each
and every provision of this Order, and has waived any and
all rights she might otherwise have pursuant to 12 U.S.c.
§ 1818 or 12 CFR Part 263, or otherwise: (a) to a hearing
for the purpose of taking evidence with respect to any
matter implied or set forth in this Order; (b) to obtain
judicial review of this Order or any provision hereof; and
(c) to challenge or contest in any manner the basis,
issuance, terms, validity, effectiveness, or enforceability of
this Order or any provision hereof.

C75

NOW, THEREFORE, prior to the taking of any testimony or adjudication of, or finding on, any issue of fact or
law implied or set forth herein, and without this Order
constituting an admission by Morgan 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 without protracted hearings or
testimony:
IT IS HEREBY ORDERED, pursuant to sections 8(e)
and 8(b)(3) of the FDI Act (12 U.S.c. §§ 1818(e) and
(b)(3», that:
I. Morgan, without the prior written approval of the Board
of Governors and, where necessary pursuant to section 8(e)(7)(B) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(B», another federal financial institution
regulatory agency, is hereby and henceforth prohibited
from:
(a) 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 or any holding company of an insured depository institution;
(b) 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 section 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 1818(e)(7)(A»;
(c) violating any voting agreement previously approved
by any federal banking agency; and
(d) voting for a director, or serving or acting as an
institution-affiliated party, 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. All communications regarding this Order shall be
addressed to:
(a) Mr. John H. Atkinson
Assistant Vice President
Department of Banking Supervision
and Regulation
Federal Reserve Bank of Atlanta
1000 Peachtree Street, N.E.
Atlanta, GA 30309-4470
(b) Ms. Seresa T. Morgan
304 Highland Heights
Goodlettsville, TN 37072
With a copy to:
(c) Larry D. Woods, Esq.
P.O. Box 24727
Nashville, TN 37202
3. Any violation of this Order shall separately subject
Morgan to appropriate civil or criminal penalties, or
both, under sections 8(i) and (j) of the FDIAct (12 U.S.C.
§§ 1818(i) and (j».
4. The provisions of this Order shall not bar, estop, or
otherwise prevent the Board of Governors, or any other
federal or state agency or department, from taking any
other action affecting Morgan.
5. Each provision of this Order shall remain fully effective
and enforceable until expressly stayed, modified, terminated, or suspended in writing by the Board of Governors.

C76

Federal Reserve Bulletin 0 June 2007

By order of the Board of Governors effective this 22nd
day of February, 2007.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
JENNIFER J. JOHNSON

Secretary of the Board
(signed)
Seresa T. Morgan

cn
October 2007

Legal Developments: Second Quarter, 2007
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY ACT

1st Source Corporation
South Bend, Indiana
Order Approving the Acquisition of a Bank
Holding Company
1st Source Corporation ("1st Source"), a bank holding
company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval
under section 3 of the BHC Act! to acquire FINA Bancorp,
Inc. ("FINA") and its subsidiary bank, First National Bank,
Valparaiso ("First National"), both of Valparaiso, Indiana. 2
Notice of the proposal, affording interested persons an
opportunity to submit comment.., has been published in the
Federal Register (72 Federal Register 13,108 (2007»). 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.
1st Source, with total consolidated assets of approximately $3.8 billion, operates one insured depository institution subsidiary, 1st Source Bank, with branches in Indiana and Michigan. 1st Source is the fifth largest depository
organization in Indiana, controlling deposits of $2.7 billion,
which represent 3 percent of total deposits of insured
depository institutions in Indiana ("state deposits").3
ANA, with total consolidated assets of approximately
$611 million, operates one insured depository institution,
First National, with branches only in Indiana. First National
is the 34th largest depository organization in Indiana,
controlling deposits of approximately $526.7 million.

1. 12 U.S.C. § 1842.
2. 1st Source proposes to merge FINA with and into Hickory
Acquisition, Inc. ("Hickory"'), a wholly owned subsidiary of 1st
Source organized solely to effect the proposed acquisition. Immediately following the merger of FINA with and into Hickory, Hickory
would merge with and into 1st Source.
3. Asset data are as of March 31, 2007, and statewide deposit and
ranking data are as of June 30, 2006, and reflect merger activity
through May 9, 2007. In this context, insured depository institutions
include commercial banks, savings banks, and savings associations.

On consummation of this proposal, and after accounting
for the proposed divestiture, 1st Source would remain the
fifth largest depository organization in Indiana, controlling
deposits of approximately $3.2 billion, which represent
3.6 percent of state deposits.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
would be in furtherance of any attempt to monopolize the
business of banking in any relevant banking market. The
BHC Act also prohibits the Board from approving a
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. 4
1st Source and FINA compete directly in three banking
markets: Gary-Hammond, Indiana; La Porte, IndianaMichigan; and Starke, Indiana.
The Board has reviewed carefully the competitive effects
of the proposal in each of the three banking markets where
1st Source and FINA compete directly, 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, the relative shares of total deposits in depository
institutions in the markets ("market deposits") controlled
by 1st Source and FINA,5 the concentration level of market
deposits and the increase in that level as measured by the
Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"),6
4. 12 U.S.c. § l842(c)(I).
5. Deposit and market share data are as of June 30, 2006, adjusted
to reflect subsequent mergers and acquisitions through February 23,
2007, 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 marketshare calculation on a 50 percent weighted basis. See, e.g., First
Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).
6. 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 ("OOJ") 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

C78

Federal Reserve Bulletin 0 October 2007

other characteristics of the markets, and commitments
made by 1st Source to divest one or more branches in the
Starke banking market.

A. Banking Market with Divestiture
1st Source and FlNA compete directly in one banking
market, the Starke market, that warrants a detailed review
of competitive effects. 7 In this market, the concentration
level on consummation of the proposal, after accounting
for the proposed divestiture, would exceed the threshold
levels in the DOJ Guidelines.
1st Source Bank is the largest depository institution in
the Starke banking market, controlling deposits of approximately $70 million, which represent approximately 31 percent of market deposits. First National is the fifth largest
depository institution in the market, controlling deposits of
approximately $13 million, which represent approximately
6 percent of market deposits. On consummation and without the proposed divestiture, the HID in this market would
increase 369 points, from 2236 to 2605, and the pro forma
market share of the combined entity would be 37 percent.
To reduce the potential adverse effects on competition in
the Starke banking market, 1st Source has committed to
divest at least one branch with no less than $6.4 million in
deposits to an out-of-market insured depository organization. 8 On consummation of the proposed merger, and after
accounting for the divestiture, 1st Source would remain the
largest depository institution in the market, controlling
deposits of approximately $77 million, which represent
34.7 percent of market deposits. The HHI would increase
no more than 237 points to 2473.
The Board carefully has considered whether other factors either mitigate the competitive effects of the proposal
or indicate that the proposal would have a significantly
adverse effect on competition in the market. 9 In this market,
the record indicates that the proposal would not have a
significantly adverse impact on competition, despite the
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.
7. The Starke banking market is defined as Starke County, Indiana.
8. 1st Source has committed that, before consummation of the
proposed merger, it will execute an agreement for the proposed
divestiture in the Starke banking market with a purchaser that the
Board determines to be competitively suitable. 1st Source also has
committed to complete the divestiture within 180 days after consummation of the proposed merger. In addition, Ist Source 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. The trnst agreement, trustee, and any alternate
purchaser must be deemed acceptable by the Board. See BankAmerica
Corporation, 78 Federal Reserve Bulletin 338 (1992); United
New Mexico Financial Corporation, 77 Federal Reserve Bulletin 484
(1991).
9. 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 a banking market.

post-consummation increase in the HHI and market share.
On consummation of the proposal and the proposed divestiture to a competitively suitable insured depository institution, at least five other insured depository institutions
would continue to operate in the market. In addition, the
concentration of deposits in the market has decreased since
2000.
B. Banking Markets without Divestiture
Consummation of the proposal without divestitures would
be consistent with Board precedent and within the thresholds in the DOl Guidelines in the Gary-Hammond and
La Porte banking markets. 1O On consummation of the
proposal, the Gary-Hammond banking market would remain moderately concentrated and the La Porte banking
market would remain highly concentrated, as measured by
the HHI. The change in the HHI measure of concentration
in each of these markets would be small, however, and
numerous competitors would remain in each banking market.
C. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOl also has conducted a detailed review of the
potential 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
competitive effects of 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 three banking markets where 1st
Source and FlNA compete directly or in any other relevant
banking market. Accordingly, the Board has determined
that competitive considerations are consistent with approval.

Legal Developments: Second Quarter, 2007

In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved both on a parentonly and on a 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 infonnation, including capital
adequacy, asset quality, and earnings perfonnance. 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 its capital
position, asset quality, and earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has considered carefully the financial factors
of the proposal. 1st Source and its subsidiary depository
institution, and First National, currently are well capitalized
and would remain so on consummation of the proposal.
Based on its review of the record, the Board also finds that
1st Source has sufficient financial resources to effect the
proposal. The proposed transaction is structured as a share
exchange and cash payment. The cash portion would be
funded from the proceeds of an issuance of trust preferred
securities and a dividend from 1st Source Bank.
The Board also has considered the managerial resources
of 1st Source, FINA, and their subsidiary banks. The Board
has reviewed the examination records of these institutions,
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 laws and with anti-money-laundering laws.
1st Source, FINA, and their subsidiary depository institutions are considered well managed. The Board also has
considered 1st Source's plans for implementing the proposal, including the proposed management after consummation, and has consulted the other relevant supervisory
agencies concerning these plans.
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.

C79

depository institutions under the Community Reinvestment
Act ("CRA").l1 1st Source Bank received a "satisfactory"
rating at its most recent CRA perfonnance evaluation by
the Federal Reserve Bank of Chicago, as of May 23, 2005.
First National received a "satisfactory" rating at its most
recent CRA perfonnance evaluation by the Office of the
ComptrolIer of the Currency, as of December 5, 2003. After
consummation of the proposal, 1st Source plans to implement its CRA policies at First National. 1st Source has
represented that the proposal would provide greater convenience to customers through a larger network of branches
and ATMs and a broader range of financial products and
services over an expanded geographic area. Based on all
the facts of record, the Board concludes that considerations
relating to the convenience and needs of the communities
to be served and the CRA perfonnance records of the
relevant depository institutions are consistent with approval.

CONCLUSION
Based on the foregoing and alI the facts of record, the
Board has detennined that the application should be, and
hereby is, approved. In reaching its decision, 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 specificalIy conditioned on compliance by 1st
Source 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 Chicago, acting
pursuant to delegated authority.
By order of the Board of Governors, effective May 15,
2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board
11. 12 U.S.C. § 2901 et seq.; 12 U.S.C. § 1842(c)(2).

C80

Federal Reserve Bulletin 0 October 2007

Appendix
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES WITHOUT
DIVESTITURES
Market
deposit
shares
(percent)

Rank

Amount
of deposits
(dollars)

Gary-Hammond-Lake County;
Porter County, excluding Pine
township; and New Durham,
Clinton, Cass, Dewey, and Prairie
townships in La Porte County,
Indiana
1st Source Pre-Consummation .......
FINA .......................................
1st Source Post-Consummation ......

17
7
6

54.8 mil.
499.2 mil.
554 mil.

.7
6.1
6.8

1,108
1,108
1,108

8
8
8

27
27
27

La Porte-La Porte County,
excluding New Durham, Clinton,
Cass, Dewey, and Prairie
townships; Olive and Warren
townships in St. Joseph County; and
Pine township in Porter County, all
in Indiana; and New Buffalo, Three
Oaks, Galien, and Weesaw
townships in Berrien County,
Michigan
1st Source Pre-Consummation .......
FINA .......................................
1st Source Post-Consummation ......

3
12
3

142.8 mil.
14.1 mil.
156.9 mil.

10.0
1.0
11.0

2,063
2,063
2,063

20
20
20

13
13
13

Bank

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

INDIANA AND INDIANAMICHIGAN BANKING MARKETS

NOTE: All rankings, market deposit shares, and HHls are based on
thrift deposits weighted at SO percent.

The Bank of New York Mellon Corporation
New York, New York
Order Approving the Formation of a Bank
Holding Company and the Merger of Bank
Holding Companies
The Bank of New York Mellon Corporation ("BNYMelIon") has requested the Board's approval under section 3 of
the Bank Holding Company Act ("BHC Act")! to become
a bank holding company by merging with The Bank of
New York Company, Inc. ("BONY"), New York, New York,
and Mellon Financial Corporation ("Mellon"), Pittsburgh,

1. 12 U.S.C. § 1842. In addition, BONY and Mellon each has
requested the Board's approval to hold and exercise options to
purchase up to 19.9 percent of each other's common stock on the
occurrence of certain events. Both options would expire on consummation of the merger of Mellon and BONY into BNYMellon.

Pennsylvania, and thereby acquiring The Bank of New York
("BONY Lead Bank"), New York, New York, Mellon
Bank, N.A. ("Mellon Lead Bank"), Pittsburgh, Pennsylvania, and the other subsidiary banks of BONY and Mellon. 2
BNYMellon is a newly organized corporation formed to
facilitate BONY's acquisition of Mellon. BNYMellon also
has filed with the Board an election to become a financial
holding company pursuant to sections 4(k) and (1) of the
BHC Act and section 225.82 of Regulation Y.3 BNYMellon

2. BONY Lead Bank and Mellon Lead Bank are the largest
subsidiary banks of their parent holding companies, as measured by
both assets and deposits. BONY operates one other subsidiary bank,
The Bank of New York (Delaware), Newark, Delaware. Mellon's
other subsidiary banks are: Mellon United National Bank, Miami,
Florida; Mellon 1st Business Bank, National Association, Los Angeles, California; and Mellon Trust of New England, National Association, Boston, Massachusetts.
3. See 12 U.S.C. § 1843(k) and (I); 12 CFR 225.82. BNYMellon
has certified that the subsidiary depository institutions of BONY and
Mellon are well capitalized and well managed, and BNYMellon has

Legal Developments: Second Quarter, 2007

also proposes to acquire BNY International Financing
Corporation, New York, New York, and Mellon Overseas
Investment Corporation, Greenville, Delaware, both Edge
Act corporations organized under section 25 of the Federal
Reserve Act. 4
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (72 Federal Register 12,800, 13,108, and
16,788 (2007)). 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.
BONY, with total consolidated assets of approximately
$99.9 billion, is the 18th largest depository organization in
the United States, controlling deposits of approximately
$30.1 billion. 5 BONY's subsidiary banks operate main
offices or branches in Connecticut, Delaware, New Jersey,
and New York, and BONY engages in numerous nonbanking activities that are permissible under the BHC Act.
Mellon, with total consolidated assets of approximately
$40.5 billion, is the 33rd largest depository organization in
the United States, controlling deposits of approximately
$22.1 billion. Mellon's subsidiary banks operate main
offices or branches in seven states,6 and Mellon engages in
numerous nonbanking activities that are permissible under
the BHC Act.
On consummation of the proposal, BNYMellon would
become the 12th largest depository organization in the
United States, with total consolidated assets of approximately $154 billion. BNYMellon would control deposits of
approximately $52.2 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
provided all the information required under Regulation Y. Based on all
the facts of record, the Board has determined that the election to
become a financial holding company will become effective on consummation of the proposal, if on that date all subsidiary depository
institutions of BONY and Mellon remain well capitalized and well
managed, and if each subsidiary insured depository institution of
BONY and Mellon has received a rating of at least "satisfactory" at its
most recent performance evaluation under the Community Reinvestment Act ("CRA") (12 U.S.c. §2901 et seq). BNYMellon proposes to
acquire the nonbanking subsidiaries of BONY and Mellon in accordance with section 4(k) of the BHC Act, 12 U.S.c. § I843(k).
4. 12 U.S.c. §601 et seq. As this acquisition is being made as part
of a proposal requiring approval under section 3 of the BHC Act,
separate approval under the Federal Reserve Act is not required
(12 CFR 211.5(e)(iii)).
5. Nationwide asset data are as of March 31, 2007. Nationwide
deposit and ranking data are as of March 31, 2007, and reflect merger
activity through that date. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.
6. Mellon's subsidiary banks operate main offices and branches in
California, Delaware, Florida, Maryland, Massachusetts, New Jersey,
and Pennsylvania.

C81

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
BONY is New York.? Mellon is located in California,
Delaware, Florida, Maryland, Massachusetts, New Jersey,
and Pennsylvania. s
Based on a review of all the facts of record, including
relevant state statutes, the Board finds that the 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 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. to
BONY and Mellon have subsidiary depository institutions that compete directly in four banking markets: Los
Angeles, California; Miami-Fort Lauderdale Area, Florida;
Wilmington, in Delaware and Maryland; and Boston in
Massachusetts and New Hampshire. 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 BONY and
Mellon,1I the concentration levels of market deposits and
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 I, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.c. § 1841 (0)(4)(C)).
8. 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(0)(4)-(7) and 1842(d)(I)(A) and
(d)(2)(B)).
9. 12 U.S.C. §§ 1842(d)(I)(A)-(B) and 1842(d)(2)(A)-(B).
BNYMellon is adequately capitalized and adequately managed, as
defined by applicable law. All of Mellon's subsidiary banks have been
in existence and operated for the minimum period of time required by
applicable state laws. On consummation of the proposal, BNYMellon
would control less than 10 percent of the total amount of deposits of
insured depository institutions in the United States. The proposal also
would comply with relevant state deposit caps, each of which is
30 percent. See Fla. Stat. § 658.2953(7)(b); Md. Code Ann., Fin. Inst.
§5-1013; Mass. Gen. Laws ch. 167, §39; and N.J. Stat. Ann.
§ 17.9A-148(E). The other requirements of section 3(d) of the BHC
Act would be met on consummation of the proposal.
10. 12 U.S.c. § 1842(c)(I).
11. Deposit and market share data are as of June 30, 2006, adjusted
to reflect mergers and acquisitions through March 31, 2007, and are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift

C82

Federal Reserve Bulletin 0 October 2007

the increase in those levels as measured by the HerfindahlHirschman Index ("HHI") under the Department of Justice
Merger Guidelines ("DOJ Guidelines"),12 and other characteristics of the markets.
In delineating the relevant product market in which to
assess the competitive effects of a bank acquisition or
merger, the Supreme Court has determined that "commercial banking" is the appropriate line of commerce because
the cluster of banking products and services provided by
commercial banks is unique relative to other types of
financial institutions. 13 To measure the "cluster of products
and services," the Court has used bank deposits to measure
the concentration and market shares in the relevant banking
markets.
Based on deposit data, consummation of the proposal
would be consistent with Board precedent and within the
thresholds in the DOJ Guidelines in each of the four
banking markets. 14 On consummation of the proposal, the
Los Angeles and Miami-Fort Lauderdale area markets
would remain unconcentrated, and the Boston market
would remain moderately concentrated, as measured by the
HHI. Although the Wilmington market would remain
highly concentrated, the increase in concentration would be
minimal. Numerous depository institution competitors
would remain in each of the four markets.
Although the subsidiary banks of BONY accept deposits, neither BONY nor Mellon engages in retail banking to a
significant degree to support their banking operations, 15
which makes the amount of deposits a less-reliable measure
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., 77 Federal
Reserve Bulletin 52, 55 (1991).
12. 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.
13. See United States v. Phillipsburg National Bank, 399 U.S. 350,
359 (1970); United States v. Philadelphia National Bank, 374 U.S.
321,356 (1963).
14. These banking markets, and the effect of the proposal on the
concentration of banking resources in the markets based on deposit
data, are described in the appendix.
15. In October 2006, BONY Lead Bank sold its retail banking
business, including 338 branches, and its regional middle market
business, to JPMorgan Chase & Co., New York, New York. In
December 200 I, Mellon Lead Bank sold its consumer, smaIl business,
and regional banking businesses, including most of its branches, to
Citizens Financial Group, Inc., Providence, Rhode Island. BONY
Lead Bank and Mellon Lead Bank each currently maintains a smaIl
network of branches to serve private banking and private wealthmanagement clients.

of the competlttve effects of the merger in this case.
Significant business lines of the subsidiary banks of BONY
and Mellon include custody services; clearing, corporate
trust, and depository receipts services; securities lending;
transfer agent services; fund administration and accounting
services; and foreign exchange (collectively "securities
services")}6 Accordingly, in analyzing the competitive
effects, the Board has taken the additional step of considering measures of securities services that more closely reflect
the effect of the proposal on competition.
Securities services are provided on a national basis, and
most customers for these services are large corporations,
institutions, and other financially sophisticated entities. An
appropriate measure of these services is domestic assets
under custody. BONY is the third largest provider of
securities services, with a market share of approximately
18.2 percent, and Mellon is the fifth largest provider of
these services, with a market share of approximately
6.7 percent.J7 Together, BONY and Mellon would be the
largest provider of these services, with a market share of
24.9 percent. This measure of the competitive effects of the
proposal indicates that the overlapping market, as measured by the HHI, would remain moderately concentrated,
with the HHI increasing 246 points from 1542 to 1788.
After consummation, 21 other participants would remain in
the market.
The DOJ has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the four banking markets where
BONY and Mellon compete directly or in any other
relevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with
approval.

Legal Developments: Second Quarter, 2007

record, including confidential reports of examination and
other supervisory information received from the federal
and state supervisors of the organizations involved in the
proposal, publicly reported and other financial information,
information provided by BONY, 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 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
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. BONY, Mellon, and their subsidiary
banks currently are well capitalized, and BNYMellon and
each bank that it would control would be well capitalized
on consummation of the proposal. Based on its review of
the record, the Board finds that BNYMellon 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. In addition, the Board has considered
BNYMellon's plans for implementing the proposal, including the proposed management after consummation. In
considering the managerial resources, the Board has reviewed the examination records of BONY and Mellon and
their subsidiary banks, including assessments of their management, risk-management systems, and operations. Moreover, 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-moneylaundering ("AML") laws. Banking organizations operating in the United States are required to implement and
operate effective AML programs. Accordingly, the Board
has considered the existing AML programs at BONY's and
Mellon's subsidiary banks, including recent enhancements
at BONY Lead Bank. 18 The Board expects that BNYMel18. BONY Lead Bank entered into written agreements in February
2000 ("2000 Written Agreement") and April 2006 ("2006 Written
Agreement"), with the Federal Reserve Bank of New York and the
New York State Banking Department to address deficiencies in the
bank's compliance with federal and state AML statutes and regulations. The written agreements included requirements that the bank
develop and implement plans to strengthen independent testing of its
AML program, enhance training of its personnel in suspicioustransaction identification and reporting, and improve its enhanced
due-diligence program. The Board has reviewed carefully the progress
made by the bank in implementing the 2006 Written Agreement's
requirements and more broadly in enhancing its AML compliance.

C83

Ion will take all necessary steps to ensure that sufficient
resources, training, and managerial efforts are dedicated to
maintaining a fully effective compliance risk-management
system to ensure compliance with AML statutes and regulations throughout its organization.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved
in the proposal are consistent with approval, as are the other
supervisory factors under the BHC Act. 19

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 take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").20 The CRA requires the federal financial
supervisory agencies to encourage 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. 21
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of the subsidiary banks of BONY and
Mellon, data reported by BONY under the Home Mortgage
In May 2007, a suit was filed against BONY Lead Bank by the
Russian Federal Customs Service in a Russian court for damages
allegedly resulting from money transfers that BONY Lead Bank had
made to and from Russia from 1996 to 1999. These transactions were
also considered in connection with the execution of the 2000 Written
Agreement and were investigated by the U.S. Department of Justice,
which entered into a Non-Prosecution Agreement with BONY Lead
Bank on November 8, 2005. The Board will continue to monitor the
suit by the Russian authorities and notes that neither Board action on
this proposal nor any supervisory action by the Board under the BHC
Act would interfere with the ability of a foreign court to resolve any
litigation pertaining to this matter.
19. A comrnenter expressed concern about BONY's relationships
with unaffiliated third parties engaged in subprime lending. BONY has
represented that it provides corporate trust and custody services
relating to some issuances backed by subprime loans or involving
issuers who originate or securitize subprime loans. BONY also
indicated that it provides commercial credit to some originators of
subprime mortgages. In addition, BONY noted that it acts as a swap
counterparty in connection with some subprime loan securitization
transactions and that its proprietary treasury portfolio, and some funds
for which BONY acts as investment manager, include securities that
may be partially backed by subprime assets. BONY has represented
that it does not play any role in the lending practices or credit review
processes of its customers who engage in subprirne lending. The Board
expects all banking organizations to conduct their operations in a safe
and sound manner with adequate systems to manage operational,
compliance, and reputational risk.
20. 12 U.S.C. §2901 et seq.; 12 U.S.c. § 1842(c)(2).
21. 12 U.S.c. §2903.

C84

Federal Reserve Bulletin 0 October 2007

Disclosure Act ("HMDA"),22 other information provided
by BONY and Mellon, confidential supervisory information, and public comments received on the proposal. Two
commenters expressed concerns about BONY's record of
serving the credit and investment needs of LMI communities in its assessment areas. 23 One commenter alleged,
based on HMDA data, that BONY engaged in disparate
treatment of minority individuals in home mortgage lending.

eRA 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
BONY and Mellon. 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. 24
BONY Lead Bank received a "satisfactory" rating at its
most recent CRA performance evaluation by the Federal
Reserve Bank of New York, as of May 16, 2005 ("2005
Evaluation").25 BONY's other subsidiary bank, The Bank
of New York (Delaware), received a "satisfactory" rating
at its most recent CRA performance evaluation by the
Federal Deposit Insurance Corporation ("FDIC"), as of
November 21, 2005. Mellon Lead Bank received an "outstanding" rating at its most recent CRA performance
evaluation by the Office of the Comptroller of the Currency
("OCC"), as of May 15, 2005. Each of Mellon's other
subsidiary banks received an "outstanding" or "satisfactory" rating at its most recent CRA performance evaluation. 26 The existing eRA programs of BONY's and Mellon's subsidiary banks will continue after consummation of
the proposal.27

22. 12 U.S.C. §280l et seq.
23. The conunenters also requested that BONY implement a number of CRA-related recommendations set forth in their comment
letters. 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 Bank of America Corporation, 93 Federal
Reserve Bulletin C52, n. 27 (2007). 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 credit needs of its CRA
assessment areas at the time the Board reviews a proposal under the
convenience and needs factor.
24. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36,640 (2001).
25. Two commenters expressed concern over the "low satisfactory" ratings BONY Lead Bank received under the lending and service
tests for its assessment area in the New York metropolitan area. The
bank received an "outstanding" rating under the investment test for
the assessment area, and examiners concluded that the bank's record
of CRA performance during the review period, when viewed as a
whole, merited a rating of "satisfactory."
26. Mellon 1st Business Bank, National Association received a
"satisfactory" rating from the FDIC, as of February 11,2003, when

BONY Lead Bank and Mellon Lead Bank have been
designated as wholesale banks for purposes of evaluating
their CRA performances. 28 Insured depository institutions
designated as wholesale institutions are evaluated under the
community development test, and examiners may consider
the institution's community development investments,
loans, and services nationwide rather than only in the
institution's assessment areas. 29 BONY Lead Bank received
its wholesale bank designation after the 2005 Evaluation,
while Mellon Lead Bank was evaluated as a wholesale
bank in its 2005 evaluation.
eRA Performance of BONY Lead Bank. As noted,
BONY Lead Bank received an overall "satisfactory" rating
in the 2005 Evaluation. 30 Under the lending test, examiners
concluded that the bank demonstrated adequate responsiveness to the retail credit needs of its two rating areas, given
the bank's capacity to meet the areas' credit needs and
overall market conditions. 3) They described the distribution
of HMDA-reportable loans among borrowers of different
income levels as good and reported that the bank's geographic distribution of loans to small businesses was
adequate. 32
In the interim between the 2005 Evaluation and the sale
of its retail banking business in October 2006, BONY Lead
Bank remained an active mortgage lender in its assessment
areas. In 2005, BONY Lead Bank made more than $1.7 billion of HMDA-reportable loans in its assessment areas. The
bank's percentages of home purchase loans and refinance
loans originated in LMI geographies in the Bronx, Brooklyn, and Manhattan all exceeded the percentages for the
aggregate of lenders in 2005. 33
In the 2005 Evaluation, examiners commended BONY
Lead Bank's community lending performance. 34 During
the bank was a state-chartered nonmember bank doing business as
Mellon 1st Business Bank. Mellon United National Bank received an
"outstanding" rating at its most recent CRA evaluation by the OCC, as
of December 31,2003; and Boston Safe Deposit and Trust Company,
the predecessor of Mellon Trust of New England, National Association, received an "outstanding" rating at its last CRA evaluation by the
Federal Reserve Bank of Boston, as of September 30, 2002.
27. BNYMellon has indicated that in the longer term, the CRA
program of the merged organization will combine the best elements of
the CRA programs of BONY and Mellon.
28. See 12 CFR 228.25; 12 CFR 25.25.
29. Two commenters questioned how, as a designated wholesale
bank, BONY Lead Bank will serve the credit needs of the communities in which it operates.
30. Full-scope evaluations were conducted in BONY Lead Bank's
assessment areas in the New York multistate metropolitan area (CTNJ-NY) ("New York metropolitan assessment area") and in the
nonmetropolitan portions of New York State.
31. Examiners noted that housing prices in the bank's assessment
areas were disproportionately high in comparison with income levels,
which made homeownership very difficult for LMI borrowers, particularly for low-income borrowers.
32. In this context, small businesses are businesses with gross
annual revenues of $1 million or less.
33. The lending data of the aggregate lenders represent the cumulative lending for all financial institutions that reported HMDA data in
a market.
34. One commenter asserted that BONY should provide community development loans with principal amounts of less than $5 million.

Legal Developments: Second Quarter, 2007 C85

the evaluation period, the bank made community development loans totaling $724 million, which supported affordable housing construction, economic revitalization projects,
and community development groups, including those serving persons with disabilities. Examiners reported that
64 percent of the community development lending by
dollar volume helped develop affordable housing, which
examiners described as a significant need in the bank's
assessment areas.
BONY Lead Bank has continued its community development lending since the 2005 Evaluation. BONY represented that the bank extended more than 80 community
development loans totaling $612 million in its assessment
areas in 2005 and 2006.
In the 2005 Evaluation, BONY Lead Bank received an
"outstanding" rating under the investment test. The bank's
new qualifying community development investments during the evaluation period totaled $176 million and were
primarily in the form of affordable housing initiatives.
BONY Lead Bank also donated $3 million during the
evaluation period to community development organizations
engaged in affordable housing development, social services, and neighborhood revitalization efforts in its
New York metropolitan assessment area. 35
BONY Lead Bank represented that it made almost
$174 million in qualified community development investments during 2005 and 2006. These included investments
totaling more than $170 million in projects to create
affordable housing through the low-income housing tax
credit program. In addition, the bank made more than
$3 million in community development grants during 2005
and 2006 to a range of groups involved in affordable
housing and community and economic development in the
bank's assessment areas.
In the 2005 evaluation, BONY Lead Bank received a
"low satisfactory" rating for the service test. Examiners
noted that the bank's retail delivery systems were reasonably accessible to geographies and individuals of different
income levels and reported that the bank provided an
adequate level of community development services. 36
Examiners reported that bank employees conducted seminars on first-time home buying, provided financial education to LMI individuals, and served on the boards of
community organizations that address the credit needs of
LMI areas and individuals.

Although the Board has recognized that banks can help serve the
banking needs of communities by making certain products or services
available, the CRA does not require an institution to provide any
specific type of product to consumers.
35. A commenter criticized the level of BONY Lead Bank's
charitable contributions. The CRA does not require an institution to
make any specific investment in, or contribution to, community
groups.
36. As noted, BONY Lead Bank sold its retail banking business,
including most of its branches, in October 2006 and has been
designated a wholesale bank for purposes of the CRA. Accordingly,
any future CRA evaluations of the bank will not include a review of its
delivery of retail banking services but will consider the extent and
level of innovation of the bank's community development services.

eRA Performance of Mellon Lead Bank. As noted,
Mellon Lead Bank received an overall "outstanding"
rating in its May 2005 evaluation. Mellon Lead Bank
provides investment management, private banking, and
fiduciary services to high-net-worth individuals and institutions and is designated as a wholesale bank for purposes of
evaluating its eRA performance.
With respect to community development lending, examiners commended Mellon Lead Bank's responsiveness to
the credit needs of its assessment areas. Examiners noted
that during the evaluation period, Mellon Lead Bank made
more than $200 million in qualified community development investments. They indicated that the majority of
Mellon Lead Bank's community development investments
were mortgage-backed securities and collateralized mortgage obligations secured by properties in its combined
assessment areas.
B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of BONY in light of public comment
received on the proposal. A commenter alleged, based on
2006 HMDA data, that BONY made higher-cost loans
more frequently to African American and Hispanic borrowers than to nonminority borrowersY Since selling its retail
banking business in October 2006, BONY no longer originates retail mortgage loans except in limited instances
when requested to do so by its private banking clients. The
Board has focused its analysis on the 2005 HMDA data
reported by BONY and its subsidiary banks. 38
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials 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 BONY is
excluding or imposing higher costs on any group on a
prohibited basis. The Board recognizes that HMDA data
alone, even with the recent addition of pricing information,
provide only limited infonnation about the covered loans. 39
HMDA data, therefore, have limitations that make them an

37. 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 or
more for first-lien mortgages and 5 percentage points or more for
second-lien mortgages (12 CFR 203.4).
38. The Board reviewed the 2005 HMDA data for BONY Lead
Bank for 2005 in its assessment area~. The Board notes that 2006
HMDA data are preliminary and that final data will not be available for
analysis until fall 2007.
39. 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.

