Federal Reserve Bulletin, 2007-01

2007 Compilation Federal Reserve ~ B U L L E T I N

The Federal Reserve Bulletin (ISSN 0014-9209) is published annually by the Board of Governors of the Federal Reserve System, Washington, DC 20551, and may be obtained from Publications Fulfillment, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551. Calls pertaining to orders should be directed to Publications Fulfillment (202) 452-3245. E-mails should be sent to Publications BOG@frbog.frb.gov. The Federal Reserve Bulletin may also be obtained by using the publications orderform available on the Board's website, at wwwJederalreserve.gov/pubs/order. The price in the United States and its commonwealths and territories, and in Bolivia, Canada, Chile, Colombia, CostaRica, Cuba,Dominican Republic, Ecuador, Guatemala, Haiti, Republic ofHonduras, Mexico, Nicaragua, Panama, Paraguay, Peru, El Salvador, Uruguay, and Venezuela is $25.00percopy; elsewhere, $35.00percopy. Remittance should be made payableto the orderofthe Board ofGovernors ofthe Federal Reserve System in a form collectible atpar in U.S. currency. The content ofthe Federal Reserve Bulletin is also published, as it becomes available, on the Board's website, at wwwJederalreserve.gov/pubslbulletin.

Volume 93 D 2007 Compilation Federal Reserve B U L L E T I N Board ofGovernors ofthe Federal Reserve System, Washington, D.C.

PUBLICAnONS COMMITTEE Rosanna PianaltoCameron, Chair D ScottG. Alvarez D SandraF. Braunstein D RogerT. Cole D MaureenT. Hannan D Jennifer1. Johnson D Brian F. Madigan D Stephen R. Malphrus D H. Fay Peters D LouiseL. Roseman D D. Nathan Sheets D Michelle A. Smith D David1. Stockton TheFederalReserveBulletinisissuedannuallyunderthedirectionofthestaffpublicationscommittee.Thiscommitteeisresponsibleforopinionsexpressedexceptin officialstatementsandsignedarticles.ItisassistedbythePublicationsDepartmentunderthedirectionofLucretiaM.Boyer.

Table of Contents PREFACE ARTICLES u.s. Cross-Border Derivatives Data: A User's Guide. ........................................ Al 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 .... A37 Mark Carlson an.d Gretchen C. Weinbach July 12 The 2006 HMDA Data ................................................................... A73 Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner December21 REpORTS ON THE CONDITION OF THE U.S. BANKING INDUSTRY First Quarter, 2006 BI April 11 Second Quarter, 2006 B7 June27 LEGAL DEVELOPMENTS Fourth Quarter, 2006 ..................................................................... CI March6 First Quarter, 2007 C49 June8 Second Quarter, 2007. .................................................................... C77 October 12 Third Quarter, 2007 CI09 December28 INDEX DI

- 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 ajournal ofrecord, 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, andenforcementactions. Starting in 2004, the Bulletin was published quarterly rather than monthly. In 2006, in response to the increased use ofthe Internet-and in order to release articles and reports in a more timely fashion-the Board discontinued the quarterly print version ofthe Bulletin and began to publish the contents ofthe 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 printcompilation. The tables that appeared in the Financial and Business Statistics section ofthe Bulletin from 1914 through 2003 are now published monthly as a separate print publication, the Statistical Supplement to the Federal ReserveBulletin. 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, andspeeches. The message provides abriefdescription anda link to the recentposting. FederalReserveBulletin: www.federalreserve.gov/pubs/bulletin StatisticalSupplement to theFederalReserveBulletin: www.federalreserve.gov/pubs/supplement/default.htrn Subscribe to e-mail notification service: www.federalreserve.gov/generalinfo/subscribe/notification.htm.

Articles

AI May 2007 u.s. Cross-Border Derivatives Data: A User's Guide Stephanie E. Curcuru, of the Board's Division of 1. Gross marketvalueand notionalvalueofglobal International Finance, preparedthis article. Jonas J. derivativesoutstanding, 1998-2006 Robison provided research assistance. Trillionsoru.s.dollars TrillionsofU.S.dollars The global derivatives market has grown rapidly in 450 the past decade. By one measure ofmarket size-the 10 400 notional value, which is u ed to determine the pay ments made on a derivatives contract-the deriva 350 8 tives marketexpanded from $87 trillion in June 1998 300 to $454 trillion inJune 2006 (figure 1).1 Measured by 6 250 the price at which a derivatives contract can be purchased in a current transaction, or the market 200 4 value, the derivatives market grew from $3 trillion in 150 2 June 1998 to 10 trillion as ofJune 2006. 100 Available data suggest that cross-border deriva I I I I I I I I I I I tivesdeals-in which a residentofonecountryenters 1998 2000 2002 2004 2006 into a contract with a resident of another country Non: The data are semiannual and extend through June 2006. Gross make up a substantial share of derivatives transac marketvalueisthesumofthetotalgrosspositivemarketvalueofcontracts with all counterparties and the absolute value of the total gross negative tions.2 Recognizing this fact, the International Mon market valueofcontractswith nonreportingcounterparties.Thetermgross etary Fund (IMF) has recommended that its member indicates that for multiplecontracts with the same counterparty, contract withpositivemarketvalue andcontractswithnegativemarketvaluesarenot countries include cross-border derivatives in their netted.Foranexplanationofnotionalvalue,refertotextnote I.Toadjustfor reports on external-sector finances.3 Many countries double counting. the notional values ofcontracts with reporting counter· partiesaredividedby2. with financial services firms active in the derivatives SOURCE: BankforInternationalSettlements. market have included derivatives in these reports sincethe mid-1990s. The United States, however, has border derivatives because ofthe limited availability to date published very little information on cros - 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 I. Thenotionalvalueofaderivativeis pecifiedinthecontractand servesasonebasisforcomputingthepaymentsmadeonthecontract. derivatives. Forexample, foracontractknownas a foreign exchange forward, in To address these gaps in data and reporting, the whichtwopartiesagreetoexchangeanamountofcurrencyatafuture U.S. DepartmentoftheTreasury, theFederal Re erve date,thenotional valuei theamountofcurrencytobeexchanged. 2. Forexanlple, data for the United J<jngdom indicatethat cro s Bank of New York, and the Federal Reserve Board border derivatives with a positive market value to the domestic began collecting data on U.S. cross-border transac counterparty totaled $1.8 trillion in that country at the end of2005. RefertoOfficeof ationalStatistics(2006).UllitedKillgdomBa/allce tions and positions in derivatives in March 2005. ofPaymellls: The PillkBook2006( ew York: Palgrave Macmillan). They collect the data through the Treasury Interna Data for other countries are available in the Ba/allce ofPaymellts tional Capital (TIC) reporting system, which for Statistics Yearbook. publishedannuallybythe International Monetary many years has collected imilar data for securities Fund. 3. In 1993 the lMF recommended including derivatives as a line such as stocks and bonds.5 Because existing TIC itemunderthereportingcategoryof"portfolioinvestment";in 1998it further recommended that member countries report such data as a separatereportingcategory-"financialderivatives."RefertoInterna 4. Some cross-border transactions in exchange-traded futures are tional Monetary Fund(1993),1MFBa/allceofPaymelllsManuaL, 5th includedinthequarterly U.S.balanceofpaymentsdata,table8a,line ed. (Washington: IMF); and International Monetary Fund (1998), B18("Commercialliabilities;Advancereceiptsandotherliabilities"), "Financial Derivatives,"paperprepared for the Eleventh Meetingof availableatwww.bea.gov/international. the IMF Committee on Balance of Payments Statistics, held at the 5. TheTIC reporting system collects information on cross-border International Monetary Fund,Washington,Oct.21-23, www.imf.org/ transactions in, and holding of, portfolio securities and on other externallbopage/agenda.htm. claims and liabilities, including deposits. Reports are filed by banks

A2 Federal Reserve Bulletin 0 May 2007 reporting forms were ill equipped to capture cross stock or bond), referred to as the "underlying." border derivatives transactions and positions, the Anything that can be measured can serve as the Treasury developed a new form specifically for this underlying to a derivative. The underlying can be the purpose-TIC form D. price of a stock, the yield on a bond, a credit rating, This article introduces the new data collected by the valueofan index, oreven something moreexotic, form D and provides helpful information for data like the average temperature in a region over a given users. The article begins with a discussion of the period. relevance of derivatives to the U.S. external-sector Common types ofderivatives include options, for reports published by the U.S. Department of Com wards, futures, and swaps. In an options contract, the merce,BureauofEconomicAnalysis.Todate, deriva buyer pays an up-front premium for the right, but not tives have been largely excluded from these reports. the obligation, to purchase or sell a specified quantity The article explains in detail the effects ofthe exclu ofthe underlying at a specified price on (or, in some sion on two such reports-the U.S. balance of pay contracts,until)theexpirationdate. Thetwopartiesto ments and the U.S. international investment position. aforward orfutures contractagree toexchangeassets In particular, it shows how the omission of deriva or theircash equivalentat, or until, a future date. The tives from reports on cross-borderflows and holdings two partiesto aswap agree toexchangeassetsortheir can lead to mistaken inferences about what is driving cash equivalent periodically until a future date (for changes in the international investment position of more information, referto box "Overview ofDeriva the United States. The implications of the analysis tives"). extend beyond the omission ofderivatives. Theeffect of any other systematic omission of data on the The U.S. Balance ofPayments external-sector reports may be similar. The article then summarizes the information col Acountry's balance ofpayments (BOP) is the record lected by form D and shows how the data will of the economic transactions between its residents improveexternal-sectorreporting. Italso presents the and those of the rest of the world in a given period. 2006 data and discusses their relation to the deriva The Bureau of Economic Analysis (BEA) publishes tives data reported by other countries. The article the U.S. BOPquarterly in three sections: the current concludes with a discussion ofthe use of the data to account, the capital account, and the financial ac estimate risk exposures. Because the terminology count.6 The current account records transactions in associated with derivatives can be somewhat daunt goods and services, income, and unilateral transfers ing, detailed definitions are provided in the boxes between residents of the United States and nonresi accompanying the main text. dents. Items recorded in the capital account include nonproduced assets and other capital transfers, such DERNATIVES AND THE U.S. EXTERNAL as debt forgiveness and transfers ofgoods and finan SECTOR REPORTS cial assets by foreign residents as they enter or leave the United States. Transactions in the current and The purpose ofTIC form D is to collect the informa capital accountsgiveriseto financial flows, which are tion needed for the inclusion ofcross-border deriva recorded, in tum, in the financial account. The finan tives transactions and holdings in U.S. external-sector cial account also records cross-border transactions reports. This section examines the effect ofthe inclu arising from trade in financial instruments such as sion of derivatives data in external-sector reports stocks and bonds, including transactions associated through examples of accounting entries in two such with the purchase or sale of the securities and those reports. Theexamples illustratethe currentandfuture associated with payment for them. treatment of derivatives transactions in the U.S. bal Transactions in the BOP accounts are recorded as ance of payments as well as the current and future credit or debit entries (refer to box "Accounting in treatment ofderivatives holdings in the U.S. interna the U.S. Balance of Payments"). Credit entries are tional investment position. given a positive sign, and debit entries a negative sign.Transactionsthatgenerateareceiptoffunds into Types ofDerivatives the United States, such as an export, the sale of a security to a foreign resident, the withdrawal ofU.S. A derivative is a financial contract whose value is depositsfrom aforeign bank, andthedepositoffunds derived from something else (such as the value of a andbankholdingcompanies;securitiesbrokers,dealers,andcustodi 6. Before 1999, the BOP had only two sections-the current ans; and nonfinancialcompanieswithsizablecommercialorfinancial account and the capital account. The capital account included items claimsandliabilitiesvis-a-visforeign residents. thatnowappearinthefinancial account.

u.s. Cross-Border Derivatives Data: A User's Guide A3 Overview of Derivatives A derivatives contract can take many forms, but each Futures Contract form hasonething incommon-thevalueofthecontract Afutures contract is similarto aforward contract, but it is derived from something else, such as the value of a trades on an organized exchange with standardized con stockorbond; that "somethingelse" is referred to as the tractterms, including maturitydate and quantity. Futures underlying. As noted in the main text, anything that can are subject to daily settlement to limit credit exposure. be measured can serve as the underlying to aderivative. Eachday,thecurrentvalueofthecontract,the "variation The following discussion covers several common types margin," is added to or subtracted from the owner's ofderivatives, theirassociatedcash flows, andtheiruses. account, thereby returning the value of the contract to Most other types of derivatives are variants of those zero. Traders are required to maintain enough funds on discussed here. deposit inamargin accounttocoverpotentiallosses. As with forwards and swaps, futures are also typically Forward Contract zero cost.2 However, because ofdaily settlement, many cash flows occur between the purchasedate and the sale Aforward contract is an agreement to purchase orsell a or maturity date. Futures can be used for the same specified quantity of an underlying asset or its cash hedging purposesas forwards. equivalentat astated priceon the given maturity date of the contract. Forwards trade in the over-the-counter Option Contract (OTC) market, in which contract terms are negotiated between each pair ofcounterparties. Forwards typically The owner of an option has the right, but not the haveazeroinitial costto thecontractingparties-thatis, obligation,to purchase(call option)orsell (putoption)a the counterparties set the delivery price so that each is fixed quantity ofthe underlyingasset at a predetermined willing to enter into the contract without an initial pay price, the strike price, on a predetermined date, the ment.Theonlypaymentison thematuritydate,whenthe exercisedate. Unlikeforwards, swaps,and futures, which counterpartieswill eitherexchangetheassetsspecifiedin are typically zero cost, options can have a sizable initial thecontractortheircashequivalent.' cost, or premium. To the option purchaser, the option Forwards can be used to lock in, or "hedge," future premiumrepresentsthe maximumpotentialloss, whereas expenses.They provide protection againstfuture adverse forforwards, swaps,andfutures,thelosspotentialofboth movements in the valueofthe underlyingasset, butthey counterparties is unlimited. A call (or put) option has dosoattheexpenseoflosing futuregainsfrom favorable value if the possibility remains that the price of the movements. For example, consider a firm that imports underlyingwillbeabove(orbelow)thestrikepriceonthe products into the United States. Ifthe value ofthe U.S. exercisedate. An option is "in the money" ifthecurrent dollarfalls relativetotheforeign currency,thedollarcost price of the underlying is above (call option) or below of the imported products will rise. To limit potential (put option) the strike price. Options trade in the aTe lossesfromexchangeratemoves,thefirmcanenterintoa market, with customized contractterms between the two foreign exchange forward contract to exchange a speci parties; and on exchanges, with standard contract terms, fied quantityofU.S.dollars foraspecifiedquantityofthe such as setdates, strikes,and notional amounts. foreign currency at a future date, thereby locking in the For calls and puts, one of three scenarios is possible exchangerate. beforeoron theexpirationdate. Iftheoptionis sold,the saleproceedsaretransferredtotheowner.Iftheoptionis Swap Contract in the money on theexpirationdate,funds aretransferred to the owner, and the amount transferred corresponds to A swap contract is basically a series of forwards, aU thedifferencebetweenthestrikepriceandthepriceofthe with the same delivery price and quantity. As with underlying, multiplied by the quantity of the underlying individual forwards, swaps trade in the aTe market, specifiedin thecontract.3Ifthe optionexpires worthless, and many are zero cost. Interest rate swaps are com nofunds aretransferred. monly used to change the flows of claims or liabilities Optionscan be used for thesamehedging purposes as from fixed to floating, or vice versa. For example, if a otherderivatives. Forexample, a firm seeking protection firm desires a loan with a fixed interest rate but can against adverse exchange rate movements can enterinto obtain a more favorable loan with a floating rate, the an option contractto exchangeaquantity ofcurrency or firm may choose the floating-rate loan and then enter its cash equivalent at a future date if the exchange rate into an offsetting swap agreement in which it pays a moves beyond thestrikeprice. fixed rate and receives a floating rate. Because aswap is equivalent to a series of forwards, the counterparties 2. Forexchange-tradedderivatives,aninitialmargindepositisrequired will exchange assets or their cash equivalents periodi beforethestartoftrading.Unlessitisintheformofsecurities,thedeposit cally over the life of the contract. isrecordedasabankingtransaction,notaderivativestransaction.When securitiesare usedas margin deposits, nobankingorothercategoryof transactionisrecorded. 3. Thisexampleassumesthattheoptioncontractspecifiescashsettle ment as opposed to physical settlement. Ifthe option underlying is an I. Generally, forward contractsare not sold before maturity. Instead, equity or commodity. physical settlement will involve actual physical oneorboth panies to the contractwill enterintoan offsettingcontract delivery of the underlying, whereas cash settlement will involve an withathirdparty. exchangeofcashequaltotheintrinsicvalueoftheoption.

A4 Federal Reserve Bulletin D May 2007 Accounting in the U.S. Balance of Payments Transactions in the U.S. balance ofpayments (BOP) are liabilities to foreign residents will fall to zero (a debit recorded on the basis of the double-entry system of entry) and its bank's liabilities to foreign residents will accounting.I In this system all transactions are classified increase(acreditentry).The means by which U.S. bank asdebitsorcredits. Foreverydebitentry there mustbea liabilities increase may not be obvious. The increase corresponding creditentry; hence the term double entry. occurs because the U.S. investor could extinguish its Corporations use this accounting method in preparing liability by issuing a check against its account at a U.S. their financial statements. In corporate financial state bank,whichtheforeigninvestorwoulddepositatitslocal ments, receipts and expenses, as well as assets and bankabroad. Thatbankwould, in tum, presentthecheck liabilities, are shown as positive numbers, and balances to theU.S. investor's U.S. bankfor settlement.Thus, the are derived through subtraction. For example, expenses series oftransactions ultimately results in an increase in are deducted from receipts to derive net income, and foreign bank claims on U.S. banks and an increase in liabilitiesaredeductedfrom assetstoderivenetworth. In U.S. holdingsofforeign securities. the BOPthe convention is somewhat different. Transac The BOP uses a similar accounting treatment for tions that generate credit entries in an accounting sense imports or exports ofgoods and services. When a busi (increasesinliabilitiesordecreasesinassets, orincreases ness purchases goods from a foreign resident, U.S. in revenues or decreases in expenses) are shown with a importswillrise(adebitentryintheBOP),andliabiHties positivesigninthebalanceofpayments,andtransactions to foreign residents will also rise because of the new that generate debit entries (decreases in liabilities or obligationto pay for the importedgoods (acreditentry). increases in assets, ordecreases in revenues or increases When the U.S. importer pays for those goods, its own inexpenses)areshown with anegativesign; the positive liabilities to foreign residents fall to zero (adebit entry), and negative entries are added to derive BOP balances, and its bank's liabilities to foreign residents increase (a such as the balance in the current account, the capital creditentry). account,orthe financial account. A transaction may be recorded in one or more BOP A single international transaction will frequently in accounts depending on the type of transaction. Some volvefourparties-apurchaser,aseller,andtheirrespec transactions, such as the purchase of a foreign bond, tive banks-and each party that is a U.S. resident will result in only financial account entries, whereas others, contribute one or more entries to the BOP, possibly in suchastheimportationofgoods,resultinentriesin more more than one accounting period. For example, when a than one set of accounts (in the example of goods U.S. resident purchases a bond from a foreign resident, purchased from a foreign resident, both the current U.S. holdings offoreign securitieswill rise (adebitentry accountandthefinancialaccountrecordedentries). None in the BOP) and liabilities to foreign residents will also theless, transactions summed across all BOP accounts rise in recognition of the new obligation to pay for the should equal zero because, in principle, each transaction bond(acreditentry).When the U.S. investorpaysforthe should have a corresponding positive or negative entry. bond in the subsequent accounting period, its own Incompleteorerroneousinformationaffects the "statisti cal discrepancy" in the BOP. The statistical discrepancy isderived bysummingallrecordedBOPtransactionsand I.Additional informationis in BureauofEconomicAnalysis(1990), reversingthesignofthetotal; itreflectsthe(net)valueof TheBalanceofPaymentsofthe UnitedStates: Concepts, DataSources, all BOPentriesduring agiven period that were notfully andEstimatingProcedure (Washington: BEA,May), www.bea.gov/scb/ pdf/internatlbpalmethlbopmp.pdf. orcorrectlycapturedin theaccounts. inaU.S. bankby aforeign resident, areeach recorded ates adebit(negative) entry in thecurrentaccount for with a credit (positive) entry. They have offsetting the imported steel. The associated payment is re debit (negative) entries to reflect transactions that corded as an offsetting positive entry in the financial generate payments of funds to foreign residents. For account and can take any ofseveral forms, including example, an import, thepurchase ofa security from a decreasedU.S. depositsinaforeign bankorincreased foreign resident, the depositofneworadditional U.S. foreign deposits in a U.S. bank. funds in a foreign bank, and the withdrawal of a foreigner's deposit from a U.S. bank are each re Accounting for Financial Instruments Other Than corded with a debit (negative) entry. Because ofthis Derivatives accounting convention, the international transactions accounts should always have a zero balance, asevery Many transactions do not involve a current account positive entry in the BOP should have a correspond paymentorreceiptbutinstead arerecordedentirelyin ing negative entry. the financial account. For example, for transactions For most current account transactions, the offset that involve the purchase or sale of financial instru ting entry is in the financial account. For example, a ments such as stocks or bonds, both the change in U.S. firm's purchase ofsteel from a foreigner gener- financial instrument holdings and the offsetting in-

u.s. Cross-Border Derivatives Data: A User's Guide A5 I. Example ofentries in the financial account ofthe U.S. TIC banking reports. As with the stock purchase, the balance ofpayments: Purchase by a foreign resident ofa stock sale will be included in the reports of TIC U.S. stock from a U.S. resident, and subsequent sale of securities transactions. Accordingly, two financial the stock accountentries arise from values reported through the U.S. dollars TIC system: a decrease (debit) of$50 in U.S. securi Financialflow ties held by foreigners and an increase (credit) ofthe Foreign-ownedassetsin theUnitedStates I same amount in U.S. banking liabilities to foreigners. Year I Year2 No entry in the financial account records the change U.S.securitiesotherthan U.S.Treasurysecurities. 100 -50 in the stock value.s U.S. liabilitiesreportedbyU.S. banks, notincludedelsewhere -100 50 The final line in the BOP is a reconciliation line Statisticaldiscrepancy ... o o labeled "statistical discrepancy." Because the BOPis basedonthedouble-entryaccountingsystem, thesum NOTE: Here and in subsequent tables. refer to text for details; a positive valueindicatesanetfinancialinflowtotheUnitedStates.andanegativevalue of all current account, capital account, and financial indicatesanet financial outflowfromthe UnitedStates. account transactions should equal zero. Any remain crease or decrease in deposits are reported in the ing balancedue to errors oromissions in the recorded financial account. For most financial account transac international transactions is reported as a statistical tions, the relevant information is collected through discrepancy. In theexampleofthestockpurchaseand the TIC system.? sale, each transaction has an exactly offsetting trans By way of illustration, suppose that in year I a action within the financial account, the sum of all foreign residentpurchases$100ofU.S. stock through transactions recorded in each year is zero, and there aU.S. broker using funds that had been on deposit at fore no statistical discrepancy arises in either year. a U.S. bank (table I). The U.S. financial services The current presentation of the U.S. financial firms that facilitate this cross-border transaction are account includes direct investment, securities (stocks responsible for reporting it on the TIC forms. The and bonds), currency, and loans and deposits (bank U.S. broker in the example is responsible for report ing and brokerage). Transactions in all these instru ing the stock purchase in its monthly report of TIC ments are recorded in the financial account as de securities transactions. The U.S. bank records the scribed in the example, buttransactions in derivatives foreigner's deposit balance at the end ofeach month contracts are recorded on only a limited basis. on the TIC banking report; the decline in deposits is inferred from changes in these month-end balances. Accounting for Derivatives In the example, the values reported through the As with transactions involvingstocks orbonds, trans TIC system generate two financial account entries. actions involving derivatives are recorded in the The account for U.S. securities held by foreigners financial account as increases or decreases in U.S. ("U.S. securities other than U.S. Treasury securi banking claims on, or liabilities to, foreigners. How ties") increases by $100, which is the purchase price ever, to date, no corresponding entry in the financial of the stock, shown as a positive amount, or credit. account reflects the change in the quantity of U.S. The account ofU.S. banking liabilities to foreigners derivatives claims on, or liabilities to, foreigners. ("U.S. liabilities reported by U.S. banks, notincluded Thus, the international transactions accounts shown elsewhere") decreases by the $100 used to purchase in the BOPcapture only one side ofmost derivatives the stock, shown as a negative amount, or debit. transactions.9 Continuingwith theexample, also supposethatthe Theeffectofthe incompleteaccounting for deriva value ofthe stock falls to $50 and that in the second tives transactions in the BOP can be seen in the year the foreign resident sells the $50 worth ofstock. following example. Suppose that instead of purchas Afterthe sale, the cash proceeds are transferred to the ing a U.S. stock from a U.S. broker, as in the earlier U.S. bank account ofthe foreign resident, and so the example, a foreign resident purchases a derivative banking deposit balance of the foreign resident in (such as an option) for$100from aU.S. residentwith creases by an amount equal to the proceeds from the funds on deposit in aU.S. bank (table 2). The change sale ofthe stock and will becaptured on the monthly in the foreigner's deposit balance, reported by the U.S. bank at the end of each month on its TIC 7. Exceptionsaredirectinvestment.currencyshipments,andsome U.S.governmenttransactions.allofwhicharecollectedthroughother means. The TIC data include commissions paid to intermediaries, 8. Valuationchangesare included in the U.S. international invest which are recorded in the currentaccount. not the financial account. mentposition,discussed laterin thearticle. The BEA adjusts the TIC data by subtracting estimated brokerage 9. TheBEAplanstoincludederivativesintheU.S. BOPstartingin commissionstodeterminefinancial accounttransactions. June2007.

A6 Federal Reserve Bulletin 0 May 2007 2. Example ofentries in the financial accountofthe U.S. reporting system, in which data on cross-border balanceofpayments: Purchase by a foreign resident ofa derivatives transactions are incompletely recorded, derivative from aU.S. resident, and subsequent sale of gives rise to a statistical discrepancy in the BOP the derivative accounts. u.s.dollars Financial flow The U.S. International Investment Position Foreign-ownedassetsin theUniledStates Year I I Year2 Like the BOP, the U.S. international investmentposi U.S. financialderivatives liabilities' n.a. n.a. tion (lIP) currently includes only a limited amount of U.S. liabilitiesreportedbyU.S. banks. notincludedelsewhere . . . -100 50 derivatives claims and liabilities. The lIP reports the Statisticaldiscrepancy . 100 -50 valueofU.S.-ownedassetsabroadandthatofforeign I. Transactions inderivatives liabilitiesare shown for illustrative purposes owned assets in the United States. In other words, it only.Asdiscussed lalerin thearticle,derivativestransactionsarecollectedon reports the current value of the assets accumulat~d anetbasisandwillappearonthatbasisintheBEA'spresentalJonsoftheU.S. balanceofpaymentsandtheU.S. internationalinvestmentposllJon. throuc e rh the transactions recorded in the finanCIal n.a. Notavailable. account ofthe BOP. In the lIP, the BEA decomposes each outstanding position at the end ofeach calendar banking report, reflects the banking transaction asso year into three parts: the position at the end of the ciated with the purchaseofthe derivative (in addition previous year, net transactions recorded in the BOP to banking activity arising from other transactions). duringthecurrentcalendaryear,and valuation adjust The deposit balance is reported to the compilers of ments attributable to changes in exchange rates, the financial account,andsoadecrease(debit) in U.S. prices, and otherfactors, such as the inclusion ofdata banking liabilities to foreigners equal to the purchase from new reporters. price of the derivative, or $100, is recorded in that account. However, in the absence ofTIC form D, the U.S. Accounting for Financial Instruments Other Than resident has no way ofreporting a purchaseorsale of Derivatives aderivative, as this type oftransaction is recorded on The catecrories in the lIP are similar to those in the no otherTIC report. As a result, the compilers ofthe e . financial account of the BOP, and the transactIOns financial account have no way of knowing that the reported in the lIP come directly from the BOP. As banking transaction was for the purchase ofa deriva previously mentioned, U.S. banking deposit claims tive, andthus noentry in the financial accountreflects on, and liabilities to, foreigners are collected on the the increase in derivatives liabilities to foreigners. monthly TIC banking reports; these data are used in The failure to record acreditentry for the changes in the lIP. For the U.S. stock and bond holdings of derivatives liabilities creates an imbalance in the foreicrn residents and the foreign stock and bond international transactions accounts, which results in a holdi~gs ofU.S. residents, thecustodial firms holding statistical discrepancy of $100, the purchase price of the securities report them on periodic TIC surveys of the derivative.10 claims and liabilities, and the BEA uses the holdings Also suppose that during year 1 the value of the information to construct the lIP. derivative falls to $50 and that in year 2 the foreign The presentation of holdings on the lIP can be resident sells the derivative. After the sale the $50 illustrated with avariationonthepreviousexampleof proceeds are transferred to the U.S. bank account of the purchase and eventual sale of U.S. stock by a the foreign resident. Because banking deposits are foreign resident. Besides the details already men reported on the TIC banking reports, an increase in tioned, we suppose that the foreign resident has $200 U.S. banking liabilities of $50 is recorded in the on depositataU.S. bankat theendofyear0 and that financial account when the derivative is sold. Howthe deposit balance is reported as the year-end posi ever , nothinc e r in the financial account reflects the tion on the lIPfor that year (table 3). Using the BOP decrease in derivatives liabilities to foreigners, and so transactions data from theearlierexample, the lIP for a statistical discrepancy ofnegative $50, equal to the year 1 reports an increase in U.S. securities held by proceeds from the sale of the derivative, results in foreigners and adecreaseinU.S. bankingliabilitiesto year 2. This example illustrates how the currentBOP foreigners, both ofwhich correspond to the purchase price ofthe stock ($100). As before, we suppose that 10. The statistical discrepancy is found by summing all recorded the value of the stock decreases by $50 between the transactions and reversing the sign ofthe total. In this example, the purchase date and the end of year 1. The year-end only recorded transaction is negative $100, and so the statistical discrepancy ispositive$100. market value of the stock, as reported on the TIC

u.s. Cross-Border Derivatives Data: A User's Guide A7 3. Example ofentries in the U.S. international investment position: Purchase by a foreign resident ofaU.S. stock from a U.S. resident, and subsequentsale ofthe stock U.S.dollars Year0 Year I Year2 Foreign-ownedassetsin the UnitedStates Ending ~e~~g~~~ I a~j~~~~~~t I Ending ;;::~~~i~~ I V~luation I Ending balance balance BOP adjustment balance U.S. securitiesotherthan U.S.Treasurysecurities. 0 100 -50 50 -50 0 0 U.S. liabilitiesreportedby U.S.banks, notincludedelsewhere 200 -100 0 100 50 0 150 Total .... ............... 200 0 -50 150 0 0 150 BOP U.S. balanceofpayments. holdings survey, is recorded in the lIP as the ending year 1. As in the BOP, no transaction corresponding balance for year 1 ($50). The lIP reports this $50 to the purchase of the derivative will be reported. declinein valueas avaluation adjustmentdueto price Although the value ofthe derivativedecreases to $50 changes. For year I, the value of the total position before the end of year 1, the lIP wiII not report the decreases by the amount ofthe valuation adjustment, valuation adjustment. The total foreign liability posi to $150. Ifthe stock is sold before the end ofyear 2 tion of $100 at the end of year 1 will include the and there are no further price changes, the total value correctvalueofthe bankingdeposits butnotthe value ofthe position is unchanged. At the end ofyear 2, no ofthe derivative. When the derivative is sold in year stock claims by foreigners remain---only a banking 2, the increase in U.S. banking liabilitiestoforeigners deposit balance. equal to the total sale proceeds ($50) will berecorded The lIPcaptures only the banking deposit transac correctly, butno transaction will reflect the decreased tions and positions associated with purchases and derivatives liabilities to foreigners resulting from the sales ofcross-border derivatives. Just as cross-border sale ofthe derivative. derivatives transactions go largely unrecorded in the Thepositions attheend ofyears 0 and 2on the lIP BOP, so cross-border derivatives positions are also are bothcorrect, as derivatives were held attheendof mostly missing from the lIP. neither of those years-only at the end of year 1. However, total transactionsand total valuation adjust Accounting for Derivatives ments over the two-year period are both incorrect. The lIPattributes the $50 change in the position over The current treatment of derivatives in the BEA's presentation of the lIP is illustrated by the next the period-from $200 to $150-to a net outflow of example, in which a foreign resident purchases a $50, when in fact the $50 change in the position is derivative instead of a stock from a U.S. resident due to a price change. (table 4). A recorded transaction will reflect the As shown in this analysis, the current omission of decrease in U.S. bank liabilities to foreigners corre derivatives positions from the lIP adversely affects sponding to the purchase price ofthe derivative, and external-sector reporting and can lead to incorrect the remaining balanceof$100 in U.S. bank liabilities inferences about the cause ofposition changes in the to foreigners will be correctly reported at the end of lIP. In the lIPpresented in theexample, the failure to 4. Example ofentries in the U.S. international investment position: Purchase by aforeign resident ofaderivative from aU.S. resident, and subsequent sale ofthe derivative u.s. dollars Year0 Year I Year2 Foreign-ownedassetsinthe UnitedStates Ending Transacti~n I Valuation I Ending Transaction I Valuation I Ending balance rec~~e: to adjustment balance rec~~~d to adjustment balance U.S. financialderivatives liabilitiesl n.a. n.a. n.a. n.a. n.a. n.a. n.a. U.S. liabilitiesreponedbyU.S. banks, notincludedelsewhere .............................. 200 -100 0 100 50 0 150 Total ........... 200 -100 0 100 50 0 150 I I. Refertotable2, note I. BOP U.S. balanceofpayments. n.a. Notavailable.

A8 Federal Reserve Bulletin 0 May 2007 account for transactions in, and holdings of, deriva that occur within the reporting quarter, including the tives contracts created two problems. First, it misrep proceeds from the purchases and sales ofderivatives resented the cross-border positions. At the end of and all contractual flows, referred to as net settle year 1, the true foreign position of $150 ($100 plus ments.13 the correct value of the derivative-$50) was re As is the case on other regulatory reports, fair corded as $100. Second, the valuation adjustments in valuesonformDareaggregatedaccordingtowhether, \ derivatives positions incorrectly appearas netforeign from the reporter's perspective, the value on the last outflows of $50. These problems can be resolved day of the quarter is positive or negative. The gross through the inclusion of specific information about positive (or negative) fair value is the sum of all cross-borderderivatives transactions and positions in positions with positive (or negative) balances from the lIP-the information collected on TIC form D. the perspective ofthe reporter.14 Along with fair values as ofthe end ofthe quarter, OVERVIEW OF TIC FORM D the netpayments, orsettlements, between the reporter and foreign residents in each quarter are reported on U.S. regulatory agencies have collected some infor form D. All transactions occurring during each quar mation on derivatives holdings for many years in ter, including those that arise from the purchases and reports outside of the TIC system. However, the sales ofderivatives as well as from periodic contrac reports do notcollect most ofthe information needed tual payments, are aggregated and reported as net to includederivatives in the international transactions settlements. accounts. For example, the reported data have ex In part 1ofform D, reporters providetotals by type cluded cross-border transactions and have either ofcontractand type ofunderlying(table5). Contracts excluded some cross-border positions-such as those that trade in the over-the-counter (OTC) market are between aparent firm and its cross-borderaffiliates reported separately from those that trade on ex orcollected positions on an ultimate-risk basis rather changes. OTC contracts are categorized by the pre than a locational basis. As noted earlier, to address dominant type ofunderlying (that is, single-currency II the gaps in data collection, the Treasury Department interest rate, foreign exchange, or other).15 Data on introducedTIC form D in 2005 to gatherinformation exchange-traded contracts are reported separately for on cross-border derivatives transactions and posi U.S. reporting firms' own contracts on foreign ex tions.J2 changes, the contracts of their U.S. customers on foreign exchanges, and foreign counterparties' con Information Collected tracts on U.S. exchanges. The fair values of OTC derivatives are reported separately for common con TIC form D collects information on U.S. residents' tract types (that is, forwards, swaps, or options), derivatives contracts with foreign entities, including while only the aggregate fair values of all types of all foreign affiliates of U.S. multinational firms. It exchange-traded contracts (such as futures and op focuses on two values: (1) the amount for which a tions) are reported. Aggregate fair values are also derivativescontractcan beexchangedin atransaction as of the end of the quarter, referred to as the fair value, and (2) the sum ofall derivatives transactions 13. Ifaderivativescontractisnotactivelytraded,thereportermust estimatethe fair value usingthepricesofotherfinancial instruments. Additionalinformationonthecalculationoffairvalues isavailable in II. The TIC forms collect data on cross-border transactions and FinancialAccounting Standards Board (1998), "StatementofFinan positions on a locational basis, as is required for reporting in the cialAccountingStandardsNo. 133:AccountingforDerivativeInstru internationaltransactionsaccounts. Inotherwords, counterpartiesare ments and Hedging Activities" (Norwalk, Conn.: FASB). For a identifiedaccordingtothecountryin which the immediatetransactor discussionofwhycontractualpaymentsonderivativesareincludedin is locatedorthecountry in whichthe position is booked,as transac the financial account instead of the current account, refer to box tionsandpositionsarerecordedinthis wayintheBOPand lIP.Other "Derivativesinthe InternationalTransactionsAccounts." reports collect cross-border position information on an ultimate-risk 14. Although reporters are encouraged to report fair values on a basis.Thesereportsidentifycounterpartiesaccordingtothecountryin grossbasis, theinstructionsstatethatmultiplecontractswithasingle whichtheultimaterisklies. Forexample,aclaimagainstasubsidiary counterparty can be reported on a net basis if a master netting firm will be reported vis-a-vis the country of the parent to the agreementisinplaceandifthecontractsarecarriedatnetvaluesinthe subsidiary. For more information on the differences between data reporting entity's accounting records and statements of financial collectedon alocational basis and datacollectedon an ultimate-risk position. A master netting agreement is a contract between two basis,refertoCarolC.Bertaut,WilliamL.Griever,andRalphW.Tryon counterpartiestonettheirtradeswith positiveand negativebalances. (2006), "UnderstandingU.S. Cross-BorderSecurities Data," Federal This practicereduces creditexposure, which, in turn, reduces collat ReserveBulletin,vol.92,pp.A59-A75,www.federalreserve.gov/pubs/ eral requirements. Todate,alimited numberofTICform Dreporters bulletin/default.htm. haveprovidedsomeoftheirfairvaluesonanetbasis. 12. TIC form D and instructions for its use are available at 15.Otherunderlyingtypesincludecreditratings,equityprices,and www.treas.gov/tic/forms-d.shtml. commodityprices.

u.s. Cross-Border Derivatives Data: A User's Guide A9 5. Data reported onTIC form D: U.S. holdings of, and transactions in, derivatives contracts with foreign residents, as of2006:Q4 MillionsofU.S.dollars Fairvalueofderivativescontractswith U.S. netseulements U.S. netselliements Holdingsandtransactions.bycontracttype foreign residentsalendofreportingquaner andbyforeigneconomiesandorganizations I duringthequaner during2006with Grosspositive Grossnegative withforeign residents foreignresidents PART 1OFFORM:CONTRACT"J'yPES Over-the-countercontracts . . 1,211,924 1,155,726 -2,125 14.553 Single-currencyinterestratecontracts ...........•......••... 789,994 746,635 -2,543 11,201 Forwards................... . . 1.747 1,622 Swaps. . . 702,266 678,278 Options................ . . 85.981 66,735 Foreignexchangecontracts .. 175,713 150,272 142 -211 Forwards 44,928 47,063 Swaps . 102.255 77,621 Options 28.530 25,588 Othercontracts............ . . 246,217 258,819 276 3,563 Exchange-tradedcontracts ............................•... 25,640 22,903 342 14.209 Totalonforeignexchanges _ . 7,471 6,765 1,056 10,365 Ownderivativescontractsonforeignexchanges 4.589 4,027 162 6.628 U.S.customers'derivativescontractsonforeignexchanges 2.882 2,738 894 3,737 Foreigncounterpartyderivativescontractson U.S.exchanges... 18.169 16,138 -714 3.844 Total . 1,237,564 1,178,629 -1,783 28,762 MEMO Contractswithownforeign offices 318,987 312.853 Contractswith foreignofficialinstitutions....................•... 10,746 9,601 211 2,120 ContractsofU.S.depository institutionswith foreigners . 415,979 397,523 PART2OFFORM: FOREIG EcONOMIE ANDORGA IZATIONS Europe' . 1,045,720 993,391 147 19,855 Belgium .._..............................................•... 9.881 9,291 -15 -315 France . 72.559 66.746 -570 759 Germany . 97,243 85.356 -1,515 ~87 Ireland . 80,219 77,926 340 4,415 Italy . 12,228 5.863 -556 215 Netherlands...... . . 23,3% 21,280 439 1,914 Switzerland . 29.412 28,054 -1,371 4,8~9 United Kingdom . 697.207 668,332 4.422 6.550 Euroarea .. 308,976 286,459 -2.487 9,158 European Union . 1,013.071 962,042 2,068 n.a Canada............ . . 31,527 27,059 42 -4,507 LatinAmerica ........ . . 14,346 13,299 -1,369 -1,464 Caribbean . 67,156 73,000 -608 5,325 Cayman Islands . 49.661 57,345 -705 4,840 Asia . . 58,723 53,938 102 5,862 Japan . 39,075 37,568 -933 -346 Africa .. 3,085 2,153 243 610 Othercountries . 14,294 11,173 -1,543 -2,317 Australia . 13,369 10,444 -1.648 -2,505 Internationalandregional organizations' .....• 2,713 4,616 1,203 5,396 I. Selectionofeconomieslistedinform. 2. Summationoforganizationslistedinform. . . . Notapplicable. n.a. Notavailable. SOURCE:Treasury InternationalCapitalreportingsystem, www.treas.govltic. reported for three memoranda items: contracts with as net settlements for exchange-traded products in the reporting firm ' own foreign offices, contracts clude the sum ofall the daily changes in the value of with foreign official institutions, andcontract ofU.S. a contract over the quarter. depository institutions with foreigners. In part 2 of form D, fairvalues and netsettlements arereported in Reporting Threshold and Requirements aggregate by the counterparty's country ofresidence. For many OTC contracts, cash flows are few or The reporting threshold u ed to determine who must even nonexistent during a quarter, while fair values fileTIC form D is based on acommon measureofthe are significant. For those exchange-traded products size oftotal derivatives positions, the notional value, (such as futures) that settle daily, the fair value is at defined earlier in the article as an amount used to most the change in value on the last day of the determinecontractualpayments.All U.S. banks, secu quarter, and so it will generally be quite small. The rities dealers, and other firms with worldwide hold difference between net settlements and fair values for ings ofderivatives exceeding $100 billion in notional exchange-traded products will generally be smaller value(in theirown and theircustomers' accounts) are than the corresponding difference for OTC contracts, required to fill out form D on a quarterly basis. The

AlO Federal Reserve Bulletin0 May 2007 Derivatives in the International Transactions Accounts Derivativesdonotfitneatlyintotheinternationaltransac The second reason that derivatives are not easily tions accounts for two reasons. The first is that, unlike incorporated into the international transactions accounts financial instruments such as bonds and stocks, some is the ambiguous status ofthe associated payments. The derivatives contracts cannot be categorized solely as periodic payments on derivatives can be considered claims or liabilities. Clearly an option written by aU.S. returns on invested capital, which are recorded in the resident and purchased by a foreign resident is a U.S. current account; alternatively, they can be considered liability to foreigners; butthe distinction is less clearfor realized gains from changes in the contractual value, products such as swaps, forwards, andfutures. Over the which are recorded in the financial account. Becausethe lives of these products, the fair market value may be return from derivatives for many end users comes in the positiveattimesand negativeattimes,anditmayswitch form oftrading gains and losses, the International Mon signsseveraltimes withinaquarter. Sotheseinstruments etary Fund has recommended that periodic payments on are neither strictly claims, with consistently positive fair derivativesberecordedas financialaccounttransactions.l values and paymentsto the U.S. residentcounterparty to the contract, nor strictly liabilities, with consistently I.RefertoRobertM. Heath(1998), "TheStatisticalMeasurementof negative fair valuesand payments from the U.S. resident FinancialDerivatives," IMFWorkingPaper98/24(Washington:Interna counterparty. tionalMonetaryFund,March). reporting threshold was intentionally set at a high as theclaimsposition, the gross negativefair valueas level because, according to results obtained by other the liabilities position, and net settlements as the net forms that collect global derivatives information, ofclaims and liabilities transactions. derivatives activity is concentrated in a small number To show how the information collected on form D of firms; fifty companies met the threshold in 2006. will be used in the BOP and lIP, we return to the Forms are filed with, and validated by, the Federal second example, in which a foreign resident pur Reserve Bank of New York. After further evaluation chases a derivative from a U.S. resident for $100 in by the Federal Reserve Board, results are forwarded year I.Recall that the valuedecreases to $50, and the to the Treasury Departmentfor release to the public. foreign resident sells the derivative for $50 in year 2. To ease the burden on reporters, reporting require As shown previously, without the information col ments for form D were phased in over the first three lected on form D, at the end of year 1 the banking quarters of 2005. In the first quarter, reporters were transaction corresponding to the payment of$100 for required to provide all categories of gross positive the derivatives contract is included in the BOP as a andgross negativefairvalues, netsettlementsofOTC decrease in U.S. bank liabilities to foreigners, but the foreign exchange contracts, and net settlements with offsetting transaction corresponding to the increased foreign official institutions. In the second quarter, net U.S. derivatives liabilities to foreigners is not re settlements ofexchange-traded contracts were added corded in the accounts; rather, it appears as a statisti to the requirements. Finally, in the third quarter, all cal discrepancy. When the derivative is sold, there is remaining information was required. an increase of$50 in U.S. bank liabilities to foreign ers but no offsetting decrease in U.S. derivatives TIC Form D and Reporting on the U.S. liabilities to foreigners, and so another statistical External Sector discrepancy is recorded. That situation will change once the net settle Starting in mid-200?, the compilers of the financial ments data collected on form D are incorporated account at the BEA will have access to information into the BOP. Because the purchase price of the from TIC form D on transactions and positions in cross-borderderivatives. Unlikeotherfinancial instru derivative ($100) and the sale proceeds ($50) wiII ments, derivatives do not fit easily into the standard be included in net settlements on the U.S. resident's BOPand lIPframeworks. Forexample, some deriva form D reports, the compilers of the financial ac tives contracts are difficult to classify strictly as count will have the information needed to include claims or liabilities (refer to box "Derivatives in the derivatives transactions in that account (table 6). The International Transactions Accounts"). Because of transactions will be correctly recorded in years 1 and this difficulty, in the international transactions ac 2, and no statistical discrepancy will be reported in counts, the gross positive fair value will be recorded eitheryear.

u.s. Cross-Border Derivatives Data: A User's Guide All 6. Example ofentries, including those for derivatives data, traded futures that settle daily accountfor the bulkof in the financial accountofthe U.S. balance ofpayments: exchange-traded derivatives; for these products, the Purchase by a foreign resident ofa derivative from a fair values generally consistentirely ofone-day mar U.S. resident, and subsequent sale ofthe derivative ket moves. Formost types ofderivatives, the reported u.s. dollars gross positive fair value exceeds the reported gross Financialflow negativefair value. Therefore, residents oftheUnited Foreign-ownedassetsinthe UnitedStates Year I I Year2 States have net derivatives claims on foreign resi dents. U.S. financial derivativesliabilities' 100 -50 Unlike fair values, reported net settlements vary U.S. liabilitiesreponedbyU.S. banks, notincludedelsewhere ..... -100 50 widely between quarters, and the flows associated Statisticaldiscrepancy . o o with both OTC and exchange-traded derivatives are significant. During the fourth quarter of 2006, total I. Refertotable2,note I. net settlements represented a $1.783 billion outflow from the United States, primarily associated with The fair values and transaction information col single-currency interest rate products (table 5, row lectedon form D will alsoenablethe compilers ofthe labeled "Total"). However, the result over the previ lIP to include derivatives contracts. The purchase ous three quarters was quite different: a net inflow to price of the derivative ($100) and the year-end fair residents of the United States, also primarily from value ($50) will be included in the lIPfor year 1, and single-currency interest rate products. So for all of the decrease in the total value offoreign assets from 2006, net settlements represented a $28.8 billion $200 to $150 will be correctly attributed to the price inflow to the United States. The amount was evenly change ofthe derivative (table 7). The position at the split between inflows associated with OTC contracts start of year 2 will be correctly reported, as will the and those associated with exchange-traded contracts. transactions in that year. As shown in this example, As with other TIC data on securities and banking, the information collected on form D substantially the bulk offair values and net settlements is vis-a-vis improves the reporting ofboth the BOPand the lIP. the United Kingdom, but large balances are also recorded againstotherEuropean countries, the Carib RESULTS FROM THE 2006 FORM D DATA bean financial center countries (such as the Cayman TheTreasury Departmentrecently released aggregate Islands), and Japan.16 In December 2006, the gross values ofthe data reported onTIC form D in 2006. In positive fair valueofderivatives vis-a-vis residents of December 2006, the gross positive fair value of the United Kingdom totaled $697 billion, while the derivatives totaled$1.238 trillion, and the gross nega gross negative fair value totaled $668 billion, each of tive fair value $1.179 trillion (table 5, row labeled which represented more than halfofthe total reported "Total"). Data for December 2006 are representative gross fair values (table 5, row labeled "United Kingof broader trends for the year as a whole in terms of the relative magnitudes ofthe fair values reported in 16. Because TIC transactions are recorded against the country each category of form D. The largest fair values are through which the transaction occurred, the data exhibit "financial for OTC derivatives, primarily single-currency inter center bias"; in other words, a majority oftransactions are recorded estrate swaps.Thefair values reported for exchange vis-a-viscountriesinwhichmanyfinancialservicesfirmsactiveinthe derivatives market are located. For more information on the issueof traded derivatives are much smaller. As discussed financial centerbiasinTICdata,referto Bertaut,Griever,andTryon, previously, this result is expected because exchange- "UnderstandingU.S.Cross-BorderSecuritiesData." 7. Exa~ple o~entries, incl~din.g those for derivatives data, in the U.S. international investment position: Purchase by a foreIgn reSIdent ofadenvatlve from a U.S. resident, and subsequent sale ofthe derivative U.s.dollars I Year0 Year I Year2 I . I I Foreign-ownedassetsin the UnitedStates Ending Trercaonrsdaecdtioinn Valuation Ending T re r c a o n r s d a e c d tio in n V aluatl . on Ending balance BOP adjustment balance BOP adjustment balance U.s. financial derivatives liabilities' .. o 100 -50 50 -50 o o U.S. liabilitiesreponedby U.S. banks, notincludedelsewhere . 200 -100 o 100 50 o 150 Total 200 o -50 150 o o 150 I. Refertotable2,note I. BOP U.S. balanceofpayments.