C86

Federal Reserve Bulletin 0 October 2007

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 or ethnicity.
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
BONY and its subsidiaries. The Board also has consulted
with the Federal Reserve Bank of New York about the
fair-lending compliance record of BONY Lead Bank.
The record, including confidential supervisory information, indicates that BONY has taken steps to ensure compliance with fair lending and other consumer protection laws.
BONY has a fair-lending compliance program that includes
a second-review process; and periodic self-assessments
involving statistical and regression analyses to identify any
indicator of disparate treatment or disparate impact. In
addition, BONY has a process for resolving fair lending
complaints and requires employees to complete fair-lending
training sessions. BNYMellon has represented that BONY's
current fair-lending compliance program will remain in
place after consummation of the proposal. 40
The Board also has considered the HMDA data in light
of other information, including the programs described
above and the overall performance records of the subsidiary banks of BONY under the CRA. These established
efforts and records of performance demonstrate that the
institutions are active in helping to meet the credit needs of
their entire communities.

that the proposal would provide customers of both organizations with increased credit availability and expanded
access to products and services. Based on a review of the
entire record and for the reasons discussed above, the
Board has concluded that considerations relating to the
convenience and needs factor and the eRA 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. 42 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 BNYMellon 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 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 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 June 14,
2007.
Voting for this action: Chairman Bernanke and Governors Warsh,
Kroszner, and Mishkin. Absent and not voting: Vice Chairman Kohn.
ROBERT DEY. FRIERSON

C. Conclusion on Convenience and Needs and
CRA Performance
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 BNYMellon, comments received on the proposal, and confidential
supervisory information. 41 BNYMellon has represented
40. BNYMellon has represented that in the longer term, the fairlending compliance program of the merged organization would combine the best elements of the fair-lending compliance programs of
BONY and Mellon.
41. One commenter 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).

Deputy Secretary of the Board
42. One comrnenter 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 rnles, 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 CPR
225.l6(e), 262.3(i)(2), 262.25(d». 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 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: Second Quarter, 2007

C87

Appendix
BONY AND MELLON BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl
GUIDELINES
Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Remaining
number of
competitors

Resulting
HHI

Change in
HHI

.08
.03
.11

1,949
1,949
1,949

0
0
0

36
36
36

721
2,602,448
2,603,169

.00
.98
.98

799
799
799

0
0
0

174
174
174

163
4
4

10
8,353,381
8,353,391

.00
6.45
6.45

1,123
1,123
1,123

0
0
0

167
167
167

99
14
14

4
1,371,208
1,371,212

.00
1.37
1.37

984
984
984

0
0
0

103
103
103

Bank

Rank

WILMINGTON BANKING MARKET
IN DELAWARE AND MARYLAND
Wilmington-includes New Castle
County, Delaware, and Cecil
County, Maryland
BONY Pre-Consummation ............
Mellon .....................................
BNYMellon Post-Consummation ...

23
25
21

80,836
35,649
116,485

Los ANGELES BANKING MARKET
IN CALIFORNIA
Los Angeles-includes the Los
Angeles Ranally Metro Area and the
towns of Acton in Los Angeles
County and Rosamond in Kern
County
BONY Pre-Consummation ............
Mellon .....................................
BNYMellon Post-Consummation ...

159
20
20

BOSTON BANKING MARKET
IN MASSACHUSETTS AND
NEW HAMPSHIRE
Boston-includes the Boston MANH Ranally Metro Area and the
towns of Athol, Hubbardston,
Orange, Petersham, Phillipston,
Royalston, and Warwick in
Massachusetts; and the towns of
Antrim, Bennington, Deering,
Dublin, Fitzwilliam, Francestown,
Greenfield, Hancock, Jaffrey,
Lyndeborough, Peterborough,
Rindge, Sharon, and Temple in New
Hampshire
BONY Pre-Consummation ............
Mellon .....................................
BNYMellon Post-Consummation ...
MIAMI-FoRT LAUDERDALE AREA
BANKING MARKET IN FLORIDA
Miami-Fort Lauderdale-includes
Broward and Dade counties
BONY Pre-Consummation ............
Mellon .....................................
BNYMellon Post-Consummation ...

NOTE: Data are as of June 3D, 2006, and are adjusted to reflect mergers and acquisitions through March 31, 2007. All deposit amounts are in
thousands of dollars. All rankings. market deposit shares. and HHis are
based on thrift deposits weighted at 50 percent.

C88

Federal Reserve Bulletin 0 October 2007

C-B-G, Inc.
West Liberty, Iowa
Order Approving the Acquisition of Shares
of a Bank Holding Company
C-B-G, Inc. ("C-B-G"), a bank holding company within
the meaning of the Bank Holding Company Act ("BHC
Act"), has requested the Board's approval under section 3
of the BHC Act! to acquire additional shares, up to
35 percent of the voting shares of Washington Bancorp
("Washington") and thereby acquire an additional interest
in Washington's subsidiary bank, Federation Bank, both of
Washington, Iowa. At the time it filed this application,
C-B-G owned 24 percent of Washington's voting shares. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (72 Federal Register 8,161 (2007)). 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 BRC Act.
C-B-G, with banking assets of approximately $193.1 million, is the 69th largest depository organization in Iowa,
controlling deposits of $164.9 million, which represent less
than 1 percent of total deposits of insured depository
institutions in Iowa ("state deposits").3 Washington, with
total banking assets of approximately $105.5 million, is the
174th largest depository organization in Iowa, controlling
$70.2 million in deposits. On consummation of the proposal, C-B-G would become the 48th largest depository
organization in Iowa, controlling approximately $235.1 million in deposits, which represents less than 1 percent of
state deposits.
The Board received comments objecting to the proposal
from the management of Washington and from some of its
directors and shareholders. The Board previously has stated
that, in evaluating acquisition proposals, it must apply the
criteria in the BRC 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
1. 12 U.S.C. § 1842.
2. In April 2005, the Board approved an application by C-B-G to
acquire up to 24.35 percent of Washington's voting shares as a
noncontrolling investment. C-B-G, Inc., 91 Federal Reserve Bulletin
421 (2005) ("2005 Order").
3. Asset data are as of March 31, 2007. Statewide deposit and
ranking data are as of June 30, 2006, and reflect merger and acquisition
activity as of April 27, 2007. Deposit data reflect the total deposits
reported by each organization's insured depository institution in their
Consolidated Reports of Condition and Income or Thrift Financial
Reports. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.
4. See, e.g., Juniata Valley Financial Corp., 92 Federal Reserve
Bulletin C171 (2006) ("Juniata,,); Central Pacific Financial Corp.,
90 Federal Reserve Bulletin 93, 94 (2004) ("Central Pacific"); North
Fork Bancorporation, Inc., 86 Federal Reserve Bulletin 767, 768
(2000) ("North Fork"); The Bank of New York Company. Inc.,
74 Federal Reserve Bulletin 257, 259 (l988) ("BONY,,).

3(c) of the BRC Act requires the Board to review each
application in light of certain factors specified in the BRC
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.
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 BRC Act. 6 As explained
below, the Board has carefully considered the statutory
criteria in light of all the comments received and information submitted by C-B-G. The Board also has carefully
considered all other available information, including information accumulated in the application process, supervisory
information of the Board and other agencies, and relevant
examination reports. In considering the statutory factors,
particularly the effect of the proposal on the financial and
managerial resources of C-B-G, the Board has reviewed
financial information, including the terms and cost of the
proposal and the resources that C-B-G proposes to devote
to the transaction.

Legal Developments: Second Quarter, 2007

Washington in relation to C-B-G's total assets. Commenters also contended that the proposal could imperil C-B-G's
future financial condition. 7
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved both on a parentonly and on a consolidated basis, as well as the financial
condition of the subsidiary depository institutions and of
their 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 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 financial factors
of the proposal. Both C-B-G's and Washington's subsidiary
depository institutions currently are well capitalized and
would remain so on consummation. Based on its review of
the record, the Board also finds that C-B-G has sufficient
financial resources to effect the proposal. The proposed
transaction is structured as a cash purchase of shares, and
C-B-G would use existing resources to fund the purchase.
The Board also has considered the managerial resources
of C-B-G, Washington, and their subsidiary depository
institutions. The Board has reviewed the examination
records of these 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 agencies with
the organizations and their records of compliance with
applicable banking laws, including anti-money-laundering
laws.
Some commenters contended that the voting-rights
restrictions on shareholders who own more than 10 percent
of Washington's shares could prevent C-B-G from serving
as a source of financial and managerial strength to Federation Bank, as required under the Board's Regulation y'8
C-B-G has acknowledged that, if it does acquire control of
25 percent or more of Washington's shares, it will be
required, if necessary, to serve as a source of financial and
managerial strength to Federation Bank. The Board has
carefully considered the capacity of C-B-G to serve as a
source of financial and managerial strength to its subsidiary
banks, including Federation Bank, on approval and consummation of the proposal.
Based on all the facts of record, including public comments, the Board has concluded that considerations relating
to the financial and managerial resources and future pros-

7. The commenters asserted that C-B-G would have only limited
influence over Washington's operations due to a provision in Washington's articles of incorporation that restricts the voting rights of
shareholders who own more than 10 percent of Washington's voting
shares. The Board has analyzed the effect of the proposal on C-B-G's
general financial condition more broadly.
8. See 12 CFR 225.4(a)(l).

C89

pects of the organizations involved in the proposal are
consistent with approval, as are the other supervisory
factors under the BHC Act. 9

COMPETITIVE AND CONVENIENCE AND NEEDS
CONSIDERA TIONS
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. Section 3 also prohibits the Board from approving a proposal
that would substantially lessen competition in any relevant
banking market, unless the Board finds that the anticompetitive effects of the proposal 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. lO C-B-G and Washington 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 significantly adverse effect on
competition or on the concentration of banking resources in
any relevant banking market and that competitive factors
are consistent with approval.
In addition, considerations relating to the convenience
and needs of the communities to be served, including the
records of performance of the institutions involved under
the Community Reinvestment Act ("CRA"),ll are consistent with approval of the application. Community Bank,
C-B-G's sole subsidiary bank, received a "satisfactory"
rating and Federation Bank received an "outstanding"
rating at their most recent evaluations for CRA performance by the FDIC.12 C-B-G has represented that the
proposal will not result in any changes in the services or
products offered by Federation Bank. 13

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. 14 In reaching its conclusion, the Board
9. Several commenters expressed concern that the proposal could
subject Federation Bank to liability under the cross-guarantee provision of the Federal Deposit Insurance Act, 12 U.S.c. § 1815(e) ("FDI
Act"), in the event that a subsidiary bank of C-B-G were to fail or
require assistance from the Federal Deposit Insurance Corporation
("FDIC"). The Board notes that the application of this provision of the
FDI Act is a matter that would be decided by the FDIC.
10. 12 U.S.c. § 1842(c)(l).
11. 12 U.S.C. § 2901 et seq.
12. The most recent CRA performance evaluations of Community
Bank and Federation Bank were as of May 2004 and December 2004,
respectively. Wilton Savings Bank, a subsidiary bank of C-B-G which
was merged into Community Bank in January 2006, received a
"satisfactory" rating at its last CRA evaluation, as of November 2003.
13. One commenter contended that the proposal would have a
deleterious effect on the services Federation Bank provides to its local
community.
14. In connection with the application that the Board approved in
2005, C-B-G made commitments to ensure that it would not control
Washington or Federation Bank for purposes of the BHC Act. These

C90

Federal Reserve Bulletin 0 October 2007

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 C-B-G 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 May 24,
2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.

considered the application and all comments received in
light of the factors set forth in section 3 of the BHC Act.
First Busey, with total consolidated assets of approximately $2.5 billion, controls two subsidiary insured depository institutions that operate in Illinois, Indiana, and
Florida: Busey Bank, also in Urbana, and Busey Bank,
National Association, Port Charlotte, Florida. First Busey is
the 33rd largest depository organization in Illinois, controlling deposits of $1.5 billion, which represent less than
I percent of total deposits of insured depository institutions
in Illinois ("state deposits").2
Main Street, with total consolidated assets of approximately $1.5 billion, controls one insured depository institution that operates only in Illinois. Main Street is the 36th
largest depository organization in Illinois, controlling
deposits of approximately $1.2 billion.
On consummation of this proposal, and after accounting
for the proposed divestiture, First Busey would become the
24th largest depository organization in Illinois, controlling
deposits of approximately $2.7 billion, which represent less
than 1 percent of state deposits.

JENNIFER J. JOHNSON

Secretary of the Board

First Busey Corporation
Urbana, Illinois
Order Approving the Merger of Bank
Holding Companies
First Busey Corporation ("First Busey"), 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 Main Street
Trust, Inc. ("Main Street") and thereby acquire its subsidiary bank, Main Street Bank & Trust, both of Champaign,
Illinois.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (71 Federal Register 76,339 (2006». The
time for filing comments has expired, and the Board has

commitments are listed in the appendix to the 2005 Order and were
modified by the Board's letter dated October 25, 2006. One commenter urged that the Board continue to require C-B-G to abide by
those commitments if the Board approves C-B-G's current proposal.
C-B-G proposes to own up to 35 percent of the voting shares of
Washington and, thus, would be deemed to control Washington for
purposes of the BHC Act without regard to the previous commitments
considered. See 12 U.S.c. § 1841(a)(2)(A). Accordingly, the Board has
determined in this case not to impose the restrictions contained in the
commitments, and not to require compliance with the commitments on
consummation of the proposal. For the reasons discussed in this order,
the Board has concluded that C-B-G meets the statutory factors
required to own more than 25 percent of Washington and to exercise
the rights attendant to that level of ownership.
1. 12 U.S.C. § 1842.

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
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. 3
First Busey and Main Street have subsidiary depository
institutions that compete directly in three markets in Illinois: Bloomington-Normal, Champaign-Urbana, and Peoria. 4 The Board has reviewed carefully the competitive
effects of the proposal in each of these banking markets in
light of all the facts of record. In particular, the Board has
considered the number of competitors that would remain in
the banking markets, the relative shares of total deposits in
depository institutions in the markets ("market deposits")
controlled by First Busey and Main Street,5 the concentration level of market deposits and the increase in that level
2. Asset data are as of March 31. 2007, and statewide deposit and
ranking data are as of June 30, 2006, and reflect merger activity
through May 21, 2007. In this context, insured depository institutions
include commercial banks, savings banks, and savings associations.
3. 12 U.S.c. § I842(c)(I).
4. These banking markets are described below and in the appendix.
5. Deposit and market share data are as of June 30, 2006, adjusted
to reflect subsequent mergers and acquisitions through May 21. 2007,
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

Legal Developments: Second Quarter, 2007 C91

as measured by the Herfindahl-Hirschman Index ("HHI")
under the Department of Justice Merger Guidelines ("DOJ
Guidelines"),6 other characteristics of the markets, and
commitments made by First Busey to divest five branches
of Main Street Bank & Trust in the Champaign-Urbana
banking market.
A. Banking Market Warranting Special Scrutiny
First Busey and Main Street compete directly in one
banking market, Champaign-Urbana,7 that warrants a detailed review of the competitive effects of the proposal.
First Busey's market share on consummation of the proposal, including proposed divestiture, would exceed 35 percent in this market.
Busey Bank is the largest depository institution in the
Champaign-Urbana banking market, controlling deposits
of approximately $1.1 billion, which represent approximately 27 percent of market deposits. Main Street Bank &
Trust is the second largest depository institution in the
market, controlling deposits of approximately $538.5 million, which represent approximately 13 percent of market
deposits. To reduce the potential adverse effects on competition in the Champaign-Urbana banking market, First
Busey has committed to divest five branches of Main Street
Bank & Trust that have at least $110.2 million in total
deposits to another insured depository organization in the
market. 8 On consummation of the proposed merger, and
after accounting for the proposed divestiture, First Busey

calculation on a 50 percent weighted basis. See. e.g.. First Hawaiian.
Inc.,77 Federal Reserve Bulletin 52 (1991).
6. 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.
7. The Champaign-Urbana banking market is defined as Champaign County; Ford County, excluding Brenton. Mona, Pella, and
Rogers townships; Artesia and Loda townships in Iroquois County;
Butler, Middlefork, Pilot, Oakwood, and Vance townships in Vermilion County; Garret, Tuscola, Camargo, Murdock, and Newman townships in Douglas County; Piatt County, excluding Willow Branch and
Cerro Gordo townships; Santa Anna township in De Witt County; and
Bellflower township in McLean County, all in Illinois.
8. First Busey has committed that, before consummation of the
proposed merger, it will execute an agreement for the proposed
divestiture in the Champaign-Urbana banking market with a purchaser
that the Board determines to be competitively suitable. First Busey
also has committed to complete the divestiture within 180 days after
consummation of the proposed merger. In addition, First Busey has
committed that, if it is unsuccessful in completing the proposed
divestiture within such time period, it will transfer any unsold
branches to an independent trustee who will be instructed to sell the
branches to an alternate purchaser or purchasers in accordance with
the terms of this order and without regard to price. Both the trustee and
any alternate purchaser must be deemed acceptable by the Board. See

would remain the largest depository institution in the
market, controlling deposits of approximately $1.6 billion,
which would represent not more than 36 percent of market
deposits. The HHI would not increase more than 506 points
to 1561.9
The application raises special concerns because First
Busey, the largest institution in the banking market, proposes to merge with the market's second largest competitor.
No other institution controls more than 6 percent of market
deposits. The Board has previously recognized that merger
proposals involving the largest depository institutions in
markets structured like the Champaign-Urbana market
warrant close review due to the size of those institutions
relative to other market competitors. IO The Board, therefore, has considered whether other factors either mitigate
the competitive effects of the proposal or indicate that the
proposal would have a significantly adverse effect on
competition in the market. l l
A number of factors indicate that the increase in concentration in the Champaign-Urbana banking market, as measured by the market share of the combined organization,
overstates the potential competitive effects of the proposal
in the market. After consummation, and taking into account
the proposed divestiture, at least 39 other insured depository institutions would continue to compete in the market.
In addition, the proposed divestiture to a banking organization operating in the Champaign-Urbana banking market
would strengthen the competitive position of an in-market
participant.
The Board notes that two community credit unions also
exert a competitive influence in the Champaign-Urbana
banking market. 12 Both institutions offer a wide range of
consumer products, operate street-level branches, and have

BankAmerica Corporation, 78 Federal Reserve Bulletin 338 (1992);
United New Mexico Financial Corporation, 77 Federal Reserve
Bulletin 484 (1991).
9. The calculations of market share and concentration include the
weighting at 100 percent of deposits controlled by two thrift institutions in the market. The Board previously has indicated that it may
consider the competitiveness of a thrift institution at a level greater
than 50 percent of its deposits if competition from the institution
closely approximates competition from a commercial bank. See, e.g.,
BankNorth Group, Inc. 75 Federal Reserve Bulletin 703 (1989). The
thrift institutions in the Champaign-Urbana banking market serve as
significant sources of commercial loans and provide a broad range of
consumer, mortgage, and other banking products. These thrift institutions have ratios of commercial and industrial loans to assets of
approximately 6 percent and 8 percent, which are comparable to the
national average for all commercial banks. Competition from these
thrift institutions, therefore, closely approximates competition from
commercial banks. See First Union Corporation, 84 Federal Reserve
Bulletin 489 (1998).
10. See Firstar Corporation, 87 Federal Reserve Bulletin 236, 238
(2001).
II. 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 a banking market. See NationsBank Corp., 84 Federal Reserve Bulletin 129 (1998).
12. The Board previously has considered the competitiveness of
certain active credit unions as a mitigating factor. See, e.g.• Regions
Financial Corporation. 93 Federal Reserve Bulletin CI6 (2007);
Wachovia Corporation, 92 Federal Reserve Bulletin CI83 (2006);

C92

Federal Reserve Bulletin D October 2007

memberships open to almost all the residents in the market.
In this light, the Board concludes that their activities in this
banking market exert sufficient competitive influence that
mitigate, in part, the potential competitive effects of the
proposal. 13
Moreover, the record of recent entry into the ChampaignUrbana banking market evidences its attractiveness for
entry. Since 2002, five depository institutions have entered
the market de novo, and nine depository institutions have
entered the market by acquisition. Other factors also indicate that the market remains attractive for entry. For
example, from 2002 to 2005, the market's average annualized income growth exceeded the average annualized
income growth for all metropolitan areas in Illinois.
Based on all the facts of record and for the reasons
discussed above, the Board believes that competitive considerations in the Champaign-Urbana banking market are
consistent with approval in this case. The Board continues
to have concerns, however, about the structure of this
banking market and believes that future mergers in the
market involving First Busey or its successors in would
warrant special consideration. The Board intends to scrutinize carefully any future acquisition proposal that would
increase First Busey's market share in the ChampaignUrbana banking market.
B. Banking Markets within Established Guidelines
Consummation of the proposal in the remaining banking
markets, Bloomington-Normal and Peoria, would be consistent with Board precedent and within the thresholds in
the DO} Guidelines without divestitures. 14 On consummation of the proposal, the Bloomington-Normal banking
market would remain highly concentrated, and the Peoria
banking markets would remain unconcentrated. Numerous
competitors would remain in both banking markets.

C. Agency Views and Conclusion on Competitive
Considerations
The DO} also has conducted a detailed review of the
potential competitive effects of the proposal and has
advised the Board that consummation of the proposal,
taking into account the proposed divestiture, 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.

F.N.B. Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway
Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004).
13. The two community credit unions control approximately
$138.8 million in deposits in the market, which represent approximately 2 percent of market deposits on a 50 percent weighted basis.
Accounting for the revised weightings of these deposits, First Busey
would control approximately 36 percent of market deposits on consummation of the proposal, and the HHI would not increase more than
490 points to 1514.
14. The effects of the proposal on the concentration of banking
resources in these markets are described in the appendix.

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 three banking markets where First
Busey and Main Street compete directly 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 from the primary federal and state
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, and
information provided by First Busey.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved both on a parentonly and on a 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 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 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 financial factors
of the proposal. First Busey, Main Street, and their subsidiary depository institutions currently are well capitalized
and would remain so on consummation of the proposal.
Based on its review of the record, the Board also finds that
First Busey has sufficient financial resources to effect the
proposal. The proposed transaction is structured primarily
as a share exchange.
The Board also has considered the managerial resources
of First Busey, Main Street, and their subsidiary depository
institutions. The Board has reviewed the examination
records of these 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 laws and with anti-moneylaundering laws. First Busey, Main Street and their subsidiary depository institutions are considered well managed.
The Board also has considered First Busey's plans for
implementing the proposal, including the proposed management after consummation.

Legal Developments: Second Quarter, 2007

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 BRC Act.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BRC 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").I 5 Busey Bank received an "outstanding"
rating at its most recent CRA performance evaluation by
the Federal Insurance Deposit Corporation ("FDIC"), as of
December 1, 2005. 16 Main Street Bank & Trust received a
"satisfactory" rating at its most recent CRA performance
evaluation by the FDIC, as of December 1, 2006. After
consummation of the proposal, First Busey plans to maintain Main Street Bank & Trust's CRA policies until Main
Street Bank & Trust is merged into Busey Bank. First
Busey has represented that consummation of the proposal
would allow it to provide a broader range of financial
products and services over a larger area. Based on all the
facts of record, the Board concludes that considerations
relating to the convenience and needs of the community to
15. 12 U.S.c. § 2901 et seq.; 12 U.S.C. § 1842(c)(2).
16. Busey Bank, National Association was rated "satisfactory" by
the Office of the Comptroller of the Currency, as of August 2, 2004,
when it was doing business as Tatpon Coast National Bank and before
its acquisition by First Busey.

C93

be served 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 BRC Act. The
Board's approval is specifically conditioned on compliance
by First Busey 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 Chicago, acting
pursuant to delegated authority.
By order of the Board of Governors, effective June 14,
2007.
Voting for this action: Chairman Bernanke and Governors Warsh,
Kroszner, and Mishkin. Absent and not voting: Vice Chairman Kohn.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

C94

Federal Reserve Bulletin 0 October 2007

Appendix
FIRST BUSEY AND MAIN STREET BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND
DO} GUIDELINES WITHOUT DIVESTITURES

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Increase in
HHI

Remaining
number of
competitors

Bloomington-Normal-McLean
County; and El Paso, Kansas,
Panola, and Minonk townships in
Woodford County
First Busey Pre-Consummation ......
Main Street ...............................
First Busey Post-Consummation ....

4
5
2

242.6 mil.
158.5 mil.
401.1 mil.

10.1
6.7
16.8

1,238
1,238
1,238

134
134
134

27
27
27

Peoria-Peoria and Tazewell
Counties, and Woodford County,
excluding El Paso, Kansas, Panola,
and Minonk townships
First Busey Pre-Consummation ......
Main Street ...............................
First Busey Post-Consummation ....

12
32
12

123.0 mil.
10.7 mil.
133.7 mil.

2.6
.2
2.8

859
859
859

1
1
1

33
33
33

Bank

ILLINOIS BANKING MARKETS

NOTE: Data are as of June 30, 2006, and reflect merger activity
through May 21, 2007. Deposit amounts are unweighted. All rankings,
market deposit shares, and HHls are based on thrift deposits weighted at
50 percent.

Huntington Bancshares Incorporated
Columbus, Ohio
Penguin Acquisition, LLC
Baltimore, Maryland
Order Approving the Merger of Bank
Holding Companies and the Formation 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 Act! to
acquire Sky Financial Group, Inc. ("Sky"), Bowling
Green, and its subsidiary bank, Sky Bank, Salineville, both
of Ohio. 2 In addition, Huntington's wholly owned subsidiary, Penguin Acquisition, LLC, Baltimore, Maryland, has

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

requested the Board's approval under section 3 of the BHC
Act to become a bank holding company and merge with
Sky.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(72 Federal Register 6242 (2007)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the BHC Act. 3
Huntington, with total consolidated assets of approximately $35.3 billion, is the 46th largest depository organization in the United States. 4 Huntington controls one
depository institution, The Huntington National Bank
("HNB"),5 also in Columbus, that operates in six states6
and engages in numerous nonbanking activities that are
permissible under the BHC Act. Huntington is the fourth
largest depository organization in Ohio, controlling deposits of approximately $16.3 billion.
3. Three commenters expressed concerns about various aspects of
the proposal.
4. Asset and ranking data are as of December 31, 2006.
5. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.
6. Huntington operates branches in Ohio, Rorida, Indiana, Kentucky, Michigan, and West Virginia.

Legal Developments: Second Quarter, 2007 C95

Sky, with total consolidated assets of approximately
$18 billion, controls Sky Bank, which operates in Ohio,
Indiana, Michigan, Pennsylvania, and West Virginia.? Sky
also engages in a broad range of permissible nonbanking
activities. In Ohio, Sky is the seventh largest depository
organization, controlling deposits of approximately $8.6 billion.
On consummation of the proposal, Huntington would
become the 34th largest depository institution in the United
States, with total consolidated assets of approximately
$53 billion. Huntington would control deposits of approximately $38.3 billion, which represent less than 1 percent of
the total amount of deposits of insured depository institutions in the United States. In Ohio, Huntington would
become the third largest depository organization, controlling deposits of approximately $24.9 billion, which represent approximately 11.9 percent of the total amount of
deposits of insured depository institutions in the state
("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 bank
holding company's home state if certain conditions are
met. For purposes of the BHC Act, the home state of
Huntington is Ohio,S and Sky is located in Ohio, Indiana,
Michigan, Pennsylvania, and West Virginia. 9
Based on a review of all the facts of record, including
relevant state statutes, the Board finds that the conditions
for an interstate acquisition enumerated in section 3(d) of
the BHC Act are met in this case. 1O In light of all the facts
of record, the Board is permitted to approve the proposal
under section 3(d) of the BHC Act.

7. Sky also controls Sky Trust, National Association, Pepper Pike,
Ohio ("Sky Trust"), a limited-purpose depository institution that
provides only trust services.
8. 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 I, 1966, or the date on which
the company became a bank holding company, whichever is later.
9. For purposes of section 3(d) of the BHCAct, 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(0)(4)--{7)
and 1842(d)(I)(A) and 1842(d)(2)(B).
10. 12 U.S.c. §§ I 842(d)(I)(A)--{B) and 1842(d)(2)(A)--{B). Huntington is adequately capitalized and adequately managed, as defined
by applicable law. Sky Bank has been in existence and operated for the
minimum periods of time required by all applicable state laws,
including Indiana state law (five years). See Bums Ind. Code Ann.
§28-2-l7-20. On consummation of the proposal, Huntington would
control less than 10 percent of the total amount of deposits of insured
depository institutions in the United States. Huntington also would
comply with the state deposit caps in all relevant states, including Ohio
and West Virginia where it will control less than 25 percent of state
deposits in each state. See 0.R.c. § ll5.05 and West Virginia Code
§3IA-2-12a. All other requirements of section 3(d) of the BHC Act
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 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. II
Huntington and Sky have subsidiary depository institutions that compete directly in the following 12 banking
markets: Cleveland, Columbus, Dayton, Akron, Toledo,
Canton, Lima, Dover-New Philadelphia, Fremont, and
Logan banking markets in Ohio; the Indianapolis banking
market in Indiana; and the Cincinnati multistate banking
market in Ohio, Indiana, and Kentucky. 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
controlled by Huntington and Sky in the markets ("market
deposits"),12 the concentration level of market deposits and
the increases in those levels as measured by the HerfindahlHirschman 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 all 12 banking markets. 14 On consummation
of the proposal, 11 markets would remain moderately
concentrated and one market would remain highly concen11. 12 U.S.C. § I842(c)(I).
12. Deposit and market share data are as of June 30, 2006, adjusted
to reflect mergers and acquisitions through February 7, 2007. 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., 77 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 ifthe 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. Those banking markets and the effects of the proposal on the
concentration of banking resources therein are described in the
appendix.

C96

Federal Reserve Bulletin D October 2007

trated, as measured by the HHI. The change in the HHI in
the highly concentrated market would be small. Moreover,
numerous competitors would remain in each of the 12
banking markets.
The DOl has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the 12 banking markets where
Huntington and Sky compete directly or in any other
relevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with
approval.

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 Huntington, Sky, 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 bank supervisory agencies with the
organizations and their records of compliance with applicable banking law, including anti-money-Iaundering laws.
Huntington, Sky, and their subsidiary depository institutions are considered to be well managed. The Board also
has considered Huntington'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: Second Quarter, 2007

lending in LMI areas. Two commenters also expressed
concern that the proposal would lead to closings of the
combined organization's branches in LMI areas.
A. eRA Performance Evaluations
As provided in the CRA, the Board has reviewed 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. 19
HNB received a "satisfactory" rating at its most recent
CRA performance evaluation by the Office of the Comptroller of the Currency ("OCC"), as of March 31, 2003
("2003 Evaluation").2o Sky Bank received a "satisfactory" CRA performance rating by the Federal Reserve
Bank of Cleveland, as of March 13,2006 ("2006 Evaluation").21 Huntington has represented that it would continue
its CRA program in the combined institution.
eRA Performance of HNB. In the 2003 Evaluation,
HNB received a "high satisfactory" rating on each of the
lending, investment, and service tests for its CRA performance overall and in Ohio. 22 Examiners reported that the
bank's overall distribution of loans to borrowers of different income levels was good and that its geographic distribution of loans was adequate. In addition, examiners noted
that HNB provided a relatively high level of community
development services and reported that its service-delivery
systems were accessible to geographies and individuals of
different income levels in its assessment areas.
In the bank's Cleveland and Columbus assessment areas,
examiners concluded that the geographic distribution of
HNB's home purchase loans and home refinance loans was
adequate. Examiners characterized the bank's geographic
distribution of its home improvement loans as excellent in
the Cleveland assessment area and good in the Columbus
assessment area. Examiners also rated HNB's distribution
of loans by borrower income level for home purchase and
home refinance as good in its Cleveland and Columbus
assessment areas and as excellent for home improvement
loans in its Cleveland assessment area. Moreover, examiners commended HNB for providing community development loans that were very responsive to community needs

19. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
20. The evaluation period for the 2003 Evaluation was January 1,
1999, through December 31, 2002, for the lending test and July 1,
1999, through December 31, 2002, for the service and investment
tests.
21. Sky Trust, a special-purpose bank, is not subject to the CRA
(12 CPR 228.11(3».
22. HNB's statewide rating for Ohio was based primarily on
full-scope evaluations conducted in HNB's Cleveland and Columbus
assessment areas, the bank's major markets in Ohio. Limited-scope
evaluations were conducted in HNB' s 13 other Ohio assessment areas.