A12 Federal Reserve Bulletin 0 May 2007 8. Effect ofderivatives data on the statistical discrepancy in 9. Net international investment position ofthe United States the international transactions accounts ofthe U.S. and selected components, and aggregate fair values of balance ofpayments, by quarter, 2006 derivatives, year-end 2005 BillionsofU.S. dollars BillionsofU.S. dollars Financialflow Item Amount Account 2006 I QI I Q2 I Q3 I Q4 Netposition ........... . . -2,694 ScenarioA(withoutderivatives) U.S.-ownedassetsabroad . 10,009 U.S.officialreserveassets .... .... . 188 Currentaccount ...... -857 -214 -218 -229 -196 U.S.governmentassetsotherthanofficialreserveassets . 78 Capitalaccount..... -4 -2 -I -I -I U.S. privateassets . 9.743 Financialaccount.... 719 171 154 230 165 Directinvestmentabroad(currentcost) . 2,454 Total .............. -141 -44 -65 0 -32 Foreignsecurities . 4,074 Statisticaldiscrepancy 141 44 65 0 32 Bonds . 988 ScenarioB(withderivatives) Corporatestocks . 3,086 Currentaccount ...... -857 -214 -218 -229 -196 U.S. claimsonunaffiliatedforeignersreported Capitalaccount... -4 -2 -I -I -I by U.S. nonbankingconcerns ... 785 Financialaccount.... 719 171 154 230 165 U.S. claimsreportedbyU.S. banks, Derivatives...... ........... 29 2 14 15 -2 notincludedelsewhere _ . 2,431 Total ............... -113 -43 -51 15 -34 Statisticaldiscrepancy ........... 113 43 51 -15 34 Foreign-ownedassetsintheUnitedStates ..•. 12,702 Foreignofficialassetsinthe UnitedStates . 2,216 Otherforeign assets . 10,486 NOTE: Components maynotsum tototalsbecauseofrounding. Datafor fi Directinvestmentin the UnitedStates(currentcost) .. 1,874 nancial derivativesrepresentnetsettlementsasreportedonTICform D. U.S.Treasurysecurities . 705 SOURCE: Bureau of Economic Analysis, "U.S. International Transactions," U.S.securitiesotherthan U.S.Treasurysecurities.. 4,391 www.bea.gov/international;andTICform D. Corporateandotherbonds ..........•.... 2,275 Corporatestocks . 2,115 U.S. currency . 352 dom"). Net settlements vis-a-vis U.K. residents to U.S. liabilitiestounaffiliatedforeignersreported byU.S. nonbankingconcerns . 564 taled $4.4 billion during the fourth quarter of 2006 U.S. liabilitiesreportedby U.S. banks, and $6.6 billion for all of 2006, the largest flows (in notincludedelsewhere........ . . 2,601 absolute magnitude) intooroutofany singlecountry. Aggregatefairvaluesofderivatives Grosspositive . . 1,190 Gross negative 1,132 The 2006 Data in the BOP and IIP SOURCE: For net international investment position, Bureau of Economic Analysis(2006),SurveyofCurrentBusiness, vol.86(July), table I,pp.9-19; The importantrole played bycross-borderderivatives foraggregate fairvalues,TICform D. in U.S. financial markets becomes apparent when the TIC form D aggregates are compared with the trans (table 8, scenario A); the inclusion ofderivatives net actions and positions in other financial instruments settlements in the BOP would have lowered the recorded in the international transactions accounts in discrepancy roughly 20 percent (table 8, scenario 2006. Derivatives transactions reported on form D B).t8 As the quarterly data show, the effect ofderiva varied substantially throughout 2006, ranging from a tives on the statistical discrepancy may vary from $15 billion inflow in the third quarter to a $2 billion quarter to quarter and year to year, as errors and outflow in the fourth quarter (table 8, row labeled omissions elsewhere in the international transactions "Derivatives"). This variability is typical of cross accounts may outweigh the effect ofderivatives. border flows in securities such as stocks and bonds. The U.S. gross positions in derivatives are compa For 2006, derivatives net settlements amounted to rable in magnitude with the U.S. positions in other inflows of$29billion,or4 percentofthe$719billion financial instruments (table9). Thegross positive fair in total financial inflows reported in the BOP. value of derivatives totaled $1,190 billion at the end Derivatives netsettlements appear moresignificant of 2005, slightly more than U.S. residents' holdings when they are compared with the magnitude of the of foreign bonds, which totaled $988 billion. The statistical discrepancy. As shown in previous ex gross negative fair value of derivatives totaled amples, iftheinternational transactions accountscon $1,132 billion, about halfofforeign holdings ofU.S. tained no errors or omissions except the omission of bonds or stocks. On net, however, the inclusion of derivatives, the inclusion of derivatives data would derivatives has little effect on the net international reduce the BOP statistical discrepancy to zero. Al investment position of the United States. Adding the though including the 2006 data on total form D net net position in derivatives of $58 billion (aggregate settlements in the BOPwould not erase the statistical discrepancy, it would reduce it in that yearP For estimateisonlyaroughapproximationoftheeffectofderivativesdata 2006, the statistical discrepancy totaled $141 billion onthestatisticaldiscrepancy inthe BOPfinancialaccount. 18. For a discussion of other possible sources of the statistical discrepancy,refertoNormanS.Fieleke(1996), "What[stheBalance 17. Because,aspreviouslydiscussed,somederivativestransactions ofPayments?"SpecialReportNo.3(Boston:FederalReserveBankof are already included in the international transactions accounts, this Boston,October),www.bosfed.org/economic/speciallbalofpay.pdf.

u.s. Cross-Border Derivatives Data: A User's Guide A13 Other Derivatives Reports Asdiscussedinthe maintext,TICform Dwasdeveloped for International Settlements, which consolidates them because most of the information necessary to include with resultsfrom otherglobal reporters forpublication in derivatives in the U.S. balanceofpayments and theU.S. itsquarterly ConsolidatedBankStatistics and in otherof international investment position was not captured on its reports, such as the RegularaTCDerivatives Market otherreports.Forexample,mostoftheexistingderivatives Statistics. forms require firms to provide consolidated exposure to Although cross-border derivatives are included in the both domestic and foreign counterparties. Although the totals, most of the existing derivatives forms do not information collected on these otherforms is notexactly require separate reporting of cross-border derivatives. comparablewiththatcollectedon form D, itis useful for Thefew reportsthatdoseparatelyreportthecross-border data verificationatthe firm and product levels. exposure, like the FFIEC 009 ("Country Exposure Re One form with data on global derivatives holdings is port," prepared by the FFIEC), collect iton an ultimate the FR Y-9C ("Consolidated Financial Statements for risk basis instead of the locational basis required for Bank Holding Companies," prepared by the Federal reporting in the international transactionsaccounts.1 Reserve Board), which is required ofbank holdingcom Whereas holdings are included in some form on other panies;thedataarepubliclyavailableand areusedbythe reports, no report other than TIC form D collects pay Office of the Comptroller of the Currency in its Bank ments information for OTC derivatives. For exchange Derivatives Quarterly Report. For U.S. branches offor traded derivatives, however, net settlements are often eign banks, similar information is collected on form equivalent to net trading profits and losses (excluding FFIEC 002 ("Report of Assets and Liabilities of U.S. commissions). Because reporters already provided such Branches and Agencies of Foreign Banks," prepared by profits and losses to the U.S. tax authorities, existing the Federal Financial Institutions Examination Council, systems could beadapted to fulfill form Drequirements. orFFIEC).Anotherformthatrequestsdataonderivatives' fair values is the FR 2436 ("Semiannual Report of Derivatives Activity," prepared by the Federal Reserve I. An exception is the Commodity Futures Trading Commission's Board), which collects information on gross positions in form40,whichcollectsdailypositiondataonfuturesandfuturesoptions over-the-counter(OTC)derivatives from the largestU.S. fromthelargesttradersonU.S.exchanges.Theinformationincludesthe trader'scountryofresidence.TheBureauofEconomicAnalysishasused bank and nonbank dealers. The reported results are thisinformationincompilingtheU.S. balanceofpaymentsandtheU.S. confidential, and aggregates are forwarded to the Bank internationalinvestmentposition. gross positive fair value minus aggregate gross nega ableness of the information reported on form D, and tive fair value) only slightly improves the U.S. net they complement the cross-checks performed at the international investment position, from negative microlevel bytheFederalReserveBankofNewYork $2,694 billion to negative $2,636 billion. (refer to box "OtherDerivatives Reports").19 A comparison ofaggregate form D net settlements u.s. Comparison of and Foreign Aggregate with the cross-border transactions and positions re Totals ported by othercountries suggests that U.S. residents arecounterpartiesto a significantshareofthe transac From a global perspective, a relationship exists tions in the global cross-border derivatives market. between the cross-border transactions into and out of Total U.S. transactions as reported on form D were the United States and those into and out of other larger in absolute value than those reported by any countries. Many other countries currently report other country in 2006 (table 10). In 2005 and 2006, derivatives transactions and positions separately on all other countries recorded a net derivatives outflow, their balance of payments and international invest while in 2006 the UnitedStates recorded a net inflow. ment position. If all countries were to report cross The recorded net derivatives inflow into the United border transactions accurately and on the same basis, then the summation of all cross-border flows in each 19.Countriesotherthanthe UnitedStates, includingAustraliaand asset class into and out of all countries would equal the United Kingdom, have reported problems with thecollectionand zero. That is, the derivatives outflows from one quality of cross-border derivatives data. Refer to Graham Semken country should be recorded as derivatives inflows to (2005), "Financial Derivatives in the UK Sector BalanceSheetsand Financial Accounts," Economic Trends, vol. 618 (May), pp. 37-44; othercountries. The same relationship holds for posi and Australian Bureau of Statistics, International and Financial tions: The sum across countries of net cross-border Accounts Branch(1998), "Financial Derivativesin Australia's Inter positions in each asset class should equal zero. Such national Accounts," paper prepared for the Eleventh Meeting ofthe IMF Committee on Balance of Payments Statistics, held at the comparisons ofinternational flows and positions rep International Monetary Fund,Washington,Oct.21-23, www.imf.org/ resent two checks at the macro level on the reason- externalfbopagelagenda.htm.

A14 Federal Reserve Bulletin0 May 2007 10. Aggregatecross-borderderivatives transactions for resulted in values that varied considerably from zero, selected foreign countries, the United States, and the for the year as a whole it resulted in a value much world, 2005-06 closer to zero, an indication that U.S. data from TIC BillionsofU.S. dollars form D will significantly reduce the gap in world accounting in the BOP.20 2006 Countryorarea 2005 2006 I I I Acomparison ofU.S. aggregate derivatives claims QI Q2 Q3 Q4 and liabilities with those of other countries further Australia .. -1.6 .5 -.2 .6 -.5 .6 shows the sizable role played by the United States in Denmark ... 1.7 2.8 1.2 .4 .3 .9 France .. 9.9 4.3 I.I 3.0 2.2 -2.0 the global derivatives market. In 2005 U.S. deriva HongKong 4.0 5.1 .3 1.9 l.l 1.8 Italy 3.1 -1.6 .3 .4 -1.8 -.5 tives claims and liabilities, approximated using the Japan -6.6 2.0 -.4 1.8 -.1 .7 gross positive and gross negative fair values on Netherlands ... -4.4 -7.1 -2.8 -.6 -1.6 -2.1 United Kingdom -4.4 -26.2 -10.5 -5.3 -7.6 -2.8 form D, were greater than those reported by all UnitedStates. n.a. 28.8 1.6 14.0 14.9 -1.8 countriesexceptthe United Kingdom (table 11). On a Worldexcludingthe UnitedStates .. -22.5 -23.0 -18.4 .6 -1.8 -3.4 net basis, the U.S. year-end derivatives position for World............. -22.5 5.8 -16.8 14.6 13.1 -5.2 2005 was a net claim of $58 billion. This U.S. net NOTE: Components may not sum to totals becauseofrounding. Net flows claim is similar in magnitude and opposite in sign to reportedin balanceofpaymentsstatistics.Worldtotalsincludeflowsofcoun the sum of the net derivatives positions reported by triesnotshown. n.a. Notavailable. all othercountries, which is a $55 billion liability. As SOURCE: For selected foreign countries and the world, individual country with transactions, including the U.S. position in the pagesofthe IMFwebsite,www.imf.org; fortheUnitedStates,TICform D. States in 2006 ($28.8 billion) is similar in magnitude to the sum of the outflows reported by all other 20. This analysis is incomplete, however, because some countries countries (negative $23.0 billion). Although on a andorganizationswithsignificantflows vis-a-vistheUnitedStatesdo notreportcross-bordertransactions(forexample,Caribbeanfinancial quarterly basis the inclusion ofU.S. derivatives trans center countries, Switzerland, and the Bank for International Settle actions in the calculation of net world transactions ments). 11. Aggregatecross-borderderivatives claims and liabilities, and net positions in derivatives, for selected foreign countries, the United States, and the world, 2000-05 BilIionsofU.S.dollars World Year Australia Denmark France Hong Italy Japan Netherlands United United excluding World Kong Kingdom States theUnited States Claims 2000.... 13 14 95 17 4 3 29 669 o.a. 876 876 2001 .. 15 II 110 18 4 3 45 858 o.a. 1,101 1,101 2002.... 20 31 108 23 II 3 72 1,245 o.a. 1,562 1,562 2003 33 24 136 20 23 5 87 1.393 o.a. 1,803 1,803 2004. 38 37 169 22 28 6 86 1,594 0.3. 2,087 2,087 2005 27 9 226 17 30 26 70 1,761 1,190 2,262 3,452 Liabilities 2000.. 13 13 98 13 3 3 24 674 n.a. 869 869 2001 .. 13 II 105 12 5 4 49 861 o.a. 1,088 1,088 2002 .... 21 28 112 21 9 4 87 1,259 n.a. 1,579 1,579 2003 .... 37 20 148 20 16 7 95 1.424 0.3. 1,848 1,848 2004.. 38 33 175 21 26 II 99 1,624 o.a. 2,132 2,132 2005. 28 0 243 17 38 33 87 1,780 1,132 2,317 3,449 Netposition(claimsless liabilities) 2000.... -I I -3 4 I 0 5 -5 0.3. 7 7 2001 . 2 0 5 5 0 -I -5 -3 n.a. 13 13 2002.... -I 2 -4 I 2 0 -15 -14 n.a. -17 -17 2003 .... -3 3 -II 0 7 -2 -8 -32 o.a. -45 -45 2004.... 0 4 -6 I 2 -5 -13 -30 n.a. -45 -45 2005 .... -I 9 -17 0 -8 -7 -17 -19 58 -55 3 NOTE:Componentsmaynotsumtototalsbecauseofrounding.Worldtotalsincludepositionsofcountriesnotshown. U.S.claimsareaggregategrosspositivefair values,andU.S. liabilitiesareaggregategrossnegativefairvalues.Theclaimsandliabilitiespositionsofsomecountriesincludevaluesreportedonanetbasis. For countriesotherthantheUnitedStates,dataoncross-borderclaims,liabilities,andnetpositionsforyear-end2006werenotavailableasofthepublicationdate. n.a. Notavailable. SOURCE:Forselectedforeign countries(exceptthe United Kingdom)andtheworld, InternationalMonetary Fund,BalanceofPaymentsStatisticsYearbook2006 (Washington: IMF);fortheUnitedKingdom,OfficeofNationalStatistics(2006),UnitedKingdomBalanceofPayments:ThePinkBook2006(NewYork: Palgrave Macmillan), tableFD,p. 114;forthe UnitedStates,TICform D.

u.s. Cross-Border Derivatives Data: A User's Guide A15 Implied Valuation Change The information onTIC form Dcan be used to estimate Example ofthe use ofimplied valuation change to exposure to the underlyings through calculation of the identify errors in the net settlements and net fair values valuation change implied by quarter-end movements in reported onTIC form D the fair values and net settlements. Specifically, the U.S.dollarsexceptas noted change in net fair value (gross positive fair value minus gross negative fair value) between two consecutive Gross Implied valuationchange reportingquarters istheresultofthecombinationofcash Net Period positive settlement Scaled flows and valuation changes due to underlying price fair value Amount I (percent) movements. That is, aside from the effect of trading activity, the following accounting relationship musthold: ScenarioA Time I 100 0 Netfair vaLue(start) + VaLuation changes = Time2 ...... 80 20 0 0 Netfair vaLue(end) +Netpaymentsreceived. ScenarioB Time I .... 100 0 In addition to measuring exposure, if the implied Time2 80 ISO' 130 144 valuation changes are too large, they signal possible ScenarioC misreporting on form D. Because the magnitude of Time I 100 0 Time2 ....... 201 20 -60 -100 valuationchangescan vary with thenumberand valueof positions, dividing each valuation change by a scaling I. Erroneouslyreported. factorsuch as the averageofgross positivefair valuesat .. . Notapplicable. thestartand end ofthequarterassists inerroridentifica tion. The following example shows how implied valuation valuation change of negative ]00 percent (scenario C).3 changecanbeusedtoidentifyexposuretotheunderlying InscenariosBandC,ahigh absolutevalueforthescaled and errors in reported net settlements and fair values. A implied valuation change signifies a reporting error. U.S. resident has one swap contract with a foreign The effectiveness of implied valuation change as an counterparty.The fair valueoftheswapis$100,due the error-identification tool depends on the number of pur U.S. resident at time I (refer to table). Between time I chases and sales ofderivativesand on movementsin the andtime2,theU.S. residentreceivesa$20payment,and, underlyings. At one extreme, given no changes in a ifthe pricedoes not change,the fair valueoftheswapat reporter's derivatives contracts and on market move in time2is$80.Ifeverythingi reportedcorrectlyonformD, the underlying prices, the valuation changes should be the impliedvaluationchangei zero(scenarioA).I Butif small; in such cases, the calculation of large implied net settlements are erroneously reported as $150, the valuationchangeswilleffectivelyindicatethepresenceof implied valuation change is $130 (scenario B); if that anerror.Attheotherextreme,givensignificantpurchases value isdivided by the average gross positive fair value, orsalesofderivativesorhigh volatility in theunderlying the scaled implied valuation change is 144 percenl.2 markets, relating the implied valuation change to the Alternatively, ifthe gross positive fair value at time 2 is movements in the underlyings will be difficult, and thus erroneouslyreportedas$20,theimpliedvaluationchange this methodology will be less effective at identifying is negative $60, which corresponds to a scaled implied errors. I.Theimpliedvaluationchangeis$80- $100+$20=$0. 3.Theimplied valuationchangeis$20- $100+$20=-$60. Ifthe 2. The implied valuation chaoge is $80- $100+$150=$130; the impliedvaluationchangeisdividedbytheaverageofthegrosspositive scaled implied valuation change is$130 / [($100+$80)/2] = 1.44,or fairvalues,thescaledimpliedvaluationchangeis-$60/[($100+$20)12] 144percent. =-1.00,or-100percent. calculation ofthe net world position moves the world value is the um ofthe fair values ofall claims with a position closer to zero. positive balance from the reporters' perspective, it is the maximum loss that would be sustained ifforeign counterparties defaulted on their obligations.21 In USING THE DATA TO ESTIMATE RISK practice, most of these positions are covered by EXPOSURE legally enforceable nettingagreements. In suchcases, Form D datacan beused toestimatetwo types ofrisk in theeventofacounterpartydefault, positions with a counterpartythathavepo itivefair valuesare reduced exposureofinterestto usersofthedata.The first type concerns the potential losses incurred if counterpar by the value of positions with the same counterparty ties fail to fulfill their obligations, usually referred to that have negative fair values. As a result, the actual as credit exposure. The data can be used to estimate an upper bound on cross-bordercreditexposure as of 21. An estimate of cross-border credit exposure should exclude the report date. Because the total gross positive fair thosepositions withaffiliates,alsoreportedonTICform D.

A16 Federal Reserve Bulletin 0 May 2007 credit exposure is much less than would be implied analysis may be misleading because ofchanges in the by the gross positive fair value. Similarly, the gross numberofderivatives contracts within the quarter. 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 SUMMARY country. However, because all TIC data are reported on a locational basis rather than an ultimate-risk This article introduced the new data on transactions basis, the true nationality ofcounterparty exposure is in, and holdings of, U.S. cross-borderderivatives and unknown. discussed the new form that will collect the data Anothertype ofriskexposureofinterestto users of TIC form D. To date, the United States has published the form D data concerns U.S. investors' potential very little information on cross-border derivatives losses or gains from changes in certain underlyings, because ofthe limited availability ofdata. The article such as exchange rates or interest rates, referred to as showed how the omission ofderivatives from reports marketexposure.Although form Dfair valuesandnet on cross-border flows and positions gives rise to a settlements may be related to the magnitude of mar statistical discrepancy in the BOP accounts and can ket exposure, the information needed to accurately also lead to mistaken inferences about whatis driving gauge thatexposure is notcollected. Fairvalues are a changes in the international investment position of weak proxy for market exposure for several reasons. the United States. One reason is that a positive fair value does not The article demonstrated how the information indicate the direction ofexposure; depending on the collected on form D substantially improves the re natureofthe contract, the value ofthe derivative may porting of both the BOP and the lIP. Because the either increase or decrease when the value of the compilers of the financial account will have the underlying increases. information needed to include derivatives transac Another source of difficulty in gauging market tions in that account, the contribution of derivatives exposure is that derivatives can be highly leveraged. to the statistical discrepancy will be reduced. Simi Accordingly, small movements in the value of the larly, the fair values and transaction information underlying can cause very large changes in the fair collected on form D will enable the compilers ofthe value. The net aggregate fair value may include both lIP to include derivatives contracts, thereby improv the fair values of contracts with high leverage and ing the lIP's accuracy. those of contracts with little or no leverage. Finally, The article also presented the results from the2006 the D data provide at most a partial picture of form D data and showed that they areconsistent with reporters' market exposure because they include no expectations. For example, although including the information about positions with offsetting risks. 2006 dataon total form D net settlements in the BOP Nevertheless, a rough estimate of the exposure to would not erase the statistical discrepancy, it would the underlyings may beconstructed by examining the reduce it in that year. Moreover, when U.S. transac changes in quarter-end fair values and net settle tions are included, net world transactions in deriva ments. For example, a comparison of the valuation tives in 2006 are closerto zero. Finally, including the changes implied by the reported quarter-end net fair U.S. position moves the net world position closer to values and net settlements ofsingle-currency interest zero. Although the data collected thus far are consis rate contracts with the quarter-end moves in interest tent with expectations, the Treasury Department, the rates can be used to construct a rough estimate ofthe Federal Reserve Bank of New York, and the Federal aggregate exposure to underlying interest rates (refer ReserveBoardcontinuetoseekways to improvedata to box "Implied Valuation Change"). However, this 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 equipment, and textiles, were partly offset by sizable Division of Research and Statistics, prepared this upward revisions in the semiconductor and chemical article. Betsy Wang providedresearch assistance. industries. In mining, the capacity utilization rate was revised On December 11, 2006, the Federal Reserve pub up 2V4 percentage points for the fourth quarter of lished revisions to its index of industrial production 2005, to 85 percent, but the revised rate for the third and the related measures of capacity and capacity quarterof2006, at90.9 percent, was only a bitabove utilization. The revision affected the data from 1972 the previous estimate. The operating rate for utilities through October 2006, but the largest changes were was revised down in both 2005 and 2006. for the period beginning in 2003. From the fourth Compared with the previous estimates, total indus quarterof2002 to the third quarterof2006, industrial trial capacity is now reported to have grown more production, as revised, increased about 1% percent slowly in 2003, 2004, and 2005. In 2006, total age points less than previously reported. By year, the industrial capacity expanded more rapidly than previ change in output was revised down a little for 2003, ously estimated, and the gains appeared in all three down substantially for 2004, up a little for 2005, and major industrial sectors-manufacturing, mining, and down a touch for 2006 (table 1).1 Revisions for utilities. previous years were small. The updated measures of production, which incor On balance, the revision to capacity utilization was porate the Census Bureau's 2004 and 2005 Annual relatively small. For the fourth quarter of 2005, the SurveysofManufactures (ASM), show slightly lower rate of capacity utilization for total industry was annual levels of output than previously estimated. revised up V4 percentage point, to 80.7 percent. For Other new source data for the revision include the third quarter of 2006, capacity utilization, at selected 2005 Current Industrial Reports (also from 82.3 percent, was only slightly lower than previously the Census Bureau), new annual data on mineral reported and was 1.3 percentage points above its extraction for 2004 and 2005 from the U.S. Geologi 1972-2005 (long-run) average.2 The operating rate cal Survey, and updated deflators from the Bureau of formanufacturing was reviseddown about 1/4percent Economic Analysis. The new monthly production age point for both the fourth quarter of200S and the third quarter of2006. Downward revisions in several estimates reflect the incorporation of updated sea industries, including computers, communications sonal factors and monthly source data that became available (or were revised) after the close of the regular four-month reporting window.3 NOTE: Charles Gilbert directed the 2006 revision and, with Kim berly Bayard, David Byrne, Wendy Dunn, Christopher Kurz, Paul The revised capacity utilization rates incorporate Lengermann, Norman Morin, MariaOtoo, John Slevens, and Daniel the results from the Census Bureau's 200S Survey of Vine, prepared the revised estimates ofindustrial production. David Plant Capacity for the fourth quarter of that year. In Byrne prepared the improved estimates for communications equip ment. Norman Morin, John Stevens, and Daniel Vine prepared the addition, the revisions to the capacity indexes and revisedestimatesofcapacityandcapacityutilization. capacity utilization rates incorporate the revised pro I. Revised data reported in this article extend through year-end duction indexes and newly available data on indus 2006andwerefirstpublishedintheBoardofGovernorsoftheFederal ReserveSystem(2007),Statistical ReleaseG.17, "Industrial Produc trial capacity from the U.S. Geological Survey, the tionandCapacityUtilization"(May 16).Datareferredtointhisarticle Energy Information Agency of the Department of as "previous," which appeared in the G.17 release published on Energy, and other organizations. November 16, 2006, extend through year-end 2006 for capacity but only through the third quarter of2006 for production and capacity utilization. Therefore, for 2006, statements comparing revised with previouslyreporteddataforproductionandcapacityutilizationcover theyearonlythroughthethirdquarter,whereassuchcomparisonsfor 3. Aftertheinitialestimateofindustrialproductionisissued,itmay capacityin 2006covertheentireyear. be revised in the next three monthly releases and will then be left 2. Thesecomparisonsusequarterlyaveragedata. unchanged until thenextmajorrevisionto industrial production.

A18 Federal Reserve Bulletin 0 May 2007 1. Revised rates ofchange in industrial production and capacity, revised rates ofcapacity utilization, and the difference between revised and previously reported rates, 2002-06 Percentexceptas noted Differencebetweenrates Memo: Revisedrate 2006 (revisedminusprevious,percentagepoints) Item pg~~~n 2~;:1 I I I I 2~;:I I I I I 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Production Totalindex. 100.0 2.7 2.7 1.2 3.0 3.2 3.5 -.2 .5 -.4 -1.4 .2 -.1 Manufacturing ............... 81.9 3.0 2.7 1.3 3.4 4.4 3.4 -.2 .6 -.4 -1.7 .2 .1 Excludingselectedhigh-tech industriesI.... 77.0 2.1 2.3 .3 3.0 2.9 2.0 -.2 .3 -.2 -1.3 .0 .0 Selectedhigh-tech industries 4.8 17.7 8.3 17.2 10.4 28.1 24.6 -.8 3.5 -4.0 -8.0 2.4 2.0 Miningandutilities 18.1 1.2 2.7 .5 .7 -1.6 3.9 -.1 .0 -.1 .2 .4 -1.2 Capacity Totalindex..... 100.0 .7 .8 -.9 .1 l.l 2.4 -.2 .1 -.7 -.5 -.5 .4 Manufacturing ............... 82.5 .8 .4 -.9 .0 1.7 2.7 -.3 .0 -.8 -.5 -.3 .1 Excludingselectedhigh-tech industries'............. 77.0 .1 -.4 -.8 -.2 .6 1.4 -.3 -.2 -.4 -.3 .0 -.4 Selectedhigh-techindustries 5.5 11.2 12.6 1.4 4.3 18.3 19.6 .2 3.1 -6.6 -2.5 -2.5 7.4 Miningandutilities 17.5 1.1 2.6 1.0 1.2 -.9 1.4 .3 .3 -.4 .0 -.8 1.8 Capacityutilization Totalindex....... 100.0 78.7 75.3 76.8 79.0 80.7 81.5 .0 .0 .3 -.4 .2 -.2 Manufacturing ..... .... 82.5 77.1 73.4 75.0 77.6 79.6 80.1 -.2 .0 .3 -.6 -.2 -.3 Excludingselectedhigh-tech industries'.................. 77.0 77.7 74.8 75.7 78.1 79.8 80.3 -.2 .1 .2 -.5 -.5 -.4 Selectedhigh-techindustries 5.5 70.3 57.8 66.8 70.7 76.5 79.7 -.5 -.7 l.l -2.1 .8 -1.5 Miningandutilities ............. 17.5 86.8 87.2 86.8 86.4 85.8 87.9 .2 -.1 .2 .3 1.3 -.5 NOTE: Forproduction, therevisedratesofchangearefrom the fourthquar Capacityutilizationratesareforthefourthquarteroftheyearindicated;difterofthepreviousyeartothe fourth quarteroftheyearindicated; the differ ferences between revised and previously reported capacity utilization are calences between revised and previously reported productionare alsocalculated culatedfromQ4ratesexceptfor2006,forwhichtheyarecalculatedfromQ3 fromQ4-to-Q4ratesexceptfor2006,forwhichtheyarecalculatedfromannu rates. alizedratesofchangebetween2005:Q4and2006:Q3. I. Manufacturing excluding semiconductors and related electronic compo- Forcapacity,therevisedratesofchangearecalculatedinamanneridentical nents,computersandperipheralequipment,andcommunicationsequipment. to that for production; the differences between revised and previouscapacity, includingthosefor2006,arecalculatedfrom Q4--to-Q4rates. RESULTS OF THE REVISION As reported earlier, total IP increased in each year from 2003 through 2006, albeit at a slower pace for As revised, total industrial production for the third this period as a whole. Data from the 2004 and the quarter of2006 was 112.3 percent ofoutput in 2002, 2005 Annual Survey ofManufactures, the most sig and capacity stood at 136.5 percentofoutputin 2002. nificant contributors to the revision, show that the Both indexes are lower than reported previously. The slowergrowth in total outputoverthisperiodwas due capacity utilization rate for total industry in the third mostly to a downward revision of 1.4 percentage quarteroflastyear, at82.3 percent, was revised down points in 2004. Revisions in other years were rela slightly. Results of the revision can be found in the tively modest (figure 1).5 appendix tables.4 Market Groups Industrial Production The most prominent change to the production index The overall contour of industrial production (IP) in for final products and nonindustrial supplies occurred this revision is similar to that published previously. in 2004, when widespread revisions caused growth in this index to be adjusted down 1.7 percentage points (figure2andtableA.3). In addition,gains in the index 4. TableA.I shows the revised datafortotal industrial production, and table A.2 shows the revised data for capacity and capacity were revised down '/2 percentage point in 2003 and utilizationfortotal industry.TablesA.3andAAshowtherevisedrates '/4 percentage point in 2006. No change was made to ofchange(fourthquartertofourthquarter)ofindustrialproductionfor the increase in the index in 2005. Nevertheless, the marketgroups,industrygroups,specialaggregates,andselecteddetail fortheyears2002through2006.TableA.5showstherevisedratesof output of this market group accelerated from 2003 changeofannualindustrialproductionindexesformarketandindustry through 2005 and advanced further in 2006; it is now groupsfortheyears2002through2006.TablesA.6andA.7showthe revised figures forcapacityand capacity utilization.TableA.8shows the annual proportions ofmarket groupsand industrygroups in total [P.TablesA.3,AA,A.5,andA.6alsoshowthedifferencebetweenthe 5. Thegainsintotal industrialproduction wererevised up0.5 per revised and previous rates ofchange.TableA.7 shows thedifference centage point in 2002, down 0.4 percentage point in 2003, down betweenthe revised and previous rates ofcapacity utilization for the 1.4 percentage points in 2004, up 0.2 percentage point in 2005, and final quarteroftheyear. down0.1 percentagepointin2006.

Industrial Production and Capacity Utilization: The 2006Annual Revision A19 1. Industrialproduction,capacity,andcapacityutilization:Totalindustry,January 1999-April2007 ProductJonandcapacity Ratioscale.2002outpUl=100 Capacityutilization Percent Revised Previous 140 84 130 82 Capacity 80 120 78 - 110 76 - 100 74 Llu...' I I 1 I I I 1 ! 1 1 I 1 IL_IL-_LI_-,-,I _---'-I_---'-I_-..L1_-..L1_--I.1_----I.1--'1 1999 2001 2003 2005 2007 1999 200I 2003 2005 2007 NOTE: Hereandinthefollowingfigures, theshadedareasareperiodsof published on May 16,2007. Data labeled "previous" are those published businessrecessionasdefinedbytheNationalBureauofEconomicResearch. before the December II, 2006, annual revision. The "previous" data for Datalabeled"revised"arethecorrespondingdataintheFederalReserve capacityextend through theendof2006 because thecapacityindexesare StatisticalReleaseG.17,"IndustrialProductionandCapacityUtilization," basedonannualprojectionsthatareconvenedtoamonthlybasis. reported to have increased 1.3 percent in 2003, durable goods were in large part offset by upward 2.6 percent in 2004, 4.8 percentin 2005, and 2.6 per revisions for nondurables. Among durable goods pro cent in 2006. ducers, theoutputofautomotive products was revised Overthe 2003-06period, revisions to the indexfor down sharply and is now shown to have increased consumer goods were small, on balance, as substan 4.8 percent in 2003 but to have fallen each year from tial downward revisions to the output of consumer 2004 through 2006. In contrast, the production gains 2. Industrialproduction: Marketgroups,January 1989-April2007 Products Ralioscale.2002=100 Equjpment Ratioscate.2002=100 155 110 135 100 115 95 90 75 80 55 70 lnduslrialmaterials 115 110 100 100 85 90 70 80 55 70

A20 Federal Reserve Bulletin 0 May 2007 for home electronics in 2004 and 2006 were revised 3. Industrialproduction: Manufacturing,and manufacturing up appreciably. Among consumer nondurables, the excludingselectedhigh-technology industries, January I989-April2007 production indexes for foods and tobacco, consumer chemical products, and consumer energy products Level Ratioscale.2002;100 were revised up overall. The indexes for clothing and for paper products are now noticeably lower than 115 estimated previously. 105 The increase in the production of business equip 95 mentsince2002 is now reported to have been weaker. Although the increase in transit equipment over this 85 period was revised up a bit, the gains in information 75 processing equipment and in industrial and other equipment were both revised down noticeably. The 65 production of defense and space equipment also increased less over the 2003-06 period than reported initially. Change(romyearearlier Percenl The 2004 increase for construction supplies was revised down to 1.6 percent and is now about in line Manufacturing with the increases in 2002 and 2003.Astrong gain in 10 2005-8.0 percent-was followed by a decrease of 2.1 percent in 2006. Increases in the output of busi 5 ness supplies over the 2003-06 period were revised down slightly. After rising about 1 percent in 2003, + o production of business supplies advanced nearly 3 percent, on average, from 2004 to 2006. The increase in the output of materials over the 5 2003-06 period was little changed, on balance. The production ofenergy materials was about the same in 2003 and 2004. In 2005, the output ofenergy materi als was revised up and is now reported to have fallen NOTE: Fordefinitionofmanufacturing.refertotextnote6. The selected high-technology industries are semiconductors and related less than initially reported. In contrast, the 2006 electronic components (NAICS 334412-9), computers and peripheral rebound in output, at 504 percent, is a lower estimate equipment(NAICS3341),andcommunicationsequipment(NAICS3342). than that initially reported. Excluding energy, the production of materials grew briskly, on average, Industry Groups from 2003 through 2006 despite downward revisions in 2003 and 2004. Durable goods materials were Manufacturing production has expanded in each year revised down, on balance. The index for consumer since 2002, albeit at a somewhat slower rate, on parts, in which motor vehicle parts is a sizable average, than previously reported (figure 3 and table component, was revised down as well. Although A.3). Increases in the output of durable goods have growth in the production of equipment parts is now remained robust in recent years despite downward lower from 2003 to 2005 than previously reported, revisions in 2003 and 2004. For nondurable goods, output still advanced at a brisk pace in recent years. increases in output were revised up from 2002 to Revisions to theindexofotherdurable materials were 2005 and little changed in 2006. Excluding selected largely offsetting and left the overall level about the high-technology industries, factory output advanced same. 1/4percentin 2003, about3percentin 2004and 2005, The production of nondurable materials was re and about 2 percent in 2006 (tableAA). vised up, on balance, from 2003 to 2006; the output Across industry groups, downward revisions in the indexes for textile, paper, and chemical materials durable goods sector were widespread. Increases in were all revised upward. Thi index is now shown to the output ofcomputer and electronic products were have fallen less in 2003 and 2005 and to have revised down from 2003 through 2005, in part increased more in 2004 and 2006. becauseofdownward revisions tothestrongadvances

I Industrial Production and Capacity Utilization: The 2006Annual Revision A21 4. Industrialproduction: Selectedhigh-technology Capacity industries,January 1998-April2007 Total industrial capacity is estimated to have ex Ratioscale.2002=100 panded less rapidly over the 2003--06 period (table I - 270 A.6). Relative to previous reports, it is estimated to rV- Semico ' n - d ' uctors 220 have fallen 3/4 percentage point more rapidly in 2003 _ ~ Communications 170 and to have risen 1/2 percentage point more slowly in equiP:Q 120 both 2004 and 2005. In 2006, however, capacity is ~F ~ Computers 100 estimated to have increased nearly 21/2 percent, 70 roughly 1/2 percentage point more quickly than ini tially published.Thecontourofmanufacturingcapac 50 ity and the revisions to that contour are similar to 35 those for total industry. The revision shows that, relativetoprevious reports, aggregatecapacityforthe I I 1 I II II I I I I I I I selected high-technology industries rose less quickly 1998 1999 2000 200I 2002 2003 2004 2005 2006 2007 from 2003 to 2005 but increased more rapidly in NOTE: For the NArCS categoriesofthese industries, referto the note to 2006. Excluding high-technology industries, manu figure3. facturing capacity declined in 2003 and 2004 and expanded in 2005 and 2006; the rates of increase for communications equipment and for semiconduc were marked down in each year except 2005, which tors and related electronics (figure4). The production was unrevised. of motor vehicles and parts over this period is now Capacity at mines is still estimated to have con reported to have been weaker than originally esti tracted from 2003 to 2005 but is now shown to have mated. For2004, theoutputofmachinery was revised increased in 2006. Capacity at electric and gas utili down substantially, but gains for that year and subse ties was revised upward in 2006 but was revised little quent years were still strong. Within the nondurable in previous years. goods sector, the indexes for apparel and leather By stage ofprocessing, capacity in the crude stage goods and for plastics and rubber products were fell from 2003 to 2005 and is estimatedto haveedged revised down for the period since 2002. The cumula up 0.3 percent in 2006. Capacity at the primary and tive increases since 2003 for all the other major semifinished stages declined in 2003 but rose from componentsofnondurablegoods are now higherthan 2004 through 2006. Capacity for finished goods previously reported. expanded from 2003 to 2006. The revision lowered the rate of change in the output ofthe publishing and logging industries about Capacity Utilization I percentage point peryear, on average, from 2003 to 2006; the IP index continues to include these two Overall, capacity utilization for total industry was industries under manufacturing, although they are little changed by the revision from 2003 to 2006 classifiedelsewhere undertheNorthAmericanIndus (tableA.7). In the third quarter of2006, the capacity try Classification System (NAICS).6 utilization rate for total industry was 82.3 percent, The output of mining received small revisions in 1,3 percentage points above its 1972-2005 average 2003 and 2004 and is now reported to havedecreased and 0.2 percentage point lower than reported previ somewhat less in 2005.Although it rose 2 percentage ously. The utilization rate for total industry was points more slowly than initially reported for 2006, revised up 1/4 percentage point in the fourth quarters the mining index still surged 8 percent. The outputof of 2003 and 2005 and revised down 0.4 percentage utilities is now estimated to have grown more slowly point in the fourth quarterof2004 and 0.2percentage from 2003 through 2006. point in 2006. The manufacturing operating rate was 80.9percent 6. In the IPindex, manufacturingcomprisesthe following NAICS in the third quarter of 2006, 0.3 percentage point categories: the manufacturing sector, the logging .industry, and the belowthepreviousestimate but 1.1 percentagepoints newspaper, periodical, book, and directory publishing tndustnes. above its 1972-2005 average. For2004 and 2005, the Logging and publishing are not classified under manufactunng In NAICS(theyareunderagricultureand informationrespectively), but rates were also marked down: 0.6 percentage point historically they were considered to be manufacturing industries and and 0.2 percentage point, respectively. For 2003, the were c1as ified as such under the Standard Industrial Classification rate was revised up 0.3 percentage point. Utilization (SIC)system. In December2002, the Federal Reserve reclassifiedall itsindustrialoutputdata from theSICsystemtoNAICS. rates for durable goods manufacturers were lower

A22 Federal Reserve Bulletin 0 May 2007 5. Capacityutilization: Selectedhigh-technologyindustries, 6. Capacityutilization:Selectedhigh-technologyindustries, and manufacturingexcludingselectedhigh-technology January 1996--April2007 industries,January I989-April2007 Ratioscale.percenl Percenl 110 90 95 70 85 50 75 I I 65 Communjcatlonsequjpment 110 55 90 70 50 NOTE: Thehigh-technologyindustriesareidentifiedinthenotetofigure3. from 2004 to 2006 than previously published. Some ofthe largest downward revisions were in machinery and in electrical equipment, appliances, and compo 110 nents. Revisions generally were upward for wood 90 products, primary metals, fabricated metal products, 70 and furniture. On balance, utilization rates for nondu rable goods industries were revised upward; the larg 50 estupward revisions werein textileandproductmills, petroleum and coal products, and chemicals. The I I I I I I I I largestdownward revisions were in food, apparel and 1997 1999 2001 2003 2005 2007 leather, and plastics and rubber products. Capacity utilization in the other (non-NAICS) manufacturing quarter of 2006, the operating rate for utilities was industries was revised upward in 2003 and 2004 and 0.4 percentage point below its long-run average. downward in 2005 and 2006. Among selected high-technology industries, the TECHNICAL ASPECTS OF THE REVISION operating rates for computers and peripheral equip ment and for communications equipment were low The benchmark indexes for manufacturing-defined ered noticeably in recentyears, whereas utilization in for each six-digit NAICS industry as nominal gross the semiconductor industry was revised up substan output divided by a price index-were updated to tially (figures 5 and 6). On balance, the aggregate of include new as well as revised information for 2003, selected high-technology industries now shows that 2004, and 2005 from the 2004 and 2005 ASMs. This utilization was lower in 2004 and 2006 but higher in revision also incorporates the 2005 Survey of Plant 2003 and 2005. By the third quarter of 2006, the Capacity, other annual industry reports, recent infor operatingratehadclimbedto78.8percent,%percent mation on prices, and revised monthly source data on age point above its 1972-2005 average. physical product and production-worker hours. Capacity utilization in mining was revised up As in the 2003ASM, the reportsfor 2004 and 2005 between 2003 and 2006, mainly because of higher did notprovidedatafor all six-digitNAICS industries operatingrates in theoil and gasextraction industries. butcombined someoftheminto higher-level industry As ofthe third quarterof2006, the utilization ratefor aggregates. The benchmark indexes for manufactur mining is now estimated to be 90.9 percent, up ing IP are calculated from gross output for six-digit 5.9percentagepointsfrom thefourth quarterof2005, industries and then aggregatedtotheIPindustry level when the effects of Hurricane Katrina reduced the using proportions based on value added. To maintain operating rates ofoil and gas extraction facilities. In benchmark references that are consistent over time, electric and gas utilities, capacity utilization rates the Federal Reserve imputed estimates of gross out were revised down in 2005 and 2006 but were little putforindustriesno longerreportedseparately,which changed in previousyears.At86.4percentin thethird are based on values for the aggregate industries that

Industrial Production and Capacity Utilization: The 2006Annual Revision A23 contained them and the gross output shares for the used in IP (discussed in "Changes to Individual disaggregate industries in 2002. Production Series").9 The refinements to values of production for de tailed product groups were based in large part on Communications Equipment information in the Census Bureau's restructured Cur rent Industrial Report (CIR) on Telecommunications, The Federal Reserve's production indexes for com which was issued in August 2006. The report pre munications equipment (NAICS 3342) have been sented new groupings ofdata that better represent the developed, updated, and expanded over a period of communications equipment industry and that are years. The benchmark production indexes developed better aligned with the price indexes estimated by the for the 2000 revision incorporated a quality-adjusted Federal Reserve. Previously issued data for 2004 price index for the networking equipment (routers, wererestated tobeconsistentwith the new groupings, switches, and hubs) used by businesses and telecom and the Federal Reserve developed historical series munications service providers; the detail underlying for the new data groupings based on data in previous the series was expanded to include wireless network years' CIRs. ing equipment in the 2005 revision. The 2002 revi Inaddition to the newprice and production indexes sion introduced a new annual price index for other for mobile phones and for satellite-based equipment types of communications equipment that included, that were developed for this revision, industry and among other items, the transmission (fiber optic) governmentsourceson prices were used to update the equipment that had grown rapidly in relative impor previously developed indexes for networking equip tance in the 1990s. The 2005 revision updated and ment, central office equipment, transmission (fiber refined thateffort.? optic)equipment,andPBX(privatebranchexchange) This revision introduced further enhancements to equipment. The remaining price indexes for commu the IP index for communications equipment. The nicationsequipmentproducts and forsecondary prod improvements affected data from 1972 forward and ucts and miscellaneous receipts were updated based included (I) refined estimates of the annual value of on producer price indexes from the Bureau ofLabor U.S. productionfordetailedproductgroups,(2)newly Statistics.10 developed annual price indexes for mobile phones The new productpricesforcommunicationsequip and related equipment and for satellites and related ment declined more than estimated previously (fig equipment, (3) updated annual and quarterly price ure 7). Accordingly, the output of communications indexes for networking equipment that use new equipment is now shown to have risen about 6 per source data for selected components, (4) new bench cent more per year, on average, from 1972 through mark price indexes that incorporate price indexes for 2005. The yearly pattern was little changed; excep secondary products and miscellaneous receipts, and tions were 2004 and 2005, when upward revisions (5) newly incorporated indicator data for networking from faster falling prices were more than offset by equipment-apart ofthe index for telephone appara downward revisions caused by benchmarking to the tus manufacturing (NAICS 334210).8 2004 and the 2005ASM. The first four of these improvements affect the benchmark indexes for communications equipment Mobile Phones and Related Equipment (discussed in the sections below on specific types of The revision incorporated a new price index for equipment), and the fifth affects a monthly indicator mobile phones (excluding satellite phones) and re lated network equipment that was constructed from detailed data available from Gartner. Previously, the 7. Refer to the following Bulletinarticles on the 2000, 2002, and IP index relied on the producer price index for these 2005 revisions for further details: Carol Corrado (200I), "Industrial Production and Capacity Utilization: The 2000 Annual Revision" products. The revised index fell 17.2 percent, on FederalReserveBulletin,vol.87(March),pp. 132-48;CarolCorrado average, from 1994 to 2005 (table 2). (2003), "Industrial Production and Capacity Utilization: The 2002 Historical and Annual Revision," Federal Reselve Bulletin, vol. 89 (April),pp. 151-76;andKimberlyBayardandCharlesGilbert(2006), 9. The benchmark indexes for most industries in the Federal "Industrial Production and Capacity Utilization: The 2005 Annual Reserve's IPindexincorporateupdatedpriceindexes fromthe indus Revision,"FederalReserveBulletin,vol.92,www.federalreserve.gov/ tryoutputprogramoftheBureauofEconomicAnalysis. However,the pubs/bulletin. priceindexes forsemiconductorsandcommunicationsequipmentare 8. Thepriceindexesforsecondaryproducts(notedinitem4above) constructedbytheFederal Reservefrom alternativesources. fall notably slower than the indexes for primary products. The 10. Producerpriceindexesareusedas priceindexes forbroadcast resultingindustrypriceindexfallsabout Ipercentagepointslower,on andstudioequipment,alarmsystems, vehicularandpedestriantraffic average,thanthe indexforprimaryproducts. equipment,intercomsystems,andothervoiceequipment.