C97

in the Cleveland and Columbus assessment areas, including
loans totaling $12.26 million to developers of affordable
housing. In addition, examiners noted that HNB's use of
flexible loan programs contributed positively to the bank's
lending performance, including its participation in affordable housing programs and its Community Access Mortgage product for borrowers in LMI tracts, under which
borrowers with have higher debt-to-income ratios could
qualify for loans.
Since the 2003 Evaluation, HNB represented that it has
introduced additional mortgage products to assist LMI
borrowers, including a mortgage product offering up to
100 percent financing with no mortgage insurance on
owner-occupied properties in LMI census tracts and on
properties purchased by LMI borrowers in census tracts of
any income level. Another new product, the "Welcome
Home" program, offers a fixed-rate mortgage with no
down-payment requirement and reduced mortgage insurance for those with slightly impaired credit and limited
funds for closing costs. HNB has made loans totaling more
than $176 million through the "Welcome Home" program.
A variation of this product is used in Cleveland's "Help
Eliminate Loans that are Predatory" program, an initiative
by Fannie Mae and local banking institutions, including
HNB and Sky Bank, to create a fund to refinance mortgages
for borrowers who have mortgages with problematic features, such as severe prepayment policies. 23
In the 2003 Evaluation, examiners characterized HNB's
performance under the investment test as good in the
Cleveland and Columbus assessment areas. Examiners
concluded that the investments were responsive to identified needs in those areas for affordable housing, financial
assistance for small business, and revitalization of LMI
areas. Huntington made investments totaling $73.5 million
from 2004 through 2006.
Examiners rated HNB's performance under the service
test in the Cleveland and Columbus assessment areas as
good in the 2003 Evaluation. Although examiners noted
that the percentages of branches in LMI geographies in
those assessment areas were generally lower than the
percentages of the population in those LMI geographies,
they reported that the operational hours and services of the
bank's branches were accessible to residents in LMI areas,
with many branches offering services on Saturdays and
making branch personnel available for appointments outside standard service hours. Examiners also noted that
telephone banking services were offered in English and
Spanish. Additionally, examiners commended HNB for
providing a high level of community development services
to numerous organizations serving the Cleveland and
Columbus assessment areas, with bank representatives
serving in leadership roles in such organizations. Some of
these services included establishing and supervising student banking programs in elementary schools with students
from primarily LMI areas, participation on a committee

23. HNB participates in similar initiatives in Montgomery County,
where Dayton is located, and Toledo.

e98

Federal Reserve Bulletin 0 October 2007

formed by the City of Cleveland to address abusive lending
practices that targeted LMI borrowers, and providing training for nonprofit organizations offering services to LMI
individuals and families. HNB represents that since the
2003 Evaluation, it has provided more than 4,000 community development services, including financial literacy education for children and adults in both the Cleveland and
Columbus metropolitan areas.
eRA Performance of Sky Bank. As noted, Sky Bank
received an overall "satisfactory" rating in the 2006 Evaluation. 24 Examiners reported that taken as a whole, Sky
Bank's distribution of lending reflected a good penetration
among customers of different income levels. Furthermore,
examiners noted that Sky Bank was a leader in making
community development loans and qualified investments
and that it provided a relatively high level of community
development services. Examiners found Sky Bank's servicedelivery systems to be reasonably accessible to all portions
of, and to individuals of different income levels in, its
assessment areas.
In its statewide assessment area in Ohio, Sky Bank
received a "high satisfactory" rating on the lending test. 25
Overall geographic income distribution of loans was considered adequate by examiners, while lending distribution
by borrower income was considered good. Although examiners reported weaker performance in Sky Bank's
Cleveland-Akron metropolitan statistical area ("MSA")
assessment area, they noted that Sky Bank's presence in the
Cleveland-Akron market was relatively new and that it
faced significant competition from well-established financial institutions in that market. In addition, examiners
stated that they considered Sky Bank's operations in that
market to be consistent with the overall operations of the
institution. Examiners reported that the bank had a high
level of community development lending in the ClevelandAkron MSA assessment area.
Examiners rated Sky's overall service performance in
the Cleveland-Akron MSA assessment area as adequate.
Examiners noted that retail office locations in LMI geographies in this assessment area were limited, but also noted
that Sky Bank provided a relatively high level of community development services in that area.

24. The evaluation period for the 2006 Evaluation was January I,
2003, through December 31, 2004, for home mortgage and home
improvement loans under the lending test and October 1, 2003, to
March 31, 2006, for community development loans and investments
under the lending and investment tests and community development
services under the service test.
25. This rating was based on the bank's lending performance in its
Ohio assessment areas where full-scope examinations were performed
in the following areas: the Cleveland-Akron MSA, the CantonMassillon MSA, and the Northwestern Ohio nonmetropolitan assessment areas. Examiners also reviewed the bank's assessment areas in
Ohio where limited-scope examinations were performed to ensure
consistency with the overall lending activity. Sky's assessment areas
where limited-scope examinations were performed included its assessment areas in the Columbus and Toledo MSAs.

B. Branch Closings
Two commenters expressed concern about the proposal's
possible effect on branch closings. Huntington has represented that management is considering internal recommendations on branch closings, relocations, and consolidations
in overlapping markets after consummation of the proposal
but that no final decisions have been made. Huntington also
represented that it would follow HNB' s branch closing
policy with respect to any of those actions that are related
to the proposal.
The Board has considered carefully HNB's branch closing policy and its record of opening and closing branches.
HNB's branch closing policy requires the bank to ensure
that its products and services meet the needs and convenience of the communities in which it does business,
including LMI communities. In making a decision on
whether to close a branch, bank management must review
and assess any factors and potential changes that, if implemented, might reasonably improve the viability of an office
and reduce the need to close that office. If a potential
branch closing is in an LMI community, the policy also
requires that HNB' s CRA experts assess the impact on the
community and contact neighborhood representatives and
interested community groups to discuss and evaluate ways
to minimize adverse effects of the proposed closing on the
community and local customers. If the bank decides to
close a branch, its management must make every reasonable effort to facilitate the availability of its services and
products to customers of the closed office. The Board also
has considered that federal banking law provides a specific
mechanism for addressing branch closings that requires an
insured depository institution to provide notice to the
public and to the appropriate federal supervisory agency
before closing a branch. 26
In the 2003 Examination, acc examiners concluded
that HNB' s record of opening and closing branches had a
favorable or neutral impact on LMI census tracts in its
full-scope Ohio assessment areas. The Board has consulted
with the OCC on the bank's record of branch openings and
closings since the 2003 Evaluation. The OCC will continue
to review the branch opening and closing record of HNB in
the course of conducting CRA performance evaluations.

C. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of Huntington and Sky in light of public

26. 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

Legal Developments: Second Quarter, 2007 C99

comments received on the proposal. Two commenters
alleged, based on 2004 and 2005 HMDA data, that Huntington had denied the home mortgage loan applications of
African-American borrowers more frequently than those of
nonminority applicants in the Columbus metropolitan area.
The Board has focused its analysis on the 2005 and
preliminary 2006 HMDA data reported by HNB.27
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials 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 is excluding or imposing higher costs on any 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. 28
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 or ethnicity.
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
Huntington and its subsidiaries. The Board also has consulted with the OCC, the primary federal supervisor of
HNB.
The record, including confidential supervisory information, indicates that Huntington has taken steps to ensure
compliance with fair lending and other consumer protection laws. Huntington has corporatewide policies and procedures to help ensure compliance with all fair lending and
other consumer protection laws and regulations. Ongoing
monitoring by corporate compliance management is designed to ensure compliance with policies and procedures.
Huntington's compliance program also includes quarterly
assessments of fair-lending compliance for each line of
business, routine reviews of loans, and regular testing to
note areas of weakness and recommend action plans for
improvement. With respect to mortgage lending, Hunting27. The Board reviewed HMDA data for Huntington in Ohio and in
the Cleveland, Columbus, and Toledo MSAs where the bank's primary
assessment areas are located. The Board notes that 2006 HMDA data
are preliminary and that final data will not be available for analysis
until fall 2007.
28. 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 nOl
available from HMDA data.

ton sells the majority of the mortgages that it originates on
the secondary market, and its standard procedure is to
submit applications through automated underwriting systems that only examine objective data concerning the loan
applicant. In addition, Huntington represented that its compliance staff members frequently receive training on best
compliance practices from industry and government experts. Huntington has stated that its fair lending policies
will apply to the combined institution after consummation
of the proposal.
The Board also has considered the HMDA data in light
of other information, including the programs described
above and the overall performance record of HNB under
the CRA. These established efforts and record of performance demonstrate that the institution is active in helping
to meet the credit needs of its entire communities.

D. Conclusion on Convenience and Needs and
CRA Performance
The Board has considered carefully all of the facts of
record, including reports of examination of the CRA
records of the institutions involved, information provided
by Huntington, comments received on the proposal, and
confidential supervisory information. Huntington states that
the proposal will result in greater convenience for Huntington and Sky customers through expanded delivery channels
and a broader range of 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 record of the relevant insured depository institutions
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 applications
should be, and hereby are, approved. 29

29. Three commenters requested that the Board hold a public
meeting or hearing on the proposal. Section 3 of the BHC ACl 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
nol 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
necessary or appropriate to clarify factual issues related to the
application and to provide an opportunity for testimony (12 CFR
225.16(e), 262.3(i)(2), 262.25(d)). 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 warranled in this case. Accordingly, the request for a
public meeling or hearing on the proposal is denied.

CI00

Federal Reserve Bulletin 0 October 2007

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 Huntington with the conditions in this order and
all the commitments made to the Board in connection with
the proposal. For purposes of these transactions, those
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 by the Federal Reserve Bank of Cleveland, acting
pursuant to delegated authority.
By order of the Board of Governors, effective June 4,
2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.

ROBERT DEY. FRIERSON
Deputy Secretary of the Board

Appendix
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES

Bank

OHIO

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

BANKING MARKETS

Cleveland-Cuyahoga, Geauga, Lake,
and Lorain counties; Medina County,
excluding the city of Wadsworth, the
townships of Guilford, Sharon, and
Wadsworth, and the village of Seville;
the cities of Aurora and Streetsboro,
the townships of Freedom, Hiram,
Mantua, Nelson, Shalersville, and
Windham, and the villages adjoining
these townships in Portage County; the
cities of Hudson, Macedonia, and
Twinsburg, the townships of Boston,
Northfield Center, Richfield, Sagamore
Hills, and Twinsburg, and the villages
adjoining these townships in Summit
County; and the city of Vermilion in
Erie County
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

6
11
4

2.41 bil.
1.15 bil.
3.56 bil.

4.0
1.9
5.9

1,781
1,781
1,781

15
15
15

41
41
41

Columbus-Franklin, Delaware,
Fairfield, Hocking, Licking, Madison,
Morrow, Pickaway, and Union
counties; and Perry County, excluding
Harrison township
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

1
12
1

8.30 bil.
323.mil.
8.63 bil.

28.0
1.1
29.1

1,662
1,662
1,662

60
60
60

59
59
59

Dayton-Montgomery, Greene, Miami,
and Preble counties
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

6
11
6

456 mil.
129 mil.
585 mil.

4.9
1.4
6.3

1,553
1,553
1,553

14
14
14

30
30
30

Legal Developments: Second Quarter; 2007

ClOl

Appendix-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued
Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

Bank

Rank

Akron-Summit County, excluding the
cities of Hudson, Macedonia, and
Twinsburg, the townships of Boston,
Northfield Center; Richfield, Sagamore
Hills, and Twinsburg, and the villages
adjoining those townships; Portage
County, excluding the cities of Aurora
and Streetsboro, the townships of
Freedom, Hiram, Mantua, Nelson,
Shalersville, and Windham, and the
villages adjoining those townships; the
city of Wadsworth, the townships of
Guilford, Sharon, and Wadsworth, and
the village of Seville in Medina
County; the townships of Lake and
Lawrence and the villages of Canal,
Fulton, and Hartville in Stark County;
the city of Rittman, the townships of
Chippewa and Milton, and the villages
adjoining those townships in Wayne
County
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

7
10
6

396 mil.
212 mil.
608 mil.

4.6
2.5
7.1

1,379
1,379
1,379

23
23
23

22
22
22

Toledo-Lucas, Fulton, and Ottawa
counties and Wood County, excluding
the city of Fostoria
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

4
3
1

969 mil.
1.29 bil.
2.26 bil.

10.9
14.5
25.5

1,666
1,666
1,666

319
319
319

20
20
20

Canton-Stark Count); excluding the
townships of Lake and Lawrence;
Carroll County; and the township of
Smith and the village of Sebring in
Mahoning County
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

2
6
1

796 mil.
535 mil.
1.33 bil.

15.1
10.2
25.3

1,700
1,700
1,700

307
307
307

16
16
16

Lima-Allen and Putnam counties; the
townships of Clay, Duchouquet,
Goshen, Logan, Moulton, Pusheta,
Salem, Union, and Wayne in Auglaize
County; the township of Liberty in
Hardin County; and the township of
Washington in Van Wert County
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

2
5
1

317 mil.
273 mil.
591 mil.

12.7
10.9
23.6

1,390
1,390
1,390

276
276
276

16
16
16

C102

Federal Reserve Bulletin 0 October 2007

Appendix-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND
Bank

Rank

Amount
of deposits
(dollars)

DOl GUIDELINES-Continued

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

Dover-New Philadelphia-Tuscarawas
and Harrison counties and the
townships of Salt Creek, Paint, Berlin,
Walnut Creek, and Clark in Holmes
County
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

I
9
1

363 mil.
53 mil.
415 mil.

25.7
3.7
29.4

1,377
1,377
1,377

191
191
191

18
18
18

Fremont-Sandusky County
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

7
6
2

39 mil.
43 mil.
82 mil.

6.0
6.5
12.5

1,977
1,977
1,977

78
78
78

10
10
10

Logan-Logan County
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

3
2
1

65 mil.
92 mil.
157 mil.

1l.5
16.2
27.8

1,725
1,725
1,725

375
375
375

II
II
II

9
4
3

617 mil.
2.01 bil.
2.62 bil.

2.6
8.5
11.1

1,283
1,283
1,283

44
44
44

49
49
49

5
66
5

1.53 bil.
14 mil.
1.55 bit.

3.9
0.0
4.0

1,799
1,799
1,799

1
1
1

77
77
77

BANKING MARKET IN INDIANA

Indianapolis-Indianapolis MSA,
consisting of Boone, Hamilton,
Hancock, Hendricks, Johnson, Marion,
Morgan, and Shelby counties; and
Green township in Madison County, all
in Indiana
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........
CINCINNATI BANKING MARKET IN
OHIO, INDIANA, AND KENTUCKY

Cincinnati-Hamilton, Brown, Butler,
Clermont, and Warren counties in
Ohio; Boone, Bracken, Campbell,
Gallatin, Grant, Kenton, and Pendleton
counties in Kentucky; and Dearborn
County in Indiana
Huntington Pre-Consummation ..........
Sky .............................................
Huntington Post-Consummation .........

NOTE: Data are as of June 30, 2006. All amounts of deposits are unweighted. All rankings, market deposit shares, and HHIs are based on
thrift deposits weighted at 50 percent.

Legal Developments: Second Quarter; 2007 C103

ORDERS ISSUED UNDER FEDERAL
RESERVE ACT

First State Bank
Conway, Arkansas
Order Approving Establishment of a Branch
First State Bank ("Bank"), a state member bank, has
requested the Board's approval under section 9 of the
Federal Reserve Act ("Act")! to establish a branch at 6039
Heber Spring Road West, Quitman, Arkansas.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in
accordance with the Board's Rules of Procedure. 2 The time
for filing comments has expired, and the Board has considered the notice and all comments received in light of the
factors specified in the Act.
Bank is the 19th largest depository institution in Arkansas, controlling approximately $390.5 million in deposits,
which represents less than I percent of the total amount of
deposits of insured depository institutions in the state. 3
Bank's main office and ten branches are in Faulkner and
White counties, Arkansas, and the proposed branch would
be in neighboring Cleburne County.
Section 9(3) of the Act4 requires a state member bank to
obtain Board approval before establishing a branch. The
Board is required by section 9(4) of the Act to consider the
financial condition of the applying bank, the general character of its management, and whether its corporate powers
are consistent with the purposes of the Act, when acting on
a branch application. 5 Regulation H, which implements
section 9(4),6 enumerates the factors that the Board must
consider, including (I) the financial history and condition
of the applying bank and the general character of its
management; (2) the adequacy of the bank's capital and its
future earnings prospects; (3) the convenience and needs of
the community to be served by the branch; and (4) in the
case of branches with deposit-taking capability, the bank's
performance under the Community Reinvestment Act
("CRA").?
The Board has carefully considered the application in
light of these factors and public comment received from a
competing bank in Quitman. The commenter asserted that
the community's demographic and economic characteristics would not support another profitable branch.
In considering the financial history and condition, future
earnings prospects, and capital adequacy of Bank, the
Board has reviewed reports of examination, other supervi1. 12 U.S.C. § 321 et seq.
2. 12 CFR 262.3(b).
3. Statewide ranking and deposit data are as of June 30, 2006, and
reflect mergers as of June I, 2007.
4. 12 U.S.C. § 321 and 12 CPR 208.6(b).
5. 12 U.S.C. § 322.
6. 12 CFR 208.6(b).
7.12 U.S.c. §2901 et seq.

sory information, publicly reported and other financial
information, and information provided by Bank and the
commenter. Bank is well capitalized and would remain so
on consummation of the proposal. The Board also has
reviewed Bank's business plan and financial projections for
the branch, including the projections for deposits, income,
and costs. After carefully considering all the facts of record,
the Board has concluded that the financial history and
condition, capital adequacy, and future earnings prospects
of Bank are consistent with approval of the proposal.
In considering Bank's managerial resources, the Board
has reviewed the bank's examination record, including
assessments of its management, risk-management systems,
and operations. The Board also has considered its supervisory experiences with Bank and the bank's record of
compliance with applicable banking law,8 including antimoney-laundering laws. Bank is considered to be well
managed. Based on this review and all the facts of record,
the Board has concluded that the character of Bank's
management is consistent with approval of the proposal.
The Board also has considered the convenience and
needs of the community to be served, taking into account
the comment received, and the bank's performance under
the CRA. Bank received a "satisfactory" rating by the
Federal Deposit Insurance Corporation at its most recent
CRA performance evaluation, as of February 17, 2004. 9
The Board generally considers the entry of a new competitor in a community to be a positive factor when assessing
the effect of a proposal on the convenience and needs of the
community because new entry provides additional alternatives to consumers and businesses. Bank has represented
that the proposed branch would provide residents of the
Quitman area with another convenient source of banking
services and offer extended service hours. 1O For these
reasons and based on a review of the entire record, the
Board concludes that the convenience and needs considerations and Bank's record of performance under the CRA
are consistent with approval of the proposal.
8. The commenter also expressed concern about Bank's construction of the proposed branch facility without obtaining regulatory
approval to establish a branch. Bank established a loan production
office in April 2007 at the proposed branch site in Quitman, which dId
not require the Board's prior approval. The Bank has confirmed to the
Board that the Quitman loan production office is not engaged in any
activities that would cause the office to be a branch within the meaning
of the Act or the Board's implementing regulations. See 12 CFR
208.2(c).
9. 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. See Interagency Questions and Answers Regarding
Community Reinvestment, 66 Federal Register 36,620 at 36,640
(2001 ).
10. In reviewing this proposal, the Board has considered the
comments in light of Bank's plans and projections for the proposed
branch, as well as its financial and managerial resources. The Board
also has reviewed the deposit and demographic data for the relevant
banking market, which includes all of Cleburne County. The data
indicate modest increases in population from 2000 to 2006 and
consistent moderate growth in deposits during the same time period.

C104

Federal Reserve Bulletin 0 October 2007

Based on the foregoing and aU the facts of record, the
Board has detennined that the application should be, and
hereby is, approved. The Board's approval is specificaUy
conditioned on Bank's compliance with all commitments
made to the Board in connection with the proposal. The
commitments and conditions relied on by the Board are
deemed to be conditions imposed in writing in connection
with its findings and decision and, as such, may be enforced
in proceedings under applicable law.
Approval of this application is also subject to the
establishment of the proposed branch within one year of the
date of this order, unless such period is extended by the
Board or the Federal Reserve Bank of St. Louis, acting
under authority delegated by the Board. l1
By order of the Board of Governors, effective June 20,
2007.
Voting for this action: Chairman Bernanke, Vice Chainnan Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

ORDERS ISSUED UNDER
INTERNATIONAL BANKING ACT

The Royal Bank of Scotland pIc
Edinburgh, Scodand
Order Approving Establishment of a Branch
The Royal Bank of Scotland pIc ("Bank"), Edinburgh,
Scotland, a foreign bank within the meaning of the International Banking Act ("IBA"), has applied under sections 5(a) and 7(d) of the IBAI to establish a branch in
Greenwich, Connecticut. The Foreign Bank Supervision
Enhancement Act of 1991, which amended the IBA, provides that a foreign bank must obtain the approval of the
Board to establish a branch in the United States.

II. The commenter requested that the Board hold a public meeting
or hearing on the proposal. The Act does not require the Board to hold
a public hearing on an application to establish a branch. Under its
rules, the Board may, in its discretion, hold a public meeting or hearing
on an application if necessary or appropriate to clarify factual issues
related to the application and to provide an opportunity for testimony
(12 CFR 262.3(e), 262.25(d». 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 his 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 written comments do not present his 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.
I. 12 U.S.C. §§ 3103(a) and 3105(d).

Notice of the application, affording interested persons an
opportunity to comment, has been published in newspapers
of general circulation in Greenwich, Connecticut (Greenwich Time), and Stamford, Connecticut (The Advocate), on
November 3, 2006. The time for filing comments has
expired, and all comments received have been considered.
Bank, with total assets of $1.6 trillion, is the second
largest commercial bank in the United Kingdom. 2 Bank is
whoUy owned by The Royal Bank of Scotland Group pIc
("RBS Group"), Edinburgh, Scotland. RBS Group's shares
are widely held, with no shareholder or group of shareholders controlling more than 5 percent of shares. Bank provides a variety of banking services to retail and corporate
customers in 27 countries, including the United States. 3 In
the United States, Bank operates an uninsured state branch
in New York, New York; representative offices in Houston,
Texas, and Los Angeles, California; and Greenwich Capital
Markets, Inc. ("GCM"), Greenwich, Connecticut, a registered broker-dealer specializing in debt capital markets
services. Bank also owns Citizens Financial Group, Inc.
("Citizens"), Providence, Rhode Island, a registered bank
holding company with $163 billion in consolidated assets. 4
Bank is a qualifying foreign banking organization under
Regulation K,5
The establishment of the Greenwich branch is the first
component in a long-range plan to relocate Bank's U.S.
branch and GCM to the same location. After completion of
a new corporate headquarters in Stamford, Connecticut, in
late 2008 or early 2009, Bank expects to move the Greenwich branch and GCM to Stamford.
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 (I) engages
directly in the business of banking outside of the United
States; (2) has furnished to the Board the infonnation it
needs to assess the application adequately; and (3) is
subject to comprehensive supervision on a consolidated
basis by its home-country supervisor. 6 The Board also
considers additional standards set forth in the IBA and
Regulation K,7
2. Asset data are as of September 30, 2006.
3. Bank also conducts banking activities through its subsidiary,
National Westminster Bank Pic, London, United Kingdom.
4. Asset data are as of September 30, 2006.
5. 12 CFR 211.23(b).
6. 12 U.S.c. §3105(d)(2); 12 CFR 211.24. In assessing this standard, the Board considers, among other indicia of comprehensive,
consolidated supervision, the extent to which the horne-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 infonnation 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 infonnation 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. No single factor is essential, and other elements may
infonn the Board's determination.
7. 12 U.S.c. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3).

Legal Developments: Second Quarter, 2007

As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with infonnation 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 that Bank is
subject to home-country supervision on a consolidated
basis. s There has been no material change in the manner in
which Bank is supervised by the Financial Services Authority ("FSA"). 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.9 The FSA has no objection to Bank's establishment
of the proposed branch.
The United Kingdom's risk-based capital standards are
consistent with those established by the Basel Capital
Accord. Bank's capital is in excess of the minimum levels
that would be required by the Basel Capital Accord and is
considered equivalent to capital that would be required of a
U.S. banking organization. Managerial and other financial
resources of Bank are consistent with approval, and Bank
appears to have the experience and capacity to support the
proposed branch. In addition, Bank has established controls
and procedures for the proposed office to ensure compliance with U.S. law, as well as controls and procedures for
its worldwide operations generally.
The United Kingdom is a member of the Financial
Action Task Force and subscribes to its recommendations
on measures to combat money laundering. In accordance
with these recommendations, the United Kingdom has
enacted laws and created legislative and regulatory standards to deter money laundering. Money laundering is a
criminal offense in the United Kingdom, and financial
institutions are required to establish internal policies, procedures, and systems for the detection and prevention of
money laundering throughout their worldwide operations.
Bank has policies and procedures to comply with these
laws and regulations. Bank's compliance with applicable
laws and regulations is monitored by Bank's internal
auditors and the FSA.
With respect to access to infonnation about Bank's
operations, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed and

8. The Royal Bank of Scotland Group pIc, 89 Federal Reserve
Bulletin 386 (2003).
9. See 12 U.S.C. §3IOS(d)(3)--(4); 12 CFR 211.24(c)(2)--(3). These
standards include: whether the bank's home-country supervisor has
consented to the establishment of the office; the financial and managerial resources of the bank; whether the bank has procedures to combat
money laundering, whether there is a legal regime in place in the home
country to address money laundering, and whether the home country is
participating in multilateral efforts to combat money laundering;
whether the appropriate supervisors in the home country may share
information on the bank's operations with the Board; whether the bank
and its U.S. affiliates are in compliance with U.S. law; the needs of the
community; and the bank's record of operation.

C105

relevant government authorities have been communicated
with regarding access to infonnation. RBS Group and Bank
have committed to make available to the Board such
infonnation on the operations of Bank and any of its
affiliates that the Board deems necessary to detennine and
enforce compliance with the IBA, the Bank Holding Company Act, and other applicable federal law. To the extent
that the provision of such infonnation to the Board may be
prohibited by law or otherwise, RBS Group and Bank 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 infonnation. In light of
these commitments and other facts of record, and subject to
the condition described below, it has been determined that
RBS Group and Bank have provided adequate assurances
of access to any necessary information that the Board may
request.
With respect to the interstate aspect of this proposal,
section 5(a)(2) of the IBA, as amended by section 104 of
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,10 authorizes a foreign bank to establish
and operate a de novo state branch in a state outside its
home state subject to certain requirements. The proposal
complies with the requirements of section 5(a)(2) of the
IBA.1l The Board has determined that all the other criteria
referred to in section 5(a)(3) of the IBA, including the
criteria in section 7(d) of the IBA, have also been met,12
Accordingly, the proposed transaction is consistent with the
requirements of section 5 of the IBA. Based on the
foregoing and all the facts of record, Bank's application to
establish the proposed branch is hereby approved by the
10. 12 U.S.C. § 3103(a)(2).
II. Section S(a)(2) of the IBAauthorizes a foreign bank to establish
and operate a de novo state branch outside its home state to the extent
that a state-chartered bank with the same home state as the foreign
bank may do so under section 18(d)(4) of the Federal Deposit
Insurance Act ("FDIA"). The Federal Deposit Insurance Corporation
has authorized state nonmember banks to establish de novo state
branches outside their home state, pursuant to section 18(d)(4) of the
FDIA, when the two states involved pennit de novo entry on a
nationwide reciprocal basis. Connecticut and Rhode Island pennit
de novo entry on a nationwide reciprocal basis.
12. Section S(a) of the IBA also requires that certain conditions in
section 44 of the FDIA be met in order for the Board to approve an
interstate branching transaction. See 12 U.S.c. § 3103(a)(3)(C) (referring to sections 44(b)(l), 44(b)(3), and 44(b)(4) of the FDIA, 12 V.S.c.
§§ 183Iu(b)(1), (b)(3), and (b)(4)). The Board has detennined that
Bank is in compliance with state filing requirements. Bank was
adequately capitalized as of the date the application was filed, and on
consummation of this proposal, Bank would continue to be adequately
capitalized and adequately managed. The Board has detennined, after
consultation with the Secretary of the Treasury, that the financial
resources of Bank are equivalent to those required for a domestic bank
to receive approval for interstate branching under section 44 of the
FDIA. The Board also must take into account community reinvestment
considerations, including the record of Bank's domestic insured
depository institutions, under the Community Reinvestment Act
("CRA"). See 12 V.S.c. § 3103(a)(3)(C); 12 U.S.C. § 183Iu(b)(3).
Bank's domestic insured depository institutions, owned through Citizens, each received "outstanding" or "satisfactory" ratings at its most
recent CRA performance evaluations by the appropriate federal regulators. Based on all the facts of record, the Board concludes that
community reinvestment considerations are consistent with approval.

C106

Federal Reserve Bulletin 0 October 2007

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. 13 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 April 26, 2007.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

Victoria Mutual Building Society
Kingston, Jamaica
Order Approving Establishment of a
Representative Office
Victoria Mutual Building Society ("Bank"), Kingston,
Jamaica, a foreign bank within the meaning of the International Banking Act ("IBN'), has applied under section 1O(a) of the IBA 1 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-Dade County,
Florida (The Miami Herald, February 18, 2005). The time
for filing comments has expired, and all comments have
been considered.
Bank, with total consolidated assets of approximately
$682 million,2 is the fourth largest deposit-taking institution and second largest building society in Jamaica. 3 Bank
primarily engages in residential mortgage lending and retail
banking activities through 15 offices in Jamaica. Bank's
13. The Board's approval of this application does not supplant the
authority of Connecticut to license the proposed office of Bank in
accordance with any terms or conditions that it may impose.

1. 12 V.S.C. § 3107(a).
2. Asset data are as of December 31,2006.
3. Bank is a mutual organization with more than 680,000 members.
Each member is considered to be a shareholder and has one vote. No
single shareholder controls the organization.

domestic subsidiaries offer insurance, investment management, real estate brokerage, and property management
services. Bank also operates representative offices and
money-transmitter subsidiaries in the United Kingdom and
Canada.
The proposed representative office would act as a liaison
between Bank's head office and existing and prospective
customers in the United States. The office would solicit
business, market products and services of the head office
and of Bank's real estate brokerage subsidiary in Jamaica,
and provide information to customers concerning their
accounts. In connection with Bank's mortgage lending
operations, it also would solicit prospective borrowers,
assemble credit information, arrange for property inspections and appraisals, assist in the preparation of loan
applications, and transmit applications and supporting
documentation to the head office.
Under the IBA and Regulation K, in acting on an
application by a foreign bank to establish a representative
office, 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. 4 The
Board also considers additional standards set forth in the
IBA and Regulation K.5 The Board considers the supervision standard to have been when 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 applications to
establish branch or agency offices of a foreign bank. The
Board considers the lesser standard sufficient for approval

4. 12 V.S.c. §3107(a)(2); 12 CFR 211.24(d)(2). 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; (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.
5. 12 V.S.c. §3105(d)(3H4); 12 CFR 211.24(c)(2H3).
6. See, e.g., Banco Latinoamericano de Exportaciones S.A., Federal Reserve Bulletin C128 (2006); Banco Financiera Comercial
Hondurefia, S.A., 91 Federal Reserve Bulletin 444 (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).

Legal Developments: Second Quarter; 2007 CI07

of representative-office applications because representative
offices may not engage in banking activities.?
In connection with this application, Bank has provided
certain commitments to the Board that limit the activities of
the representative office. It has committed that the representative office would engage only in certain specified activities and would not make credit decisions; solicit or accept
deposits; process or initiate transactions on behalf of Bank;
or engage in activities related to securities trading, foreign
exchange, or money transmission.
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
Bank of Jamaica ("B01") is the licensing, regulatory, and
supervisory authority for banks and all other financial
institutions in Jamaica and, as such, is the home-country
supervisor for Bank. The BOJ has pursued a program of
reforms intended to update its regulatory and supervisory
framework. The BOJ authorizes the establishment of foreign offices of Jamaican banks, regulates those offices, and
reviews their operations in connection with annual on-site
examinations of the head office.
The Board previously determined, in connection with an
application involving another bank from Jamaica, that the
bank was subject to a supervisory framework that is
consistent with the activities of the proposed representative
office, taking into account the nature of such activities. 8
Bank is supervised by the BOJ on substantially the same
terms and conditions as that other Jamaican bank. Based on
all the facts of record, including commitments provided by
Bank limiting the activities of the proposed office, 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 have also been taken into account. 9 The
BOJ 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
7. 12 CFR 2l1.24(d)(2».
8. Jamaica National Building Society, 88 Federal Reserve Bulletin
59 (2002).
9. See 12 U.S.c. § 3l05(d)(3H4); 12 CFR 2l1.24(c)(2H3). The
additional standards set forth in section 7 of the IBA and Regulation K
include the following: whether the bank's home-country supervisor
has consented to the establishment of the office; the financial and
managerial resources of the bank; whether the bank has procedures to
combat money laundering, whether there is a legal regime in place in
the home country to address money laundering, and whether the home
country is participating in multilateral efforts to combat money
laundering; whether the appropriate supervisors in the home country
may share information on the bank's operations with the Board;
whether the bank and its U.S. affiliates are in compliance with U.S.
law; the needs of the community; and the bank's record of operation.

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.
Although Jamaica is not a member of the Financial
Action Task Force, Jamaica is a member of the Caribbean
Financial Action Task Force and subscribes to its measures
on combating money laundering and terrorist financing.
Jamaica also participates in other international fora that
address the prevention of money laundering and terrorist
financing. lO It has enacted laws and the BOJ has promulgated implementing regulations and guidelines aimed at
preventing money laundering and terrorist financing. Money
laundering and financing terrorism are criminal offenses in
Jamaica. The laws, regulations, and guidelines require
financial institutions, including building societies, to establish and implement policies, procedures, and controls for
the purpose of preventing and detecting money laundering
and terrorist financing and to report certain cash transactions and suspicious transactions to appropriate authorities.
An institution's compliance with applicable laws, regulations, and guidelines is monitored by the BOJ and the
institution's external auditors. Bank has policies and procedures to comply with these laws and regulations.
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 the Board
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 as 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, subject to certain conditions, the
BOJ 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, as well as the terms and

10. Jamaica is a member of the Organization of American States
Inter-American Drug Abuse Control Commission Group of Experts
for the Control of Money Laundering and the Inter-American Convention against Corruption. Jamaica is also party to the 1988 United
Nations Convention against the Illicit Traffic of Narcotics and Psychotropic Substances and the United Nations International Convention
against Transnational Organized Crime.