A24 Federal Reserve Bulletin 0 May 2007 7. Industrial production:Communicationsequipment, 2. Pricechanges for communications equipment, by type, January 1972-April2007 1994--2005 I Ratioscale.2002=100 Type I A p n er n c u e a n l t a c v h e a r n a g g e e I ------------'--- Satellitesandrelatedequipment................ -14.8 - J~ ~= 200 Mobilephonesandrelatedequipment.......... -17.2 - etworkingequipment......................... -18.5 100 Previous.................................... -19.8 - 50 NOTE:Thepreviousestimatefornetworkingequipmentisthatpublishedfor the2005annual revisiontoindustrial production. - V r< Revised - 20 -~ ~ - 10 developed using information from Current Industrial - / - 5 Reports issued by the U.S. Census Bureau and other government and industry sources. These gross value _/ - 2 estimates were deflated by the price indexes just II II I I I I II I II I I I I I I I I I I II I I I I II described to obtain benchmark indexes ofreal output 1972 1977 1982 1987 1992 1997 2002 2007 ofmobile phones and related equipment. Average annual percent change Satellites and Related Equipment Period Previous Revised Data from industry groups on prices for satellites and 1972-94average 6.8 12.7 1995-2002average 13.2 19.7 related ground equipment were used to construct a 2001 -10.2 -3.1 price index for this product class. The index fell 2002 -30.0 -23.5 2003 .1 7.6 14.8percent, on average, from 1994to2005 (table2). 2004 16.6 9.7 2005 24.4 7.9 Informationfrom Futronon satellitemanufacturino o revenues and total satellitecapacity launched, proxied by transponder bandwidth, was used to construct an DataonU.S. unitsalesandpricesofmobilephones estimate ofsatellite unit costs, which fell 27 percent, categorized by function (basic, enhanced, smart, and on average, over the 2000--05 period. Pricing infor cellular PDA) and type of signal (that is, GSM, mation for the highly diverse ground equipment CDMA, TDMA, and so on) were used to create a category is notwidely available. Detailed information Fisher price index, which fell, on average, 17.8 per from the NPD Group on one such product-GPS centperyear.11Formobilephonenetworkequipment, navigation equipment-yielded a price index that fell a price index was constructed using prices and units an average of 12.2 percent per year from 2002 to for U.S. sales ofbase stations, which transmit signals 2006. The technologies underlying mobile phone to and receive signals from mobile phones, and networking equipment and satellite ground equip related switching equipment. This index declined an ment are similar, so the geometric mean of the GPS averageof 14 percent peryear from 1994 to 2005. In index and the price index for mobile phone network contrast, the producer price index for this category ing equipment was used as a deflator for ground was little changed over this period. equipment. The combined price index for mobile phones and From 2000 to 2005, the FRB price index for related equipment was extended backward to 1972 satellites and related equipment fell about 15 percent using the producer price index for the product class per year on average, more than 12 percentage points containing mobile phones adjusted by the average faster than the annual PPI that previously represented bias (14 percent) from 1994 to 2005.12 these products in the deflator used to calculate the Estimatesoftheannual gross valueofU.S. produc benchmark index for IP. The FRB price index was tion of mobile phones and related equipment were extended back before2000 using a bias-adjusted PPI. 11. GSM (Global System for Mobile Communications), CMDA Networking Equipment (CodeDivisionMultipleAcce ),andTDMA(TimeDivisionMultiple Access)arecommontypesofcell phonesignals. The IPseries for the production ofnetworking equip 12. Jerry Hausman (1999), "Cellular Telephone, New Products, and the CPI," Journal ofBusiness & Economic Statistics, vol. 17 ment is not published in the monthly statistical (April), pp. 188-94; Hausman suggests that mobile phone prices release, but it is included in the broader IPaggregate dropped substantially during the years before 1994, whereas the for communications equipment and updated on an producerpriceindexforthatproductc1as changesverylilliebetween 1972and 1994. ongoing basis. Tables 3 and 4 report the price index 1

Industrial Production and Capacity Utilization: The 2006Annual Revision A25 3. Price indexes for communications equipment 4. Production and prices for U.S. networkingequipment, manufacturing, 1997-2005 1998-2005 2002price= 100 Valueof Index,2002=100 production Networking Other Period I (millionsof Year Total equipment communications Production Prices dollars) andserviceequipment providerrouters Annualestimates 1998..... 58.7 240.7 20.556.4 1 1 9 9 9 9 7 8................ 2 1 1 7 0 9 . . 7 3 2 3 4 3 0 3 . . 7 8 1 1 6 8 4 6 . . 8 2 2 1 0 9 0 9 0 9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... 1 8 1 2 3 . . 5 8 1 17 9 5 7 . . 3 2 2 2 3 9 . , 7 16 8 0 1 . . 7 6 1999................ 157.3 197.2 147.3 2001 ...................... 124.7 132.7 25.202.6 2000................ 140.4 175.3 131.5 2002...................... 100.0 100.0 15,747.5 2001 119.1 132.7 114.0 2003 ..................... 90.7 80.6 13.088.5 2002........ 100.0 100.0 100.0 2004.... 89.1 67.3 11,151.3 2003 ..............•. 86.5 80.6 88.6 2005 ................ 102.0 60.5 11,455.9 2004....... 78.4 67.3 81.7 2005 ...... 71.3 60.5 74.6 Quarterlyestimates 1998:QI ........ 49.9 288.3 19,361.9 MEMO Q2 ..........- 59.1 255.3 21,667.2 Averagepercent Q3 ................... 62.5 198.5 20,516.9 change, 1997-2005 .. -12.5 -18.5 -10.9 Q4 ........... .-. . .. 63.3 220.3 20,806.8 1999:QI .................. 78.3 225.3 23,513.5 Q2 .................. 82.7 202.0 23,906.1 Q3 .................. 82.1 173.7 23,545.0 Q4 .................. 87.0 185.8 24,224.3 fornetworkingequipment.Forthe 1994-2000period, 2000:QI .................. 103.3 199.9 27,993.8 theprice index is based on detailed priceandquantity Q2 .................. 113.9 178.8 28,940.9 Q3 .................. 117.4 153.7 29,722.5 information from Gartner on routers, switches, and Q4 ..... ............ 120.6 166.7 29,970.2 200I:QI 136.7 160.2 29,004.9 hubs. With this revision, the componentprice indexes Q2 .................. 124.1 143.6 25,699.2 for routers and switches are based on data from Q3 .................. 120.5 110.1 23,512.1 Q4 .................. 117.4 118.3 22,504.3 Synergy from 2001 on. The price index for wireless 2002:QI .................. 10I.l 126.2 17,062.0 Q2 .................. 102.5 122.7 16.765.8 networking equipment, such as adapters and access Q3 .............. 98.5 74.6 14,914.0 Q4 .................. 97.9 82.4 14,158.7 ports, is based on data from Gartner from 1994 to 2003:QI .................. 94.0 103.5 13,208.2 2005. Q Q 3 2 .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8 6 9 . . 7 8 6 9 4 5 . . 5 6 1 13 3 , . 3 6 4 3 9 4 . . 1 8 Thepreviouspriceindexesforrouters and switches Q4 .................. 92.3 64.0 12,057.9 2004:QI ................... 95.9 81.8 12,689.1 required a downward adjustment of 8 percentage Q2 .............. . 89.6 75.2 10,716.9 pointsto align theirresults withquality-adjusted price Q3 ................ 86.3 55.9 10.995.1 Q4 .................. 84.5 58.7 10,241.2 indexes based on research using item-level prices and 2005:QI 88.7 72.7 10,456.8 Q2 ............. 109.9 64.6 11.598.7 characteristics for 1995-2000.13 A similar exercise Q3 .................. 100.9 52.7 11.607.9 . Q4 .... ........ 108.4 54.3 12,090.7 was conducted to update the bias adjustment. A price index was computed from data for constant-quality, high-end routers (thatis, specific models ofa particu Ethanol lar type and brand ofrouter) from 2002 to 2005. The A new industrial production index for ethyl alcohol Fisher price index based on the quarterly Synergy (also known as ethanol, NAICS 325193) was intro data yielded results that were very close to the price duced with this revision. The index begins in 1997 index based on the specific models, so the previous and uses as a monthly indicator data on fuel-ethanol downward adjustment was phased out between 2000 production from theMonthly OxygenateReport, pub and 2004. lished by the Energy Information Agency of the On average, the movements in the overall network DepartmentofEnergy. Previously,ethanol production ing price index and the component price indexes are had been included in the production index fororganic revised only slightly, but the pattern is somewhat chemicals (NAICS 32511, 32519), which used the different, particularly in the router index, primarily output of eight basic organic chemicals as its high because ofthe switch to Synergy source data. frequency indicator. The data for those eight chemi Changes to Individual Production Series cals now serve as the indicator for a new series that coversthecombinedoutputofpetrochemicals(NAICS With this revision, the monthly production indicators 32511) and other organic chemicals (NAICS 32519), for some series have changed, and some new series except ethanol. The new ethanol series is classified have been created. both in the energy materials market group (86.5 per cent by weight) and in the business supply market group(13.5 percentby weight). Likethe oldseriesfor 13. MarkDomsandChristopherForman(2005), "PricesforLocal all of organic chemicals, the new series for organic Area Network Equipment," Information Economics and Policy, vol. 17(July),pp.365-88. chemicals other than ethanol is classified both in

A26 Federal Reserve Bulletin0 May 2007 non-energy chemical materials (86.5 percent) and in were very nearly proportional to the midpoint of the business supplies (13.5 percent). cooling capacity range in each category, which al lowed the calculation of unit values for those ARI size categories that did not exactly line up with the Unitary Air Conditioners CIR categories. The relative prices appeared stable The output of unitary air conditioners is now repre across time, so the indicators for the new IP indexes sented by separate production indexes for residential were constructed as fixed-weight aggregates of the and nonresidential units for the period 1997 to the ARI shipments series. present. Unitary air conditioners include both central ARIpublishedestimatesofthechange in manufac air units and heat pumps and are a part of NAICS turers' overall inventories-not broken into size industry 333415, which covers air conditioners, non categories-up through the summer of 2006. Previ household refrigeration equipment, and warm air ously, the inventory change figures had been added to furnaces. Previously, a single production index for unit shipments to construct an estimate of unit pro unitary air conditioners was based on data for ship duction. These data on inventory change were ex ments and inventories from theAir-Conditioning and tended with model-based estimates of inventory Refrigeration Institute (ARI). change and used the method implemented for other The new indexes take advantage of additional industries in recent annual revisions to industrial detail available in the ARI report both to develop production.14The weighted shipments aggregates are indexes for the residential and nonresidential markets then multiplied by the ratio of implicit production to and to weightunits ofvarious sizes by relative prices. shipments for overall unitary airconditioners tocom The ARI shipments data are available for seventeen putethe monthly productindicator forthe residential size categories that range from units with cooling and nonresidential production indexes. capacityofless than 16,500BritishThermal Unitsper hour (BTUH) to tho e with cooling capacity of Audio and Video Equipment 640,000 BTUH or more. The shipments for each size The monthly indicator for audio and videoequipment category aresplitbetween residential and nonresiden (NAICS 3343) was updated to include both digital tial units; the bulk ofthe units with cooling capacity televisions and speakers for the period 2002 to the less than 65,000BTUHareassumed to beresidential, present. Previously, the index reflected shipments of and the bulk of the units with cooling capacity of at analog televisions with diagonal sizes of24 inches or least65,000BTUHare assumed to be nonresidential. larger that were adjusted for imports, but the rapid The shipments ofthe smaller units are split into eight transition ofthe market from analog to digital televi sizecategories; theunits are assumed tobe97 percent sionsin thepastfew years madeitnecessarytoexpand residential in the smallest category, 96 percent in the the scope ofthe index. In addition, data on the output next smallest category, and so on, until the share ofspeakers were included in the new indicator; ship decreases to 90 percent in the largest ofthese mostly ments of speakers and commercial sound systems residentialcategories.Ashareofthe larger-sizedunits account for about 15 percent to 20 percent of U.s. is assumed to be for use in apartments and other multifamily residential buildings. The residential audioandvideoequipmentshipmentsinrecentyears.15 The new monthly indicator is a Fisher quantity share of units with cooling capacity between 65,000 index, which in late 2006 was based on eighteen and 96,000 BTUH is assumed to be 20 percent. This distinct components. Unit and dollar sales of digital share decreases 2 percentage points for each larger televisionsareavailablebytechnology(plasma,LCD, category, falling to 4 percent for units with cooling projection, and digital tube) and by size (length of capacity of640,000 BTUH or more. diagonal) from theConsumerElectronicsAssociation Relative prices for the various size categories are (CEA). In late 2006, sales of plasma TVs were derived from the Current Indu trial Report (CIR) on available for three sizegroupings: sets with diagonals Refrigeration, Air Conditioning, and Warm Air Heat up to 49 inches, sets with diagonals between 50 and ing Equipment from the Census Bureau for 2004 and 59 inches, and sets with diagonals 60 inches and 2005; previously, the single index was based on an above. In addition, sales ofLCD TVs were available 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 14. Kimberly Bayardand CharlesGilbert(2005), "Industrial Pro broken down by size categories very similar to the duction and Capacity Utilization: The 2004Annual Revision," Fed eralReserveBulletin,vol. 91 (Winter),pp.9-25. ARI size categories. Unit values were calculated for 15. U.S. Census Bureau, Current Industrial Reports, Consumer the various size categories in the CIR. These values Electronics: 2005,www.census.gov/cir/www/334/ma334m.html.

Industrial Production and Capacity Utilization: The 2006Annual Revision A27 in seven size categories that ranged from sets with 8. U.S. shareofworldwideproductionofmicroprocessors, diagonals up through 18 inches to those with diago 1992-2006 nals 40 inches and longer. Data for projection TVs P~rccnt weregrouped intofourcategories: diagonalsless than 50 inches, diagonals from 50 to 54 inches, diagonals from 55 to 59 inches, and diagonals 60 inches and - - 100 above. Data for digital tube sets were available for two groups: those with diagonals less than 30 inches - - 80 and those with diagonals of 30 inches or more. Speakers and analog television sets with diagonals 24 - - 60 inches and above were included as separate compo nents ofthe Fisher index. Smaller analogTV sets are - - 40 generally imported. A price index was derived for each ofthe compo - - 20 nents of the Fisher index. For the digital televisions, I I II II II II II II II II II II II II II II II I the price indexes werejust the unit values calculated 1992 1994 1996 1998 2000 2002 2004 2006 from the dollar and unit sales figures. For the analog televisions, the price index was assumed to equal the production ofMPUs contains more-noticeable decel priceindexforpersonalconsumptionexpenditureson erations in 1994, 2001, and 2005 and a more rapid televisions from the national income and product acceleration in 1995. Abrupt and pronounced move accounts. For speakers, a producer price index was ments in the seriescoincide with changes to the small used. number of facilities that account for the bulk of The source data from the CEA are sales figures, worldwideproduction, such as idlingaplantto install so an adjustment was made so they better represent upgraded equipment. U.S. production. The Current Industrial Report for ConsumerElectronics includes domestic factory ship ments data for speaker systems, flat panel televi Communications Equipment Quarterly Indicator sions (plasma and LCD), projection TVs, and tube This revision introduced a new data source, Synergy TVs (digital and analog). The ratios of these data to Research Group, for the quarterly indicator for data the nominal sales data were used to adjust the nomi networking equipment, which is part of telephone nal values for each of the components in the Fisher apparatus manufacturing (NAICS 334210). Synergy index.16 provided data from 2002 forward on U.S. sales of routers and switches that were more comprehensive Semiconductors and timely than the previous source. As in previous years, the index for the production of Periodicals and Other Publishers semiconductors is based on worldwide sales data from the Semiconductor Industry Association, ad Theindexforperiodicalsandotherpublishers(NAICS justedfor net trade using adomestic production share 51112, 51114, and 51119) was split into separate estimated from various government and industry indexes for periodicals (NAICS 51112) and other sources. Before this revision, Current Industrial Re publishers (NAICS 51114, 51119). Both new indexes portsissuedbytheU.S.CensusBureauandannounce use production-worker hours as monthly indicators ments from major manufacturers of microprocessor and begin in 1987. The separate indicators will allow units (MPUs) were used to estimate shares. With this comparisons to other industry data. revision, annual information from Gartner on the location of specific facilities and information from Series Switched from Product Data to Instat on quarterly production at specific establish Production-Worker Hours ments were used to refine production share estimates (figure 8). The resulting shares are noticeably differ Productdata used as indicators for several IPindexes ent from previous estimates; the revised pattern of 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 16. Nominal sales data from the CEA are used for the digital (NAICS 31192), cotton and synthetic fabrics (part of televisionsandthespeakers. NominalsalesofanalogTVsarederived astheproductoftheunitsalesandthepriceindex. NAICS 31321), wool fabrics (partofNAICS 31321),

A28 Federal Reserve Bulletin0 May 2007 5. Industrial production data, by type, availablein reporting indicator for organic chemicals excluding ethanol is window, 2005 based on utilization rates from the Survey of Plant Percentage Capacity. Capacity for synthetic rubber is now based on Monthofestimate Typeofdata utilization rates from the Survey of Plant Capacity 1st 4th and begins in 2002. Capacity for previous years is Product-based ....... 27 42 54 54 still derived from physical capacity data from the Production-workerhours 43 43 43 43 Totalavailable ... 70 84 96 97 International Institute ofSynthetic RubberProducers. FederalReserveestimates.... 30 16 4 3 Weights for Aggregation NOTE: Industrial productionfor a month is issued in the middleofthe fol lowingmonthandrevised inthesubsequentthreemonthlyG.17 releases.The columns in this tableshow thepercentagesofindustrial production, basedon The IP index is a Fisher index. This reVISion uses valueadded,thathavebeenderivedfromdifferenttypesofsourcedataforthe initialestimateandsubsequentrevisions. information from the Census of Manufactures to obtain updated estimates ofthe industry value-added weights used in the aggregation of IP indexes and tire cord (NAICS 314992), hosiery (NAICS 31511), pigments (NAICS 31523), synthetic rubber (NAICS capacity utilization rates. TheFederal Reservederives 325212), and electron tubes (NAICS 334411). estimates of value added for the electric and gas utility industries from annual revenue and expense Reliability ofMonthly Estimates data issued by other organizations. The weights for aggregation, expressed as unit value added, were Thefirst estimateofoutputfor a month is preliminary estimated using the latest data on producer prices. and is subject to revision in each of the subsequent Table A.8 shows the annual value-added proportions three months as new source data become available. in the IPindex from 1997 through 2005. By the third revision (the fourth month ofestimate), theproduct-basedcontentofIPis54percent(table5). Revised Monthly Data Changes to Individual Capacity Series This revision incorporates product data that became available after the regular four-month reporting win The capacity index for organic chemicals (NAICS dow for monthly IP was closed. These data are 32511, 9) was split irito two series-ethyl alcohol (or released with too great a lag to be included with ethanol, NAICS 325193) and organic chemicals monthly IPestimates; however, the data are available excludingethanol(NAICS32511,9except325193) for inclusion in the annual revision. for 1997 and onward. The capacity indicator for ethanol is gallons of ethanol capacity from the Revised Seasonal Factors Renewable Fuels Association (RFA). The capacity index and corresponding index ofcapacity utilization Seasonal factors for all series were reestimated using were constructed as follows: A physical utilization data that extend into 2006. Factors for production rate was calculated as the ratio of production data worker hours-which adjust for timing, holiday, and from the Monthly Oxygenate Report (published by monthly seasonal patterns-were updated with data the Energy InformationAgency ofthe Department of through September 2006 and were prorated to corre Energy) and the physical capacity indictor from the spond with the seasonal factors for hours aggregated RFA. This physical utilization rate was then divided tothethree-digitNAICSlevel.Theupdatedfactorsfor into the industrial production index for ethanol to thephysicalproductseries,whichincludeadjustments create acorrespondingcapacity index.17Thecapacity for holiday and workday patterns, used data through 2006. Seasonal factors for unit motor vehicle assem blieshavebeen updated,andprojectionsthroughJune 17. Typically,thecapacityindexesresultingfromthismethodology are furthersmoothed usingamodel-basedapproachthataccounts for 2007 are on the Federal Reserve Board's website at featuresofthedatacollectionprocessordifferentmeasurementerrors. www.federalreserve.gov/releases/gI7/mvsf.htm. 0 With theshort history oftheseseries, 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 Manufactures and Annual Surveys ofManufactures. This correction indexbeforeapplyingthecorrection factor thatalignsthe production factor was then applied to both the production and the capacity indicator to the benchmark output information in the Census of indexes. Appendixtables startonpageA29

Industrial Production and Capacity Utilization: The 2006Annual Revision A29 Appendix Tables Based on the G.17 Statistical Release, May 16, 2007 A.I. Revised data for industrial production for total industry Seasonallyadjusteddataexceptasnoted Quarter Annual Year Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. I I I avg.1 I 2 3 4 Industrialproduction(percentchange) 1977................ -.6 \.5 1.3 .9 .8 .7 .2 .1 .5 .3 .0 .2 8.4 12.8 4.9 2.9 7.7 1978. -\.3 .4 \.8 2.1 .3 .7 .0 .4 .3 .9 .7 .6 -\.2 16.8 3.6 7.6 5.5 1979.. -.7 .6 .3 -1.1 .8 .0 -.2 -.7 .1 .6 -.1 .1 2.0 -.5 -\.4 1.4 3.1 1980.. .5 .0 -.3 -2.0 -2.5 -\.3 -.6 .3 \.6 \.3 \.7 .6 1.7 -15.9 -6.2 16.2 -2.6 1981 -.5 -.5 .6 -.5 .7 .5 .7 .0 -.6 -.7 -1.1 -\.I \.0 \.5 4.3 -8.5 \.4 1982............. -1.9 2.0 -.7 -.8 -.7 -.4 -.3 -.8 -.4 -.8 -.4 -.8 -7.6 -4.9 -5.9 -7.4 -5.1 1983 1.9 -.6 .9 \.2 .7 .6 1.6 1.1 \.5 .9 .3 .5 4.4 9.6 14.8 11.0 2.7 1984 2.0 .5 .5 .6 .5 .4 .3 .1 -.1 -.1 .4 .1 12.5 6.5 2.9 .5 9.1 1985................ -.3 .4 .2 -.2 .1 .1 -.6 .5 .4 -.4 .3 \.0 \.2 .7 -.5 2.7 1.4 1986................ .5 -.8 -.6 .1 .2 -.3 .6 -.2 .2 .4 .5 .9 2.4 -2.4 \.7 4.6 \.1 1987 -.3 \.3 .2 .6 .7 .5 .6 .7 .3 \.5 .5 .5 5.4 7.2 7.3 9.9 5.1 1988 .0 .4 .3 .5 -.1 .2 .2 .5 -.3 .6 .2 .4 3.4 3.4 2.1 3.3 5.1 1989 .2 -.5 .3 .0 -.7 .0 -.9 \.0 -.3 -.1 .3 .7 \.5 -\.8 -2.4 \.8 .9 .............. 1990. -.6 .9 .5 -.1 .2 .3 -.2 .3 .2 -.7 -\.2 -.7 3.0 2.8 \.4 -5.9 \.0 1991 ..... -.5 -.7 -.5 .2 \.0 \.0 .0 .2 .9 -.2 -.1 -.3 -7.6 2.7 5.7 \.0 -\.5 1992.....•......•... -.5 .7 .8 .7 .4 .1 .8 -.5 .2 .7 .4 .1 -.3 7.1 3.1 4.0 2.9 1993................ .5 .3 .0 .3 -.4 .3 .4 .0 .5 .8 .4 .6 3.7 1.1 2.4 6.4 3.4 1994................ .5 .0 \.0 .5 .5 .7 .2 .5 .3 .9 .7 1.1 5.6 7.3 5.1 8.3 5.5 1995............•... .4 .1 .1 -.1 .2 .3 -.4 \.3 .4 -.2 .3 .3 6.0 \.0 3.8 3.5 5.0 1996................ -.8 1.5 -.2 .9 .7 .9 -.2 .7 .5 .0 .9 .7 2.0 8.4 5.2 6.1 4.3 1997................ .2 \.2 .8 -.1 .6 .4 .5 \.3 .9 .8 \.0 .4 8.3 5.5 9.0 11.1 7.2 1998......... .5 .1 .0 .5 .7 -.5 -.3 2.2 -.2 .7 -.1 .4 4.7 3.3 3.8 5.3 6.1 1999................ .6 .5 .2 .2 .8 -.1 .7 .5 -.4 1.3 .6 .9 4.9 4.0 4.4 8.2 4.7 2000................ .1 .4 .4 .8 .3 .1 -.3 -.3 .5 -.5 .0 -.4 5.3 5.9 -.5 -\.6 4.5 2001 ................ -.7 -.6 -.4 -.3 -.7 -.6 -.4 -.4 -.4 -.6 -.5 .0 -5.7 -5.4 -5.6 -5.1 -3.5 2002................ .5 .1 .8 .4 .4 .9 -.3 .2 .1 -.3 .4 -.4 2.7 6.4 2.3 -.4 .0 2003 ................ .6 .3 -.2 -.8 -.1 .2 .4 -.1 .5 -.1 .8 .0 2.3 -3.2 2.5 3.3 \.1 2004................ .2 .7 -.6 .6 .6 -.7 .6 .2 -.2 .7 .2 .6 3.3 2.5 \.8 4.3 2.5 2005 .3 .6 -.1 .1 .4 .6 .0 .3 -\.6 \.2 1.1 .8 4.6 2.8 .8 4.7 3.2 2006.. .0 .3 .5 .9 -.1 .9 .4 .2 -.3 -.2 -.4 .6 5.0 6.5 4.0 -\.5 3.9 2007 ................ -.5 .8 -.3 .7 .9 Industrial production(2002=100) 1977... ........... 49.7 50.5 51.1 5\.6 52.0 52.4 52.5 52.5 52.8 52.9 53.0 53.1 50.4 52.0 52.6 53.0 52.0 1978............... 52.3 52.6 53.5 54.7 54.8 55.2 55.2 55.4 55.6 56.0 56.5 56.8 52.8 54.9 55.4 56.4 54.9 1979............... 56.4 56.8 56.9 56.3 56.8 56.8 56.7 56.3 56.3 56.6 56.6 56.7 56.7 56.6 56.4 56.6 56.6 1980.. 56.9 56.9 56.8 55.6 54.2 53.5 53.2 53.4 54.2 54.9 55.9 56.2 56.9 54.5 53.6 55.7 55.1 1981 ... 55.9 55.6 55.9 55.6 56.0 56.3 56.7 56.7 56.4 55.9 55.3 54.7 55.8 56.0 56.6 55.3 55.9 1982. 53.7 54.7 54.4 53.9 53.5 53.3 53.2 52.7 52.5 52.1 5\.8 51.4 54.3 53.6 52.8 51.8 53.1 1983. 52.4 52.1 52.5 53.2 53.6 53.9 54.7 55.3 56.2 56.7 56.9 57.1 52.3 53.5 55.4 56.9 54.5 1984... 58.3 58.6 58.9 59.2 59.5 59.8 59.9 60.0 59.9 59.8 60.1 60.1 58.6 59.5 59.9 60.0 59.5 1985... 60.0 60.2 60.4 60.2 60.3 60.3 60.0 60.2 60.5 60.3 60.5 6\.1 60.2 60.3 60.2 60.6 60.3 1986............... 6\.4 60.9 60.6 60.6 60.7 60.5 60.9 60.8 60.9 6\.2 6\.5 62.0 6\.0 60.6 60.9 6\.6 6\.0 1987.... 6\.8 62.6 62.7 63.1 63.5 63.8 64.2 64.7 64.9 65.8 66.2 66.5 62.4 63.5 64.6 66.1 64.1 1988........... 66.5 66.7 66.9 67.2 67.2 67.3 67.4 67.8 67.6 68.0 68.1 68.4 66.7 67.3 67.6 68.2 67.4 1989.............. 68.6 68.2 68.4 68.4 68.0 68.0 67.3 68.0 67.8 67.7 67.9 68.4 68.4 68.1 67.7 68.0 68.1 1990.............. 68.0 68.6 68.9 68.8 68.9 69.1 69.0 69.2 69.4 68.9 68.1 67.6 68.5 69.0 69.2 68.2 68.7 1991 .............. 67.2 66.8 66.5 66.6 67.3 68.0 68.0 68.1 68.7 68.5 68.4 68.2 66.8 67.3 68.2 68.4 67.7 1992. .............. 67.9 68.3 68.8 69.3 69.6 69.6 70.2 69.9 70.0 70.5 70.8 70.9 68.3 69.5 70.0 70.7 69.7 1993 .............. 7\.2 7\.5 7\.5 7\.7 71.4 7\.6 7\.9 7\.9 72.3 72.8 73.1 73.5 7\.4 7\.6 72.0 73.1 72.0 . 1994.... ....... ... 73.9 73.9 74.7 75.0 75.4 75.9 76.1 76.4 76.6 77.3 77.8 78.7 74.1 75.4 76.4 77.9 76.0 1995. .. . ............ 79.0 79.0 79.2 79.1 79.2 79.5 79.2 80.2 80.6 80.4 80.7 8\.0 79.1 79.3 80.0 80.7 79.8 1996.... ........... 80.3 8\.6 8\.4 82.1 82.7 83.4 83.3 83.8 84.3 84.3 85.1 85.7 81.1 82.8 83.8 85.1 83.2 1997................ 85.9 86.9 87.6 87.5 88.0 88.4 88.8 89.9 90.8 9\.5 92.4 92.8 86.8 87.9 89.9 92.3 89.2 1998. ............. 93.3 93.3 93.4 93.8 94.4 94.0 93.7 95.7 95.5 96.1 96.1 96.4 93.3 94.1 95.0 %.2 94.6 1999................ 96.9 97.5 97.6 97.8 98.6 98.5 99.2 99.7 99.3 100.6 101.3 102.1 97.4 98.3 99.4 101.3 99.1 2000................ 102.2 102.7 103.1 103.9 104.2 104.3 104.0 103.8 104.2 103.7 103.7 103.3 102.7 104.1 104.0 103.6 103.6 . 2001 .. . ........... 102.6 102.0 10\.6 101.3 100.6 100.0 99.6 99.2 98.8 98.3 97.8 97.7 102.1 100.7 99.2 97.9 100.0 2002................ 98.3 98.4 99.1 99.5 99.9 100.9 100.6 100.7 100.8 100.5 100.9 100.4 98.6 100.1 100.7 100.6 100.0 2003 ............. 101.1 101.4 101.1 100.3 100.2 100.4 100.8 100.8 101.3 101.2 102.0 102.0 101.2 100.3 10\.0 10\.8 101.1 2004... ............ 102.3 103.0 102.4 103.1 103.7 102.9 103.6 103.8 103.6 104.4 104.7 105.3 102.6 103.2 103.7 104.8 103.6 2005 ... ............ 105.6 106.2 106.1 106.2 106.6 107.3 107.3 107.6 105.8 107.1 108.2 109.1 106.0 106.7 106.9 108.1 106.9 . 2006... ........... 109.1 109.4 110.0 110.9 110.9 111.9 112.3 112.5 112.2 112.0 111.5 112.2 109.5 111.2 112.3 111.9 111.1 2007... ............ 111.7 112.6 112.2 113.0 112.2 OTE: Monthly percentchangefigures show the changefrom the previous Estimatesfrom February2007 throughApril 2007aresubjectto funherremonth;quarterly figuresshowthechangefromthepreviousquarteratacom- vision intheupcomingmonthlyreleases. poundannualrateofchange. Productionandcapacityindexesareexpressedas I.Annual averagesofindustrial productionarecalculatedfrom nol seasonpercentagesofoutputin2002. allyadjustedindexes. ... NOlavailableasofMay 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 Seasonallyadjusteddataexceptas noted Quarter Annual Year Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. I I 2 I 3 I 4 avg.1 Capacity(percentof2002output) 1977...... .... ... 61.5 61.7 61.8 62.0 62.2 62.4 62.5 62.7 62.9 63.1 63.3 63.5 61.7 62.2 62.7 63.3 62.5 1978... .......... 63.7 63.9 64.1 64.2 64.4 64.6 64.8 65.0 65.1 65.3 65.5 65.6 63.9 64.4 65.0 65.5 64.7 1979.... ....... 65.8 65.9 66.1 66.2 66.4 66.5 66.7 66.8 66.9 67.1 67.2 67.4 65.9 66.4 66.8 67.2 66.6 1980................ 67.5 67.6 67.8 67.9 68.0 68.2 68.3 68.5 68.6 68.8 68.9 69.1 67.6 68.0 68.5 68.9 68.3 1 19 9 8 8 1 2 . .. .. . . . . .. . . . . . . . . . . . . . . . . . . . . 7 6 1 9 . . 3 2 6 7 9 1 . . 4 4 7 6 1 9 . .6 6 6 7 9 1 . . 7 8 6 7 9 1 . . 9 9 7 7 2 0. . 1 1 7 7 0 2 . . 2 2 7 72 0 . . 3 4 7 7 0 2 . . 6 4 7 7 2 0 . .8 5 7 7 0 2 . . 9 6 7 71 2 . . 1 7 6 7 9 1 . . 4 4 7 6 1 9 . .9 9 7 7 2 0 . . 3 4 7 7 0 2 . . 9 6 7 72 0 . . 1 2 1983 .... ........... 72.7 72.8 72.8 72.9 72.9 72.9 73.0 73.0 73.0 73.1 73.2 73.2 72.8 72.9 73.0 73.2 73.0 1984............... 73.3 73.4 73.5 73.6 73.7 73.8 74.0 74.1 74.3 74.5 74.7 74.8 73.4 73.7 74.1 74.7 74.0 1985............. .. 75.0 75.2 75.4 75.6 75.8 76.0 76.2 76.3 76.5 76.6 76.8 76.9 75.2 75.8 76.3 76.8 76.0 1986.. .......... 77.0 77.1 77.2 77.3 77.4 77.5 77.6 77.7 77.8 77.9 78.0 78.1 77.1 77.4 77.7 78.0 77.5 1987 .. ..... 78.2 78.4 78.5 78.7 78.9 79.0 79.2 79.3 79.5 79.6 79.7 79.8 78.4 78.9 79.3 79.7 79.1 1988. ............. 79.9 79.9 80.0 80.1 80.1 80.1 80.2 80.2 80.3 80.4 80.5 80.5 79.9 80.1 80.2 80.5 80.2 1989............ 80.6 80.8 80.9 81.0 81.2 81.3 81.5 81.6 81.8 82.0 82.2 82.3 80.8 81.2 81.6 82.2 81.4 . 1990........ . .... 82.5 82.7 82.8 83.0 83.2 83.3 83.5 83.6 83.8 83.9 84.1 84.2 82.7 83.2 83.6 84.1 83.4 1991 .............. 84.4 84.5 84.6 84.8 84.9 85.0 85.1 85.3 85.4 85.5 85.6 85.8 84.5 84.9 85.3 85.6 85.1 1992... ..... 85.9 86.1 86.2 86.4 86.5 86.7 86.9 87.0 87.2 87.4 87.5 87.7 86.1 86.5 87.0 87.5 86.8 1993.. ....... 87.8 87.9 88.1 88.2 88.3 88.4 88.6 88.7 88.8 89.0 89.1 89.3 87.9 88.3 88.7 89.1 88.5 1994.. ............. 89.5 89.7 89.9 90.1 90.4 90.6 90.9 91.2 91.5 91.8 92.2 92.5 89.7 90.4 91.2 92.2 90.9 1995... ..... ....... 92.9 93.2 93.6 94.0 94.4 94.8 95.1 95.5 95.9 96.4 96.8 97.2 93.2 94.4 95.5 96.8 95.0 1996............... 97.6 98.1 98.5 98.9 99.4 99.8 100.3 100.7 101.2 101.7 102.1 102.6 98.1 99.4 100.7 102.1 100.1 1997....... ...... 103.1 103.6 104.1 104.7 105.2 105.8 106.4 107.1 107.7 108.4 109.1 109.8 103.6 105.3 107.1 109.1 106.3 1998................ 110.6 111.3 112.0 112.7 113.5 114.1 114.8 115.4 116.0 116.5 117.1 117.6 111.3 J13.4 115.4 117.1 114.3 ....... 1999 ....... 118.2 118.7 119.2 119.7 120.2 120.7 121.2 121.7 122.2 122.7 123.2 123.7 118.7 120.2 121.7 123.2 120.9 2000.............. .. 124.3 124.8 125.3 125.8 126.3 126.8 127.2 127.6 128.1 128.5 128.9 129.3 124.8 126.3 127.6 128.9 126.9 2001 .....-.......... 129.6 130.0 130.3 130.6 131.0 131.3 131.6 131.9 132.1 132.4 132.7 132.9 130.0 131.0 131.8 132.7 131.4 2002... ............ 133.1 133.3 133.5 133.6 133.7 133.8 133.9 133.9 133.8 133.8 133.7 133.6 133.3 133.7 133.9 133.7 133.6 2003 .. ............. 133.5 133.3 133.2 133.0 132.9 132.8 132.7 132.6 132.5 132.5 132.4 132.4 133.3 132.9 132.6 132.4 132.8 2004.............. 132.4 132.4 132.5 132.5 132.5 132.5 132.6 132.6 132.6 132.6 132.6 132.7 132.4 132.5 132.6 132.6 132.5 2005 .............. 132.7 132.7 132.8 132.9 133.0 133.1 133.2 133.4 133.6 133.8 134.1 134.3 132.7 133.0 133.4 134.1 133.3 2006... ....... .... 134.6 134.8 135.1 135.4 135.7 136.0 136.2 136.5 136.8 137.0 137.3 137.5 134.9 135.7 136.5 137.3 136.1 2007 .............. 137.8 138.0 138.2 138.5 ... ... ... ... ... ... ... 138.0 ... ... ... Capacity utilization(percent) . 1977... ...... ..... 80.8 81.8 82.7 83.2 83.6 84.0 83.9 83.8 83.9 83.9 83.7 83.6 81.8 83.6 83.9 83.7 83.2 1978.. .. .... .. .. 82.2 82.3 83.6 85.1 85.1 85.5 85.2 85.3 85.3 85.8 86.2 86.5 82.7 85.2 85.3 86.2 84.9 1979...........~ ...... 85.8 86.1 86.2 85.1 85.5 85.4 85.0 84.2 84.1 84.4 84.2 84.1 86.0 85.3 84.5 84.3 85.0 1980........... .... 84.3 84.2 83.8 81.9 79.7 78.5 77.9 77.9 79.0 79.8 81.0 81.3 84.1 80.1 78.3 80.7 80.8 1981 ... .......... 80.7 80.1 80.3 79.8 80.2 80.4 80.7 80.5 79.8 79.1 78.0 77.0 80.4 80.1 80.4 78.0 79.7 1982. ............. 75.3 76.6 75.9 75.1 74.4 74.0 73.6 72.9 72.5 71.8 71.4 70.8 75.9 74.5 73.0 71.3 73.7 1983... ...... 72.0 71.5 72.1 73.0 73.5 73.9 75.0 75.8 76.9 77.5 77.7 78.0 71.9 73.4 75.9 77.8 74.8 1984. ... .. ...... 79.5 79.8 80.1 80.5 80.8 80.9 81.0 80.9 80.6 80.3 80.5 80.4 79.8 80.7 80.8 80.4 80.4 1985. .......... 80.0 80.1 80.0 79.7 79.6 79.4 78.7 78.9 79.1 78.6 78.8 79.5 80.0 79.6 78.9 79.0 79.4 1986............ 79.8 79.0 78.4 78.4 78.4 78.1 78.5 78.3 78.3 78.6 78.8 79.4 79.1 78.3 78.4 78.9 78.7 1987........... 79.0 79.9 79.9 80.2 80.5 80.8 81.1 81.6 81.6 82.7 83.0 83.3 79.6 80.5 81.4 83.0 81.1 1988............ 83.2 83.5 83.6 84.0 83.9 84.0 84.1 84.5 84.2 84.6 84.7 84.9 83.4 84.0 84.2 84.7 84.1 1989................ 85.0 84.5 84.6 84.4 83.7 83.6 82.6 83.3 82.8 82.6 82.7 83.1 84.7 83.9 82.9 82.8 83.6 1990................ 82.4 83.0 83.2 82.9 82.9 83.0 82.7 82.8 82.8 82.1 80.9 80.2 82.9 82.9 82.7 81.1 82.4 1991 ................ 79.7 79.0 78.5 78.6 79.3 79.9 79.8 79.8 80.4 80.1 79.9 79.5 79.1 79.3 80.0 79.9 79.6 1992............... 79.0 79.4 79.9 80.3 80.4 80.3 80.8 80.3 80.3 80.8 80.9 80.8 79.4 80.3 80.5 80.8 80.3 1993. ...... . . .. 81.1 81.3 81.1 81.3 80.9 81.0 81.2 81.1 81.4 81.8 82.0 82.3 81.2 81.1 81.2 82.1 81.4 1 1 9 9 9 9 5 4. . . . · · . . . .. . . .. ... .. .. . . . . . . . 8 85 2 . . 1 6 8 8 2 4 . . 4 8 8 8 3 4 . . 1 6 8 84 3 . . 1 3 8 8 3 4 . . 5 0 8 83 3 . . 8 9 8 83 3 . . 7 2 8 8 4 3. . 8 0 8 8 4 3. . 8 0 8 8 3 4 . . 5 2 8 84 3 . . 4 4 8 8 5 3 . . 1 3 8 8 2 4 . . 7 8 8 8 3 4 . . 5 0 8 83 3 . . 7 8 8 8 4 3 . . 6 4 8 8 3 4 . . 6 0 1996................ 82.3 83.2 82.6 83.0 83.2 83.6 83.0 83.2 83.3 83.0 83.3 83.5 82.7 83.3 83.2 83.3 83.1 . 1997...·..... ..... 83.3 83.8 84.1 83.6 83.6 83.5 83.5 84.0 84.3 84.4 84.7 84.5 83.7 83.6 83.9 84.5 83.9 1998... ....... 84.3 83.9 83.3 83.2 83.2 82.3 81.6 82.9 82.3 82.5 82.0 81.9 83.8 82.9 82.3 82.2 82.8 1999..............- 82.1 82.1 81.9 81.8 82.1 81.6 81.8 81.9 81.3 82.0 82.2 82.6 82.0 81.8 81.7 82.3 81.9 2000..... ..... 82.3 82.3 82.3 82.6 82.5 82.3 81.8 81.3 81.4 80.8 80.5 79.9 82.3 82.5 81.5 80.4 81.7 ............... 2001 79.2 78.5 78.0 77.5 76.8 76.2 75.7 75.3 74.8 74.2 73.7 73.6 78.5 76.9 75.3 73.8 76.1 2002............ 73.8 73.8 74.3 74.5 74.7 75.4 75.1 75.2 75.3 75.1 75.5 75.2 74.0 74.9 75.2 75.3 74.8 2003 .... ........ 75.7 76.0 75.9 75.4 75.4 75.7 76.0 76.0 76.4 76.4 77.1 77.1 75.9 75.5 76.1 76.8 76.1 2004............... 77.2 77.8 77.3 77.8 78.2 77.7 78.1 78.3 78.2 78.7 78.9 79.4 77.5 77.9 78.2 79.0 78.1 2005 .... ....... 79.6 80.0 79.9 79.9 80.2 806 80.5 80.7 79.2 80.0 80.7 81.3 79.8 80.2 80.1 80.7 80.2 2006.... ........... 81.1 81.1 81.4 81.9 81.7 82.3 82.4 82.4 82.0 81.7 81.3 81.6 81.2 82.0 82.3 81.5 81.7 2007 ....... ... .... 81.1 81.6 81.2 81.6 ... ... ... ... ... ... ... 81.3 ... ... ... ... NOTE: Estimatesfrom February2007 throughApril 2007aresubjectto fur Referalsotothegeneral noteintableA.1. therrevision inthe upcomingmonthlyreleases. ... NotavailableasofMay 16.2007.

Industrial Production and Capacity Utilization: The 2006Annual Revision A31 Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued A.3. Rates ofchange in industrial production, by market and industry groups, 2002-061 Differencebetweenratesofchange: Revisedrateofchange(percent) Item NAICS revisedminusprevious(percentagepoints) code' I I I I I I I I 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Total industry 2.7 1.2 3.0 3.2 3.5 .5 -.4 -1.4 .2 -.1 MARKETGROUPS Finalproductsandnonindustrialsupplies 1.8 1.3 2.6 4.8 2.6 .4 -.5 -1.7 .0 -.2 Consumergoods 2.7 1.4 1.8 2.7 1.1 .0 .0 -.2 .4 .0 Durable .. 7.1 3.4 -.2 2.3 -2.5 -.8 -.9 -1.5 -.8 .1 Automotiveproducts 11.7 4.8 -3.2 -1.8 -4.6 -.7 -1.7 -3.6 -4.3 -1.3 Homeelectronics . -10.1 20.4 14.2 16.8 13.1 -2.4 2.0 17.9 -.4 11.2 Appliances,furniture,carpeting 1.9 2.3 2.2 3.1 -4.7 -2.1 .1 -.2 .9 -.7 Miscellaneousgoods 5.1 -1.3 2.1 6.4 -.6 .2 -.5 -.9 3.2 -.2 Nondurable . 1.0 .6 2.6 2.9 2.2 .3 .4 .2 .8 -.3 Non-energy -.6 1.1 2.2 3.4 2.7 .4 .5 -.2 1.2 -.6 Foodsandtobacco -2.9 2.7 2.3 4.8 2.2 .2 .5 .4 1.9 -1.0 Clothing. . . -10.6 -10.9 -10.5 -.3 .7 -3.5 -1.6 -7.7 1.0 -3.5 Chemical products . 5.6 2.3 3.8 .9 3.8 1.6 1.3 .8 .6 .7 Paperproducts . -.2 -4.3 3.2 2.2 3.3 .3 -.8 -2.7 -1.5 -.6 Energy.... . . 9.2 -1.7 3.7 1.7 .7 -.3 .2 2.0 .0 7 Businessequipment . -1.0 1.1 5.3 11.2 9.7 1.3 -1.7 -5.5 .7 -1.1 Transit .. -10.8 .4 6.0 20.5 16.9 .0 -3.2 -3.7 5.5 4.0 lnformation processing . --6.7 7.0 7.2 13.7 10.1 2.2 .5 -7.4 -5.7 -5.1 Industrialandother . . 6.6 -2.0 3.9 6.7 6.9 1.2 -2.4 -5.2 2.4 -.7 Defenseandspaceequipment .6 1.5 2.5 3.8 2.3 -.2 -3.9 -7.2 -5.5 -1.3 Constructionsupplies 1.7 1.0 1.6 8.0 -2.1 .4 -.7 -3.1 1.4 .0 Businesssupplies . 3.1 .9 2.9 3.4 2.4 .6 .0 -.9 -.4 .4 Materials . 4.0 1.0 3.4 1.1 4.7 .6 -.2 -.8 .5 .0 Non-energy . 5.2 1.4 4.8 3.5 4.5 .8 -.3 -1.2 .2 .8 Durable 6.0 2.9 5.4 7.0 5.6 .6 -.9 -2.2 .0 1.3 Consumerparts 7.5 -1.5 .2 1.7 -3.2 1.5 -.3 -1.8 -.5 -.7 Equipmentparts. 8.3 8.8 9.4 16.0 19.4 .9 -3.0 -4.7 -.2 4.7 Other . 3.2 .5 4.5 2.7 -.7 -.1 .5 -.5 .6 .1 Nondurable.... . . 3.7 -1.1 3.8 -2.1 2.6 1.0 .6 .6 1.0 .2 Textile .. 5.7 -7.6 -3.4 .2 -7.3 .7 -1.1 3.0 4.6 -1.6 Paper ... 1.4 -5.2 3.9 -.2 2.5 .5 1.3 -.7 .7 .2 Chemical 6.0 2.4 7.7 --6.5 4.7 2.1 .9 2.4 2.1 .0 Energy . .5 .1 -.2 -4.2 5.4 .1 .2 .0 1.2 -1.9 INDUSTRYGROUPS Manufacturing3.....................••......... 2.7 1.3 3.4 4.4 3.4 .6 -.4 -1.7 .2 .1 Manufacturing(NAICS) 31-33 3.1 1.6 3.5 4.6 3.6 .6 -.4 -1.7 .3 .2 Durablemanufacturing.. . . 4.3 2.6 3.7 7.9 4.7 .5 -1.4 -3.4 .2 .6 Woodproducts . 321 1.5 4.6 1.8 10.5 -14.5 .6 .6 -1.3 3.1 .8 Nonmetallicmineralproducts 327 1.2 1.9 3.8 5.8 -1.9 .2 -.2 -1.2 2.9 1.1 Primary metal . 331 5.5 4.3 7.4 -2.3 -3.5 -1.1 3.3 3.6 -.6 2.7 Fabricatedmetal products . 332 1.8 -2.2 1.6 6.1 3.8 .6 -1.5 -3.7 2.1 -.5 Machinery......... ... 333 6.3 -2.0 5.0 8.2 5.3 2.2 -3.0 --6.5 1.9 .4 Computerandelectronicproducts 334 4.3 13.6 10.2 18.3 18.3 1.5 -2.1 -5.9 -4.7 2.5 Electricalequipment,appliances, andcomponents . 335 -3.8 -1.0 2.0 3.8 2.4 -1.7 -.3 -3.1 -3.2 -5.8 MOlorvehiclesandparts.. 3361-3 12.4 3.1 -1.6 .2 -3.8 .2 -1.5 -4.3 -2.1 -.1 Aerospaceand miscellaneous transportationequipment 3364-9 -7.3 -3.7 2.0 15.0 14.7 .0 -3.3 -3.3 3.1 2.2 Furnitureandrelatedproducts. 337 5.8 .1 3.5 1.7 -1.2 -1.6 -.1 1.3 3.7 .2 Miscellaneous . 339 9.1 .1 2.2 8.7 4.8 -.5 -.5 -1.7 3.9 -1.1 Nondurablemanufacturing 1.5 .4 3.2 .9 2.3 .7 .8 .4 .9 -.1 Food,beverage,andtobaccoproducts 311,2 -1.7 2.6 1.2 5.3 2.6 .5 .9 -.5 1.9 -1.0 Textileandproductmills . 313,4 2.8 -4.7 -.7 20 -7.7 .6 -.5 3.1 2.3 -.1 Appareland leather . 315,6 -10.7 -10.5 -9.6 .4 -.1 -3.8 -1.1 -7.5 .8 -3.3 Paper ....... 322 4.1 -5.4 3.0 -.1 -.1 .7 .6 -1.5 .6 .7 Printingandsupport . 323 -3.3 -2.4 1.9 1.9 5.2 -.1 .7 .4 .2 -1.1 Petroleumandcoalproducts 324 2.3 1.0 10.0 -3.6 2.6 -.6 .7 3.7 2.4 -.2 Chemical . 325 5.4 2.0 6.1 -2.5 3.8 1.8 1.3 1.8 1.0 .3 Plasticsandrubberproducts 326 5.0 -.2 .8 3.0 .2 .6 .0 -2.4 -.9 -.5 Othermanufacturing(non-NAICS) 1133,5111 -2.5 -3.4 2.6 .6 .2 .1 -.4 -1.2 -1.2 -1.1 Mining . 21 -3.7 .6 -.8 -5.5 8.0 .1 .1 -.3 1.4 -2.3 Utilities , . 2211,2 7.0 .6 1.6 2.1 .3 .0 -.2 .4 -.7 .1 Electric . 2211 5.6 1.8 2.2 3.4 .0 .0 -.1 .2 -.4 -.1 Naturalgas . 2212 15.7 --6.0 -1.4 -3.4 1.9 .1 -.4 1.5 -1.8 1.4 I. Ratesofchangearecalculatedasthepercentchangeintheseasonallyad 3. ManufacturingcomprisesNorthAmerican IndustryClassificationSystem justedindexfrom thefourth quarteroftheprevious yeartothe fourth quarter (NAICS) manufacturing industries (sector 31-33) plus the logging industry oftheyearspecifiedinthecolumnheading. For2006,thedifferencesbetween and thenewspaper,periodical,book,anddirectorypublishingindustries. Log theratesofchangearecalculatedfromannualizedratesofchangebetweenthe gingand publishingareclassifiedelsewherein NAJCS (underagricultureand fourthquarterof2005andthethirdquarterof2006. informationrespectively),buthistoricallytheywereconsideredtobemanufac 2. NorthAmerican IndustryClassificationSystem. turingindustriesandwereincludedin theindustrialsectorundertheStandard IndustrialClassification(SIC)system. InDecember2002, the Federal Reserve reclassifiedallitsindustrialoutputdatafrom theSICsystemtoNAICS. Notapplicable.