C108

Federal Reserve Bulletin 0 October 2007

conditions set forth in this order, Bank's application to
establish the representative office 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. l l 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 or recommend termination of any of Bank's direct or indirect
activities in the United States. Approval of this application
also is specifically conditioned on compliance by Bank
with the commitments made in connection with this application and with the conditions in this orderP The commitments and conditions referred to above are conditions
II. See 12 CPR 265.7(d)(l2).
12. 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

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 June 14,2007.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

license the representative office in accordance with any terms or
conditions that it may impose.

Cl09

December 2007

Legal Developments: Third Quarter, 2007
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY ACT

Bank of America Corporation
Charlotte, North Carolina
Order Approving the Acquisition of a Bank
Holding Company
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 Act) to
acquire ABN AMRO North America Holding Company
("ABN AMRO North America") and thereby indirectly
acquire LaSalle Bank Corporation ("LaSalle"), both of
Chicago, Illinois, and its subsidiary banks, LaSalle Bank
National Association ("LaSalle Bank"), Chicago, and
LaSalle Bank Midwest National Association ("LaSalle
Bank Midwest"), Troy, Michigan. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(72 Federal Register 31,582 (2007». The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the BHC Act. 3
Bank of America, with total consolidated assets of
approximately $1.5 trillion, is the second largest depository
1. 12 U.S.c. § 1842.
2. ABN AMRO North America is a wholly owned subsidiary of
ABN AMRO Bank N.v. ("ABN AMRO"), Amsterdam, the Netherlands. Bank of America also proposes to acquire two other subsidiaries
of ABN AMRO North America, Standard Federal International, LLC
and LaSalle Trade Services Corporation, both of Chicago, which are
agreement corporations under section 25 of the Federal Reserve Act
("FRA"), 12 U.S.c. §601 et seq. In addition, Bank of America
proposes to acquire the nonbanking subsidiaries of ABN AMRO North
America, other than ABN AMRO WCS Holding Company ("WCS
Holding"), New York, New York, in accordance with section 4(k) of
the BHC Act, 12 U.S.C. § 1843(k). ABN AMRO North America would
divest WCS Holding and its subsidiaries by distributing them to ABN
AMRO before Bank of America consummates the proposed transaction.
3. Four commenters supported the proposal, and 18 commenters
expressed concerns about various aspects of the proposal.

organization in the United States. 4 Bank of America controls seven insured depository institutions 5 that operate in
thirty-one states and the District of Columbia. In Illinois,
Bank of America is the 14th largest depository organization, controlling deposits of $5.4 billion, which represent
1.6 percent of the total amount of deposits of insured
depository institutions in the state ("state deposits").6
ABN AMRO North America has total consolidated
assets of approximately $160 billion and controls indirectly two depository institutions, LaSalle Bank and LaSalle Bank Midwest, which operate in Illinois, Indiana,
and Michigan. In Illinois, ABN AMRO North America is
the second largest depository organization, controlling
deposits of $37 billion, which represent 11.2 percent of
state deposits.
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 $1.7 trillion. Bank of America would become the
largest depository organization in Illinois, controlling
deposits of approximately $42.4 billion, which represent
approximately 12.9 percent of the total amount of state
deposits.

INTERSTATE AND DEPOSIT CAP 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 Bank
of America is North Carolina,? and ABN AMRO North
America's subsidiary banks are located in Illinois, Indiana,
and Michigan. 8

4. Asset data are as of June 30, 2007, and are adjusted to reflect the
acquisition by Bank of America of U.S. Trust Corporation and its
subsidiary bank, United States Trust Company, National Association
("U.S. Trust Bank"), both of New York, New York, that was
consummated on July 2, 2007. See Bank of America Corporation,
93 Federal Reserve Bulletin C49 (2007) ("BOA/U.S. Trust Order").
5. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.
6. State deposit data and rankings are as of June 30, 2006.
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

ClIO

Federal Reserve Bulletin 0 December 2007

The Board may not approve an interstate acqUisItion
under section 3(d) if the applicant (including all its insured
depository institution affiliates) 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").9 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 lO in the United States. In
analyzing this matter, 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 consummation of the proposal would
control, based on the definition of "deposit" in the FDI
Act, II the deposit data collected in reports filed by all
insured depository institutions,12 and the methods and
adjustments used by the FDIC to compute total deposits.
These calculations were made using the methodology
described in the Board's 2004 order approving Bank of
America's acquisition of FleetBoston Financial Corporation13 and take into account the voluntary use by some
insured depository institutions of the newly revised Call
Report and Thrift Financial Report forms, which became
available in the first quarter of 2007. 14
headquartered or operates a branch. See 12 U.S.C. §§ 1841(0)(4H7)
and 1842(d)(I)(A) and (d)(2)(B).
9. Several commenters expressed concerns about the proposal's
consistency with the nationwide deposit cap.
10. The BRC 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's
definition of "insured depository institution" includes all banks
(whether or not the institution is a bank for purposes of the BRC 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 tenns is defined in the FDI Act. See
12 U.S.c. § 1813(c)(2).
11. Section 3(d) of the BRC Act 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(1».
12. 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"). Each insured savings association similarly must report its total deposits on the institution's Thrift
Financial Report. 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. These data are reported quarterly to the FDIC and are
publicly available.
13. Bank of America Corporation, 90 Federal Reserve Bulletin
217, 219 (2004) ("BOA/Fleet Order"); see also Bank of America
Corporation, 92 Federal Reserve Bulletin C5 (2006) (order approving
Bank of America's merger with MBNA Corporation, Wilmington,
Delaware) ("BOA/MBNA Order"».
14. Reporting on the revised Call Report and Thrift Financial
Report forms is voluntary until calendar year 2008. Most insured
depository institutions continue to use the previously authorized
version of these forms. To compute the amount of deposits held by
those institutions, the Board used the fonnula described in the
BOA/Fleet Order to combine the appropriate lines from the previous
version of the forms. Some insured depository institutions are already

Based on the latest available deposit data reported by all
insured depository institutions, the total amount of deposits
of insured depository institutions in the United States is
approximately $6.828 trillion as of June 30, 2007. Also
based on the latest Call Report, Bank of America (including
all its insured depository institutiori affiliates) controls
deposits of approximately $615.4 billion, and ABN AMRO
North America controls deposits of approximately $59.1 billion. Bank ofAmerica, therefore, currently controls approximately 9.01 percent of total U.S. deposits. On consummation of the proposed transaction, Bank of America would
control approximately 9.88 percent of the total amount of
deposits of insured depository institutions in the United
States. Accordingly, 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.15
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 the applicable percentage of state deposits established by state law ("state deposit cap").16 On
consummation of the proposal, Bank of America would
control less than 30 percent of the total amount of deposits
of insured depository institutions in Illinois, Indiana, and
Michigan and would not hold deposits in excess of any
applicable state deposit caps.
All other requirements of section 3(d) of the BHC Act
also would be met on consummation of the proposal. 17
Based on all the facts of record, the Board is permitted to
approve the proposal under section 3(d) of the BHC Act.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
using the revised versions of the Call Report and the Thrift Financial
Report. The amount of deposits held by those institutions was
computed as outlined in Appendix A.
15. Bank of America's lead bank, Bank of America, National
Association, Charlotte, North Carolina, recently acquired nonvoting
convertible shares of Countrywide Financial Corporation ("Countrywide"), Calabasas, California, which operates a savings association.
This investment by Bank of America was a noncontrolling investment
for purposes of the BRC Act and was made pursuant to section 4(c)(6)
of the BRC Act (12 U.S.C. § 1843(c)(6». Because the investment did
not cause Countrywide's subsidiary savings association to become an
"affiliate" of Bank of America, as defined by the BRC Act, the
deposits of Countrywide are not included in the calculation of the
deposit cap, which, by statute, refers only to affiliated insured depository institutions of a bank holding company. See 12 U.S.c. § I 841(k).
16. 12 U.S.c. § 1842(d)(2)(BHD).
17. Bank of America is adequately capitalized and adequately
managed as defined by applicable law (12 U.S.c. § 1842(d)(I)(A».
LaSalle Bank and LaSalle Bank Midwest have been in existence and
operated for the minimum period of time required by applicable state
law. See 12 U.S.c. § 1842(d)(I)(B). The other requirements in section 3(d) of the BRC Act also would be met on consummation of the
proposal.

Legal Developments: Third Quarter, 2007

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. 18
Bank of America and ABN AMRa North America have
subsidiary depository institutions that compete directly in
five banking markets in Illinois: Aurora, Chicago, Elgin,
Joliet, and Woodstock. 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 Bank of America and
ABN AMRa North America,19 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"),20 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 the five banking markets. 21 The
change in the HHI's measure of concentration would be
small and numerous competitors would remain in each
market. On consummation, three markets would remain
unconcentrated and two markets would remain moderately
concentrated, as measured by the HHI.
The DOJ has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
18. 12 U.S.c. § I 842(c)(I).
19. Deposit and market share data are as of June 30, 2007, adjusted
to reflect mergers and acquisitions through July 9, 2007, and are based
on calculations in which the deposits of thrift institutions are included
at SO 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.• 77 Federal
Reserve Bulletin 52. SS (1991).
20. 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.
21. These markets and the effects of the proposal on the concentration of banking resources in these markets are described in
Appendix B.

C 111

any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the five banking markets where
Bank of America and ABN AMRa North America compete
directly 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 relevant
federal and state supervisors of the organizations involved
in the proposal, publicly reported and other financial information, and information provided by Bank of America.
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
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. Bank of America and its subsidiary
banks, LaSalle Bank, and LaSalle Bank Midwest are all
well capitalized and would remain so on consummation of
the proposal. Based on its review of the record, the Board
finds that Bank ofAmerica has sufficient financial resources
to effect the proposal. The proposed transaction is structured as a cash purchase of shares, and Bank of America
will use existing resources to fund the 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 Bank of America, ABN AMRO North America,
and their subsidiary banks, including assessments of their
management, risk-management systems, and operations. 22
22. A commenter opposing the proposal expressed concern about
Bank of America's connection to investigations and lawsuits related to
the bankruptcy of Parmalat SpA. Parma, Italy. The commenter also
expressed unsubstantiated concerns about Bank of America's student

C1l2

Federal Reserve Bulletin 0 December 2007

In addition, the Board has considered its supervisory
experiences and those of the other relevant bank supervisory agencies with the organizations and their records of
compliance with applicable banking law, including antimoney-laundering laws. 23 The Board also has considered
Bank of America's plans for implementing the proposal,
including with respect to the proposed management of the
organization 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.24

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").25 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
loan policies. The Board has considered these comments in light of all
the facts of record, including reports of examination assessing the
financial and managerial resources of the organizations, information
on the allegations raised by the pending lawsuits, and information
provided by the Office of the Comptroller of the Currency ("OCC").
23. As part of its consideration of managerial factors, the Board has
reviewed confidential supervisory information on the policies, procedures, and practices of Bank of America and its subsidiary banks for
complying with the Bank Secrecy Act and consulted with the acC.
One cornmenter reiterated concerns that it previously expressed about
the handling of certain money transfers through the New York branch
of Bank of America, National Association ("BA Bank"), Charlotte,
North Carolina. The Board notes that this matter was addressed in the
BOA/U.S. Trust Order at footnote 22 and incorporates those findings in
this order.
24. Some commenters expressed concerns about Bank of America's relations with unaffiliated third parties engaged in subprime
lending. The commenters provided no evidence that Bank of America
has originated, purchased, or securitized "predatory" loans or otherwise engaged in abusive lending practices. 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. Bank of America stated that it
conducts extensive due diligence reviews of the third-party loan
originators with which it does business, as well as the loans that it
purchases and the servicers of each pool, to help ensure that Bank of
America is not facilitating "predatory" lending. The Board expects all
banking organizations to conduct their operations in a safe and sound
manner with adequate systems to manage operational, compliance,
and reputational risks and will take appropriate supervisory actions to
address and prevent abusive lending practices.
25. 12 U.S.c. § 2901 et seq.; 12 U.S.c. § 1842(c)(2).

of its entire community, including low- and moderateincome ("LM!") neighborhoods, in evaluating bank expansionary proposals. 26
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of the subsidiary banks of Bank of America
and ABN AMRO North America, data reported by Bank of
America under the Home Mortgage Disclosure Act
("HMDA"),27 other information provided by Bank of
America, confidential supervisory information, and public
comments received on the proposal.
Four commenters supported the proposal. Those commenters commended Bank of America's focus on economic
integration in the communities in which it operates, sponsorship of homebuyer events in LMI communities, and
financial support for small business and microlending programs. Several other commenters expressed concerns about
either the lending record of Bank of America or its ability to
adequately meet its CRA obligations, and some of them
opposed the proposal or recommended approval only if
subject to conditions suggested by the commenter. 28 Some
commenters alleged that Bank ofAmerica has not addressed
the diversity and community reinvestment needs of California communities or expressed concern about the CRA
performance of Bank of America in California. Another
commenter alleged that Bank of America has discriminated
against, and has not addressed the convenience and needs of,
LMI and minority residents of Chicago. One other commenter alleged more generally, based on HMDA data, that
Bank of America has engaged in disparate treatment of
minority individuals in home mortgage lending.
A.

eRA 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
26. 12 U.S.C. §2903.
27. 12 U.S.C. §2801 et seq.
28. Some 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 to
take certain future actions, or asked the Board to condition its approval
on a commitment by Bank of America to improve its CRA record. The
Board consistently has 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 and that the enforceability of any such third-party
pledges, initiatives, and agreements are matters outside the CRA. 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 credit needs of its assessment areas
at the time the Board reviews a proposal under the convenience and
needs factor.

Legal Developments: Third Quarter, 2007

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. 29
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 ("BOA
2001 Evaluation").3o The two other subsidiary banks of
Bank of America subject to the CRA, FIA Card Services,
N.A., Wilmington, Delaware, and U.S. Trust Bank, also
received "outstanding" ratings at their most recent CRA
performance evaluations.3 1
ABN AMRO North America's lead subsidiary bank,
LaSalle Bank, received an "outstanding" rating at its most
recent CRA performance evaluation by the OCC, as of
December 31, 2002 ("2002 Evaluation").32 The other
subsidiary bank, LaSalle Bank Midwest, received a "satisfactory" rating at its most recent CRA performance evaluation by the OCC, as of December 31, 2002. 33 Bank of
America has represented that it would combine the community development and community investment activities of
BA Bank and ABN AMRO North America's subsidiary
banks to strengthen and help meet the banking needs of its
communities. 34
eRA Performance of BA Bank. The BOA 2001 Evaluation was discussed in the BOA/Fleet Order. 35 The Board
also considered BA Bank's CRA performance earlier this
year in the BOAlU.S. Trust Order. Based on a review of the
record in this case, the Board hereby reaffirms and adopts
the facts and findings detailed in those orders concerning
BA Bank's CRA performance record. Bank of America
also provided the Board with additional information about
its CRA performance since the Board last reviewed such
matters in the BOAlU.S. Trust Order. In addition, the Board

29. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
30. The evaluation period for the BOA 2001 Evaluation was
January 1,2000, through December 31, 2001.
31. FIA Card Services, N.A., formerly known as MBNA America
Bank, National Association, was last evaluated by the OCC as of
April 4, 2005. U.S. Trust Bank was formed in 2006 by the conversion
of United States Trust Company of New York ("USTC New York") to
a national bank charter and its subsequent merger with U.S. Trust
Company, National Association ("USTC Los Angeles"). The CRA
performance of USTC New York was evaluated by the Federal
Reserve Bank of New York as of March IS, 2004, before its sale to
Bank of America and conversion to a national bank charter in 2006.
The CRA performance of USTC Los Angeles was last evaluated by the
OCC as of October IS, 2002. The OCC has not yet evaluated U.S.
Trust Bank's CRA performance.
32. The evaluation period for the 2002 Evaluation was January I,
2000, through December 31,2002.
33. LaSalle Bank Midwest was formerly known as Standard Federal Bank, N.A., Troy, Michigan.
34. Several commenters questioned Bank of America's efforts in
awarding contracts to minority- and women-owned businesses. Although the Board fully supports programs designed to promote equal
opportunity and economic opportunities for all members of society, the
comments about supplier diversity programs are beyond the factors the
Board is authorized to consider under the BHC Act. See e.g., Deutsche
Bank AG, 85 Federal Reserve Bulletin 509,513 (1999).
35. BOA/Fleet Order at 225-229.

C113

has consulted with the OCC with respect to BA Bank's
CRA performance since the BOA/U.S. Trust Order.
In the BOA 200 I 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
bank's 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. In addition,
examiners 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. 36 Examiners also noted in the BOA 2001
Evaluation that BA Bank's level of community development lending was excellent.
Since the BOA 2001 Evaluation, BA Bank has maintained a substantial level of home mortgage, small business, and community development lending. In 2005 and
2006, the bank originated more than 756,000 HMDAreportable home mortgage loans totaling approximately
$161 billion throughout its assessment areas, including
more than $18 billion in loans to LMI individuals.J7 In
2006, BA Bank was recognized by the U.S. Small Business
Administration ("SBA") for the ninth consecutive year as
the leading small business lender in the country, based on
its origination of SBA loans totaling more than $405 million. 38 As noted in the BOAlU.S. Trust Order, BA Bank's
community development lending during 2005 and 2006
totaled approximately $5.8 billion. 39
In the BOA 2001 Evaluation, examiners reported that
BA Bank consistently demonstrated strong performance
under the investment test, noting that its performance was
excellent or good in the majority of its assessment areas. 40
36. 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 borrowers in
the United States.
37. In California in 2005 and 2006, the bank originated more than
150,000 HMDA-reportable home mortgage loans totaling approximately $51 billion throughout its assessment areas, including more
than $2.8 billion in loans to LMI individuals. In the Chicago metropolitan statistical area ("MSA"), the bank originated more than 20,000
HMDA-reportable home mortgage loans totaling approximately
$2.2 billion throughout its assessment areas, including more than
$610 million in loans to LMI individuals.
38. Bank of America represented that BA Bank's small business
loans of less than $50,000 in California in 2006 more than doubled
from the level attained in 2005, both in number and dollar amounts of
such loans.
39. BA Bank's community development lending during 2005 and
2006 in its California assessment areas and in the Chicago market
totaled approximately $1.2 billion and $34 million, respectively. BA
Bank has entered into partnerships with approximately 500 housingcounseling agencies throughout its assessment areas, including 16
housing-counseling agencies in the Chicago metropolitan area, to offer
pre- and post-purchase home mortgage counseling to LMI borrowers.
Such counseling includes reviewing the buyer's credit report, income,
and debt; preparing a budget; and conducting an affordability analysis.
40. One commenter criticized the amount of Bank of America's
charitable donations and its methodology for making these donations.

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Federal Reserve Bulletin 0 December 2007

During the evaluation period, BA Bank funded more than
17,000 housing units for LMI families with its community
development investments throughout its assessment areas. 41
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 BOA 2001 Evaluation, BA Bank has maintained a substantial level of community development
investment activities in its assessment areas. Bank of
America represented that BA Bank's qualifying community
development investments totaled approximately $3.7 billion during 2005 and 2006, and that BA Bank's subsidiary
community development corporation had helped develop
more than 6,200 housing units in LMI census tracts or for
LMI individuals since 2003. 42
Examiners commended BA Bank's service performance
throughout its assessment areas in the BOA 2001 Evaluation. 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. 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.
eRA Performance of LaSalle Bank. As noted, LaSalle
Bank received an overall "outstanding" rating in the 2002
Evaluation, with "outstanding" ratings on both the lending
and investment tests and a "high satisfactory" rating on the
service test. Examiners noted that LaSalle Bank's mortgage
and small business lending performance was excellent and
had a positive impact on individuals and businesses in LMI
areas as well as persons of different income levels. In
addition, examiners found that the bank's community
development lending activity was excellent and that several
lines of business, ranging from commercial credit to apartment lending, contributed to the bank's community development lending efforts. Examiners noted that during the
evaluation period, LaSalle Bank extended 390 community
development loans totaling more than $523 million, includ-

Bank of America represented that it has a record of providing
significant corporate philanthropic donations in all the communities
that it serves. The Board notes that neither the CRA nor the agencies'
implementing rules require institutions to engage in charitable giving.
41. Bank of America also has provided grants to nonprofit organizations that promote SBA programs and originate microloans in
amounts as low as $500.
42. Bank of America represented that BA Bank's qualifying community development investments during 2005 and 2006 in its California assessment areas and in the Chicago market totaled approximately
$821 million and $82 million, respectively. Bank of America further
represented that BA Bank made at least 11 Low Income Housing Tax
Credit investments totaling more than $134 million in 2005 and 2006
in California, which supported the renovation or construction of 1,070
housing units for LMI individuals and senior citizens. The bank also
stated that it has allocated more than $27 million to California
Community Development Financial Institutions ("CDFIs") since 2005
in more than 20 of its assessment areas, including $9.4 million for
CDFIs focused on small business microfinancing and $17.7 million for
CDFIs focused on affordable housing.

ing $182 million in loans for affordable housing and
multifamily community development projects.
In the 2002 Evaluation, examiners characterized LaSalle
Bank's performance under the investment test as excellent.
They reported that the bank made more than 700 qualified
community development investments totaling approximately $140 million during the evaluation period, despite
significant competition from more than 300 insured depository institutions in its assessment areas. Examiners also
reported that LaSalle Bank made 715 CRA qualified grants
and contributions to community organizations in its assessment areas during the evaluation period, totaling more than
$4 million, with half of those grants and contributions to
organizations providing community development services
to LMI individuals. In addition, examiners commended
LaSalle Bank's excellent level of community development
services, particularly in providing financial education.

B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of Bank of America in light of public
comments received on the proposal. One commenter alleged, based on 2005 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 MSAs and
nationwide. The commenter also alleged, based on 2005 and
preliminary 2006 HMDA data, that Bank ofAmerica and its
subsidiary banks made disproportionately higher-cost loans
to African American and Hispanic borrowers than to nonminority borrowers. 43 The Board has focused its analysis
primarily on the 2006 HMDA data reported by BA Bank. 44
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials 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 Bank of
America is excluding or imposing higher costs on any
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. 45 HMDA data, therefore, have limitations

43. 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.)
44. The Board reviewed HMDA data for BA Bank nationwide and
in the MSAs noted by the commenter.
45. 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: Third Quarter; 2007 CllS

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 or ethnicity.
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
Bank of America and its subsidiaries. The Board also has
consulted with the acc, the primary federal supervisor of
Bank of America's subsidiary banks.
The record, including confidential supervisory information, indicates that Bank of America has taken steps
through policies and procedures to ensure compliance with
fair lending and other consumer protection laws and regulations. 46 Bank of America's compliance program includes
fair-lending policy and product guides, compliance file
reviews, testing of HMDA data's integrity, and other
quality-assurance measures. In addition, Bank of America
represented that it provides fair lending training annually to
ensure that Bank of America's associates understand their
responsibility for complying with the fair lending policy
and how to employ fair lending "best practices" in all
aspects of the lending process. 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
and make appropriate modifications to the fair lending
policies that will apply to the operations of LaSalle Bank
and LaSalle Bank Midwest after consummation of the
proposal.
The Board also has considered the HMDA data in light
of other information, including the programs described
above and the overall performance records of the subsidiary banks of Bank of America under the CRA. These
established efforts and record of performance demonstrate
that the institutions are active in helping to meet the credit
needs of their entire communities.

46. One commenter alleged that the terms of Bank of America's
credit card contracts are unfair and deceptive and suggested that the
Board should require Bank of America to modify its credit card
contracts to avoid unfair and deceptive consequences and to adopt
certain credit card-related practices that have been adopted by other
banking organizations. Bank of America has stated that it does not
engage in or condone deceptive practices and that it conducts multiple,
ongoing reviews to ensure that the terms, conditions, and marketing of
its credit card products are appropriate and comply with applicable
laws and regulations, including the Truth in Lending Act and the
Board's Regulation Z. The Board has consulted with the ace, the
primary federal supervisor of Bank of America's subsidiary bank that
engages in credit card operations.

C. Conclusion on Convenience and Needs and
CRA Performance
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 Bank of
America, comments received on the proposal, and confidential supervisory information. 47 Bank of America represented that the proposal would result in greater convenience for Bank of America and LaSalle customers through
expanded delivery channels and a broader range of 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
insured depository institutions are consistent with approval
of the proposal. 48
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. 49 In reaching its
47. Some commenters expressed concern that the proposed acquisition would result in a loss of jobs. The effect of a proposed
transaction on employment in a community is not among the factors
that the Board is authorized to consider under the BHC Act, and the
federal banking agencies, courts, and the Congress consistently have
interpreted the convenience and needs factor to relate to the effect of a
proposal on the availability and quality of banking services in the
community. See, e.g., Wells Fargo & Company, 82 Federal Reserve
Bulletin 445, 457 (1996).
48. One commenter reiterated comments it made in connection
with the BOA/Fleet Order and BOA/MBNA Order, 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 e.g., 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 thirdparty pledges, initiatives, and agreements as matters outside the CRA.
Bank of America has represented that it has complied with its
commitment to the State of Hawaii's Department of Hawaiian Home
Lands by making loans and investments exceeding $151 million under
the terms of that commitment.
49. 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 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), 262.25(d». 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

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Federal Reserve Bulletin 0 December 2007

conclusion, the Board has considered all the facts of record
in light of the factors that is required to consider under the
BHC Act, the FRA, and other applicable statutes. 50 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.
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 September 14, 2007.
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.
50. A number of commenters have contended that a longer public
comment period should have been provided in light of, or that
consideration of the proposal should be delayed until a final disposition of, litigation in the Netherlands concerning the need for ABN
AMRO shareholder approval of the proposed transaction. As discussed above, the Board has carefully reviewed the record in this case,
in light of the Board's limited jurisdiction under the BHC Act and the
International Banking Act (12 U.S.C. § 3101 et seq.). The Board notes
that the Supreme Court of the Netherlands has ruled that the proposed
acquisition of ABN AMRO North America did not require shareholder
approval and, accordingly, this matter has been resolved. Further, as
noted above, the commenters have had ample opportunity to submit
their views and, in fact, have provided written submissions that the
Board has considered carefully in acting on the proposal. Moreover,
the Board is required under applicable law and its regulations to act on
applications submitted under the BHC Act and the FRA within
specified time periods. Based on all the facts of record, the Board
concludes that the record is sufficient to act on this proposal under the
factors the Board is required to consider under the relevant statutes and
that delay in considering the proposal or extension of the comment
period on the bases set forth by these commenters is not warranted.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

Appendix A
Computation of the Amount of Deposits Held by Institutions Using the Revised Call Report and Thrift Financial
Report Forms

INSURED BANKS WITHOUT FOREIGN DEPOSITS
The amount of deposits held by insured banks without
foreign deposits using the revised Call Report was computed by adding the "Total deposit liabilities before exclusions (gross) as defined in section 3(1) of the Federal
Deposit Insurance Act and FDIC regulations," reported on
Schedule RC-O, and the "Interest accrued and unpaid on
deposits in domestic offices," reported on Schedule RC-G.

INSURED BANKS WITH FOREIGN DEPOSITS
The amount of deposits held by insured banks with foreign
deposits using the revised Call Report was computed by
subtracting "Total foreign deposits" from the "Total
deposit liabilities before exclusions (gross) as defined in
Section 3(1) of the Federal Deposit Insurance Act and FDIC
regulations," reported on Schedule RC-O, and adding the
"Interest accrued and unpaid on deposits in domestic
offices," reported on Schedule RC-G.

INSURED SAVINGS ASSOCIATIONS
The amount of deposits held by insured savings associations using the revised Thrift Financial Report was computed by subtracting "Total Foreign Deposits" from the
"Total Deposit Liabilities Before Exclusions (Gross) as
Defined in Section 3(1) of the FDI Act and FDIC Regulations," reported on Schedule DI, and adding "Accrued
Interest Payable-Deposits," reported on Schedule Sc.

Legal Developments: Third Quarter, 2007

e1l7

Appendix B
ILLINOIS BANKING MARKETS WITH COMPETITIVE OVERLAP
Amount
of deposits

Market
deposit
shares
(percent)

Resulting
HHI

. Change in
HHI

Remaining
number of
competitors

Bank

Rank

Aurora-The southern three tiers of
townships in Kane County (Virgil,
Campton, St. Charles, Kaneville,
Blackberry, Geneva, Batavia, Big Rock,
Sugar Grove, and Aurora townships);
Little Rock, Bristol, Oswego, Fox, and
Kendall townships in Kendall County;
and Sandwich township in De Kalb
County
Bank of America Pre-Consummation ...
ABN AMRO North America ..............
Bank of America Post-Consummation ..

27
25
18

$42.5 mil.
$50.6 mil.
$93.1 mil.

.6
.7
1.4

1,042
1,042
1,042

1
1
1

40
40
40

Chicago-Cook, Du Page, and Lake
counties
Bank of America Pre-Consummation ...
ABN AMRO North America ..............
Bank of America Post-Consummation ..

12
1
1

$4.6 bil.
$36.5 bil.
$41.1 bil.

2.1
16.5
18.6

807
807
807

69
69
69

192
192
192

Elgin-Marengo, Seneca, Nunda, Riley,
Coral, Grafton, and Algonquin
townships in McHenry County; and the
northern two tiers of townships in Kane
County (Hampshire, Rutland, Dundee,
Burlington, Plato, and Elgin townships).
Bank of America Pre-Consummation ...
ABN AMRO North America ..............
Bank of America Post-Consummation ..

27
19
15

$28.4 mil.
$107.4 mil.
$135.7 mil.

.5
1.7
2.2

573
573
573

2
2
2

38
38
38

Joliet-Will County (excluding Florence,
Wilmington, Reed, Custer, and Wesley
townships); Aux Sable township in
Grundy County; and Na-Au-Say and
Seward townships in Kendall County.
Bank of America Pre-Consummation ...
ABN AMRO North America ..............
Bank of America Post-Consummation ..

28
8
8

$46.5 mil.
$202.2 mil.
$248.7 mil.

.6
2.5
3.1

1,203
1,203
1,203

3
3
3

53
53
53

Woodstock-Chemung, Alden, Hebron,
Richmond, Burton, Dunham, Hartland,
Greenwood, McHenry, and Dorr
townships in McHenry County
Bank of America Pre-Consummation ...
ABN AMRO North America ..............
Bank of America Post-Consummation ..

19
9
9

$7.5 mil.
$84.9 mil.
$92.3 mil.

.3
3.7
4.0

843
843
843

2
2
2

24
24
24

NOTE: All amounts of deposits are unweighted. All rankings. market deposit
shares. and HHls are based on thrift institution deposits weighted at 50 percent.

el18

Federal Reserve Bulletin 0 December 2007

Mercantile Bancorp, Inc.
Quincy, Illinois

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.

Order Approving the Acquisition of a Bank
Holding Company

COMPETITIVE CONSIDERATIONS

Mercantile Bancorp, Inc. ("Mercantile"), a bank holding
company within the meaning of the Bank Holding Company Act ("BHCAct"), has requested the Board's approval
under section 3 of the BHC Act! to acquire HNB Financial
Services, Inc. ("HNB") and thereby acquire its subsidiary
bank, HNB National Bank ("HNB Bank"), both of Hannibal, Missouri.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (72 Federal Register 33,506 (2007». 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.
Mercantile, with total consolidated assets of approximately $1.4 billion, controls eight subsidiary banks that
operate in Florida, Illinois, Kansas, and Missouri. Mercantile is the 60th largest depository organization in Missouri,
controlling deposits of $290.7 million, which represent less
than 1 percent of total deposits of insured depository
institutions in Missouri ("state deposits").2
HNB, with total consolidated assets of $164.9 million, is
the IIIth largest depository organization in Missouri, controlling deposits of approximately $133.3 million. On
consummation of this proposal, Mercantile would become
the 35th largest depository organization in Missouri, controlling deposits of approximately $424 million, which
represent less than I percent of state deposits.
INTERSTATE ANALYSIS

1. 12 U.S.c. § 1842.
2. Asset data are as of March 31, 2007; statewide deposit and
ranking data are as of June 30, 2006, and reflect merger activity
through July 6, 2007. In this context, insured depository institutions
include commercial banks, savings banks, and savings associations.
3. 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.
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 or
headquartered or operates a branch. See 12 U.S.c. §§ 1841(0)(4H7)
and 1842(d)(1)(A) and 1842(d)(2)(B).