A32 Federal Reserve Bulletin D May 2007 Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued AA. Rates ofchange in industrial production, special aggregates and selected detail, 2002-061 Differencebetweenratesofchange: Revisedrateofchange(percent) NAICS revisedminusprevious(percentagepoints) Item code' I I I I I I I I 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Totalindustry , ...................... 2.7 1.2 3.0 3.2 3.5 .5 -.4 -1.4 .2 -.1 Energy....._... 2.8 .6 1.5 -1.8 4.0 .0 .1 .8 .7 -.8 Consumerproducts...... 9.2 -1.7 3.7 1.7 .7 -.3 .2 2.0 .0 .7 Commercialproducts 4.3 4.8 4.5 .5 2.3 -.2 -.4 2.0 -2.3 2.5 . Oilandgaswell drilling ...... ...... 213111 -15.2 21.2 8.3 11.8 14.7 .0 .0 .0 .0 .5 Convertedfuel .. .................. 4.3 1.0 2.1 -2.5 2.2 .2 .4 .5 -.3 -1.9 Primarymaterials ......... ............ -1.5 -.3 -1.3 -4.9 6.8 .1 .1 -.3 1.9 -1.9 Non-energy 2.7 1.3 3.3 4.6 3.3 .6 -.4 -1.8 .2 .0 Selectedhigh-technologyindustries 8.3 17.2 10.4 28.1 24.6 3.5 -4.0 -8.0 2.4 2.0 Computersandperipheralequipment. 3341 -2.9 4.8 6.6 30.4 12.1 -.3 -.9 2.0 18.3 -4.9 Communicationsequipment ..... 3342 -13.6 13.9 6.2 12.9 14.8 9.0 4.0 -16.1 -12.5 -8.9 Semiconductorsandrelated electroniccomponents ....... 334412-9 28.0 24.4 13.7 33.8 34.8 2.0 -9.6 -7.7 3.9 12.1 Excludingselectedhigh-technology industries 2.2 .3 2.8 3.1 1.9 .3 -.2 -1.4 .1 -.2 Motorvehiclesandparts .... 3361-3 12.4 3.1 -1.6 .2 -3.8 .2 -1.5 -4.3 -2.1 -.1 Motorvehicles ............- 3361 13.7 7.8 -3.0 -2.5 -6.0 -.7 -2.6 -4.6 -2.4 -.3 Motorvehicleparts 3363 11.1 -2.1 -1.1 1.3 -.2 .9 -.6 -3.3 -2.0 -.5 Excludingmotorvehiclesandparts 1.3 .0 3.2 3.4 2.4 .3 -.1 -1.2 .2 -.3 Consumergoods ............... .2 1.0 2.4 3.6 1.8 .2 .4 .1 1.3 -.5 Businessequipment ... .5 -1.5 4.4 8.9 10.2 .2 -2.0 -4.6 -.7 .3 Constructionsupplies .............. 1.8 .8 1.5 8.0 -2.2 .4 -.8 -3.1 1.5 -.1 Businesssupplies 2.0 -1.0 2.1 3.1 1.0 .6 .5 -1.3 .4 -.6 Materials ....... 2.3 -.4 4.4 .7 2.3 .5 .4 -.3 .1 .0 Measuresexcludingselectedhigh-technology industries Totalindustry ...... .. 2.3 .3 2.5 1.9 2.4 .3 -.2 -1.0 .1 -.3 Manufacturing3 ........... .............. 2.3 .3 3.0 2.9 2.0 .3 -.2 -1.3 .0 .0 Durable ..... .............. 3.5 .7 2.8 5.2 2.0 .0 -1.0 -2.8 -.3 .1 Measuresexcludingmotorvehiclesandparts Totalindustry 2.0 1.0 3.3 3.4 3.9 .5 -.3 -1.1 .3 -.2 Manufacturing3 ................... 1.9 1.1 3.9 4.7 3.9 .6 -.3 -1.4 .3 .0 Durable ............ 2.7 2.5 4.8 9.3 6.0 .5 -1.3 -3.2 .4 .4 Measuresexcludingselectedhigh-technology industriesandmO/orvehiclesandparts Totalindustry .. .............. 1.5 .1 2.9 2.1 2.8 .3 .0 -.7 .2 -.4 Manufacturing3 ..... 1.3 .0 3.4 3.1 2.5 .3 .0 -1.0 .2 -.1 Measuresofnon-energymaterialsinputs10 Finishedprocessors 6.7 2.2 5.2 8.3 9.0 1.0 -1.3 -2.8 .0 1.9 Primaryandsemifinishedprocessors 3.8 .7 4.4 -.1 1.3 .5 .5 .1 .7 .2 SlOge-of-processgroups Crude.................. ............... -.2 -.4 3.1 -7.2 6.9 .9 1.3 1.1 1.5 -1.4 Primaryandsemifinished 4.5 .6 3.2 4.3 2.3 .3 -.6 -1.3 .1 .6 Finished ..... ............ 1.2 2.4 2.6 5.6 4.1 .6 -.5 -2.2 .2 -.8 I. Ratesofchangearecalculatedasthepercentchangeintheseasonallyad- 2. NorthAmerican IndustryClassificationSystem. justedindex from thefourth quarterofthepreviousyearto thefourth quarter 3. Refertofootnote3in tableA.3. oftheyearspecifiedinthecolumnheading. For2006.thedifferencesbetween Notapplicable. theratesofchangearecalculatedfromannualizedratesofchangebetweenthe fourthquarterof2005andthethirdquarterof2006.

Industrial Production and Capacity Utilization: The 2006Annual Revision A33 Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued A.5. Rates ofchangefor annual industrial production indexes, 2002-06' Differencebetweenratesofchange: Revisedrateofchange(percent) Item revisedminusprevious(percentagepoints) 2002 I 2003 I 2004 I 2005 I 2006 2002 I 2003 I 2004 I 2005 I 2006 Totalindustry ............ .0 1.1 2.5 3.2 4.\ -.\ .4 -1.6 .1 -.2 MARKETGROUPS Consumergoods 1.9 1.3 1.4 2.8 1.3 -.3 .3 -.7 .7 -.2 Durable ............. ........... 5.4 3.4 1.4 1.0 .0 -.9 -.6 -1.4 -.9 -.5 Nondurable .6 .5 1.4 3.5 1.7 -.1 .7 -.3 1.3 -.1 Businessequipment -7.1 .2 4.3 7.9 11.7 .7 .2 -5.0 -1.1 -.8 Defenseandspaceequipment ................ -.6 3.8 .2 5.5 2.3 -.4 -1.2 -7.6 -5.2 -4.0 Constructionsupplies -.5 -.2 2.0 4.8 3.5 -.3 .7 -3.5 .8 -.5 Businesssupplies.... .0 1.5 2.2 3.4 3.2 -.2 8 -1.0 -.2 -.1 Materials . .9 .9 3.1 2.2 4.7 -.1 .5 -1.2 .2 .3 Non-energy ................ . 1.2 1.3 4.3 3.6 5.9 -.1 .6 -1.5 .1 .5 Energy .0 -.1 -.2 -1.3 1.8 .0 .3 -.2 .5 .0 INDUSTRYGROUPS Manufacturing2..... .0 1.1 2.9 3.9 4.7 -.1 .5 -1.9 .0 -.2 Manufacturing(NAICS) ............. .2 1.3 3.0 4.0 5.0 -.1 .6 -2.0 .1 -.1 Durablemanufacturing -.4 2.3 4.0 5.5 7.6 -.2 .0 -3.3 -1.0 .3 Nondurablemanufacturing 1.0 .1 1.9 2.4 2.1 0 1.3 -.3 1.6 -.2 Othermanufacturing(non-NArCS) -3.1 -3.0 .9 1.8 -1.3 -.1 -.1 -.9 -1.3 -.9 Mining... -4.3 -.1 -.6 -1.6 2.7 .0 .1 -.4 .5 -.2 Utilities 3.1 1.9 1.4 2.0 .7 .0 -.1 .2 -.4 .1 I. Theratesofchangearecalculatedfromannualaveragesofseasonallyad- 2. Referto footnote3intableA.3. justed industrial production indexes rather than between the fourth quarter of one year and the fourth quarter ofthe next. The differences between revised andearlierchangesfor2006arecomputedfromannualizedratesofchangebetweenthefull year2005and thefirstthreequartersof2006. A.6. Rates ofchange in capacity, by industry groups, 2002-061 Differencebetweenratesofchange: I Revisedrateofchange(percent) revised minusprevious(percentagepoints) Item I I I I I 2002 2003 2004 I 2005 I 2006 2002 I 2003 2004 2005 2006 Totalindustry ...................... .8 -.9 .1 1.1 2.4 .1 -.7 -.5 -.5 .4 Manufacturing2 .4 -.9 .0 1.7 2.7 .0 -.8 -.5 -.3 .1 Manufacturing(NAICS) .............. .5 -.7 .0 1.8 2.8 .0 -.8 -.5 -.4 .1 Durablemanufacturing .................. .9 -.2 .5 3.3 4.2 -.2 -1.4 -.9 -.7 .5 Nondurable manufacturing ... .1 -1.1 -.3 .3 1.0 .4 .0 .4 .5 -.3 Othermanufacturing(non-NAICS) -2.4 -3.8 -.1 .6 .9 .3 -.7 -.5 .1 .8 Mining............. -.5 -2.1 -.3 -1.7 .6 .8 -1.1 .3 -1.1 2.0 Utilities ...................... 4.5 3.2 2.6 .0 2.1 .0 .1 .0 .0 1.4 Selectedhigh-technologyindustries 12.6 1.4 4.3 18.3 19.6 3.1 -6.6 -2.5 -2.5 7.4 Manufacturingexceptselected high-technologyindustries2 -.4 -.8 -.2 .6 1.4 -.2 -.4 -.3 .0 -.4 Stage-of-processgroups Crude..................................... .2 -2.2 -.1 -1.1 .3 1.3 -.1 1.0 -.2 1.4 Primaryandsemifinished ........... .9 -1.4 .4 1.4 3.0 .0 -1.3 -.5 -1.1 1.0 Finished .. ........... .6 .3 .5 2.0 2.3 .0 -.3 -.3 .8 -.5 I. Ratesofchangearecalculatedasthepercentchangeintheseasonallyad- 2. Refertofootnote3intableA.3. justedindex from the fourth quarterofthepreviousyeartothe fourth quarter oftheyearspecifiedinthecolumnheading.

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 Differencebetweenratesofchange: Revisedrate revised minusprevious Item NArcs (percentofcapacity,seasonallyadjusted) (percentagepoints) code' I I I 1 1972- I I 2005avg.12003:Q41 2004:Q4 2005:Q4 2006:Q3 2003:Q4j2004:Q412005:Q4I2006:Q3 Totalindustry . 81.0 76.8 79.0 80.7 82.3 .3 -.4 .2 -.2 Manufacturing2.................•.. 79.8 75.0 77.6 79.6 80.9 .3 -.6 -.2 -.3 Manufacturing(NArCS) . 31-33 79.5 74.6 77.2 79.3 80.8 .2 -.6 -.2 -.2 Durablemanufacturing .. 78.0 72.4 74.8 78.1 79.5 .2 -1.5 -.9 -.9 Woodproducts 321 80.2 80.3 81.3 88.5 80.4 1.8 .3 1.4 1.3 Nonmetallicmineral products 327 79.4 79.2 81.1 83.8 82.3 -.2 -1.3 .6 1.0 Primarymetal .... 331 80.6 80.4 86.8 83.7 88.8 -.2 1.8 .2 2.2 Fabricatedmetalproducts 332 77.2 72.2 73.6 78.0 80.7 2.1 -.3 1.9 2.1 Machinery . 333 78.6 70.2 73.5 78.8 82.1 .8 -4.8 -4.7 -5.4 Computerandelectronicproducts ..... 334 78.4 67.1 71.7 75.1 77.2 .1 -1.2 -3.1 -3.7 Electricalequipment,appliances,and components 335 83.2 75.9 79.1 83.4 85.4 .1 -2.0 -4.3 -8.0 Motorvehiclesandparts.... 3361-3 77.6 79.9 79.0 78.6 75.6 -.4 -1.5 -1.0 -.3 Aerospaceand miscellaneous transportationequipment 3364-9 72.4 60.4 61.5 70.3 77.6 -1.9 -3.7 -1.4 -.4 Furnitureandrelatedproducts 337 78.5 72.4 76.5 78.6 79.5 -1.3 1.3 5.3 5.7 Miscellaneous . 339 76.7 75.3 75.0 78.2 78.1 .6 -1.7 -.2 -.8 Nondurablemanufacturing .. 81.7 77.4 80.1 80.6 82.4 .2 .2 .5 .6 Food,beverage,andtobaccoproducts 311,2 81.6 77.8 78.2 81.4 81.1 -.5 -1.2 -.5 -.8 Textileandproductmills .. 313,4 82.4 73.3 75.6 79.8 78.3 -1.3 .6 2.6 2.7 Apparelandleather 315,6 78.9 66.2 67.9 71.5 74.1 -.5 -5.0 -8.8 -11.3 Paper.... . . 322 87.9 81.7 84.5 85.0 85.4 .4 -1.0 -.1 .4 Printingandsupport . 323 83.8 72.9 76.0 78.0 79.3 1.3 1.1 .7 -1.1 Petroleumandcoalproducts . 324 86.1 89.0 94.4 87.9 93.1 .6 1.0 .6 .5 Chemical . 325 78.3 75.2 78.5 75.7 79.5 .7 1.2 1.6 2.1 Plasticsandrubberproducts ., 326 83.8 81.6 85.0 87.3 87.5 .4 .1 -1.7 -2.5 Othermanufacturing(non-NAlCS) ........•.. 1133,5111 84.8 82.9 85.2 85.2 83.2 .8 .2 -.9 -2.0 Mining . 21 87.3 88.8 88.4 85.0 90.9 .7 .1 2.3 -.1 Utilities. 2211,2 86.8 85.5 84.7 86.5 86.4 -.1 .2 -.4 -1.2 Selectedhigh-technologyindustries . 78.0 66.8 70.7 76.5 78.7 1.1 -2.1 .8 -1.5 Computersandperipheralequipment .. 3341 78.2 74.5 79.8 76.2 74.5 -.4 3.5 -4.2 -8.6 Communicationsequipment . 3342 75.6 49.0 54.4 63.8 71.8 1.9 -4.3 -10.4 -12.8 Semiconductorsandrelatedelectronic components .. . . 334412-9 80.5 75.6 76.8 83.2 83.5 1.4 -2.6 8.0 5.7 Measuresexcludingselected high-technologyindustries Totalindustry ... 81.1 77.5 79.5 80.9 82.6 .2 -.3 .0 -.2 Manufacturing2 79.9 75.7 78.1 79.8 81.3 .2 -.5 -.5 -.4 Stage-oj-processgroups Crude.. 86.4 85.2 88.0 83.0 89.4 .2 .2 1.6 .2 Primaryandsemifinished . 82.2 79.3 81.3 83.5 84.1 .7 .0 .9 .6 Finished . 77.8 72.2 73.9 76.5 77.9 -.2 -1.4 -1.8 -1.9 I. NorthAmerican IndustryClassificationSystem. 2. Referto footnote3intableA.3. ... Notapplicable.

I Industrial Production and Capacity Utilization: The 2006Annual Revision A35 Appendix Tables Based on the G.17 Statistical Release, May 16, 2007-Continued A.8. Annual proportion in industrial production, by marketgroups and industry groups, 1998-2006 ~~~~,S I I I I I I I I I Item 1998 1999 2000 200I 2002 2003 2004 2005 2006 Total industry 100.0 100.0 100.0 100.0 100.0 tOO.O 100.0 100.0 100.0 MARKETGROUPS Final productsandnon-industrialsupplies 58.1 57.6 57.6 59.1 58.9 58.3 57.3 57.5 57.4 Consumergoods . . 28.1 28.2 28.6 30.1 31.1 31.1 30.4 30.3 29.3 Durable . 7.9 8.0 7.9 8.1 8.9 8.7 8.0 7.5 7.2 Automotiveproducts . 3.7 3.9 3.7 4.0 4.7 4.6 4.0 3.6 3.3 Homeelectronics . .4 .4 .4 .4 .4 .4 .4 .4 .4 Appliances,furniture,carpeting 1.4 1.4 1.4 1.4 1.4 1.4 1.3 1.3 1.2 Miscellaneousgoods 2.4 2.4 2.4 2.3 2.4 2.3 2.2 2.2 2.2 Nondurable . 20.2 20.2 20.7 22.0 22.2 22.4 22.5 22.8 22.2 Non-energy . 16.9 16.7 16.9 18.2 18.3 18.1 17.4 17.0 16.9 Foodsandtobacco 9.2 9.2 9.4 10.0 9.8 9.8 9.5 9.3 9.2 Clothing . 1.5 1.4 1.2 1.1 .9 .8 .7 .6 .6 Chemical products , 3.8 3.8 3.9 4.5 5.0 5.0 4.9 4.8 4.8 Paperproducts . 1.9 1.9 1.9 2.0 2.0 1.9 1.9 1.8 1.8 Energy 3.2 3.5 3.7 3.8 3.9 4.3 5.1 5.8 5.3 Businessequipment .. . .. 12.2 11.8 11.6 11.1 10.1 9.6 9.4 9.4 9.9 Transit . 2.5 2.3 2.0 2.0 1.8 1.6 1.6 1.7 2.0 Informationprocessing . 4.0 4.0 4.0 3.7 3.0 2.9 2.8 2.7 2.8 Industrialandother . 5.8 5.5 5.6 5.4 5.3 5.1 4.9 4.9 5.1 Defenseand spaceequipment .. 1.9 1.8 1.5 1.8 1.8 1.8 1.7 1.7 1.7 Constructionsupplies . 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.4 4.6 Businesssupplies 11.2 11.1 11.2 11.2 11.2 11.1 11.0 11.1 11.0 Materials . 41.9 42.4 42.4 40.9 41.1 41.7 42.7 42.5 42.6 Non-energy . .. 33.3 33.1 32.3 30.9 30.7 30.2 30.2 29.8 30.8 Durable . 21.4 21.4 20.9 19.6 19.1 18.7 18.6 18.3 19.2 Consumerparts.. ...•.......... 4.2 4.4 4.1 3.8 4.0 3.8 3.6 3.4 3.3 Equipmentparts 8.1 8.1 8.1 7.3 6.7 6.5 6.4 6.2 6.6 Other . 9.1 9.0 8.6 8.4 8.4 8.3 8.6 8.7 9.2 Nondurable . 11.9 11.7 11.4 11.3 11.6 11.5 11.6 11.5 11.6 Textile 1.0 1.0 .9 .8 .8 .8 .7 .6 .6 Paper . 2.8 2.9 2.8 2.8 2.7 2.5 2.4 2.3 2.3 Chemical . 4.6 4.5 4.3 4.2 4.5 4.7 5.2 5.3 5.5 Energy .. 8.6 9.3 10.1 10.1 10.4 11.5 12.5 12.7 11.8 INDUSTRYGROUPS Manufacturing2 . 86.4 85.8 84.5 84.1 83.9 82.5 81.5 80.9 81.8 Manufacturing(NAtCS) . 31-33 81.8 81.0 79.7 79.2 79.0 77.9 77.0 76.6 77.7 Durablemanufacturing 47.1 46.6 45.5 44.2 43.4 42.3 41.0 40.2 41.5 Woodproducts . 321 1.5 1.6 1.5 1.4 1.5 1.6 1.6 1.5 1.4 Nonmetallicmineralproducts 327 2.3 2.3 2.2 2.3 2.3 2.2 2.2 2.3 2.4 Primarymetal . 331 2.9 2.8 2.5 2.3 2.3 2.4 2.8 2.8 3.3 Fabricatedmetalproducts . 332 6.1 6.0 6.1 5.9 5.7 5.6 5.4 5.4 5.6 Machinery 333 6.2 5.8 6.0 5.6 5.3 5.0 4.9 4.9 5.1 Computerandelectronicproducts 334 10.2 10.3 10.3 9.1 8.0 7.9 7.8 7.4 7.5 Electricalequipment,appliances, andcomponents. 335 2.6 2.5 2.5 2.4 2.2 2.0 2.0 1.9 2.0 Motorvehiclesandparts . 3361-3 6.6 7.0 6.6 6.5 7.5 7.3 6.5 5.9 5.5 Aerospaceandmiscellaneous transportationequipment 3364-9 4.1 3.8 3.3 3.8 3.6 3.3 3.1 3.3 3.8 Furnitureandrelatedproducts.. 337 1.7 1.7 1.7 1.7 1.8 1.7 1.6 1.6 1.6 Miscellaneous . 339 2.8 2.8 2.9 3.1 3.3 3.3 3.1 3.2 3.2 Nondurablemanufacturing 34.7 34.4 34.2 35.0 35.6 35.6 36.0 36.4 36.2 Food,beverage,and tobaccoproducts 311,2 10.6 10.4 10.7 11.4 11.4 11.5 11.1 10.8 10.8 Textileandproductmills 313,4 1.6 1.5 1.4 1.4 1.4 1.3 1.2 1.1 1.1 Apparel andleather . 315,6 1.6 1.4 1.3 1.2 1.0 .9 .7 .7 .6 Paper . 322 3.2 3.2 3.2 3.1 3.1 2.9 2.8 2.6 2.6 Printingandsupport . 323 2.6 2.6 2.6 2.6 2.4 2.3 2.1 2.0 2.0 Petroleumandcoalproducts . 324 1.5 1.7 1.9 1.8 1.8 2.2 3.3 4.2 3.8 Chemical 325 9.9 9.6 9.4 9.8 10.8 10.9 11.4 11.5 11.8 Plasticsandrubberproducts 326 3.7 3.8 3.7 3.7 3.8 3.7 3.5 3.4 3.5 Othermanufacturing(non-NAJCS) 1133,5111 4.7 4.8 4.9 4.9 4.8 4.6 4.5 4.3 4.2 Mining . 21 4.8 5.5 6.5 6.4 6.4 7.5 8.7 9.2 8.6 Utilities . 2211,2 8.7 8.7 9.0 9.5 9.7 9.9 9.8 9.9 9.6 Electric . 2211 7.6 7.4 7.6 8.1 8.3 8.3 8.1 8.1 8.1 Naturalgas 2212 1.2 1.2 1.4 1.4 1.4 1.6 1.7 1.7 1.5 NOTE:The IPproportiondataareestimatesoftheindustries' relativecontri I. NorthAmerican IndustryClassificationSystem. butionstotheoverall IPchangebetween thereferenceyearandthefollowing 2. Refertofootnote3intableA.3. year. Forexample, a I percent increase in durable goods manufacturing be ... Notapplicable. tween2006and2007wouldaccountfor a0.415percentincreaseintotal !P.