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
Mercantile and HNB have subsidiary depository institutions that compete directly in two banking markets: St.
Louis, Missouri-Illinois; and Hannibal, Missouri. The
Board has reviewed carefully the competitive effects of the
proposal in each 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 markets, the
relative shares of total deposits in depository institutions in
the markets ("market deposits") controlled by Mercantile
and HNB,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 markets.
5. 12 U.S.c. §§ 1842(d)(1)(AHB) and 1842(d)(2)(AHB). Mercantile is adequately capitalized and adequately managed, as defined
by applicable law. HNB Bank has been in existence and operated for
the minimum period of time required by Missouri state law (five
years). See Mo. Rev. Stat. §362.077.1. On consummation of the
proposal, Mercantile would control less than 10 percent of the total
amount of deposits of insured depository institutions in the United
States. Mercantile also would comply with the state deposit cap in
Missouri, where it will control less than 13 percent of state deposits.
See Mo. Rev. Stat. § 362.915. 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)(1).
7. Deposit and market share data are as of June 30. 2006, adjusted
to reflect mergers and acquisitions through July 6, 2007, 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 institution deposits in the market share
calculation on a 50 percent weighted basis. See, e.g., First Hawaiian,
Inc., 77 Federal Reserve Bulletin 52, 55 (1991).
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 more than 200
points. The DOJ has stated that the higher-than-normal HHI thresholds
for screening bank mergers and acquisitions for anticompetitive effects

Legal Developments: Third Quarter, 2007

Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
guidelines in the 5t. Louis market. 9 On consummation of
the proposal, there would be no increase in concentration
and the 5t. Louis market would remain unconcentrated as
measured by the HHI. In addition, numerous competitors
would remain in the market. 10
The Hannibal banking market II warrants a detailed
review of the competitive effects because the postconsummation concentration level would exceed the threshold levels in the DOJ Guidelines. In the Hannibal banking
market, Mercantile is the largest depository organization,
controlling deposits of approximately $106.3 million,
which represent approximately 19 percent of market deposits. HNB is the second largest depository organization in
the market, also controlling deposits of approximately
$106.3 million. On consummation of the proposal, Mercantile would remain the largest depository organization in the
market, controlling deposits of approximately $212.6 million, which represent approximately 37.9 percent of market
deposits. The HHI would increase 718 points to 1972.
One thrift institution operating in the market serves as a
significant source of commercial loans and provides a
broad range of consumer, mortgage, and other banking
products. Competition from this thrift institution closely
approximates competition from a commercial bank. Accordingly, the Board has concluded that deposits controlled by
this institution should be weighted at 100 percent in
market-share calculations.J 2 Accounting for the revised
weighting of these deposits, Mercantile would control
implicitly recognize the competitive effects of limited-purpose and
other nondepository financial entities.
9. The St. Louis banking market is defined as: (1) in Missouri-the
city of St. Louis; Franklin, Jefferson, Lincoln, Saint Charles, St. Louis,
Warren, and Washington counties; Roark, Boeuf, Canaan, and Brush
Creek townships and the cities of Hermann and Owensville, all in
Gasconade County; Boone township in Crawford County; and Loutre
township in Montgomery County; and (2) in Illinois-Bond, Calhoun,
Clinton, Jersey, Macoupin, Madison, Monroe, and St. Clair counties;
the western part of Randolph County (defined by Route 3 on the east
and the Kaskaskia River on the south), including the cities of Red Bud,
Ruma, and Evansville; Washington County, excluding Ashley and Du
Bois townships; and the city of Centralia.
10. On consummation of the proposal, the HHI would remain
unchanged at 665 for the St. Louis market. Mercantile operates the
63rd largest depository organization in the market, controlling deposits
of approximately $100.4 million, which represent less than 1 percent
of market deposits. HNB operates the I 14th largest depository organization in the market, controlling deposits of approximately $27.1 million. After consummation, Mercantile would operate the 56th largest
depository organization in the market, controlling deposits of approximately $127.5 million, which represent less than I percent of market
deposits. One hundred thirty-nine depository institutions would remain
in the banking market.
11. The Hannibal banking market is defined as Marion and Ralls
counties and the Monroe township in Monroe County, all in Missouri.
12. The Board previously has indicated that it may consider
competition from a thrift institution at a level greater than 50 percent
of its deposits when appropriate. See, e.g., Banknorth Group. Inc.,
75 Federal Reserve Bulletin 703 (1989). The thrift institution in the
Hannibal banking market has a ratio of commercial and industrial
loans to assets of more than 10 percent, which is comparable to the

C1l9

approximately 34.6 percent of market deposits on consummation of the proposal, and the HHI would increase 599
points to 1871.
The Board has considered carefully whether other factors either mitigate the competitive effects of the proposal
or indicate that the proposal would have a significantly
adverse effect on competition in the market. The number
and strength of factors necessary to mitigate the competitive effects of a proposal depend on the size of the increase
and the resulting level of concentration in the banking
market.J3
In this market, the record indicates that the proposal
would not have a significant adverse impact on competition. After consummation of the proposal, ten other depository organizations would continue to operate in the market.
In addition, the second largest competitor in the market
would have a branch network comparable to Mercantile's
branch network.
The Board also has concluded that the activities of a
community credit union in the market exert a sufficient
competitive influence to mitigate, in part, the potential
adverse competitive effects of the proposal. The credit
union offers a wide range of consumer products, operates
street-level branches, and has membership open to all the
residents in the market. 14 This active community credit
union controls approximately $10.8 million in deposits in
the market, which represent approximately 1 percent of
market deposits on a 50 percent weighted basis. Accounting for the revised weighting of these deposits, Mercantile
would control approximately 34.3 percent of market deposits on consummation of the proposal, and the HHI would
increase 588 points to 1839.
The DOJ has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the transaction 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, including the number of
competitors that would remain in the Hannibal banking
market after consummation, the branch networks of competitors, the presence of an active credit union, and other
data, the Board concludes that consummation of the proposal would not have a significantly adverse effect on
competition or on the concentration of resources in either
banking market where Mercantile and HNB compete
directly or in any other relevant banking market. Accordnational average for all commercial banks. See First Union Corporation, 84 Federal Reserve Bulletin 489 (1998).
13. See NationsBank Corporation, 84 Federal Reserve Bulletin 129
(1998).
14. The Board previously has considered competition from similarly active credit unions as a mitigating factor. See, e.g., The PNC
Financial Services Group, Inc., 93 Federal Reserve Bulletin C65
(2007); Wachovia Corporation, 92 Federal Reserve Bulletin C183
(2006); F.N.B. Corporation, 90 Federal Reserve Bulletin 481 (2004);
Gateway Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004).

Cl20

Federal Reserve Bulletin 0 December 2007

ingly, 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, and
information provided by Mercantile.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved both on a parentonly and on a consolidated basis, as well as the financial
condition of the subsidiary depository institutions and the
organizations' 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 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 financial factors
of the proposal. Mercantile, HNB, and their subsidiary
depository institutions currently are well capitalized and
would remain so on consummation of the proposal. Based
on its review of the record, the Board also finds that
Mercantile has sufficient financial resources to effect the
proposal. The proposed transaction is structured as a cash
purchase that would be funded from the proceeds of issuing
trust preferred securities and debt.
The Board also has considered the managerial resources
of Mercantile, HNB, and their subsidiary depository institutions. The Board has reviewed the examination records of
these 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 laws and with anti-moneylaundering laws. The Board also has considered Mercantile'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").15 All of Mercantile's banks received "outstanding" or "satisfactory" ratings at their most recent
CRA performance evaluations by the banks' primary federal supervisors. HNB Bank received a "satisfactory"
rating at its most recent CRA performance evaluation by
the Office of the Comptroller of the Currency, as of July 14,
2003. After consummation of the proposal, Mercantile
plans to integrate its CRA program with HNB Bank's
operations. Mercantile has represented that consummation
of the proposal would allow it to provide a broader range of
financial products and services over a larger area. Based on
all the facts of record, the Board concludes that considerations relating to the convenience and needs of the communities to be served 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. The
Board's approval is specifically conditioned on compliance
by Mercantile 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 5t. Louis, acting
pursuant to delegated authority.
By order of the Board of Governors, effective August 7,
2007.
Voting for this action: Chairman Bemanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

15. 12 U.S.C. § 2901 et seq.; 12 U.S.c. § 1842(c)(2).

Legal Developments: Third Quarter, 2007 Cl21

Wells Fargo & Company
San Francisco, California
Order Approving the Merger of Bank
Holding Companies
Wells Fargo & Company ("Wells Fargo"), a financial
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act! to acquire
Greater Bay Bancorp ("Greater Bay"), East Palo Alto, and
its subsidiary bank, Greater Bay Bank, National Association ("GB Bank"), Palo Alto, both in California. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(72 Federal Register 35,246 (2007». The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the BHC Act.
Wells Fargo, with total consolidated assets of approximately $539.9 billion, is the fifth largest depository organization in the United States,3 controlling deposits of approximately $329.8 billion, which represent 4.3 percent of the
total amount of deposits of insured depository institutions
in the United States. Wells Fargo's subsidiary banks operate in 23 states, including California. Wells Fargo is the
second largest depository institution in California, controlling $101.9 billion in deposits.
Greater Bay has total consolidated assets of $7.3 billion
and operates only in California. It is the 18th largest
depository organization in the state, controlling deposits of
approximately $5.3 billion.
On consummation of the proposal, Wells Fargo would
remain the fifth largest depository institution in the United
States, with total consolidated assets of approximately
$547.2 billion. Wells Fargo would control deposits of
approximately $335.3 billion, which represent approximately 4.4 percent of the total amount of deposits of
insured depository institutions in the United States. In
California, Wells Fargo would remain the second largest
depository organization, controlling deposits of approximately $107.2 billion, which represent approximately
15 percent of the total amount of deposits of insured
depository institutions in the state.
1. 12 U.S.c. § 1842.
2. Wells Fargo also proposes to acquire the nonbanking subsidiaries
of Greater Bay in accordance with section 4(k) of the BHC Act,
12 U.S.C. § 1843(k). In addition, Wells Fargo has requested the
Board's approval to hold and, in certain circumstances, exercise an
option to purchase up to 19.9 percent of Greater Bay's stock. The
option would terminate on consummation of Wells Fargo's acquisition
of Greater Bay.
3. Asset data are as of June 30, 2007; national deposit and ranking
data are as of March 31, 2007; statewide deposit and ranking data are
as of June 30, 2006. In this context, insured depository institutions
include commercial banks, savings banks, and savings associations.

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 Wells Fargo is
Minnesota,4 and Greater Bay is located in California. 5
Based on a review of all the facts of record, including
relevant state statutes, the Board finds that the 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 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.?
Wells Fargo and Greater Bay have subsidiary depository
institutions that compete directly in five banking markets in
California: Monterey-Seaside-Marina; San FranciscoOakland-San Jose; Santa Cruz; Santa Rosa; and Watsonville. 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 controlled by Wells Fargo and Greater Bay
4. 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 I, 1966, or the date on which
the company became a bank holding company, whichever is later.
5. 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(0)(4H7)
and 1842(d)(I)(A) and 1842(d)(2)(B).
6. 12 U.S.c. §§ I 842(d)(I)(AHB) and 1842(d)(2)(AHB). Wells
Fargo is adequately capitalized and adequately managed, as defined by
applicable law. California does not have a minimum age requirement
applicable to the proposal. On consummation of the proposal, Wells
Fargo 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 state deposits. All other requirements of section 3(d)
of the BHC Act would be met on consummation of the proposal.
7. 12 U.S.c. § 1842(c)(l).
8. Deposit and market share data are as of June 30, 2006, adjusted
to reflect mergers and acquisitions through June 29, 2007, 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

C122

Federal Reserve Bulletin D December 2007

in the markets ("market deposits"),8 the concentration level
of market deposits and the increases in these levels as
measured by the Herfindahl-Hirschman 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 within the thresholds in the DOJ
Guidelines in all five banking markets. 10 On consummation
of the proposal, each market would remain moderately
concentrated, as measured by the HHI. Also, the change in
the HHI measure of concentration would be very small and
numerous competitors would remain in each market.
The DOJ has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the five banking markets where
Wells Fargo and Greater Bay compete directly or in any
other relevant banking market. Accordingly, the Board has
determined that competitive considerations are consistent
with approval.

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 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 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 the proposal carefully under
the financial factors. Wells Fargo, Greater Bay, and their
subsidiary depository institutions are currently well capitalized and would remain so on consummation of the proposal. Based on its review of the record, the Board finds
that Wells Fargo has sufficient financial resources to effect
the proposal. The proposed transaction is structured primarily 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
records of Wells Fargo, Greater Bay, 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 bank supervisory
agencies with the organizations and their records of compliance with applicable banking laws and with anti-moneylaundering laws. Wells Fargo, Greater Bay, and their subsidiary depository institutions are considered well managed.
The Board also has considered Wells Fargo'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.

II. 12 U.S.c. § 2901 et seq.; 12 U.S.c. § I 842(c)(2).

Legal Developments: Third Quarter, 2007 C123

depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank expansionary proposals.1 2
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of the subsidiary depository institutions of Wells
Fargo and Greater Bay, data reported by Wells Fargo and
Greater Bay under the Home Mortgage Disclosure Act
("HMDA"),13 other information provided by Wells Fargo,
confidential supervisory information, and public comment
received on the proposal. A commenter expressed concerns
about Wells Fargo's record of serving the credit and
community-development-investment needs of its assessment areas,14 particularly in California, and criticized a
specific credit product offered by WF Bank. ls The commenter also alleged, based on HMDA data, that WF Bank
engaged in disparate treatment of African American individuals in home mortgage lending. In addition, the commenter contended, without specific allegations, that GB
Bank had demonstrated little responsiveness to community
needs during its operating history. The commenter also

l2. l2 U.S.C. § 2903.
13. 12 U.S.C. §2801 et seq.
14. The commenter also requested that Wells Fargo renew certain
community commitments that it made in 1998 and make annual
community goals. In addition, the comrnenter requested that Wells
Fargo Bank, National Association ("WF Bank"), Sioux Falls, South
Dakota, agree to declare a six-month moratorium on home mortgage
foreclosures because of current concerns about the mortgage industry.
The Board has consistently stated that neither the CRA nor the federal
banking agencies' eRA regulations require depository institutions to
make pledges or enter into commitments or agreements with any
organization. See Bank of America Corporation, 93 Federal Reserve
Bulletin C49, C52 footnote 27 (2007). 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 credit needs of its CRA
assessment areas at the time the Board reviews a proposal under the
convenience and needs factor. Wells Fargo represented that it will
continue to communicate with, and provide information regarding its
eRA performance 10, community organizations. Wells Fargo also
noted that it works with customers who encounter financial difficulties
to prevent foreclosures whenever possible.
IS. The commenter urged WF Bank to reduce the price of its Direct
Deposit Advance Service, which the commenter characterized as a
costly payday-loan product. Wells Fargo represented that the service
provides an open-end line of credit available only to WF Bank's
checking account customers who have recurring income electronically
deposited in their checking accounts. Wells Fargo indicated that
although the service is a higher-priced form of credit, it provides
customers with short-term emergency access to funds. Wells Fargo
indicated that it has developed tools to help customers understand how
the service works and whether other lower-cost alternatives may be
available. The Board has consulted with the Office of the Comptroller
of the Currency ("OCC"), WF Bank's primary federal supervisor,
about this product. The Board also recognizes that although 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 the costs charged for them.

expressed concern that the proposal would lead to closings
of the combined organization's branches.

A. eRA Performance Evaluations
As provided in the CRA, the Board reviewed the proposal
in light of the evaluations by the appropriate federal
supervisors of the CRA performance records of the insured
depository institutions of Wells Fargo and Greater Bay. An
institution's most recent CRA performance evaluation is a
particularly important consideration in the applications
process because it represents a detailed, on-site evaluation
of the institution's overall record of performance under the
CRA by its appropriate federal supervisor. 16
Wells Fargo's lead bank, WF Bank, received an "outstanding" rating at its most recent CRA performance
evaluation by the acc, as of September 30, 2004 ("2004
WF Bank Evaluation"). Each of Wells Fargo's other
subsidiary banks that is subject to the CRA received an
"outstanding" or "satisfactory" rating at its most recent
CRA performance evaluation.J7 GB Bank also received an
"outstanding" CRA performance rating by the acc, as of
May 17,2006 ("2006 GB Bank Evaluation"). Wells Fargo
has represented that it would implement its CRA programs,
policies, and procedures at GB Bank.
eRA Performance of WF Bank. In the 2004 WF Bank
Evaluation, the bank received "outstanding" ratings on
each of the lending, investment, and service tests for its
CRA performance overall and in California. 18 Examiners
reported that WF Bank's overall lending performance was
excellent and that it had a good distribution of home
mortgage loans to borrowers of different income levels.
They also noted that the bank had an excellent geographic
distribution of small loans to small businesses. 19
In WF Bank's California assessment areas, examiners
concluded that the bank's distribution of loans among
borrowers of different income levels was good and that its
lending levels reflected an excellent responsiveness to
credit needs. Examiners reported that the bank's community development lending had a positive impact on its
performance within the state and commended the bank for
providing flexible lending programs to meet the credit
16. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001); 72 Federal Register 37,922 at 37,951 (2007).
17. Appendix B lists the most recent CRA ratings of Wells Fargo's
other subsidiary depository institutions that are subject to the CRA.
18. The evaluation period for the California assessment areas was
October I, 2001, through December 31, 2003, for HMDA and small
business lending under the lending test; and November I, 2001,
through September 30. 2004, for community development lending
under the lending test and for the investment and service tests.
19. Small businesses are businesses with gross annual revenues of
$1 million or less. Small loans to small businesses include loans with
original amounts of $1 million or less that are either secured by
nonfarm, nonresidential properties or classified as commercial and
industrial loans.

C124

Federal Reserve Bulletin 0 December 2007

needs in its assessment areas, including the credit needs of
LMI individuals and businesses. WF Bank represented that
since the 2004 WF Bank Evaluation, it has provided 401
community development loans in California totaling more
than $1.2 billion. 20
Examiners characterized the bank's investment activity
in the 2004 WF Bank Evaluation as reflecting an excellent
level of responsiveness to a wide variety of community
development needs in its California assessment areas,
particularly the need for affordable housing. They reported
that WF Bank funded 4,038 investments during the evaluation period, totaling more than $307 million and benefiting more than 2,000 different entities that help meet
community development needs. WF Bank represented that
it has generally provided increased levels of community
development investments since the 2004 WF Bank Evaluation. The bank stated that between 2004 and 2006 it
provided more than 4,450 community development investments and grants in California totaling more than $330 million, including more than $11 million in investments and
grants in San Francisco. In addition, WF Bank represented
that it has made numerous investments in or grants to
programs directed at community-based small businesses
since 2004.
Examiners commended WF Bank for providing services
that showed an excellent responsiveness to banking needs
in its assessment areas. They reported that the bank's
services were accessible to essentially all portions of its
assessment areas and that the bank's alternative delivery
systems, including ATMs, banking by phone or mail, and
Internet banking, helped accessibility throughout all geographies. Examiners also noted that the level of community
development services the bank provided had an overall
positive influence on its performance under the service test
in its California assessment areas. WF Bank represented
that since the 2004 WF Bank Evaluation, it also has
implemented several programs to improve financial literacy
and to make banking services accessible to traditionally
underserved communities.
eRA Performance of GB Bank. As noted, GB Bank
received an overall "outstanding" rating in the 2006 GB
Bank Evaluation. 21 Examiners reported that the bank's
level of lending activity was adequate and that its geographic distribution of small loans to businesses was good
in the San Francisco Bay Area assessment area. Examiners
also commended GB Bank's level of community development lending and noted that the bank made 89 community
development loans totaling $294 million in this assessment
area during the evaluation period. In addition, they reported
20. The commenter urged Wells Fargo to provide a "one-stop"loan
product for multifamily housing to enhance its competitive position in
California. Wells Fargo noted that WF Bank has recently established
such a loan product that is available to the bank's existing nonprofit
developers of affordable multifamily housing.
21. The evaluation period for the 2006 GB Bank Evaluation was
January 1,2004, through December 31, 2005, for HMDA and CRA
data under the lending test; and January 1,2004, through June 5, 2006,
for community development lending under the lending test and for the
service and investment tests.

that the bank's performance under the investment test in the
San Francisco assessment area was excellent and that many
of the bank's qualified investments provided affordable
housing and economic revitalization. Examiners found that
GB Bank's distribution of branches was good and that the
bank's retail services and alternate delivery systems were
responsive to the needs of the community. They also
commended GB Bank's community development services.
B. Branch Closings
The commenter expressed concern about the proposal's
possible effect on branch closings. Wells Fargo represented
that as a result of the acquisition, branches might be closed
in those markets where branches of WF Bank overlap with
those of GB Bank but that it has not made any decisions
about specific branches to be closed, relocated, or consolidated. Wells Fargo has indicated that it would follow its
own branch closing policy with respect to branch closings,
relocations, and consolidations related to the proposal.
The Board has considered carefully Wells Fargo's
branch closing policy and its record of opening and closing
branches. The Board notes that the branch closing policy,
which applies to all Wells Fargo subsidiary banks that are
subject to the CRA, generally requires a CRA impact report
and recommendation to be prepared for any branch closing
in an LMI area. A CRA impact report also is required for a
branch closing that is more than five miles from another
Wells Fargo branch. Each CRA impact report must include
alternatives to closing and steps that could be taken to
mitigate the effect of the proposed closing on the community served.
In the 2004 WF Bank Evaluation, examiners reported
that the bank's branch opening and closing activity in LMI
areas did not have an impact on the overall evaluation of its
performance under the service test in California. Examiners
noted, however, that such activity in the assessment areas
receiving full-scope reviews generally had a positive effect
on the evaluation of the bank's performance. The Board has
consulted with the aee on WF Bank's record of branch
openings and closings since the 2004 WF Bank Evaluation.
The aee will continue to review WF Bank's record of
opening and closing branches in the course of conducting
eRA performance evaluations.
The Board also has considered 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. 22

22. Section 42 of the Federal Deposit Insurance Act (12 U.S.c.
§ 183Ir-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 closing, consistent with the institution's written
policy for branch closings.

Legal Developments: Third Quarter; 2007 el25

C. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of Wells Fargo and Greater Bay in light of
public comment received on the proposal. The commenter
alleged that Wells Fargo had engaged in disparate treatment
of African American individuals in the pricing of home
mortgage loans in six Metropolitan Statistical Areas
("MSAs"), including the Los Angeles MSA.23 The Board
has focused its analysis on the 2005 and preliminary 2006
HMDA data reported by Wells Fargo. 24
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials 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 Wells
Fargo is excluding or imposing higher costs on any 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 or ethnicity.
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
23. The commenter based the allegation on a study it recently
completed using loan-pricing data reported under HMDA in 2005. The
comrnenter urged WF Bank to institute an underwriting system that
directs a borrower to the least expensive loan available to that
customer regardless of the lending channel chosen by the customer to
apply for a loan. Wells Fargo noted that the study did not include
Federal Housing Administration loans designed for LMI borrowers or
reflect the fact that the majority of Wells Fargo's loans to individuals
were priced below the thresholds that require HMDA price reporting.
Wells Fargo has represented that its pricing is fully disclosed, competitive, and reflects the customer's particular credit risk. In addition,
Wells Fargo stated that its subsidiary banks offer prime pricing options
to all first mortgage customers who qualify for such pricing regardless
of the channel or division through which the customer applies.
24. The Board reviewed HMDA data reported by Wells Fargo's
significant lending subsidiaries in California and Texas and in the Los
Angeles, Houston, and Chicago MSAs where Wells Fargo's primary
assessment areas are located. The Board notes that 2006 HMDA data
are preliminary and that final data will not be available for analysis
until fall 2007.
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.

on-site evaluations of compliance with fair lending laws by
Wells Fargo and its subsidiaries. The Board also has
consulted with the acc, the primary federal supervisor of
WFBank.
The record, including confidential supervisory information, indicates that Wells Fargo has taken steps to ensure
compliance with fair lending and other consumer protection laws. All Wells Fargo business units, whether those
units are separate companies or line-of-business departments in a subsidiary bank or nonbanking subsidiary,
develop and maintain comprehensive compliance programs
for all laws and regulations applicable to their business,
including fair lending compliance programs. Wells Fargo's
Compliance and Risk Management Group provides oversight for and guidance on these compliance programs, and
a corporate fair lending committee that includes senior
executives from Wells Fargo's consumer lending subsidiaries coordinates Wells Fargo's enterprise-wide fair lending
strategy. Wells Fargo's subsidiary banks and home mortgage lending subsidiaries provide fair lending training for
their employees and conduct self-assessments and audits to
verify compliance and consistent underwriting practices.
Several subsidiaries also provide second-review programs
for credit applications designated for denial. Wells Fargo
has stated that it will review and make appropriate modifications to the fair lending policies for GB Bank's operations after consummation of the proposal.
The Board also has considered the HMDA data in light
of other information, including the programs described
above and the overall performance records of the subsidiary banks of Wells Fargo and Greater Bay under the CRA.
These established efforts and records of performance demonstrate that the institutions are active in helping to meet
the credit needs of their entire communities.
D. Conclusion on Convenience and Needs and
CRA Performance
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 Wells Fargo,
public comment received on the proposal, and confidential
supervisory information. Wells Fargo has represented that
consummation of the proposal would provide customers of
Greater Bay with expanded access to the products and
services offered by Wells Fargo's bank and nonbank subsidiaries. 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 insured
depository institutions 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 applications
should be, and hereby are, approved. In reaching its

C126

Federal Reserve Bulletin 0 December 2007

conclusion, the Board has considered all the facts of record
in light of the factors that it is required to consider under
the BRC Act and other applicable statutes. The Board's
approval is specifically conditioned on compliance by
Wells Fargo 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.
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 San Francisco, acting
pursuant to delegated authority.
By order ofthe Board of Governors, effective August 21,
2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.

ROBERT DEV. FRIERSON
Deputy Secretary of the Board

Appendix A
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES

Bank

Rank

Amount
of deposits

Market
deposit
shares
(percent)

Resulting
HHI

1
13
1

$659.8 mil.
$10.8 mil.
$670.6 mil.

22.6
.4
23.0

1,499
1,499
1,499

17
17
17

14
14
14

2
9
2

$40.5 bil.
$5.0 bi!.
$45.5 bil.

19.4
2.4
21.8

1,427
1,427
1,427

93
93
93

109
109
109

3
6
2

$420.0 mil.
$236.9 mil.
$656.9 mil.

13.8
7.8
21.6

1,767
1,767
1,767

215
215
215

12
12
12

3
18
3

$830.1 mil.
$7.1 mil.
$837.3 mil.

13.8
.1
14.0

1,043
1,043
1,043

3
3

21
21
21

Change
in HHI

Remaining
number of
competitors

MONTEREy-SEASIDE-MARINA
BANKING MARKET

Monterey-Seaside-MarinaMonterey-Seaside-Marina Ranally
Metro Area (RMA)
Wells Fargo Pre-Consummation .....
Greater Bay ..............................
Wells Fargo Post-Consummation ....
SAN FRANCISCO-OAKLAND-SAN JOSE
BANKING MARKET

San Francisco-OakLand-San JoseSan Francisco-OakLand-San Jose
RMA and the towns of Byron,
Hollister, Pescadero, Point Reyes
Station, and San Juan Bautista
Wells Fargo Pre-Consummation .....
Greater Bay ..............................
Wells Fargo Post-Consummation ....
SANTA CRUZ BANKING MARKET

Santa Cruz-Santa Cruz RMA
Wells Fargo Pre-Consummation .....
Greater Bay ..............................
Wells Fargo Post-Consummation ....
SANTA ROSA BANKING MARKET

Santa Rosa-Santa Rosa RMA and
the city of Cloverdale
Wells Fargo Pre-Consummation .....
Greater Bay ..............................
Wells Fargo Post-Consummation ....

Legal Developments: Third Quarter, 2007

Appendix

C127

A-Continued

BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued
Bank

Rank

Amount
of deposits

Market
deposit
shares
(percent)

Resulting
HHI

Change
in HHI

Remaining
number of
competitors

$187.8 mil.
$19.3 mil.
$207.2 mil.

23.5
2.4
25.9

1,650
1,650
1,650

113
113
113

11
11
11

WATSONVILLE BANKING MARKET
Watsonville-Watsonville RMA
Wells Fargo Pre-Consummation .....
Greater Bay ..............................
Wells Fargo Post-Consummation ....

I
10

NOTE: Data are as of June 30, 2006. An amounts of deposits are unweighted. An rankings. market deposit shares. and HHIs are based on thrift institution deposits weighted at 50 percent.

Appendix B
CRA PERFORMANCE EVALUATIONS
Subsidiary Bank

CRARating

Date

Supervisor

1. Placer Sierra Bank,
Auburn, California
2. Wells Fargo Bank Northwest,
National Association,
Ogden Utah
3. Wells Fargo HSBC Trade Bank, National
Association,
San Francisco, California
4. Wells Fargo Financial National Bank,
Las Vegas, Nevada
5. Wells Fargo Financial Bank,
Sioux Falls, South Dakota

Satisfactory

March 2005

Federal Reserve

Satisfactory

December 2005

OCC

Outstanding

June 2006

OCC

Outstanding

June 2006

OCC

Outstanding

March 2005

FDIC

ORDERS ISSUED UNDER SECTION 4 OF
THE BANK HOLDING COMPANY ACT

National City Corporation
Cleveland, Ohio

Order Approving the Acquisition of a
Savings Association and Notice to Engage in
Nonbanking Activities
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 sections 4(c)(8) and 4(j) of the BHC Act
and section 225.24 of the Board's Regulation yl to acquire

I. 12 V.S.c. §§ 1843(e)(8) and G); 12 CFR 225.24.

Mid America Bank, fsb ("Mid America"), a savings association, by merging with its holding company, MAF Bancorp, Inc. ("MAF"), both of Clarendon Hills, Illinois.
National City also has requested the Board's approval
under those provisions to acquire St. Francis Equity Properties, Inc. ("St. Francis"), Brookfield, Wisconsin, a subsidiary of Mid America, and thereby engage in community
development . activities in accordance with section 225.28(b)(l2) of the Board's Regulation y'2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (72 Federal Register 28,491 (2007». 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.
2. 12 CPR 225.28(b)(l2). National City also proposes to acquire
Mid America Insurance Agency, Inc., Clarendon Hills, and Mid
America Re, Inc., Burlington, Vermont, in accordance with section 4(k) of the BHC Act, 12 V.S.c. § 1843(k).

Cl28

Federal Reserve Bulletin D December 2007

National City, with total consolidated assets of $138.5 billion, is the 13th largest depository organization in the United
States, controlling deposits of approximately $88.6 billion,
which represent approximately I percent of the total amount
of deposits of insured depository institutions in the United
States. 3 National City controls one insured depository institution, National City Bank, Cleveland, Ohio, that operates in
eight states. 4 National City is the ninth largest depository
organization in Illinois, controlling deposits of approximately $7.2 billion, which represent approximately 2.3 percent of the total amount of deposits of insured depository
institutions in the state ("state deposits").
MAF has total consolidated assets of approximately
$10.4 billion and Mid America, MAP's only subsidiary
insured depository institution, operates in Illinois and Wisconsin. MAF is the 12th largest depository organization in
Illinois, controlling deposits of approximately $5.7 billion.
On consummation of the proposal, National City would
remain the 13th largest insured depository organization in
the United States, with total consolidated assets of approximately $150.7 billion. National City would control deposits
of approximately $95.7 billion, representing 1.4 percent of
the total amount of deposits of insured depository institutions in the United States. In Illinois, National City would
become the fourth largest insured depository organization,
controlling deposits of approximately $12.9 billion, which
represent approximately 4 percent of state 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.5 The Board requires that
savings associations acquired by bank holding companies
conform their direct and indirect activities to those permissible for bank holding companies under section 4 of the
BRC Act. 6 National City has committed to conform all the
activities of Mid America to those that are permissible
under section 4(c)(8) of the BRC Act and Regulation Y
The Board also has determined that community development activities are closely related to banking, and National
City has committed to conduct those activities in accordance with the Board's regulations and orders.?
Section 4(j)(2)(A) of the BRC Act requires the Board to
determine that the proposed acquisition of Mid America
and St. Francis "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 under these public
3. Asset and nationwide deposit-ranking data are as of March 31,
2007. Statewide deposit and ranking data are as of June 30, 2006, and
reflect merger activity through July 5, 2007. In this context, insured
depository institutions include commercial banks, savings banks, and
savings associations.
4. National City Bank operates branches in Florida, Illinois, Indiana, Kentucky, Michigan, Missouri, Ohio, and Pennsylvania.
5. 12 CFR 225.28(b)(4)(ii).
6.Id.
7. 12 CFR 225.28(b)(1I).
8. 12 U.S.c. § 1843(j)(2)(A).

interest factors, the Board reviews the financial and managerial resources of the companies involved, the effect of the
proposal on competition in the relevant markets, and the
public benefits of the proposal. 9 In acting on a notice 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").l0 The Board has considered the proposal under
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.

COMPETITIVE CONSIDERATIONS
The Board has considered carefully the competitive effects
of National City's acquisition of MAF, including Mid
America and St. Francis'!! National City Bank and Mid
America compete directly in four banking markets in
Illinois: Aurora, Chicago, Elgin, and Joliet.!2 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
share of total deposits of National City Bank and Mid
America in the markets ("market deposits"),13 the concentration level of market deposits and the increase in this level
as measured by the Rerfindahl-Rirschman Index ("HHI")
under the Department of Justice Guidelines ("DOl Guidelines"),!4 and other characteristics of the markets.
9. See 12 CFR 225.26; see, e.g., BancOne Corporation, 83 Federal
Reserve Bulletin 602 (1997).
10. 12 U.S.c. §2901 et seq.
II. See First Hawaiian, Inc., 79 Federal Reserve Bulletin 966
(1993).

12. These banking markets and the effects of the proposal on the
concentration of banking resources in them are described in the
appendix.
13. Deposit and market-share data are as of June 30, 2006, and
reflect merger activity through July 5, 2007. The deposits of thrift
institutions are included at 50 percent, except as noted below. The
Board previously has indicated that thrift institutions have become, or
have the potential to become, significant competitors of commercial
banks. See. e.g., Midwest Financial Group, 75 Federal Reserve
Bulletin 386 (1989); National City Corporation, 70 Federal Reserve
Bulletin 743 (1984). Thus, the Board regularly has included thrift
institution deposits in the market-share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve
Bulletin 52 (1991). In this case, Mid America's deposits are weighted
at 50 percent pre-merger and at 100 percent post-merger to reflect the
resulting ownership by a commercial banking organization.
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 ("DOl") 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.

Legal Developments: Third Quarter, 2007

Cl29

Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in each relevant
banking market. After consummation of the proposal, the
Chicago and Elgin markets would remain unconcentrated,
and the Aurora and Joliet markets would remain moderately concentrated. In each of these markets, the changes in
the HHI measure of concentration would be small and
numerous competitors would remain. Based on all the facts
of record, the Board has concluded that consummation of
the proposal would not have a significantly adverse effect
on competition or on the concentration of resources in any
of the four banking markets where National City Bank and
Mid America compete directly or in any other relevant
banking market.
The Board also has considered the effects of the proposed transaction on competition in community development activities. National City and St. Francis do not both
engage in community development activities in any relevant market. Moreover, the market for this nonbanking
activity is local in scope and unconcentrated, and there are
numerous participants that engage in these activities. Based
on all the facts of record, the Board concludes that consummation of the proposal would not have a significantly
adverse effect on competition among providers of community development activities in any relevant market.

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 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
records of National City, MAP, 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 financial supervisory agencies with the organizations and their records of compliance
with applicable banking law and with anti-moneylaundering laws. National City, MAP, 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 the financial and managerial resources of the organizations involved in the proposal are consistent with approval
under section 4 of the BHC Act.

FINANCIAL AND MANAGERIAL RESOURCES

As previously noted, the Board considers the records of
perfonnance 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 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.1 5
The Board has considered carefully all the facts of record,
including evaluations of the CRA perfonnance records of
National City's and MAP's subsidiary depository institutions, data reported under the Home Mortgage Disclosure
Act ("HMDA")16 by the subsidiaries of National City and
MAF that engage in home mortgage lending, other lending
data reported under the CRA, other infonnation provided by
National City and MAF, confidential supervisory infonnation provided by the federal supervisor of each bank, and
public comment received on the proposal.
The Board received a comment related to the CRA
perfonnance records of National City Bank and Mid
America. The commenter alleged that in the Milwaukee

In reviewing the proposal under section 4 of the BHC Act,
the Board has carefully considered the financial and managerial resources of National City, MAP, 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 infonnation from the primary federal supervisors of the organizations involved in the proposal, and
publicly reported and other financial infonnation, including
infonnation provided by National City.
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 infonnation, including capital
adequacy, asset quality, and earnings perfonnance. 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 proposal under
the financial factors. National City, MAF, and their subsidiary depository institutions are well capitalized and would

eRA PERFORMANCE RECORDS

15. 12 U.S.c. §2903.
16. 12 U.S.C. §2801 et seq.

C130

Federal Reserve Bulletin D December 2007

area, National City has not adequately served the mortgage
credit needs of LMI borrowers!? and that Mid America has
not provided adequate levels of loans of less than $100,000
to businesses. IS
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.!9
National City Bank received an "outstanding" rating at
its most recent CRA performance evaluation by the Office
of the Comptroller of the Currency ("OCC"), as of June 30,
2005 ("NC Evaluation").2o Mid America received an
"outstanding" rating at its most recent CRA performance
evaluation by the Office of Thrift Supervision COTS"), as
of July 18, 2005 ("MA Evaluation"). National City has
indicated that Mid America's CRA program will remain in
place on consummation of the proposal.
CRA Performance of National City Bank. In addition to
the overall "outstanding" rating that National City Bank
received in the NC Evaluation, the bank received separate
overall "outstanding" or "satisfactory" ratings for its CRA
performance in each of the states reviewed. Examiners
reported that the bank's distribution of HMDA loans to
borrowers of different income levels was excellent, as was
the bank's distribution of small loans to businesses in LMI
census tracts. 2! Examiners stated that the bank's record of
community development lending and qualified community
development investments demonstrated excellent responsiveness to community credit and investment needs.

17. As the commenter acknowledges, National City Bank operates
no branches in the Milwaukee area. The Milwaukee area, therefore, is
not part of the bank's assessment areas for purposes of evaluating its
CRA performance.
18. The commenter also requested that National City and Mid
America commit to implement a number of the commenter's recommendations. The Board has consistently found that neither the CRA
nor the federal banking agencies' CRA regulations require depository
institutions to make pledges or enter into commitments or agreements
with any organization. See, e.g., Bank of America Corporation,
93 Federal Reserve Bulletin C52, footnote 27 (2007). 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 credit
needs of its assessment areas at the time the Board reviews the
proposed acquisition of an insured depository institution.
19. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36,640 (2001).
20. The evaluation periods were October I, 1999, through December 31, 2004, for the lending test; and February 23, 2000, through
June 30, 2005, for the service and investment tests. The NC Evaluation
included the activities within National City Bank's assessment areas of
five affiliated banks that were consolidated into National City Bank in
July 2006 and of three nonbank mortgage lending subsidiaries of
National City.
21. "Small loans to businesses" are loans with original amounts of
$1 million or less that are either secured by nonfarm, nonresidential
properties or classified as commercial and industrial loans.

Since the NC Evaluation, National City has continued its
high level of CRA lending activity. In 2005 and 2006, it
made more than $22 billion HMDA-reportable loans in
National City Bank's assessment areas. National City also
made approximately $1.2 billion in total qualified community development loans during 2005 and 2006 in the bank's
assessment areas.
Examiners rated National City's performance under the
investment test as "outstanding" or "high satisfactory" in
most of the states reviewed. They reported that the bank's
investments were complex in nature and demonstrated
excellent responsiveness to the needs of the community.
During the evaluation period, the bank made qualified
investments totaling more than $182 million and contributed more than $5 million to charities with community
development purposes.
National City continued to make a significant amount of
qualified investments since the NC Evaluation. In 2005 and
2006, National City made approximately $222 million in
qualified investments and grants in the bank's assessment
areas. These investments included several projects that
created affordable housing through the low-income-housing
tax credit program.
Examiners concluded that the bank's retail banking
services generally were accessible to geographies and
individuals of different income levels. They also reported
that the bank generally provided a high level of community
development services, including service by bank employees on the boards of nonprofit groups involved in providing
affordable housing and other services to LMI individuals.
CRA Performance of Mid America. As noted, Mid
America received an overall "outstanding" rating in the MA
Evaluation. 22 Under the lending test, examiners commended
the savings association's responsiveness to the credit needs
of its assessment areas. Examiners characterized Mid
America as a market leader in originating mortgages reportable under HMDA in LMI geographies and to LMI borrowers when compared with its peer group. In addition, they
commended Mid America for offering numerous innovative
and flexible programs to LMI borrowers, including several
mortgage lending programs in the Chicago and Milwaukee
areas under which the savings association made more than
1,100 loans totaling more than $167 million. Examiners also
reported that the savings association's geographic distribution of small loans to businesses was good and that a
significant percentage of Mid America's small loans to
businesses were in amounts of $100,000 or less.
In the MA Evaluation, examiners described Mid America's performance as a community development lender as
excellent. During the evaluation period, the savings association originated community development loans totaling

22. The evaluation periods were January 1,2003, through December 31, 2005, for the lending test; and July 1,2002, through June 30,
2005, for the service and investment tests. Full-scope evaluations were
conducted in the Chicago-Naperville-Joliet Metropolitan Statistical
Area ("MSA") in Illinois, and in the Milwaukee-Waukesha MSA in
Wisconsin. Limited-scope evaluations were conducted in other areas
in Wisconsin.

Legal Developments: Third Quarter; 2007

$53.4 million, including more than $40 million in multifamily loans that supported affordable housing in LMI areas.
Examiners also reported that Mid America made qualifying
community development investments during the evaluation
period totaling $18.3 million, which included investments in
Chicago-based community investment funds for affordable
housing development and in 14 projects in Wisconsin that
were eligible for the low-income housing tax credit.
Examiners noted that Mid America's retail delivery systems were reasonably accessible to all geographies in its
assessment areas. In addition, examiners reported that the
bank provided a reasonable level of community development services and noted that bank employees conducted
more than 200 seminars on homebuying and served on the
boards of organizations that address community needs such
as affordable housing and educational programs for innercity youths.
Conclusion on CRA Performance. Based on a review of
the entire record, and for the reasons discussed above, the
Board has concluded that considerations relating to the
CRA performance records of the relevant depository institutions are consistent with approval.

C131

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 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 or ethnicity.
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, MAF,
and their subsidiaries with fair lending laws. The Board has
consulted with the OCC and the OTS about the fair-lending
and consumer-protection compliance records of National
City Bank and Mid America.
The record indicates that National City and MAF have
taken steps to ensure compliance with fair lending and other
consumer protection laws. National City has a centralized
compliance function and has implemented corporate-wide
compliance policies and procedures to help ensure that all
National City business lines comply with all fair lending and
other consumer protection laws and regulations. It employs
compliance officers and staff responsible for compliance
training and monitoring, and conducts file reviews for
compliance with federal and state consumer protection rules
and regulations for all product lines and origination sources.
National City also regularly performs self-assessments of its
compliance with fair lending laws and provides training in
fair lending policy for its employees. MAF also employs
compliance techniques, such as a second-review process for
mortgage loans and annual fair lending training for its
employees. MAF also conducts internal testing of products
and practices for illegal discrimination, which includes
testing for potential steering of certain products to minority
borrowers and the use of regression analysis of credit and
pricing decisions. National City has indicated that Mid
America's fair lending and consumer compliance program
will remain in place on consummation of the proposal.
The Board also has considered the HMDA data in light of
other information, including the CRA performance records
of National City Bank and Mid America. Based on all the
facts of record, the Board has concluded that the fair lending
24. The data, for example, does 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.

C132

Federal Reserve Bulletin 0 December 2007

record and HMDA data of National City and MAF are
consistent with approval under section 4 of the BHC Act.
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 Mid America. National City
has represented that the proposed transaction would provide Mid America's customers with expanded products and
services, including a wider range of commercial lending
products, brokerage, and trust services. In addition, National City has represented that its acquisition of St. Francis
would facilitate the provision of low-income housing,
including affordable housing for seniors, in Wisconsin.
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 concentrations 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 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.

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 National City and Mid America 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),25 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 decision 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 Cleveland, acting pursuant to
delegated authority.
By order of the Board of Governors, effective August 29,
2007.
Voting for this action: Chainnan Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the proposal should be, and

25. 12 CFR 225.7 and 225.25(c).

Appendix
ILLINOIS BANKING MARKETS WITH COMPETITIVE OVERLAP

Bank

Rank

Amount
of deposits
(dollars)

Aurora-the southern three tiers of
townships in Kane County (Virgil,
Compton, St. Charles, Kaneville,
Blackberry, Geneva, Batavia, Big
Rock, Sugar Grove, and Aurora
townships); Little Rock, Bristol,
Oswego, Fox, and Kendall townships
in Kendall County; and Sandwich
township in DeKalb County
National City Pre-Consummation ....
MAF ........................................
National City Post-Consummation ...

14
22
6

110,529
68,727
247,982

Market
deposit
shares
(percent)

Resulting
HHI

Change
inHffi

Remaining
number of
competitors

1.6
1.0
3.6

1,041
1,041
1,041

-12
-12
-12

40
40
40

Legal Developments: Third Quarter, 2007

C133

Appendix-Continued
ILLINOIS BANKING MARKETS WITH COMPETITIVE OVERLAP-Continued
Market
deposit
shares
(percent)

Change
in HHI

Remaining
number of
competitors

4.1

741
741
741

--4
--4
--4

183
183
183

12,979
284,241
581,461

.2
4.8
9.4

571
571
571

18
18
18

37
37
37

245,060
69,879
384,817

3.0
.9
4.7

1,200
1,200
1,200

-8
-8
-8

48
48
48

Bank

Rank

Amount
of deposits
(dollars)

Chicago-Cook, Du Page, and Lake
counties
National City Pre-Consummation ....
MAF ........................................
National City Post-Consummation .. ,

12
17
4

4,269,259
2,427,389
9,124,037

2.0

Elgin-Marengo, Seneca, Nunda,
Riley, Coral, Grafton, and Algonquin
townships in McHenry County; and
the northern two tiers of townships
in Kane County (Hampshire,
Rutland, Dundee, Burlington, Plato,
and Elgin townships)
National City Pre-Consummation ....
MAF ........................................
National City Post-Consummation .. ,

37
8
2

Joliet-Will County (excluding
Florence, Wilmington, Reed, Custer,
and Wesley townships); Aux Sable
township in Grundy County; and
Na-Au-Say and Seward townships in
Kendall County
National City Pre-Consummation ....
MAF ........................................
National City Post-Consummation ...

7
24
4

1.1

Resulting
HHI

NOTE: All rankings. market deposit shares, and HHls are based on thrift institution deposits weighted at 50 percent, except that MAP's thrift institution
deposits are weighted at 50 percent pre-merger and 100 percent post-merger.

Order Determining that Certain Activities
Are Complementary to the Financial Activity
of Underwriting and Selling Health Insurance
The Federal Deposit Insurance Corporation ("FDIC") has
asked the Board to determine whether the disease management and mail-order pharmacy activities described below
and conducted by WellPoint, Inc. ("WellPoint"), Indianapolis, Indiana, are permissible for a financial holding
company ("FHC") under the Bank Holding Company Act
("BHC Act"), as amended by the Gramm-Leach-Bliley
Act ("GLB Act"). WellPoint has filed an application with
the FDIC to obtain deposit insurance for a proposed de
novo industrial loan company ("ILC"), ARCUS Financial
Bank, Salt Lake City, Utah ("Bank").! The FDIC has

1. Because ofthe special exception from the definition of "bank" in
the BRC Act for ILCs chartered in certain slates (12 U.S.C.
§ I841(c)(2)(R), WellPoint would not become a bank holding company on acquisition of Bank. This order addresses only the issue of

imposed a temporary moratorium on acting on applications
for deposit insurance by ILCs controlled by companies that
are engaged in any nonbanking activity that is not permissible for an FHC under section 4 of the BHC Act 2 or for all
savings and loan holding companies under the Home
Owners' Loan Act. 3
Section 4(k) of the BHC Act permits a bank holding
company that qualifies to be an FHC to engage in a broad
range of activities that are defined by statute to be financial
in nature. 4 The BHC Act also permits FHCs to engage in
any activity that the Board determines, in consultation with

whether the disease management and mail-order pharmacy activities
described below are pennissible for FHCs. This order does not address
any other issues raised by the deposit insurance application filed by
WellPoint with the FDIC or the speciailLC exception in the BRC Act.
2. 12 U.S.C. § 1843.
3. See Moratorium on Certain Industrial Bank Applications and
Notices, 72 Federal Register 5290 (Feb. 5, 2007). The FDIC's
moratorium is scheduled to expire on January 31, 2008.
4. See 12 U.S.C. § I 843(k)(4).

C134

Federal Reserve Bulletin 0 December 2007

the Secretary of the Treasury, to be financial in nature or
incidental to a financial activity.5
In addition, the BHC Act permits an FHC to engage in
any activity that the Board (in its sole discretion) determines, by regulation or order, 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 statutory provision was
intended to allow the Board to permit an FHC to engage, on
a limited basis, in an activity that appears to be commercial
rather than financial in nature when the activity is meaningfully connected to a financial activity such that it complements the financial activity.? This limited authority was
designed to allow FHCs to remain competitive with other
providers of financial services and to better provide financial services to their customers in a developing marketplace. Although WelIPoint is not a bank holding company,
the FDIC has requested that the Board determine the
permissibility of WellPoint's disease management and
mail-order pharmacy activities under the BHC Act, as
amended by the GLB Act.
WellPoint is principally engaged in underwriting and
selling health insurance. Underwriting and selling health
insurance as principal, agent, or broker are activities
deemed by Congress in the GLB Act to be financial in
nature. 8 WellPoint is one of the largest health insurance
companies in the United States, with total revenues of
$57 billion for the year ending December 31, 2006, and
total assets of $51.8 billion as of December 31, 2006.
WellPoint, through its regulated insurance company subsidiaries, provides health insurance in 21 states, is the Blue
CrosslBlue Shield licensee in 14 states, and provides health
insurance to more than 34 million members. WellPoint's
insurance offerings include preferred provider, health maintenance, point of service, Medicare and Medicaid health
plans; vision, dental, pharmacy benefit, life, disability, and
long-term care insurance products; and consumer-directed,
high-deductible, and limited-service health insurance products. WellPoint also engages in a variety of related activities, including claims processing.
In addition, WellPoint provides disease management and
mail-order pharmacy services to persons who obtain health
insurance from WellPoint or another insurance company.
These activities are conducted through subsidiaries that are
not themselves insurance companies. Through its disease
management services, WelIPoint provides insurance plan
members with access to a variety of tools and resources
designed to help them maintain healthy lifestyles and
properly manage their medical conditions. For example,
WellPoint uses data analysis software to identify plan
members that have, or are at high risk of developing,

5. Jd. at § 1843(k)(I)(A) and (2).
6. Jd. at § 1843(k)(l)(B).

7. See 145 Congo Rec. HII529 (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(k)(4)(B).

chronic or complex health conditions, such as diabetes or
kidney or heart disease. WelIPoint employees then contact
and work with the plan member (and his or her physician,
as appropriate) to provide information on treatment options
and ways of managing the member's care in an appropriate
and cost-effective manner and to help coordinate the member's access to and use of health services and related
insurance coverages.
Other disease management services provided by WellPoint to plan members include flu vaccinations; health
screenings and assessments (for example, for cholesterol or
blood pressure); a toll-free "Nurse Line" to respond to
questions about injuries or conditions; access to online and
audiotape libraries with information on a wide variety of
health topics; and assistance in developing personalized
plans for achieving a variety of health-related goals, such
as tobacco-use cessation, weight and stress management,
and proper diet and nutrition. These disease management
services typically are provided by, or under the direction of,
licensed health-care professionals (including doctors and
nurses) employed by WellPoint.
The WellPoint subsidiaries engaged in providing mailorder pharmacy services fill prescriptions for customers
who have pharmacy benefit insurance coverage from WellPoint or another insurance company, provide drug-related
information to customers, and track potential issues with
customer prescriptions, such as drug interactions. WelIPoint's mail-order pharmacy subsidiaries are state-licensed
and employ state-licensed pharmacists. WellPoint has indicated that most customers who use mail-order pharmacy
services are persons with chronic health conditions or
"maintenance" medication requirements. 9
WellPoint's disease management and mail-order pharmacy activities are not within the scope of activities that, to
date, have been determined to be financial in nature,
incidental to a financial activity, or complementary to a
financial activity under the BHC Act. The activities do not
themselves involve the provision of insurance, are not
regulated as insurance by state insurance authorities, and
are not provided by an affiliate that is licensed as an
insurance company or as an insurance agent or broker. Both
activities also involve the provision of health-care services
that, while related to insurance underwriting activities, are
themselves nonfinancial activities. The Board concludes,
however, for the reasons set forth below, that there is a
reasonable basis for construing these activities as complementary to a financial activity within the meaning of the
GLB Act.

9. WellPoint offers these mail-order pharmacy services as part of a
broader "pharmacy benefit management" program offered by its
subsidiaries. Pharmacy benefit managers ("PBMs") provide employers a variety of services to improve the pharmacy benefit coverages for
employees, including arranging a network of retail pharmacies where
plan members can fill prescriptions under the plan and assisting plan
sponsors in developing and managing the list of drugs and their costs
that the plan will cover. See Federal Trade Commission, Pharmacy
Benefit Managers: Ownership of Mail-Order Pharmacies at p. ii
(August 2005) ("FTC Report").

Legal Developments: Third Quarter, 2007 C13S

Both disease management and mail-order pharmacy
activities help employers that obtain health insurance from
an insurance company to manage and reduce the risks and
costs of providing health insurance to employees. WellPoint has indicated that many of its customers request or
demand that health insurers include disease management
services or mail-order pharmacy services in the health
insurance program designed for the customer and its
employees. WellPoint has indicated that employers do so
because the services help employers better manage and
reduce their health insurance costs (i) in the case of disease
management services, by promoting healthy lifestyle
choices, reducing unnecessary doctor or hospital visits, and
assisting customers with chronic conditions in developing
and pursuing available treatment options to manage properly their condition; and (ii) in the case of mail-order
pharmacy services, by providing employers and employees
(particularly those with chronic conditions) access to a
low-cost provider of prescriptions.
WellPoint also has provided data demonstrating that
many of the largest health insurers in the United States
provide disease management and mail-order pharmacy
services both to their own insurance customers and to
customers of other health insurance companies. These data
indicate, for example, that of the ten largest health insurers
in the United States in terms of the dollar value of direct
premiums written in 2006, six provide disease management
services and five provide mail-order pharmacy services. 10
These data also indicate that for both services all but one of
these large insurance companies currently provide the
service to customers who obtain health insurance from the
insurance company or another insurance company. The
Federal Trade Commission also has found that many large
insurers provide "in-house" PBM services and that many
PBMs own their own mail-order pharmacies. 11
Based on the foregoing and other facts of record, the
Board concludes that disease management and mail-order
pharmacy activities complement the financial activity of
underwriting and seIling health insurance.
As noted above, section 4(k)(l)(B) of the BHC Act
requires that the Board determine that any proposed
complementary activity does not pose a substantial risk to
the safety or soundness of depository institutions or the
financial system generally.12 Moreover, the Board previously has stated that complementary activities should be
limited in size and scope relative to the financial activities
that they complement. 13
WellPoint's disease management and mail-order pharmacy activities in the aggregate currently account for less
than I percent of WellPoint's consolidated total assets and

less than 4 percent of WellPoint' s consolidated total annual
revenues. The total assets of WellPoint's subsidiaries
engaged in disease management and mail-order pharmacy
activities also constitute less than 4 percent of the total
capital (calculated in accordance with applicable statutory
accounting principles) of all regulated insurance company
subsidiaries and health plans of WellPoint. To limit the
potential size and safety and soundness risks of the proposed activities, the Board has conditioned its determination in this order that the disease management and mailorder pharmacy activities conducted by WellPoint are
complementary to a financial activity on the requirement
that these activities in the aggregate must not account for
more than 2 percent of WellPoint's consolidated total assets
or 5 percent of its consolidated total annual revenues. In
addition, the total assets of WellPoint's subsidiaries engaged in disease management or mail-order pharmacy
activities in the aggregate may not exceed 5 percent of the
total capital (calculated in accordance with applicable
statutory accounting principles) of all regulated insurance
company subsidiaries and health plans of WellPoint.
The Board also has considered the types of risks to
which WellPoint is exposed by conducting disease management and mail-order pharmacy activities and confidential
information provided by WellPoint concerning how it
manages and addresses those risks. WellPoint has indicated, for example, that it maintains liability insurance and
provides extensive training to the employees engaged in
these activities to ensure compliance with applicable laws
and regulations, including relevant privacy laws and regulations. The Board notes, moreover, that WellPoint's mailorder pharmacy units and the pharmacists they employ, as
well as the doctors and nurses employed by the subsidiaries
engaged in disease management services, are licensed and
regulated by appropriate state licensing boards.
WellPoint also has indicated that it does not expect that
Bank will make loans to, engage in cross-marketing activities with, or have other direct business relationships with
the WellPoint subsidiaries that provide disease management or mail-order pharmacy services. Any future extensions of credit by Bank to, or other covered transactions by
Bank with, these or other affiliates, including any covered
transaction with an unaffiliated person the proceeds of
which are transferred to or used for the benefit of an
affiliate, must comply with sections 23A and 23B of the
Federal Reserve Act and the Board's Regulation W.14
For these reasons, the Board concludes that the proposed
activities do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system
generally. 15

10. These data are based on a 2006 National Association of
Insurance Commissioners report of market share by direct premiums
written by all accident and health insurance carriers and have been
adjusted to exclude certain large insurance carriers that engage
exclusively or predominantly in underwriting nonhealth accident
insurance.
11. See FTC Report at p. i and v.
12. 12 V.S.C. § I843(k)(l)(B).
13. See 68 Federal Register 68493,68497 (Dec. 9, 2003).

14. 12 V.S.c. 371c, 37Ic-l; 12 CFR Part 223.
15. Because this order is issued in response to a request from the
FDIC, the Board has not determined whether WellPoint's conduct of
the proposed activities "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." See

C136

Federal Reserve Bulletin 0 December 2007

The Board's decision is based on all the facts of record,
including the representations made to the Board in connection with this order. The Board's decision is subject to, and
is specifically conditioned on compliance with, the terms
and conditions set forth in this order.
By order of the Board of Governors, effective September 7,2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

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

The Bank of Nova Scotia
Toronto, Canada
Order Approving the Acquisition of Shares
of a Bank and a Savings Association
The Bank of Nova Scotia ("BNS"), a foreign bank that is a
financial holding company for purposes of the Bank Holding Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act! to acquire
10 percent of the outstanding voting shares of First BanCorp ("FBC"), San Juan, and, indirectly, its subsidiary
bank, FirstBank of Puerto Rico, Santurce, both of Puerto
Rico. In addition, BNS has requested approval under
section 4 of the BHC Act to acquire indirectly FBC's
subsidiary savings association, FirstBank Florida, Miami,
Florida. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (72 Federal Register 18,250 (2007». 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 sections 3 and 4 of the BHC Act.
BNS, with total consolidated assets of $373 billion, is
the third largest commercial bank in Canada3 and provides
a variety of banking services to retail and corporate custom12 U.S.C. § 1843(j)(2). For the same reason, the Board has not
reviewed the financial and managerial resources of WellPoint and the
other factors set forth in section 225.26(b) of the Board's Regulation Y
(12 CFR §225.26(b».
I. 12 U.S.C. § 1842. See 12 CFR 225.15.
2. 12 U.S.c. § 1843. See 12 CFR 225.24. BNS's indirect investments in the nonbank subsidiaries of FBC and FirstBaok Florida, all in
Puerto Rico and the U.S. Virgin Islands, are made in accordance with
section 4(c)(9) of the BHC Act and 225.23(f)(1) of Regulation K,
because these locations are outside the United States for purposes of
the International Banking Act ("IBA") and Regulation K (12 U.S.C
§3101(7); 12 U.S.C. § 1843(c)(9); 12 CFR 211.23(f)(1) and 211.2(i».
3. Canadian asset and ranking data are as of April 30, 2007. Both
are based on the exchange rate then in effect.

ers through more than 950 branches in Canada. It also
provides stock brokerage, insurance brokerage, fund management, and financial advisory services through subsidiaries. In the United States, BNS operates branches in Houston, Texas; Portland, Oregon; and New York, New York;
and agencies in Atlanta, Georgia;' and San Francisco,
California. BNS also has branches in the U.S. Virgin
Islands and Puerto Rico. Scotia Bank de Puerto Rico
("Scotia Bank"), San Juan, BNS's subsidiary bank, operates only in Puerto Rico. BNS also provides custody and
trust services through The Bank of Nova Scotia Trust
Company of New York, New York, New York, a nondepository trust company.
FBC, with total consolidated assets of approximately
$17.3 billion, is the 45th largest depository organization in
the United States, controlling deposits of approximately
$10.8 billion, which represent less than 1 percent of the
total amount of deposits of insured depository institutions
in the United States.4 1f BNS were deemed to control FBC,
BNS would become the 42nd largest depository organization in the United States, with total consolidated assets of
approximately $18.9 billion, controlling deposits of approximately $12.4 billion.

NONCONTROLLING INVESTMENT
Although 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, the requirement in
section 3(a)(3) of the BHC Act to obtain the Board's
approval before a bank holding company acquires more
than 5 percent of the voting shares of a bank suggests that
Congress contemplated acquisitions by bank holding companies of between 5 and 25 percent of the voting shares of
banks. 5 On this basis, the Board previously has approved
the acquisition by a bank holding company of less than a
controlling interest in a bank or bank holding company.6
BNS has stated that it does not propose to control or
exercise a controlling influence over FBC and that its
indirect investment in FBC's subsidiary depository institutions would also be a passive investment. BNS has agreed
to abide by certain commitments ("Passivity Commitments") that are substantially similar to 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

4. Domestic asset data are as of March 31, 2007; deposit and
ranking data are as of June 30, 2006, and reflect subsequent mergers
and acquisitions through April 6, 2007. In this context, the "United
States" includes any state of the United States, the District of
Columbia, any territory of the United States, Puerto Rico, Guam,
American Samoa, and the Virgin Islands. In this context, depository
institutions include commercial banks, savings banks, and savings
associations.
5. See 12 U.S.c. § 1842(a)(3).
6. See. e.g., Passumpsic Bancorp, 92 Federal Reserve Bulletin
C175 (2006); Brookline Bancorp. MHC, 86 Federal Reserve Bulletin
52 (2000).

Legal Developments: Third Quarter, 2007

company for purposes of the BHC Act. 7 For example, BNS
has committed not to exercise or attempt to exercise a
controlling influence over the management or policies of
FBC or any of its subsidiaries; not to seek or accept
representation on the board of directors of FBC or any of its
subsidiaries; and not to have any director, officer, employee,
or agent interlocks with FBC or any of its subsidiaries.
BNS also has committed not to attempt to influence the
dividend policies, loan decisions, or operations of FBC or
any of its subsidiaries.
Based on these considerations and all the other facts of
record, the Board has concluded that BNS would not
acquire control of, or have the ability to exercise a controlling influence over, FBC or its subsidiary depository institutions through the proposed acquisition of FBC's voting
shares. The Board notes that the BHC Act would require
BNS to file an application and receive the Board's approval
before the company could directly or indirectly acquire
additional shares of FBC or attempt to exercise a controlling influence over FBC. 8

COMPETITIVE CONSlDERATlONS
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. 9
The Board also must consider the competitive effects of a
proposal to acquire a savings association under the public
benefits factor of section 4 of the BHC Act.
FirstBank of Puerto Rico and Scotia Bank, whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"), compete directly in the Aguadilla, Mayaguez, Ponce, and San Juan banking markets in Puerto
Rico. to BNS also competes directly with FirstBank of
Puerto Rico through branch offices l l in the St. John-St.
7. The commitments made by BNS are set forth in Appendix A.
8. See. e.g.. Emigrant Bancorp, Inc., 82 Federal Reserve Bulletin
555 (1996); First Community Bancshares. Inc., 77 Federal Reserve
Bulletin 50 (1991).
9. 12 U.S.c. § 1842(c)(I).
10. These banking markets, and the effects of the proposal on the
concentration of banking resources in these markets, are described in
Appendix B.
11. Deposits held by BNS's branch offices in the U.S. Virgin
Islands are not insured by the FDIC. Pursuant to the IBA, a foreign
bank wishing to engage in retail deposit-taking in the United States
must organize or acquire an insured U.S. depository institution.
Branch offices of foreign banks, with few exceptions, must confine
their deposit-taking in the United States to activities not requiring
FDIC insurance, such as wholesale deposit-taking (12 U.S.C.
§3104(c». Typically, the Board has taken the view that these branches
do not fully compete with U.S. depository institutions for purposes
of the competitive analysis. See Banco Santander Central Hispano.
SA. 92 Federal Reserve Bulletin CISI (2006).

C137

Thomas and the St. Croix banking markets in the U.S.
Virgin Islands. 12 BNS and First Bank Florida do not
compete directly in any banking market.
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 banking
markets; the relative shares of total deposits in depository
institutions in the market ("market deposits") controlled by
FBC and BNS;13 the concentration level of market deposits
and the increase in the level as measured by the HerfindahlHirschman Index ("HHI") under the Department of Justice
Merger Guidelines ("DOJ Guidelines");14 other characteristics of the market; and the Passivity Commitments made
by BNS with respect to FirstBank of Puerto Rico.

A. Banking Markets within Established Guidelines
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in the Aguadilla, Mayaguez, Ponce, and San
Juan banking markets in Puerto RicO. 15 On consummation

Because the U.S. Virgin Islands are not a "State" for purposes of
the IBA, however, the limitation on retail deposit-taking does not
apply to branches of foreign banks in the U.S. Virgin Islands
(12 U.S.C. §§ 3101(7) and 3104(c». As such, branches of foreign
banks operating in the U.S. Virgin Islands may accept retail deposits
and offer a full range of banking services in direct competition with
local depository institutions to the extent permissible under local law
and regulation. In light of all the facts of record, including information provided by the U.S. Virgin Islands Division of Banking and
Insurance, the Board has concluded that BNS does compete with
local depository institutions for retail deposits, small business loans,
and various other banking services in the U.S. Virgin Islands and
that uninsured deposits held by BNS branch offices, therefore,
should be included for purposes of calculating relevant market data.
12. The SI. John-St. Thomas banking market includes the islands of
St. John and SI. Thomas. The SI. Croix banking market includes the
island of SI. Croix.
13. Deposit and market share data are as of June 30, 2006, are
adjusted to reflect subsequent mergers and acquisitions through
April 6, 2007, 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 regnlarly 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).
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 ("DOl") 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 DOl 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.
15. The effect of the proposal on the concentration of banking
resources in these markets is described in Appendix B.

Cl38

Federal Reserve Bulletin 0 December 2007

of the proposal, three banking markets would remain
highly concentrated and one market would remain moderately concentrated, as measured by the HHI. The change in
the HHI in the three highly concentrated markets would be
small. In each of the four banking markets, numerous
competitors would remain.
B. Two Banking Markets Warranting Special
Scrutiny
BNS and FBC compete directly in two banking markets
that warrant a detailed review: St. John-St. Thomas and St.
Croix. As discussed below, if BNS were to acquire control
ofFBC, the post-consummation concentration levels would
exceed the DOJ Guidelines, and BNS's resulting market
share would exceed 35 percent in both markets.
St. John-St. Thomas Banking Market. BNS is the third
largest depository institution in the St. John-St. Thomas
market, controlling $212 million in deposits, which represents 13.3 percent of market deposits. FirstBank of Puerto
Rico is the second largest depository institution in the
market, controlling $576 million in deposits, which represents 36.2 percent of market deposits. If considered a
combined organization on consummation of the proposal,
BNS and FirstBank of Puerto Rico would be the largest
depository organization in the banking market, controlling
$788 million in deposits, which would represent approximately 49.5 percent of market deposits. The proposal
would exceed the DOJ Guidelines because the HHI for the
St. John-St. Thomas banking market would increase 965
points to 5000.
St. Croix Banking Market. BNS is the third largest
depository institution in the St. Croix market, controlling
$131 million in deposits, which represents 20.8 percent of
market deposits. FirstBank of Puerto Rico is the largest
depository institution in the market, controlling $177 million in deposits, which represents 28.1 percent of market
deposits. If considered a combined organization on consummation of the proposal, BNS and FirstBank of Puerto
Rico would be the largest depository organization in the St.
Croix banking market, controlling $308 million in deposits,
which would represent approximately 48.9 percent of
market deposits. The proposal would exceed the DOJ
Guidelines because the HHI for the St. Croix banking
market would increase 1171 points to 3359.
Competitive Effects in the Two Markets. The market
indexes suggest that consummation of the proposal would
raise competitive issues in both the St. John-St. Thomas
and St. Croix banking markets. 16 After careful analysis of
the record, the Board has concluded, however, that no
significant reduction in competition is likely to result from
BNS's proposed indirect investment in FirstBank of Puerto
Rico. Of particular significance in this case is the structure
of the proposed investment, which is designed to limit the
16. The Board also notes that one depository institution entered the
St. Thomas-St. John banking market de novo in 2006.

ability of BNS to control FBC. Although the Board previously has noted that one company need not acquire control
of another company to lessen competition between them
substantially, both BNS and FBC have proposed special
safeguards to limit access by BNS to competitively sensitive infonnation and to limit the potential for BNS to
influence the policies or management of FBC in the St.
John-St. Thomas and St. Croix banking markets. 17
As noted, the record shows that BNS intends to be a
passive investor and that there will be no officer or director
interlocks between BNS and FBC or FirstBank of Puerto
Rico, although FBC has agreed to allow BNS to have a
nonparticipating observer on FBC's board. The Board
recognizes that a significant reduction in competition can
result from the sharing of nonpublic financial infonnation
between two organizations that are not under common
control. To address this concern, FBC and BNS have
committed that FBC would restrict BNS from having
access to any infonnation that would allow anticompetitive
behavior in the St. John-St. Thomas and St. Croix banking
markets. For example, BNS would not be provided access
to operational or management infonnation regarding the
operations of FBC in the U.S. Virgin Islands, and BNS's
representative will not be present when any matters concerning those operations are presented to FBC's board.
These restrictions and commitments, including the Passivity Commitments noted above, limit BNS's access to
confidential infonnation that could enable it to engage in
anticompetitive behavior in the St. John-St. Thomas and St.
Croix banking markets with respect to FirstBank of Puerto
Rico. Anticompetitive behavior otherwise might occur in
these banking markets through either coordinating BNS's
activities with FBC or influencing the behavior of FBC.18

C. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOJ also has reviewed the proposal and has advised
the Board that it does not believe that BNS's acquisition of
10 percent of the voting shares of FBC would likely have a
significantly adverse effect on competition in any relevant
banking market at this time. 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
17. See. e.g.. Passumpsic Bancorp, 92 Federal Reserve Bulletin
e175 (2006); BOK Financial Corp., 81 Federal Reserve Bulletin
1052, 1053-54 (1995); 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).
18. There are no other legal, contractual, or statutory provisions
that would allow greater access to the bank's financial infoffi1ation in
the two banking markets than is available to shareholders with less
than a 5 percent interest.

Legal Developments: Third Quarter, 2007

concentration of resources in any relevant banking market
and that competitive considerations are consistent with
approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BRC 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
also reviews financial and managerial resources of the
organizations involved in a proposal under section 4 of the
BRC Act.\9 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,
and information provided by BNS. The Board also has
consulted with the Office of the Superintendent of Financial
Institutions ("OSH"), the agency with primary responsibility for the supervision and regulation of Canadian banks,
including BNS.
In evaluating the financial factors in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved both on a parentonly and on a consolidated basis, as well as the financial
condition of the subsidiary depository organizations 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 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.
The Board has carefully considered the financial factors
of this proposal. Canada's risk-based capital standards are
consistent with those established by the Basel Capital
Accord ("Accord"). The capital ratios of BNS 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. Furthermore, the U.S. subsidiary depository
institutions involved are well capitalized and would remain
so on consummation. The Board also has considered the
financial resources of BNS and the other organizations
involved and the effects of this proposal on the capital and
financial resources of FBC and its subsidiary depository
institutions. Based on its review of these factors, the Board
finds that BNS has sufficient financial resources to effect
the proposal and that the financial factors are consistent
with approval. The proposed transaction is structured as a
share purchase to be funded with available cash resources.
19. 12 CFR 225.26(b).

e139

The Board also has considered the managerial resources
of the organizations involved. The Board has reviewed the
examination records of FBC, its depository institutions, and
the U.S. banking operations ofBNS, including assessments
of their management, risk-management systems, and operations. In addition, the Board has considered its supervisory
experiences and those of other relevant banking supervisory agencies, including the Office of Thrift Supervision
("OTS") and the FDIC, with the organizations and their
records of compliance with applicable banking law and
with anti-money-Iaundering laws. 20
Based on all the facts of record, the Board has concluded
that considerations relating to the managerial resources and
future prospects of the organizations involved in the proposal are consistent with approval. Section 3 of the BRC
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.2\ As noted, the OSH is the primary
supervisor of Canadian banks, including BNS. The Board
previously has determined that BNS is subject to comprehensive supervision on a consolidated basis by its homecountry supervisor. 22 Based on this finding and all the facts
of record, the Board has concluded that BNS continues to
be subject to comprehensive supervision on a consolidated
basis by its home-country supervisor.
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

20. On March 16,2006, the Board issued a cease and desist order
("Order") requiring FBC to address accounting deficiencies for
certain mortgage loans, which subsequently led it to restate the
company's financial statements. See In the Matter of First Bancorp,
Doc. No. 06-006-B-HC. In a separate and coordinated action, the
FDIC also issued a cease and desist order against FirstBank of Puerto
Rico. The Order required, among other actions, that FBC hire an
independent consultant to review its mortgage portfolio; establish
policies and procedures to ensure appropriate classification of loans;
submit a written capital plan to ensure that the consolidated organization maintains an adequate capital position; and submit an acceptable
liquidity contingency plan. The Board has reviewed carefully the
progress made by FBC in implementing the Order's requirements. The
Board expects that FBC will continue to take all necessary steps to
ensure compliance with the Order.
21. 12 U.S.c. § 1843(c)(3)(B). As provided in Regulation Y, the
Board detennines 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 foreigu
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 CPR 211.24(c)(l).
22. The Bank of Nova Scotia, 93 Federal Reserve Bulletin C73
(2007).

C140

Federal Reserve Bulletin 0 December 2007

in the proposal are consistent with approval, as are the other
supervisory factors. 23

CONVENIENCE AND NEEDS AND CRA
PERFORMANCE 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").24 The Board also must review the records of
performance under the CRA of the relevant insured depository institutions when acting on a notice under section 4 of
the BHC Act to acquire voting securities of an insured
savings association. 25
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. 26
Scotia Bank received a "satisfactory" rating from the
FDIC at its most recent CRA performance evaluation, as of
March 1, 2005. FirstBank of Puerto Rico received a
"satisfactory" rating at its most recent CRA performance
evaluation by the FDIC, as of September 1, 2006, and
FirstBank Florida received a "satisfactory" rating from the
OTS at its most recent CRA performance evaluation, as of
February 28, 2005.
Based on all the facts of record, the Board concludes that
considerations relating to the convenience and needs of the

23. Section 3 of the BHC Act also requires the Board to determine
that an applicant has provided adequate assurances that it will make
available to the Board such information on its operations and activities
and those of its affiliates that the Board deems appropriate to determine and enforce compliance with the BHC Act (12 U.S.c.
§ 1842(c)(3)(A)). The Board has reviewed the restrictions on disclosure in the relevant jurisdictions in which the applicant operates and
has communicated with relevant government authorities concerning
access to information. In addition, BNS previously has committed
that, to the extent not prohibited by applicable law, it 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, the IBA, and other applicable federal
law. BNS also previously has committed to cooperate with the Board
to obtain any waivers or exemptions that may be necessary to enable
its affiliates to make such information available to the Board. In light
of these commitments, the Board has concluded that BNS has
provided adequate assurances of access to any appropriate information
the Board may request.
24. 12 U.S.C. §2901 et seq.; 12 U.S.C. § I 842(c)(2).
25. See. e.g., North Fork Bancorporation, Inc., 86 Federal Reserve
Bulletin 767 (2000).
26. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36,640 (2001); 72 Federal Register 37,922 at 37,951 (2007).

communities to be served and the CRA performance
records of the relevant depository institutions are consistent
with approval.

PUBLIC BENEFITS
As noted above, BNS also has filed a notice under section 4(c)(8) and 4(j) of the BHC Act for its proposed
indirect investment in FirstBank Florida. 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.27 To approve this notice, the Board also must
determine that the proposed acquisition of FirstBank
Florida "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."28
As part of its evaluation of the public interest factors
under section 4 of the BHC Act, the Board 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 currently
served by FBC. BNS's investment in FBS, and thus
indirectly in FirstBank Florida, would strengthen FBC's
capital position and allow FBC to better serve its customers. For the reasons discussed above and based on the entire
record, 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 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.

OTHER CONSIDERATIONS
BNS also requests that it be permitted to acquire an indirect
interest in FBC's noncontrolling minority investment in
Sun American Bancorp and its subsidiary bank, Sun American Bank, both in Boca Raton, Florida (collectively, "Sun
American"), without filing an application for the Board's
prior approval under section 3 of the BHC Act.29 FBC has
entered into and complied with commitments not to exer-

27. 12 CFR 225.28(b)(4)(ii).
28. See 12 V.S.c. § 1843(j)(2)(A).
29. 12 V.S.c. § 1842(a)(3). In 2004, FBC was approved to acquire
up to 9.9 percent of the voting shares of Sun American Bancorp,
previously Southern Security Bank Corporation. See letter to Ms.
Szendrey-Ramos from Ms. Tham, Federal Reserve Bank of New York,
dated May 10, 2004.

Legal Developments: Third Quarter, 2007

cise or attempt to exercise a controlling influence over Sun
American that are similar to the Passivity Commitments
noted above. and BNS would have no meaningful interaction or influence over Sun American through BNS's proposed minority, noncontrolling investment in FBC. Based
on all the facts of record, the Board has determined that no
regulatory purpose would be served by requiring BNS to
file an application under the BHC Act for such an investment; accordingly, the Board will not require BNS to file an
application. 30

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application and notice
should be, and hereby are, approved. In reaching its
conclusion, the Board has considered all the facts of record
in light of the factors that it is required to consider under
the BHC Act. The Board's approval is specifically conditioned on compliance by BNS with the conditions imposed
in this order and the commitments made to the Board in
connection with the proposal. The Board's approval of the
nonbanking aspects of the proposal is also subject to all the
conditions set forth in Regulation Y, including those in
sections 225.7 and 225.25(c),31 and to the Board's authority
to require such modification or termination of the activities
of BNS 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 bank-related portion of the proposal shall 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 by the Federal Reserve Bank of
New York, acting pursuant to delegated authority.
By order of the Board of Governors, effective August 9,
2007.
Voting for this action: Chairman Bemanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner. and Mishkin.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

30. The Board notes that the requirements of section 3(d) of the
BHC Act would be met if BNS were to acquire control of Sun
American (12 U.S.c. § 1842(d).
31. 12 CFR 225.7 and 225.25(c).

C141

Appendix A
PASSIVITY COMMITMENTS
In connection with its application to acquire up to 10 percent of First BanCorp ("FBC"), San Juan, Puerto Rico,
Bank of Nova Scotia ("BNS"), Toronto, Canada, commits
that it will not directly or indirectly:
1. Exercise or attempt to exercise a controlling influence
over the management or policies of FBC or any of its
subsidiaries;
2. Seek or accept representation on the board of directors
of FBC or any of its subsidiaries;
3. Have or seek to have any employee or representative
serve as an officer, agent, or employee of FBC or any
of its subsidiaries;
4. Take any action that would cause FBC or any of its
subsidiaries to become a subsidiary of BNS or any of
BNS's subsidiaries;
5. Acquire or retain shares that would cause the combined
interests of BNS and any of BNS's subsidiaries and
their officers, directors, and affiliates to equal or exceed
25 percent of the outstanding voting shares of FBC 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 FBC or any of its
subsidiaries;
7. Solicit or participate in soliciting proxies with respect
to any matter presented to the shareholders of FBC or
any of its subsidiaries;
8. Attempt to influence the dividend policies or practices;
the investment, loan, or credit decisions or policies; the
pricing of services; personnel decisions; operations
activities (including the location of any offices or
branches or their hours of operation, etc.); or any
similar activities of FBC or any of its subsidiaries;
9. Dispose or threaten to dispose of shares of FBC or any
of its subsidiaries in any manner as a condition of
specific action or nonaction by FBC or any of its
subsidiaries; or
10. Enter into any other banking or nonbanking transactions with FBC or any of its subsidiaries, except that
BNS may establish and maintain deposit accounts with
FBC, provided that the aggregate balances of all such
accounts do not exceed $500,000 and that the accounts
are maintained on substantially the same terms as those
prevailing for comparable accounts of persons not
affiliated with FBC.
Notwithstanding the foregoing, BNS and FBC's subsidiary, First Bank of Puerto Rico, directly or indirectly, may
act as a syndication or administrative agent, or in a
similar agency or arranging capacity, in connection with a
loan syndication or similar credit offering (together, "syndication") in which the other institution is a participating
lender or member of the syndicate (together, "member"),
provided that (I) the total fee income derived by either
party as a member in such syndications in a calendar year

C142

Federal Reserve Bulletin 0 December 2007

will be less than 5 percent of First Bank of Puerto Rico's
total fee income in dollar amounts in that year, (2) the
loans booked by either party as a member in connection
with such syndications in a calendar year will account for
no more than 10 percent of the aggregate dollar amount

of all loans committed and originated by First Bank of
Puerto Rico in that year, and (3) any syndication-related
arrangements between BNS and First Bank of Puerto
Rico will be nonexclusive and on an arm's length basis
on market terms.

Appendix B
BNS AND FBC BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES

Bank

Rank

Amount
of deposits
(millions
of dollars)

Share
of market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

PuERTO RICO BANKING MARKETS

Aguadilla-Aguada, Aguadilla,
Anasco, Isabela, Lares, Moca,
Rincon, and San Sebastian
municipios
BNS Pre-Merger ........................
FBC ........................................
BNS Post-Merger .......................

6
5
4

28.6
30.7
59.3

2.31
2.49
4.80

3,175
3,175
3,175

12
12
12

8
8
8

Mayaguez-Cabo Rojo,
Hormigueros, Lajas, Las Marias,
Maricao, Mayaguez, Sabana
Grande, and San German
municipios
BNS Pre-Merger ........................
FBC ........................................
BNS Post-Merger .......................

II
6
6

7.0
71.7
78.7

.35
3.55
3.90

2,633
2,633
2,633

3
3
3

88.8
56.3
145.1

4.02
2.55
6.57

1,921
1,921
1,921

21
21
21

11
11
11

Ponce-Adjuntas, Coamo, Guanica,
Guayanilla, Juana Diaz, Penuelas,
Ponce, Santa Isabel, Villalba, and
Yauco municipios
BNS Pre-Merger ........................
FBC ........................................
BNS Post-Merger .......................

10
10

Legal Developments: Third Quarter, 2007

C143

Appendix B-Continued
BNS AND

FBC

BANKING

MARKETS

CONSISTENT WITH

BOARD

PRECEDENT AND

DOl

GUIDELINES-Continued

Bank

San Juan-Aibonito, Aguas Buenas,
Arecibo, Arroyo, Barceloneta,
Barranquitas. Bayamon, Caguas,
Camuy, Canovanas, Carolina,
Catano, Cayey, Ceiba, Ciales,
Cidra. Comerio, Corozal, Culebra,
Dorado. Fajardo, Florida,
Guayama, Guaynabo, Gurabo,
Hatillo, Humacao, Jayuya, Juncos,
Las Piedras, Loiza, Luquillo,
Manati, Maunabo, Morovis,
Naugabo, Naranjito, Orocovis,
Patillas. Quebradillas, Rio Grande,
Salinas, San Juan, San Lorenzo. Toa
Alta, Toa Baja, Trujillo Alto,
Utuado, Vega Alta, Vega Baja,
Vieques. and Yabucoa municipios
BNS Pre-Merger ........................
FBC ........................................

BNS Post-Merger .......................

Rank

Amount
of deposits
(millions
of dollars)

Share
of market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

11
1
1

1,044
11,878
12,922

1.95
22.16
24.11

1,521
1,521
1,521

87
87
87

10
10
10

NOTE: Deposit and market-share data are as of June 30. 2006, are adjusted
to reflect subsequent mergers and acquisitions through April 6, 2007, and are
based on calculations in which the deposits of thrift institutions are included at
50 percent. All deposit data are in millions of dollars. Data for the St. ThomasSt. John and St. Croix banking markets are discussed in the order.

ORDERS ISSUED UNDER BANK
MERGER ACT

County Bank
Merced, California
Order Approving the Acquisition and
Establishment of Branches
County Bank, 1 a state member bank, has requested the
Board's approval under section 18(c) of the Federal Deposit
Insurance Act ("Bank Merger Act")2 to purchase all the
assets and assume all the liabilities of eleven California
branches of National Bank of Arizona ("NBA"), Tucson,
Arizona. County Bank also has applied under section 9 of

1. County Bank is a subsidiary of Capital Corp of the West,
Merced, a bank holding company.
2. 12 V.S.c. § 1828(c).

the Federal Reserve Act ("FRA") to establish and operate
branches at the locations of those branches. 3
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in
local publications in accordance with the Bank Merger Act
and the Board's Rules of Procedure. 4 As required by the
Bank Merger Act, a report on the competitive effects of the
merger was requested from the United States Attorney
General and a copy of the request was provided to the
Federal Deposit Insurance Corporation. The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the Bank Merger Act and the FRA.
County Bank, with total assets of approximately $1.8 billion, operates only in California. s County Bank is the 45th
largest insured depository institution in California, control3. 12 V.S.c. § 321. These branches are listed in the appendix.
4. 12 CFR 262.3(b).
5. Asset data are as of March 31, 2007. Deposit data and state
rankings are as of June 30, 2006. In this context, the term "insured
depository institutions" includes insured commercial banks, savings
banks, and savings associations.

el44

Federal Reserve Bulletin 0 December 2007

ling deposits of approximately $1.5 billion, which represents less than 1 percent of the total amount of deposits of
insured depository institutions in the state ("state deposits").
NBA operates in Arizona and California. In California,
NBA is the 156th largest insured depository institution in
the state, controlling deposits of approximately $198.8 million. On consummation of the proposal, County Bank
would become the 40th largest insured depository institution in California, controlling deposits of approximately
$1.7 billion, which represents less than 1 percent of state
deposits.

COMPETITIVE CONSIDERATIONS
The Bank Merger 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 Bank Merger
Act 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 its
probable effect in meeting the convenience and needs of the
community to be served. 6
County Bank and NBA compete directly in three relevant banking markets in California: Fresno, Los Banos,
and Merced. The Board has reviewed carefully the competitive effects of the proposal in each 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 markets, the relative shares of total deposits in
depository institutions in the markets ("market deposits")
controlled by County Bank and NBA,7 the concentration
levels of market deposits and the increase in those levels as
measured by the Herfindahl-Hirschman Index ("HHI")
under the Department of Justice Merger Guidelines ("DOJ
Guidelines"), 8 and other characteristics of the markets.

6. 12 U.S.C. § 1828(c)(5).
7. Deposit and market share data are as of June 30, 2006, adjusted
to reflect subsequent mergers and acquisitions through August 24,
2007, 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 institution deposits in the
market share calculation on a 50 percent weighted basis. See, e.g.,
First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).
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 ("DOl") 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.

Consummation of the proposal in the Fresno banking
market9 would be consistent with Board precedent and
within the thresholds in the DOJ Guidelines. 1O On consummation of the proposal, it would remain moderately concentrated, and numerous competitors would remain in the
market.
County Bank and NBA also compete directly in two
banking markets, Los Banos and Merced, tl that require a
detailed review of the competitive effects of the proposal.
In each market, County Bank is the largest depository
institution and already controls approximately half the
market deposits. The Board previously has recognized that
merger proposals involving a depository institution with a
large market share relative to the shares of other market
competitors warrant close review. 12
After careful analysis of the record, the Board has
concluded that no significant reduction in competition is
likely to result from County Bank's proposed acquisition of
NBA's branches in the Los Banos and Merced banking
markets. As noted below, County Bank's existing market
shares in the two banking markets would increase only
slightly on consummation of the proposal. Moreover, the
increase in concentration levels in each of these highly
concentrated markets on consummation of the proposal
would not exceed the threshold levels in the 001 Guidelines. The Board has also considered other factors indicating that the proposal would not have a significantly adverse
effect on competition in either banking market.J3
Los Banos Banking Market. County Bank is the largest
insured depository institution in the Los Banos banking
market, controlling deposits of approximately $217.3 million, which represent approximately 49.8 percent of market
deposits. NBA is the fifth largest depository institution in
the market, controlling deposits of approximately $6.4 mil9. The Fresno banking market is defined as the Fresno metropolitan
area, including the Fresno Ranally Metro Area and the towns of
Chowchilla, Kingsburg, Parlier, Reedley, Orange Cove, Dinuba, Coarsegold, Oakhurst, Prather, and Shaver Lake.
10. On consummation of the proposal, the HHI would remain
unchanged at 1208 for the Fresno market. County Bank operates the
14th largest depository institution in the market, controlling deposits
of approximately $183.2 million, which represents less than 2 percent
of market deposits. NBA controls $12.2 million in deposits, which
represents less than 1 percent of market deposits. After consummation,
County Bank would become the 13th largest depository institution in
the market, controlling deposits of approximately $195.3 million,
which represents approximately 2 percent of market deposits. Twentysix depository institutions would remain in the banking market.
11. The Los Banos banking market is defined as southwestern
Merced County, excluding the Merced Ranally Metro Area, livingston, and Mariposa; and including the towns of Dos Palos and Los
Banos.
12. See Firstar Corporation, 87 Federal Reserve Bulletin 236, 238
(2001); The Citizens Bank, 91 Federal Reserve Bulletin 438 (2005);
and First Busey Corporation, 93 Federal Reserve Bulletin C90 (2007).
13. The Board has evaluated whether other factors mitigate the
competitive effects of the proposal or indicate that the proposal would
have a significantly adverse effect on competition in the market. 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 a banking market. See NationsBank Corp.,
84 Federal Reserve Bulletin 129 (1998).

Legal Developments: Third Quarter, 2007

lion. On consummation, County Bank would remain the
largest depository institution in the market, controlling
deposits of approximately $223.7 million.
The NBA deposits that County Bank proposes to acquire
in the Los Banos market represent less than 1.5 percent of
the total market deposits, and the HHI would increase 146
points to 3477, which is consistent with the DOl Guidelines. Accordingly, the proposal would not signii, cantly
increase the market concentration.
Other factors indicate that the increase in concentration in
the Los Banos banking market, as measured by the market
share of the combined organization, overstates the potential
competitive effects of the proposal in the market. After
consummation, two of County Bank's three competitors in
the market would control 21 percent and 18 percent of
market deposits, respectively. In addition, the market appears to be moderately attractive for entry. For example, the
population growth rate of the Los Banos market between
2002 and 2005 increased signii, cantly faster than the average growth rate in other rural markets in California or in
rural markets nationwide during the same time period. The
Los Banos market also experienced higher deposit growth
rates than the average deposit growth rates in California
nonmetropolitan counties and in nonmetropolitan counties
nationwide during the last three years.
Merced Banking Market. County Bank also is the largest
insured depository institution in the Merced banking market,14 controlling deposits of approximately $668.6 million,
which represent approximately 50.4 percent of market
deposits. NBA is the tenth largest depository institution in
the market, controlling deposits of approximately $1.6 million. On consummation, County Bank would control deposits of approximately $670.2 million, which would represents 50.5 percent of market deposits.
County Bank proposes to acquire only a small amount of
deposits in this market, and the proposal would not signii, cantly increase the market concentration. On consummation, County Bank's market share would increase by only
0.1 percent. The HHI would increase 12 points to 3035,
which is consistent with the DOJ Guidelines.
Other factors also indicate that this small increase in
concentration in the Merced banking market would not have
signii, cant anticompetitive effects. After consummation,
eight insured depository institutions would continue to
compete with County Bank in the market. The market also
appears to be moderately attractive for entry. Since 2000, the
population in the banking market has grown more rapidly
than the average population growth in urban markets in
California and nationwide.

Agency Views 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 consummation of the proposal would not
14. The Merced banking market is del, ned as the Merced metropolitan area, including the Merced Ranally Metro Area and the towns of
Livingston and Mariposa.

Cl45

likely have a signii, cantly adverse effect on competition in
any relevant banking market. Based on all the facts of
record, the Board concludes that consummation of the
proposal would not have a signii, cantly adverse effect on
competition or on the concentration of resources in the three
banking markets where County Bank and NBA compete
directly 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
The Bank Merger Act requires the Board to consider the
i, nancial 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 coni, dential reports of examination, other
supervisory information from the primary federal and state
supervisors of the organizations involved in the proposal,
publicly reported and other i, nancial information, and
information provided by County Bank.
In evaluating i, nancial factors in expansion proposals by
banking organizations, the Board considers a variety of
measures in this evaluation, including capital adequacy,
asset quality, and earnings performance. In assessing i,nancial factors, the Board consistently has considered capital
adequacy to be especially important. The Board also evaluates the i, nancial 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.
County Bank and NBA are well capitalized, and County
Bank would remain so on consummation of the proposal.
Capital Corp of the West also would remain well capitalized
on consummation ofthe proposal. Based on its review of the
record in this case, the Board i, nds that County Bank has
sufficient l nancial resources to effect the proposal. The
proposed transaction is structured as a cash purchase that
will be funded through the issuance of trust preferred
securities by Capital Corp of the West.
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 County Bank and NBA, 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, including anti-money-laundering laws. County Bank
and NBA are considered to be well managed. The Board
also has considered County Bank'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 i, nancial and managerial

C146

Federal Reserve Bulletin 0 December 2007

resources and future prospects of the organizations involved
in the proposal are consistent with approval under the Bank
Merger Act.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under 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").15 County
Bank received a "satisfactory" rating at its most recent CRA
performance evaluation by the Federal Reserve Bank of San
Francisco, as of March 26, 2007. NBAreceived a "satisfactory" rating at its most recent CRA performance evaluation
by the Office of the Comptroller of the Currency, as of
October 20, 2003. After consummation of the proposal,
County Bank plans to implement its CRA policies at the
NBA branches. County Bank has represented that consummation of the proposal would allow it to provide a broader
range of financial products and services over a larger area.
Based on all the facts of record, the Board concludes that
considerations relating to the convenience and needs of the
communities to be served and the CRA performance records
of the relevant depository institutions are consistent with
approval.

OTHER CONSIDERATIONS
County Bank also has applied under section 9 of the FRA to
establish and operate branches at NBA's 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 finds those factors to be consistent
with approval. 16

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 Bank Merger Act and
the FRA. The Board's approval is specifically conditioned
on compliance by County 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
15. 12 U.S.c. § 2901 et seq.
16. 12 U.S.C. §322; 12 CFR 208.6(b).

the Board or the Federal Reserve Bank of San Francisco,
acting pursuant to delegated authority.
By order of the Board of Governors, effective September 25, 2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

Appendix
BRANCHES IN CALIFORNIA TO BE
ESTABLISHED BY COUNTY BANK
Caruthers
2200 West Tahoe Avenue
Coalinga
410 North Fifth Street
Dos Palos
2142 Blossom Street
Farmersville
400 West Visalia Road
Hariford
890 West Lacey Boulevard
Lemoore
142 West D Street
Mendota
567 Oller Street
Merced
2936 G Street
Needles
1019 West Broadway Street
Tulare
140 East Tulare Avenue
Visalia
800 West Main Street

East West Bank
Pasadena, California
Order Approving the Merger of Banks and
Establishment of Branches
East West Bank l has requested the Board's approval under
section 18(c) of the Federal Deposit Insurance Act2 ("Bank
1. East West Bank is a subsidiary of East West Bancorp, Inc.,
Pasadena, California, a financial holding company.
2. 12 U.S.c. § 1828(c).

Legal Developments: Third Quarter; 2007

Merger Act") to merge with Desert Community Bank
("Desert Bank"), Victorville, California, both state member banks, with East West Bank as the surviving entity. East
West Bank also has applied under section 9 of the Federal
Reserve Act ("FRA") to establish and operate branches at
Desert Bank's main office and branch 10cations.3
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in
local publications in accordance with the Bank Merger Act
and the Board's Rules of Procedure. 4 As required by the
Bank Merger Act, a report on the competitive effects of the
merger was requested from the United States Attorney
General and a copy of the request was provided to the
Federal Deposit Insurance Corporation. The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the Bank Merger Act and the FRA.
East West Bank, with total assets of approximately
$10.7 billion, operates in California and Texas. 5 In California, East West Bank is the 15th largest insured depository
institution, controlling deposits of approximately $7.1 billion, which represent 1 percent of the total amount of
deposits of insured depository institutions in the state
("state deposits").
Desert Bank operates only in California and is the 85th
largest insured depository institution in the state, controlling deposits of approximately $494.4 million. On consummation of the proposal, East West Bank would remain the
15th largest insured depository institution in California,
controlling deposits of approximately $7.6 billion, which
represents 1.1 percent of state deposits.

COMPETITIVE CONSIDERATIONS
The Bank Merger 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 Bank Merger
Act 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 its
probable effect in meeting the convenience and needs of the
community to be served. 6 East West Bank and Desert Bank
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 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.

3. 12 U.S.C. § 321. These branches are listed in the appendix.
4. 12 CFR 262.3(b).
5. Asset data are as of March 31, 2007. Deposit data and state
rankings are as of June 30, 2006. In this context, the term "insured
depository institutions" includes insured commercial banks, savings
banks, and savings associations.
6. 12 U.S.C. § 1828(c)(5).

C147

FINANCIAL AND MANAGERIAL RESOURCES
AND FUTURE PROSPECTS
The Bank Merger 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 East West Bank, and public comment on
the proposal.
In evaluating financial factors in expansion proposals by
banking organizations, 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.
East West Bank and Desert Bank are well capitalized,
and the resulting bank would remain so on consummation
of the proposal. East West Bancorp will also remain well
capitalized on consummation of the proposal. Based on its
review of the record in this case, the Board finds that East
West Bank has sufficient financial resources to effect the
proposal. The proposed transaction is structured as a combination share exchange and cash purchase. East West
Bank 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
organization. The Board has reviewed the examination
records of East West Bank and Desert Bank, 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, including anti-money-Iaundering laws.
East West Bank and Desert Bank are considered to be well
managed. The Board also has considered East West Bank'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 under the Bank
Merger Act.

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Federal Reserve Bulletin 0 December 2007

institutions under the Community Reinvestment Act
("CRA").? 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. 8
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of East West Bank and Desert Bank, data reported
by East West Bank and Desert Bank under the Home
Mortgage Disclosure Act ("HMDA"),9 other information
provided by the banks, confidential supervisory information, and public comment received on the proposal. Twentyeight commenters supported the proposal and commended
East West Bank's efforts to meet the banking needs of its
diverse communities. Three commenters opposed or expressed concerns about the proposal. One commenter
asserted that East West Bank had not adequately served the
credit and investment needs of LMI communities in its
assessment areas. In addition, two commenters alleged that
East West Bank and Desert Bank failed to provide adequate
banking services to all groups of individuals who historically have had insufficient access to banking services. IO

A. eRA 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. 11
East West Bank received a "satisfactory" rating at its
most recent CRA performance evaluation by the Federal
Reserve Bank of San Francisco, as of May 15,2006 ("2006
Evaluation"). Desert Bank also received a "satisfactory"
rating at its most recent CRA performance evaluation by
the Federal Reserve Bank of San Francisco, as of May 31,
7.12 U.S.c. §290l et seq.
8.12 U.S.C. §2903.
9. 12 U.S.c. §2801 et seq.
10. Two commenters criticized East West Bank and Desert Bank for
not providing effective banking services in languages other than
English and Chinese. East West Bank stated that its ATMs and
telephone services are available in English, Chinese, and Spanish and
that it provides retail banking and mortgage lending services in
multiple languages other than English. In addition, East West Bank has
conducted first-time horne-buyer seminars in Spanish and has expanded its home mortgage programs, which were originally created
for Chinese Americans, to serve other borrowers.
11. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

2005 ("2005 Evaluation"). East West Bank's current CRA
program will be implemented at the resulting bank after
consummation of the proposed merger with Desert Bank.
eRA Performance of East West Bank. In the 2006
evaluation, East West Bank received an "outstanding"
rating on its lending test, a "needs to improve" rating on its
investment test, and a "low satisfactory" rating on its
service test. 12 Examiners reported that, throughout the
California assessment areas, the bank's overall geographic
and borrower distribution of loans reflected excellent participation in LMI census tracts. 13 Although the examiners
found that East West Bank's community development
investments were low compared to the opportunity in its
area, the examiners determined that the bank's level of
community development lending in California demonstrated excellent responsiveness to the need for affordable
housing in its assessment areas in the state. In addition to
direct loans for community development projects, the bank
also offered $70 million in credit enhancements, such as
letters of credit, to support the construction or rehabilitation
of more than 1,500 housing units.
Examiners reported that the bank's excellent responsiveness to credit needs within LMI areas was a strength in its
overall performance. They found that the percentage of the
bank's total mortgage loans in LMI areas was substantially
higher than the percentage reported by the aggregate of all
lenders ("aggregate lenders")14 to LMI areas in Southern
California. IS In most of East West Bank's Northern California assessment area, the examiners commended the bank's
distribution of home purchase and refinance loans. 16 Furthermore, examiners determined that East West Bank's
small business lending in LMI areas of its Southern California assessment area was strong and generally exceeded
the performance of the aggregate lenders in those areas.
More than one-third of the bank's small business loans
were made in LMI areas, and a majority of its small
business loans was extended to businesses with revenues of
$1 million or less in the cities of Los Angeles and Santa
Ana and the surrounding areas. I?
12. One commenter expressed concern about these latter two ratings
for East West Bank's assessment areas in California. Examiners
concluded that the bank's overall record of CRA performance during
the review period merited a rating of "satisfactory." Notably, the
lending test is weighted more heavily than either the investment or
service test in determining the institutional rating.
13. The Southern California assessment area is defined as Los
Angeles County and portions of Orange County. The Northern California assessment area is defined as San Francisco County and
portions of Alameda, San Mateo, and Santa Clara counties.
14. The lending data of the aggregate lenders represent the cumulative lending for all financial institutions that have reported mortgage
lending as part of their CRA data in a particular area.
15. East West Bank noted that it offers a home loan program with
affordable interest rates for persons who would not qualify for
traditionally underwritten loans.
16. More than half of the 1-4 and multifamily loans extended by
East West Bank in its California assessment areas were made in LMI
areas in 2006, while LMI areas comprised 35.8 percent of those
assessment areas.
17. For purposes of the evaluation, "small business loans" are loans
that have original amounts of $1 million or less and are either secured

Legal Developments: Third Quarter; 2007 C149

Examiners concluded that East West Bank's performance under the service test throughout California assessment areas was adequate. In general, retail banking services
were reasonably accessible to all portions of the assessment
areas.
eRA Peiformance of Desert Bank. As noted, Desert
Bank received an overall "satisfactory" rating in its May
2005 examination. Although Desert Bank focuses on commercial lending, it offers a full range of banking products
and services. Examiners concluded that the bank's overall
lending levels reflected good responsiveness to community
credit needs. In particular, they noted that the bank's
distribution of small business loans was excellent and that
such lending was strongest in LMI census tracts. In addition, more than half of the bank's small business loans were
extended to businesses with revenues of $1 million or less.
Business loans in small-dollar amounts made by the bank
helped meet an important credit need of its communities.
Examiners found community development lending and
investments to be adequate, and they rated Desert Bank as
"high satisfactory" for its services.

B. HMDA and Fair Lending Record and Other
Issues
The Board has carefully considered the fair lending records
and HMDA data reported by East West Bank and Desert
Bank in 2005 in light of public comments received on the
proposal. Two commenters expressed concern that East
West Bank focused its services too narrowly on the Chinese
American population in its assessment areas and did not
effectively serve other populations of historically underserved minority communities. In addition, one commenter
questioned the bank's lending record and asserted that East
West Bank made a disproportionately small number of
home mortgage loans to Latinos, African Americans, and
Southeast Asian Americans.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials 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 East West
Bank is excluding or imposing higher costs on any 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. 18 HMDA data, therefore, have limitations that make

by nonfarm or nonresidential real estate or are classified as commercial and industrial loans. One commenter criticized East West Bank for
not making a sufficient number of loans under $100,000. The Board
has previously noted that the eRA does not require an institution to
provide any specific type of products or services in its 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

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 or ethnicity.
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
East West Bank.
The record, including confidential supervisory information, indicates that East West Bank has taken steps and
developed programs to ensure compliance with all fair
lending and other consumer protection laws and regulations. These efforts include bankwide fair lending training
for all employees. The bank also has a second review
process for all loans recommended for denial to ensure that
all applicants are evaluated properly, and it performs fair
lending audits and examinations. Examiners found no
evidence of discriminatory lending practices at East West
Bank.
The Board also has considered the HMDA data in light
of other information, including the overall performance
record of East West Bank under the CRA. The institution's
record of performance demonstrates that it is active in
helping to meet the credit needs of all the communities it
serves.

C. Conclusion on Convenience and Needs
Considerations
The Board has considered carefully the CRA performance,
fair lending records, and HMDA data of East West Bank
and Desert Bank in light of public comments received on
the proposal. The Board also has considered carefully all of
the facts of record, including reports of examination of the
CRA records of the institutions involved, information
provided by East West Bank, comments received on the
proposal, and confidential supervisory information. The
Board notes that the proposal would provide customers of
Desert Bank with a broader array of products and services,
including expanded options for affordable mortgage loans
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 eRA performance records of the relevant
depository institutions are consistent with approval.

OTHER CONSIDERATIONS
East West Bank also has applied under section 9 of the FRA
to establish and operate branches at Desert Bank's locamost frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

e150

Federal Reserve Bulletin 0 December 2007

tions 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 finds those factors to
be consistent with approvaLI9

Appendix

CONCLUSION

Adelanto
10474 Rancho Road

Based on the foregoing and all facts of record, the Board
has determined that the applications should be, and hereby
are, approved. 20 In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the Bank Merger Act and
the FRA. The Board's approval is specifically conditioned
on compliance by East West 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 San Francisco,
acting pursuant to delegated authority.
By order of the Board of Governors, effective July 16,
2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.

BRANCHES IN CALIFORNIA TO BE
ESTABLISHED BY EAST WEST BANK

Apple Valley
16003 Quantico Road
Barstow
945 E. Armory Road
Hesperia
15479 Main Street
Victorville
12022 Dunia Road
12470 Hesperia Road
12530 Hesperia Road
14800 La paz Drive
Wrightwood
1261 Highway 2
Phelan
48895 Phelan Road

ORDERS ISSUED UNDER
INTERNATIONAL BANKING ACT

ROBERT DEY. FRIERSON

Deputy Secretary of the Board

Caixa Economica Federal
Brasilia, Brazil
Order Approving Establishment of a
Representative Office

19. 12 U.S.c. § 322; 12 CFR 208.6(b).
20. Three commenters requested that the Board hold a public
meeting or hearing on the proposal. Neither the Bank Merger Act nor
the FRA requires the Board to hold a public meeting or hearing. Under
its rules, the Board 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
262.3(e) and 262.25(d». The Board has considered carefully the
comrnenters' requests in light of all the facts of record. In the Board's
view, the commenters have 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 requests by the
commenters 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.

Caixa Econ6mica Federal ("Bank"), Brasilia, Brazil, a
foreign bank within the meaning of the International Banking Act ("IBA"), has applied under section lO(a) of the
IBA 1 to establish a representative office in Jersey City,
New Jersey. 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 Jersey (The
New York Times, January 28, 2007). The time for filing
comments has expired, and all comments received have
been considered.
Bank, a state-owned entity with total consolidated assets
of approximately $98 billion,2 is the second largest bank in
l. 12 U.S.C. § 3107(a).
2. Data are as of December 31, 2006.

Legal Developments: Third Quarter, 2007

BraziJ.3 The Federative Republic of Brazil, including the
states and the municipalities, owns all the capital of Bank,
but Bank has its own equity and management autonomy.
Bank currently has operations only in Brazil, where it
provides commercial and retail banking services and investment banking services throughout the country. Through its
subsidiaries, Bank manages a development fund, administers Brazilian lotteries, and offers insurance products. Bank
also is the main fiscal agent for the Brazilian government,
and it provides financing for the government's housing,
education, and infrastructure projects.
The proposed representative office would market products of Bank in the United States, act as a liaison between
Bank's head office in Brazil and its prospective U.S.-based
customers, and develop relationships with international
organizations.
In acting on a foreign bank's application under the IBA
and Regulation K to establish a representative office, the
Board takes into account 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. 4 The Board also
considers additional standards set forth in the IBA and
Regulation K. 5 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. 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. 6
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided

3. The Bank's board of directors consists of seven members. The
Minister of Economy appoints five members, including the chairman;
the Minister of Planning, Budget and Management appoints one
member; and the Bank's president occupies the remaining seat and
serves as vice chairman of the board.
4. 12 U.S.c. §3107(a)(2); 12 CFR 211.24(d)(2). In assessing this
standard, the Board considers, among other factors, the extent to which
the home-country supervisors: (i) ensure that the bank has adequate
procedures for monitoring and controlling its activities worldwide; (ii)
obtain information on the condition of the bank and its subsidiaries
and offices through regular examination reports, audit reports, or
otherwise; (iii) obtain information on the dealings with and relationship between the bank and its affiliates, both foreign and domestic; (iv)
receive from the bank financial reports that are consolidated on a
worldwide basis or comparable information that permits analysis of
the bank's financial condition on a worldwide consolidated basis; (v)
evaluate prudential standards, such as capital adequacy and risk asset
exposure, on a worldwide basis. These are indicia of comprehensive,
consolidated supervision. No single factor is essential, and other
elements may inform the Board's determination.
5. 12 U.S.c. §3105(d)(3)-(4); 12 CPR 211.24(c)(2).
6. 12 CFR 211.24(d)(2).

C151

the Board with information necessary to assess the application through submissions that address the relevant issues.
With respect to home-country supervision of Bank, the
Board has considered the following information. Bank is
subject to the regulatory and supervisory authority of the
Central Bank of Brazil ("Central Bank"), which has
primary responsibility for the regulation of financial institutions in Brazil. The Board previously has determined that
the Central Bank exercises a significant degree of supervision over the activities of four other Brazilian banks. In
each case, the supervision exercised by the Central Bank
was found to be sufficient to allow for the approval of a
representative office in the United States by the applicant.?
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 have also been taken into account. 8 The Central Bank 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. Bank
appears to have the experience and capacity to support
the proposal and has established controls and procedures
for the proposed representative office to ensure compliance with U.S. law and for its operations in general.
Brazil 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 Brazil has enacted laws and created legislative
and regulatory standards to deter money laundering. Money
laundering is a criminal offense in Brazil, and financial
institutions are required to establish internal policies, pro7. See Banco Bandeirantes. SA., 81 Federal Reserve Bulletin 742
(1995); Unibanco-Uniiio de Bancos Brasileiros. SA, 82 Federal
Reserve Bulletin 1148 (1996); Banco BBA-Creditanstalt SA., 85 Federal Reserve Bulletin 518 (1999); Banco Itau S.A., 86 Federal Resen'e
Bulletin 851 (2000). The Board later determined that two privately
owned commercial banks in Brazil, Banco Itau and Banco Bradesco,
were subject to comprehensive consolidated supervision by the Central Bank in connection with each bank's election to be treated as a
financial holding company. Banco Itau's election was declared effective in February 2002, and Banco Bradesco's election was declared
effective in January 2004. Bank is a government-owned bank with a
mandate to carry out certain policy initiatives of the Brazilian government. As such, some of its activities differ from those of privately
owned Brazilian banks.
8. See 12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3). These
standards include: whether the bank's home-country supervisor has
consented to the establishment of the office; the financial and managerial resources of the bank; whether the bank has procedures to combat
money laundering, whether there is a legal regime in place in the home
country to address money laundering, and whether the home country is
participating in multilateral efforts to combat money laundering;
whether the appropriate supervisors in the home country may share
information on the bank's operations with the Board; whether the bank
and its U.S. affiliates are in compliance with U.S. law; the needs of the
community; and the bank's record of operation.

Cl52

Federal Reserve Bulletin 0 December 2007

cedures, 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-Iaundering 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 addition, subject to certain conditions, the
Central Bank 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
establish the representative office is hereby approved. 9
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 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 August 7,2007.
ROBERT DEY. 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. See 12 CFR 265.7(d)(12).
10. The Board's authority to approve the establishment of the
proposed representative office parallels the continuing authority of the
state of New Jersey to license offices of a foreign bank. The Board's
approval of this application does not supplant the authority of the state
of New Jersey or its agent, the New Jersey Department of Banking and
Insurance, to license the proposed office of Bank in accordance with
any terms or conditions that it may impose.

The State Export-Import Bank of Ukraine,
Inc.
Kiev, Ukraine
Order Approving Establishment of a
Representative Office
The State Export-Import Bank of Ukraine, Inc. ("Bank"),
Kiev, Ukraine, a foreign bank within the meaning of the
International Banking Act ("IBA"), has applied under
section lO(a) of the IBN 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
(New York Post, August 18, 2006). The time for filing
comments has expired, and all comments received have
been considered.
Bank, with total consolidated assets of approximately
$3.7 billion,2 is the sixth largest commercial bank in
Ukraine and provides wholesale and retail banking services
through a network of domestic branches. 3
The proposed representative office is intended to act as a
liaison between Bank's head office in Ukraine, other financial institutions, and its existing and prospective customers
in Ukraine and the United States. The office would engage
in representative functions in connection with the activities
of Bank, solicit new business, provide information to
customers concerning their accounts, promote business
investment in and trading opportunities with Ukraine,
conduct research, and receive applications for extensions of
credit and other banking services on behalf of Bank.
Under the IBA and Regulation K, in acting on an
application by a foreign bank to establish a representative
office, 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. 4 The
1. 12 U.S.c. § 3107(a).
2. Unless otherwise indicated, data are as of December 31, 2006.
3. Bank is wholly owned by the government of Ukraine and
operates as a commercial bank in addition to promoting trade by and
with Ukrainian companies.
4. 12 U.S.c. § 3107(a)(2); 12 CFR 211.24(d)(2). 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

Legal Developments: Third Quarter, 2007 Cl53

Board also considers additional standards set forth in the
IBA and Regulation K. 5 The Board considers the supervision standard to have been met when 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 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. 7
In connection with this application, Bank has provided
certain commitments that limit the activities of the representative office. It has committed that the representative
office would engage only in certain specified activities and
would not make credit decisions; solicit or accept deposits;
process or initiate transactions on behalf of Bank; or
engage in activities related to securities trading, foreign
exchange, or money transmission.
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. Bank
is supervised by the National Bank of Ukraine ("NBU"),
which is responsible for the regulation and supervision of
financial institutions operating in Ukraine and is in the
process of enhancing its supervisory framework. The NBU
issues rules and implements regulations concerning accounting requirements, asset quality, management, operations,
capital adequacy, loan classification, and loan-loss-reserve
requirements. In addition, the NBU has authority to order
corrective measures, impose sanctions, and assume management of a financial institution or liquidate it.
The NBU supervises and regulates Bank in Ukraine
through a combination of on-site examinations and off-site
monitoring. On-site examinations are conducted biennially
and cover capital adequacy, asset quality, profitability,
liquidity, and compliance with the law. If necessary, the
NBU can also conduct special on-site examinations. The
NBU conducts off-site monitoring of Bank through the
review of required daily, monthly, and quarterly reports. An
external audit is also part of the supervisory process and
must be conducted at least annually.
Based on all the facts of record, including the commitments provided by Bank limiting the activities of the
comparable infonnation 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. No single factor is essential, and other elements may
inform the Board's determination.
5. 12 U.S.C. § 3105(d)(3)--(4); 12 CFR 211.24(c)(2)--(3).
6. See. e.g., Victoria Mutual Building Society, 93 Federal Reserve
Bulletin C106, footnote 6 (2007); Banco Financiera Comereial Hondurena, 91 Federal Reserve Bulletin 444 (2005); Jamaica National
Building Society, 88 Federal Reserve Bulletin 59 (2002).
7. 12 CFR 211.24(d)(2).

proposed office, 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 have also been taken into account. 8 The
NBU 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. 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.
Although Ukraine is not a member of the Financial
Action Task Force ("FATF"), Ukraine has enacted laws
based on the general recommendations of the FATF. Additionally, Ukraine participates in international fora that
address the prevention of money laundering. 9 Money laundering is a criminal offense in Ukraine, and banks are
required to establish internal policies and procedures for
the detection and prevention of money laundering. 10 Legislation and regulations require banks to adopt know-yourcustomer policies, report suspicious transactions, and maintain records. Bank has established anti-money-Iaundering
policies and procedures, which include the implementation
of know-your-customer policies, suspicious activity reporting procedures, and related training programs and manuals.

8. See 12 U.S.c. §3105(d)(3)--(4); 12 CFR 211.24(c)(2)--(3). These
standards include: whether the bank's home-country supervisor has
consented to the establishment of the office; the financial and managerial resources of the bank; whether the bank has procedures to combat
money laundering, whether there is a legal regime in place in the horne
country to address money laundering, and whether the home country is
participating in multilateral efforts to combat money laundering;
whether the appropriate supervisors in the home country may share
information on the bank's operations with the Board; whether the bank
and its U.S. affiliates are in compliance with U.S. law; the needs of the
community; and the bank's record of operation.
9. Ukraine is party to the 1988 United Nations Convention Against
the lIIicit Traffic of Narcotics and Psychotropic Substances, the United
Nations International Convention Against Transnational Organized
Crime, the United Nations International Convention for the Suppression of the Financing of Terrorism, and the Council of Europe
Convention on Laundering, Search, Seizure, and Confiscation of
Proceeds from Crime.
10. In 2001 and 2002, Ukraine was designated by the FATF as a
non-cooperative country. In response, Ukraine enacted legislation to
strengthen its anti-money-laundering regime in 2002 and 2003. Among
other measures, the legislation expanded the definition of money
laundering, strengthened enforcement, and established a financial
intelligence unit, the State Committee for Financial Monitoring. As a
consequence of these improvements, Ukraine was removed from the
list of non-cooperative countries by the FATF on February 27,2004. In
light of these and other actions taken by Ukraine to strengthen its
anti-money-laundering policies and procedures, including identifying
terrorist financing as a separate crime, the Board believes that factors
related to anti-money-laundering are consistent with approval of the
application to establish a representative office.

C154

Federal Reserve Bulletin 0 December 2007

Bank's internal and external auditors review compliance
with requirements to prevent money laundering.
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 lBA, 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 NBU 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
establish the representative office 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. 11 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 conditions imposed in this order and the
commitments made to the Board in connection with this
application. 12 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 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 August 17,2007.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board
II. See 12 CFR 265.7(d)(I2).
12. 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, to
license the proposed office of Bank in accordance with any tenns or
conditions that it may impose.

FINAL ENFORCEMENT DECISION
ISSUED BY THE BOARD

THE MATTER OF

Michelle M. Moore, Former InstitutionAffiliated Party of RBC Centura Bank,
Rocky Mount, North Carolina, Respondent
Docket Nos. 06-035-E-l A, 06-035-B-l
FINAL DECISION
This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ("the PDI Act") in which the
Board Enforcement Counsel seeks to prohibit the Respondent, Michelle M. Moore ("Respondent"), from further
participation in the affairs of any financial institution and to
require her to pay restitution based on actions she took
while employed at RBC Centura Bank, Rocky Mount,
North Carolina (the "Bank").
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 "AU"), and orders the
issuance of the attached Order of Prohibition and to Cease
and Desist.

1. STATEMENT OF THE CASE
A. Statutory and Regulatory Framework
Under the PDI Act and the Board's regulations, the AU is
responsible for conducting proceedings on a notice of
charges relating to a proposed order requiring payment of
restitution or prohibition from banking (12 U.S.C.
§§ 1818(b), 1818(e)(4)). The AU issues a recommended
decision that is referred to the Board 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 the requested
orders (12 CPR 263.38).
The PDI 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 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. § 1818(e)(l)(AHC)).

Legal Developments: Third Quarter, 2007

The FDI Act also spells out the requirements for an order
requiring restitution, which is a type of cease-and-desist
order under the Act. Specifically, a cease-and-desist order
may be imposed when the agency has reasonable cause to
believe that the respondent has engaged or is about to
engage in an unsafe or unsound practice in conducting the
business of a depository institution, or that the respondent
has violated or is about to violate a law, rule, or regulation
or condition imposed in writing by the agency (12 U.S.C.
§ 1818(b)(1)). Such an order may require the respondent to
make restitution if the respondent was "unjustly enriched"
in connection with the violation or practice, or the violation
or practice in involved "reckless disregard" of the law or
applicable regulations or a prior agency order (12 U.S.c.
§ 1818(b)(6)(A)).
An enforcement proceeding is initiated by filing and
serving on the respondent a notice of intent to prohibit.
Under the Board's regulations, the respondent must file an
answer within 20 days of service of the notice (12 CFR
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
263. 19(c)(1)).
B. Procedural History
On January 5, 2007, the Board issued a Notice ofIntent to
Prohibit and Notice of Charges and of Hearing ("Notice")
that sought an order of prohibition against Respondent
based on her conduct while employed at the Bank, and an
order requiring her to make restitution to the Bank. A Board
investigator, under the direction of Enforcement Counsel,
personally served the Notice on Respondent on January 19,
2007. Respondent acknowledged that she had received the
Notice in two subsequent voice mail messages to Enforcement Counsel. 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 263.19, and warned that
failure to do so would constitute a waiver of her right to
appear and contest the allegations. Nonetheless, Respondent failed to file an answer within the 20-day period or
thereafter.
On March 29, 2007, Enforcement Counsel filed a Motion
for Entry of an Order of Default against Respondent. On
April 12, 2007, the AU issued an Order to Show Cause,
providing Respondent until May 1, 2007, to file an answer
to the Notice and to show good cause for having failed to
do so previously. The Order was delivered by overnight
delivery to Respondent's address. 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
teller and then a Customer Service Officer for Bank from
May 2001 through May 2004. Her duties included oversee-

C155

ing the balancing of other tellers' cash supply and accounting for cash at the branch at which she worked. By virtue of
her position, she had access to the cash drawers and cash
vault of the branch. By using that access, Respondent was
able make unauthorized withdrawals of over $66,000 from
an account of one customer, using the proceeds for her own
purposes. She concealed her activity by changing the
address field for statements so that the statements no longer
were sent to the customer's home. When the customer
noticed she was no longer receiving statements, she spoke
to Respondent about the problem. Respondent subsequently sent a letter on Bank letterhead falsely informing
the customer that the account contained over $107,000,
when in fact its funds were reduced by the amounts that
Respondent had stolen. Shortly thereafter, Respondent
made an unauthorized withdrawal from another customer's
account and deposited the proceeds into the account of the
first customer. Within a few weeks, however, the defalcation in the first customer's account was discovered by
another Bank employee, and Respondent abruptly resigned.
The Bank restored its customers' accounts for the amounts
embezzled by Respondent, and froze Respondent's personal account at Bank. As a result of these actions, Bank's
total loss was approximately $59,823.53.

II. DISCUSSION
The Board 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 263. 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. [d.
In this case, Respondent failed to file an answer to the
Notice despite notice to her of the consequences of such
failure, and also failed to respond to the AU'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. § 18l8(e). It was
a breach of fiduciary duty, unsafe and unsound practice,
and violation of law or regulation, for Respondent to make
unauthorized withdrawals from customers' accounts and to
use Bank systems to conceal her actions. Respondent's
actions resulted in loss to the Bank and financial gain to the
Respondent, in that the Respondent used the proceeds for
her own purposes and the Bank was forced to repay its
customers for the amounts embezzled by Respondent.
Finally, such actions also exhibit personal dishonesty and
willful disregard for the safety and soundness of the Bank.

C156

Federal Reserve Bulletin 0 December 2007

For the same reasons, the allegations in the Notice meet
all the criteria for the entry of an order requiring restitution.
Respondent engaged in an unsafe or unsound practice and a
violation of law when she made unauthorized withdrawals
from customers' accounts, and she was unjustly enriched
by her actions in that she used the proceeds of her
defalcation for her own purposes.
Accordingly, the requirements for an order of prohibition and for an order for restitution 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 and Order to Cease and
Desist.
By Order of the Board of Governors, this ninth day of
July, 2007.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
JENNIFER J. JOHNSON

Secretary of the Board

ORDER OF PROHIBITION AND TO CEASE AND
DESIST
WHEREAS, pursuant to sections 8(b) and 8(e) of the
Federal Deposit Insurance Act, as amended, (the "FDI
Act") (12 U.S.C. § 18l8(b) and (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 and to Cease and
Desist should issue against MICHELLE M. MOORE
("Moore"), a fonner employee and institution-affiliated
party, as defined in Section 3(u) of the FDI Act (12 U.S.c.
§ 1813(u»), of RBC Centura Bank, Rocky Mount, North
Carolina.
NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the FDI Act, 12 U.S.C. § l818(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)), Moore 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 liInited 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 FOI Act (12 U.S.c.
§ l818(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 FDIAct (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. § 18l8(e)(7)(A)).
2. On or before the effective date of this Order, Moore shall
make restitution to the Bank in the sum of $59,823.53
for its loss as a result of Moore's violations and unsafe
or unsound practices.
3. Any violation of this Order shall separately subject
Moore to appropriate civiI or criminal penalties or both
under section 8 of the FDI Act (12 U.S.C. § 1818).
4. This Order, and each and every provision hereof, is and
shall remain fully effective and enforceable until expressly stayed, modified, tenninated or suspended in
writing by the Board.
This Order shall become effective at the expiration of 30
days after service is made.
By Order of the Board of Governors, this ninth day of
July, 2007.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
JENNIFER J. JOHNSON
Secretary of the Board

Index

A
ARTICLES
Industrial Production and Capacity Utilization:
The 2006 Annual Revision
Profits and Balance Sheet Developments at U.S.
Commercial Banks in 2006
2006 HMDA Data, The
U.S. Cross-Border Derivatives Data: A User's Guide
Avery, Robert B., article

A17-35
A37-71
A73-109
AI-16
A73-109

B
BALANCE of payments, U.S
A2, A4, A12
Balance sheet developments, commercial banks
A39--48
Bank Holding Company Act of 1956, orders issued under
1st Source Corporation
C77-80
CI-2
AFNB Holdings, Inc
Banco Mercantil del Norte, S.A., Nuevo Leon, Mexico .. Cl4-16
Bank of America Corporation
C49-59, C109-17
C8D-87
Bank of New York Mellon Corporation, The
Bank of Nova Scotia, The, Toronto, Canada
C136--43
Banorte USA Corporation
Cl4-16
C-B-G, Inc
,
C8S-90
C2-9
Capital One Financial Corporation
Citizens Banking Corporation
C9-13
Community Bankshares, Inc
C59-62
C9D-94
First Busey Corporation
Grupo Financiero Banorte, S.A. de c.v., Nuevo Leon,
Cl4-16
Mexico
Huntington Bancshares Incorporated
C94-102
IBT Holdings Corp
C62-65
Industrial Bank of Taiwan Co., Ltd., The, Taipei,
Taiwan
C62-65
Cl4-16
lnstitucion de Banca Multiple, Nuevo Leon, Mexico
Mercantile Bancorp, Inc
C118-20
National City Corporation
C44-48, C127-33
Penguin Acquisition, LLC
C94-102
PNC Financial Services Group, Inc., The
C65-70
C16--41
Regions Bank
Regions Financial Corporation
C16--41
Sky Financial Group, Inc. ..
C42--44
Wells Fargo & Company
C121-27
Bank Merger Act of 1960, orders issued under
County Bank
CI43--46
Cl46-50
East West Bank
Banking industry, U.S.
Profits and balance sheet developments
A49-60
Reports on condition of
BI-12
Brevoort, Kenneth P., article
A73-109

C
CANNER, Glenn B., article
A73-109
Capacity utilization (See Industrial production and capacity
utilization)
Capital, commercial banks
A47
Carlson, Mark, article
A37-71
Commercial and industrial (C&I) loans
A53
Commercial banks
Article
,
A37-71
Balance sheet developments
A39--48
Capital
A47
A47--48
Derivatives, holdings of
Interest income and expense
A5D-51
International operations .. "
A58
A46--47
Liabilities
Loans and performance
A40--46, A52-56

Non-interest income and expense
Securities, holdings of
Securitized loans
Subprime mortgages, delinquency rates
Syndicated loans
Commercial real estate loans
Condition of U.S. banking industry, reports
Contracts
Derivatives, types of
Credit (See Loans)
Credit quality, subprime mortgages
,
Curcuru, Stephanie E., article

A51-52
A46
A55-56
A49-50
A42
A53-54
BI-12
A2, A3
,

A56-57
A1-16

D
DELINQUENCY rates, subprime mortgages
A56--57
Derivatives
AI-16
Article
Bank holdings of
A47-48
Contract types
A2, A3
Cross-border transactions
A1-16
Implied valuation change
A15
International transactions accounts
AI0
Reports, other
A13
TIC form D
A2, A8-12
Treasury International Capital (TIC) reporting system
Al

E
ENFORCEMENT actions (See Litigation, final enforcement
decisions)

F
FEDERAL Reserve Act, orders issued under
First State Bank
Financial holding company, definition of complementary
activity
Foreign investments (See International investments)

C103-04
C133-36

G
GILBERT, Charles, article

A17-35

H
HEALTH insurance, definition of complementary
activity for financial holding company
C133-36
Home Mortgage Disclosute Act (HMDA) 2006 data,
article
,
A73-109
Home Ownership and Equity Protection Act
(HOEPA)
A79, A86--88
Households, loans to
A44-45, A54-55

I
IMPLIED valuation change
Industrial production and capacity utilization
Article, 2006 annual revision
Capacity and capacity utilization
Industrial production
Technical aspects of the revision .. , '" .,
Interest income and expense, commercial banks
International Banking Act, orders issued under
Banco Santander Totta, S.A., Lisbon, Portugal
Bank of Nova Scotia, The, Toronto, Canada
Caixa Economica Federal, Brasilia, Brazil
Royal Bank of Scotland pIc, The, Edinburgh,
Scotland
State Export-Import Bank of Ukraine, The, Kiev,
Ukraine
Victoria Mutual Building Society

Al5
A17-35
A21-22
A18-21
A22-28
A5D-51
C71-73
C73-74
C15D-52
ClO4-06
C152-54
ClO6-08

Federal Reserve Bulletin D 2007

International
International
International
International

investment position, U.S
investments, cross-border
operations, U.S. commercial banks
transactions accounts, derivatives

A6-7, AI2-13
A1-16
A58
AI0

L
LEGAL developments,
(See also Bank Holding Company Act, orders issued under;
Federal Reserve Act, orders issued under; International
Banking Act, orders issued under; Litigation, final
enforcement decisions)
First quarter, 2007
C49-76
CI-48
Fourth quarter, 2006
Second quarter, 2007
C77-108
Third quarter, 2007
C109-56
A46-47
Liabilities, commercial banks
Litigation, final enforcement decisions
C75-76
Civitas BankGroup, Inc
Moore, Michelle M
C154-56
C75-76
Morgan, Seresa T.
RBC Centura Bank
C154-56
Loans
'"
,
A40-44
Business
Commercial and industrial
A53
Commercial real estate
A53-54
A44-45, A54-55
Household
Loss provisioning
" . A56-58
Mortgages, subprime
A56-57
Performance
" ,. "
,. "
A52-53
Securitized
A55-56
Syndicated
A42

M
MORTGAGE loans
Home Mortgage Disclosure Act (HMDA) 2006 data,
article
Subprime, delinquency rates

A73-109
A56-57

N
NON-INTEREST income and expense, commercial
banks

A51-52

o
OTOO, Maria, article

A17-35

P
PRODUCTION (See Industrial production and capacity
utilization)
Profits and balance sheet developments at U.S.
commercial banks in 2006, article

A37-71

R
REAL estate loans, commercial
Regulations, Board of Governors
C, Home Mortgage Disclosure
Reports on the condition of the U.S. banking industry
First quarter, 2006
Second quarter, 2006

A53-54
A73-109
B1---{)
B7-12

S
SECURITIES, commercial bank holdings of
Subprime mortgages, delinquency rates

A46
A56-57

T
TIC form D
Treasury International Capital (TIC) reporting system
Treasury securities, yield curve

A2, A8-12
AI
A91

u
U.S. balance of payments
A2, A4, A12
U.S. commercial banks, article on profits and balance
sheet developments in 2006
A37-71
U.S. cross-border derivatives data: a user's guide,
Al-16
article
U.S. international investment position
A6-7, A12-13

W
WEINBACH, Gretchen C., article
WellPoint, Inc., financial holding company

y
YIELD curve, Treasury securities

A37-71
C133-36
A91

INSPECTOR GENERAL HOTLINE

(800) 827-3340
You may use this number to report suspected instances of impropriety, wrongdoing, fraud, waste, and abuse in programs and operations administered or financed by the Federal Reserve Board.

Full text of Federal Reserve Bulletin : Compilation 2007

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