A37 July 2007 Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 Mark Carlson and Gretchen C. Weinbach, of the 1. Bankprofitability, 1990--2006 Board's Division ofMonetary Affairs, prepared this article. Thomas C. Allard assisted in developing the Perce-nt ---------------Percent database underlying much ofthe analysis. Isaac L. 18 - 1.8 Laughlinprovided research assistance. Returnonequity 16 1.6 The U.S. commercial banking industry continued to 14 1.4 be quite profitable in 2006, and industry assets grew 12 1.2 considerably. The strength in profitability and growth 10 1.0 of bank balance sheets last year reflected favorable U.S. financial market conditions and the generally 8 .8 solid economic expansion. Industry return on equity 6 .6 advancedfrom its 2005 level, and the return on assets 4 .4 edged up to match its highest annual level in recent I I I I I I I I I I I I I I I I I I I decades (figure 1). Profitability was supported by I990 1992 I994 1996 1998 2000 2002 2004 2006 brisk growth in non-interest income and generally NOTE: Thedataareannual. strong asset quality; the flattening of the yield curve and competitive pressures, however, further weighed federal funds rate, which increased 1percentagepoint on net interest margins. over the first halfofthe year as monetary policy was In U.S. financial markets during 2006, short-term tightened and then held steady thereafter (figure 2). interest rates generally moved higher with the target Intermediate- and longer-term interest rates also rose significantly over the first half ofthe year, but much NOTE: The data in this article cover insured domestic commercial of those increases were later reversed. The Treasury banks and nondeposit trust companies (hereafter, banks). Except yieldcurveflattened furtherandattimeswasinverted. whereotherwiseindicated,thedataarefromtheConsolidatedReports Interest rates on fixed-rate home mortgages rose ofCondition and Income (Call Report). The Call Report consists of two forms submitted by domestic banks to the Federal Financial somewhat on average and, like Treasury yields, InstitutionsExaminationCouncil:FFIEC031 (forthosewithdomestic peaked around midyear. Corporate risk spreads gen and foreign offices) and FFIEC 041 (forthose with domestic offices erally remained quite narrow, and spreads on high only).Thedatathusconsolidateinformationfrom foreign anddomes ticoffices,andtheyhavebeenadjustedtotakeaccountofmergersand yield corporate bonds fell to levels seldom seen since theeffectsofpush-downaccounting.Foradditionalinformationonthe 1997. adjustments to the data, refer to the appendix in William B. English The U.S. economy expanded at a brisk pace over and William R. Nelson (1998), "Profits and Balance Sheet Develop mentsat U.S.Commercial Banksin 1997,"FederalReserveBulletin, the first quarterof2006 and then grew moderately, on vol. 84(June), p. 408. Sizecategories, based on assets atthestartof average, over the rest of the year. In the corporate eachquarter, are as follows: the 10 largest banks, large banks (those sector, spending picked up relative to 2005 as busi ranked 11 through 100), medium-sized banks (those ranked 101 through 1,000),and small banks. AtthestaItofthe fourth quarterof nesses increased their investment in fixed assets and 2006,theapproximateassetsizesofthebanksinthosegroupswereas inventories.Although hefty corporateprofits and sub follows: the 10 largest banks, more than $136.7 billion; large banks, stantial cash balances helped fund business spending, $7.3 billion to $135.7 billion; medium-sized banks, $481 million to $7.2billion;andsmall banks,lessthan$480million. firms' demand for external financing still rose nota Datashown in thisarticle may not matchdatapublished inearlier bly.Demandwas also supported by heavy mergerand years because of revisions and corrections. Call Report data reflect acquisition activity and record levels of share repur informationavailableas ofApril 13,2007. In thetables, components may notsumtototalsbecauseofrounding.AppendixtableA.I,A-E, chases. Availability of bank-intermediated business reports portfolio composition, income, and expense items, all as a credit also increased during the year as banks report percentageofoverallaveragenetconsolidatedassets,forallbanksand edly eased terms on their commercial and industrial foreachofthefoursizecategories.AppendixtableA.2reportsincome statementdataforallbanks. (C&I) loans, particularly spreads of loan rates over

A38 Federal Reserve Bulletin 0 July 2007 2. Selectedinterestrates,2002-07 tial homeconstructionlikely helpedfuel theconstruc tion and land developmentcomponentofcommercial Percent real estate loans in recent years, but the pace ofsuch lending moved lower in 2006 as home construction 7 activity slowed. Apart from the consolidation of a 6 sizable amount of thrift assets onto banks' books in the fourth quarter that resulted from a reorganization 5 within a large bank holding company, residential real 4 estate lending also decelerated. Growth in consumer 3 loans-which had been particularly lackluster in 2005, when households apparently substituted mort 2 gage debt for consumer debt-picked back up to a moderatepace.l Theattractivenessofmortgagefinanc I I I I ing relative to consumer loans probably diminished last year as mortgage rates rose and appreciation in 14 houseprices slowed.On the liability side,increases in 13 short-term interest rates likely contributed to some 12 shifts in the profile of banks' deposits. Small time co M rp o o o r d a y te 's b B on aa ds II deposits, whose yields track market rates relatively 10 closely,grew particularlyquickly, whereasothercom 9 ponents of core deposits expanded more slowly or 8 even contracted.2 With their rates lagging market 7 rates on average, core deposits as a whole grew at a 6 slower pace than total assets, and banks tapped Thirty-year 5 managed liabilities, particularly large time and _fixed-ratemongages 4 I I I I I foreign-booked deposits, to fund their asset growth. 2002 2003 2004 2005 2006 2007 Economic and financial conditions also had a NOTE: ThedataaremonthlyandextendthroughMarch2007. strong effect on bank profitability. Brisk growth in SOURCE: For Treasury securities, mongages, and Moody's corporate non-interestincomesupportedprofits;for largebanks, bonds, Federal Reserve Board, Statistical Release H.15, "Selected Interest Rates" (www.federalreserve.gov/releaseslhI5); for federal funds, Federal trading revenue surged, and income from securitiza ReserveBoard(www.federalreserve.gov/fomc/fundsrate.htm);forhigh-yield tion and investment banking activity also grew nota bonds,MerrillLynchMasterIIindex. bly,thelatterlikely boosted in partbythe financing of corporate mergers and acquisitions. Although non their costs of funds. Strong fundamentals in the interestexpensegrew-mainly becauseofan increase commercial real estate sector, including rising prop in salaries and benefits costs-its growth lagged that erty values and declining vacancy rates, bolstered the of non-interest income. The configuration of market demand for commercial mortgages. interest rates and competitive pressures caused the In the household sector, higher mortgage rates and industry's net interest margin to edge lower, and a cooling of the pace of house-price appreciation margins at large banks were affected the most. Loss combinedtodamp residential housingactivity. Bythe provisioning continued to be near the low end of its end of 2006, home sales had ebbed markedly, and historical range as a share of assets, although this home construction activity had slowed significantly. measure turned up a bitin thefourth quarter. The low In addition, mortgage refinancing activity declined, level ofprovisioning reflected asset quality that gen on average, last year. Moderate growth in consumer erally remained solid. Banks' direct exposure to spending was supported by continued strength in the subprime mortgages generally appeared limited. Still, labor market and gains in household wealth from significant increases in equity prices and advances in I. Inthisarticle,consumerloansconsistofloanstohouseholdsthat home prices during the first halfofthe year. arenotsecuredby real estate,andtheyincludecreditcardloans. These financial and economic conditions shaped 2. In this article, core deposits consist of transaction deposits, savings deposits (including money market deposit accounts). and balance sheetdevelopments at commercial banks. On small-denomination time deposits (those issued in denominations of the asset side, borrowing by businesses to finance lessthan$100,000).Managedliabilitiesconsistoflargetimedeposits capital expenditures and mergerandacquisitionactiv bookedindomesticoffices,depositsbookedinforeign offices,subor dinated notes and debentures, federal funds purchased and securities ity contributedto the rapid growth in C&I lending for sold under repurchase agreements, Federal Home Loan Bank ad thesecondconsecutiveyear.The financing ofresiden- vances,andotherborrowed money.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A39 3. Numberofbanks,andshareofassetsatthelargest financial holding companies rose last year-it moved banks, 1990-2006 up from 625 at year-end 2005 to 643 at year-end 2006. Mostofthe largestbankholdingcompanies are -----------------T-housands also financial holding companies. As a result, about Number 14 86 percent of the assets of bank holding companies were held by financial holding companies.4 12 10 BALANCE SHEET DEVELOPMENTS 8 6 Total bank assets expanded 12.4 percent in 2006, the I I I I I I I I I I I I largest annual gain in the past two decades and about ------------------Percent 5 percentage points faster than total domestic nonfi nancial sectordebt(table I).Bankloansgrewatarate Shareofassets 80 of 12 percent; the increase importantly reflected strong C&I lending, which was spurred by greater 60 financing needs related to inventory accumulation 10largest 40 and capital investment by nonfinancial firms as well as from increased merger-related financing activity. 20 Robust real estate lending was a significant contribu I I I I I I I I I I I I I I I I I I I I tor to bank loan growth, especially in the first halfof 1990 1992 1994 1996 1998 2000 2002 2004 2006 the year, but---excluding the effects of the sizable NOTE: Thedataareasofyear-end.Forthedefinitionofbanksize,referto thegeneralnoteonthefirstpageofthemaintext. thrift-to-bank consolidation noted above-growth in real estate loans slowed notably later in the year as delinquency rates associated with residential real home construction and sales decelerated. Banks' estate moved up in the second half of the year from securities holdingsexpanded atarate of 11.5 percent. exceptionally low levels. Charge-off rates remained Total bankassetsexpanded atafasterpacethan either quite low for all major loan categories. loans or securities in 2006 as federal funds sold and The numberofnew bankschartered in 2006 picked securities purchased under resale agreements and upforthefourth consecutiveyearbutremainedbelow balances due from depository institutions, which the numberofbank mergers and consolidations.As a together account for 7 percent of assets, increased result, the numberofbanks declined further, to 7,403 20 percent. at year-end 2006 from 7,522 at year-end 2005 (fig On the liability side of the balance sheet, core ure 3). Merger and consolidation activity involving deposit growth remained moderate. Rising short-term the top 10 banks pushed the share of industry assets interest rates in the first halfofthe year made liquid accounted for by these banks up 2.3 percentage deposits less attractive because their interest rates points, to 51.7 percent, at year-end. The share of adjust sluggishly to changes in market rates. This assets held at the 100 largest banks rose 1.6 percent slow growth, however, was partly offset by the brisk age points, to 78.5 percent. According to the Federal expansion of small time deposits, interest rates on DepositInsurance Corporation (FDIC), 2006 was the secondconsecutive year with no bank failures. a few institutions whose commercial bankingoperations account for There was more merger activity at the holding onlyasmall portionoftheirassetsandearnings.Thequarterlyarticle in the Federal Reserve Bulletin, "Report on the Condition of the company level in 2006 than in 2005, and the rate at U.S. Banking Industry," at www.federalreserve.gov/pubs/bulletinl which bank holding companies were formed held default.htm, provides information on the 50 large bank holding companies(the50largestasdefinedhere)andonthebankingindustry about steady, There were 5,102 bank holding compa from the perspectiveofbank holdingcompanies (including financial nies at year-end 2006, 52 less than at year-end 2005 holdingcompanies)thatfilereportsFRY-9CandFRY-9LP;currently, (for multitiered bank holding companies, only the onlyabollt 1,000top-tierbankholdingcompaniesarerequired to file top-tier organization is counted in these figures). At thosereports(referto"ReportontheCondition"table I,lastrow,and note I). the end of2006, the 50 largest bank holding compa 4. Financialholdingcompanystatisticsincludebothdomesticbank nies with major commercial banking operations ac holding companies that have elected to become financial holding counted for 76 percent of all bank holding company companiesand foreign bankingorganizationsoperatingin the United Statesasfinancial holdingcompaniesandsubjecttothe BankHolding assets, afigure unchangedfrom 2005.3The numberof CompanyAct. Formore information, refertothe BoardofGovernors of the Federal Reserve System (2003), Report 10 the Congress on Financial Holding Companies under the Gramm-Leach-Bliley Act 3. The50largestbankholdingcompaniesaredefinedhereasthe50 (Washington: Board of Governors, November), at www. largest(asmeasuredbytotalconsolidatedassets)aftertheexclusionof 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. Item 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006 (billions of dollars) Assets .. 9.22 8.18 5.44 8.76 5.11 7.19 7.18 10.78 7.72 12.36 9.996 lnterest-earningassets 8.66 8.16 5.87 8.66 3.95 7.54 7.28 11.29 7.96 12.44 8,687 Loansand leases(net) . 5.32 8.70 8.10 9.24 1.82 5.90 6.51 11.20 10.38 11.98 5,853 Commercialandindustrial 12.02 12.94 7.88 8.54 -6.73 -7.41 -4.56 4.35 12.53 11.86 1,132 Realestate . 9.30 7.99 12.22 10.74 7.94 14.44 9.75 15.41 13.80 14.94 3,395 Bookedindomesticoffices . 9.53 7.97 12.36 11.02 8.02 14.85 9.66 15.09 13.93 15.06 3,339 One-tofour-familyresidential.. 9.67 6.36 9.70 9.28 5.70 19.86 10.01 15.75 11.95 15.15 1,891 Otherrealestate . 9.32 10.29 16.06 13.31 10.95 8.81 9.19 14.20 16.61 14.94 1,448 Bookedinforeignoffices .. .34 8.79 6.28 -1.62 3.97 -7.41 15.74 35.59 7.19 8.68 56 Consumer . -2.19 .34 -1.48 8.04 4.16 6.55 9.31 10.11 2.24 6.30 849 Otherloansandleases . -7.91 13.46 7.17 7.01 -2.02 -.03 8.31 3.57 -.18 2.97 547 Loan-lossreservesandunearned income. _ . -.45 3.08 2.37 7.98 13.15 5.73 -2.68 -4.19 -5.74 1.81 70 Securities . 8.85 8.40 5.11 6.36 7.22 16.20 9.44 10.58 2.40 11.53 2,099 Investmentaccount 8.66 12.07 6.68 2.85 8.88 13.53 8.70 6.15 1.19 6.91 1,633 U.S.Treasury . -8.85 -25.17 -1.89 -32.72 -40.27 41.92 14.14 -15.87 -17.59 -19.30 40 U.S. governmentagencyand corporationobligations.. 14.18 17.01 1.83 3.75 12.84 18.09 9.68 9.46 -1.83 4.71 1,016 Other .. 11.21 26.99 20.90 13.39 12.18 2.72 5.98 3.02 10.12 13.68 577 Tradingaccount . 10.00 -13.32 -6.93 37.16 -3.72 36.12 14.01 36.81 7.96 31.46 466 Other.. .. .. 38.53 3.78 -8.37 10.30 13.02 -2.92 6.82 14.28 5.81 19.14 736 Non-interest-eamingassets 13.03 8.37 2.64 9.45 12.79 5.10 6.61 7.60 6.18 11.85 1,308 Liabilities 9.11 8.06 5.58 8.59 4.45 7.13 7.24 9.55 7.74 12.10 8,971 Coredeposits 4.52 7.04 .23 7.53 10.55 7.58 7.29 8.25 6.41 5.80 4,474 Transactiondeposits .. ..... -4.55 -1.41 -8.97 -1.31 10.20 -5.12 2.82 3.20 -1.21 -4.24 704 Savingsdeposits(includingMMDAs) 12.96 18.32 6.68 12.51 20.68 18.46 13.71 11.72 6.94 5.52 2,898 Smalltimedeposits .. 4.18 .53 -.76 7.20 -7.23 -4.92 -6.79 1.58 12.91 16.72 872 Managedliabilities1•••••• •••••••••••• 13.79 9.44 15.54 8.79 -2.73 5.34 6.96 12.06 12.23 19.51 3,904 Largetimedeposits . 20.14 9.10 14.19 19.37 -3.65 5.05 1.42 21.86 22.85 16.16 1,006 Depositsbookedinforeignoffices .. 11.13 8.71 14.60 7.84 -10.96 4.49 12.63 16.84 6.32 29.67 1,193 Subordinatednotesanddebentures. 21.05 17.00 5.07 13.98 9.56 -.59 5.08 10.49 11.41 22.60 149 Grossfederal funds purchased and RPs . 30.51 4.35 1.56 6.49 5.72 12.75 -8.70 8.40 15.62 9.47 695 Othermanaged liabilities -4.04 15.65 35.27 1.80 -.28 .97 22.00 1.37 6.15 18.90 861 Revaluationlossesheldintrading accounts . 36.94 3.44 -13.20 7.47 -17.06 33.44 14.02 -12.61 -17.86 6.89 144 Other....... 14.82 12.73 -1.26 20.61 14.90 5.23 5.28 17.08 -1.74 22.24 449 Capitalaccount 10.44 9.53 3.89 10.65 12.30 7.84 6.61 23.14 7.59 14.74 1,025 MEMO Commercialrealestateloans2 10.13 11.37 15.42 12.16 13.10 6.82 8.99 13.93 16.87 14.89 1,444 Mortgage-backedsecurities 14.16 22.12 -3.34 3.29 29.05 15.54 10.12 13.45 2.06 8.92 960 Federal HomeLoan Bankadvances o.a. o.a. o.a. 0.3. 0.3. 17.21 3.71 3.73 10.00 29.80 349 NOTE: Dataarefrom year-endtoyear-endandareasofApril 13,2007. by multifamilly residential properties; and loans to finance commercial real I. Measuredas thesumoflarge timedepositsin domesticoffices,deposits estate,construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. booked in foreign offices, subordinated notes and debentures, federal funds n.a. Notavailable. purchased and securities sold under repurchase agreements, Federal Home MMDA Moneymarketdepositaccount. Loan Bankadvances,andotherborrowed money. RP Repurchaseagreement. 2. Measuredasthesumofconstructionandlanddevelopmentloanssecured byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor which moved more in line with market rates. On net, Loans to Businesses growth In overall core deposits was modest, and banks, especially the largest ones, turned to managed Increases In both fixed and inventory investment boosted spending by U,S, nonfinancial corporations liabilities to fund the rapid expansion ofassets. in 2006. The stepped-up pace ofcapital expenditures Banks' capital expanded somewhat faster than pushed the financing gap into positive territory de assets. Equity capital was boosted by increased good spite firms' strong profits and robust cash positions will and by strong retained earnings. Regulatory (figure4).5To helpfund investment, businesses relied capital, which generally excludes goodwill, grew a touch slower than equity capital. Nevertheless, regu latorycapital expanded a bitfaster than risk-weighted 5. The net financing gap isdefined hereas the difference between assets, and regulatory capital ratios ticked higher. capital expenditures and internally generated funds. The rise in the I

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A41 4. Financinggapatnonfarm nonfinancialcorporations, 15 percent of institutions, including some of the 1990-2006 largestC&I lenders, reported that between 11 percent and 30 percent ofthe C&I loans on their books were Billionsofdollars related to mergers and acquisitions. Most of the 300 remaining banks noted that these loans accounted for 250 less than 10 percent oftheirC&I loan portfolio. Half 200 the respondents, again including some of the largest 150 C&I lenders, indicated that the shareofloans on their 100 books that were M&A-related had increased overthe 50 past twelve months, a pattern consistent with other + o reports suggesting that this type of activity has sup 50 ported the growth in C&I lending. A sizable portion 100 of the recent wave of mergers and acquisitions took 150 the form ofleveraged buyouts.As with M&A-related I I I I I I I I I I I I I I I I I I I I loans in general, a few banks reported significant 1990 1992 1994 1996 1998 2000 2002 2004 2006 involvement in these transactions, with about 15 per NO'rE: Thedataarefour-quartermovingaverages.Thefinancinggapisthe differencebetweencapitalexpendituresandinternallygeneratedfunds. cent ofrespondents indicating that more than 30 per SOURCE: Federal Reserve Board, Statistical Release Z.l,"FlowofFunds cent of the M&A-related loans on their books were AccountsoftheU.S.,"tableF.102(www.federalreserve.gov/releases/zl). used to finance leveraged buyouts. Close to 80 per more on external resources, including C&I loans and cent of banks, however, reported that they were not corporate bond issuance. Merger and acquisition very involved in providing loans to finance this type (M&A) activity among nonfinancial firms has been ofdeal. strongoverthe pastfew years and continued apace in Changes in lending standards and terms may also 2006. Financing needs associated with this activity havesupported C&Iloan growth in 2006.Early in the also added to C&I loan demand. Equity share repur year, a modest net share of BLPS respondents indi chases remained very strong last year and likely cated that they had eased their lending standards for supported the growth of business borrowing. C&I C&I loans. Somewhat larger net fractions also re loan growth last year reflected importantly a substan ported easing lending terms on C&I loans, especially tial expansion in syndicated loans (referto box "Syn by reducing the spread ofloan rates overtheircostof dicated Loans"). Commercial real estate lending funds. Respondent banks most frequently cited com expanded robustly, butthe pace was a bit slowerthan petition from other funding sources as a reason for it was in 2005. easing their C&I lending policies. Asmall number of The strength in C&I lending was evident at com institutionsreported tighteninglending terms-in par mercial banks ofall sizes last year, as this category of ticular by raising the premiums charged on riskier loans expanded 12 percent at both larger and smaller loans-and frequently pointed to a less-favorable or banks. According to respondents to the Senior Loan more-uncertain economic outlook, as well as a re Officer Opinion Survey on Bank Lending Practices duced tolerance for risk, as reasons for doing so. (BLPS), loan demand was rising as the year started Commercial real estate (CRE) loans alsoexpanded and held steady thereafter (figure 5). Banks reporting briskly last year, but the pace of the advance was stronger demand during the yeargenerally pointed to down slightly from 2005. All banks registered strong increased needs by businesses to finance M&Aactiv growth in this loan category, but the expansion was a ity, accumulate inventory, or invest in plant and bitfaster at the banks outside the top 100.As a result equipment. of this rapid growth, CRE loans now account for In light of the rapid pace of corporate merger slightly more than 45 percent of the loans of these activity in 2006 and the frequency with which BLPS smaller institutions, well above the levels of the respondents cited customer M&A financing needs as 1990s (figure 6). This level of concentration has not an important reason for increased demand, the Octo gone unnoticed by bank supervisors, and in Decem ber 2006 survey contained some special questions on berof2006, theFederal Reserve, FDIC, and Officeof the influenceofM&Aactivity on C&I lending.About the Comptroller of the Currency issued interagency guidance to promote sound risk-management prac financing gap at the end of2004 is due in part to a large dividend tices at banks regarding theirCRE loans. payout by Microsoft. The drop during 2005 generally reflects the For the third year in a row, CRE lending was repatriationofprofits heldatforeignsubsidiariesofU.S. nonfinancial corporations,whichwasencouragedbytemporarytax provisions. boosted by rapid growth of construction and land

A42 Federal Reserve Bulletin0 July 2007 Syndicated Loans Syndicated business loans grew briskly in 2006 and expenseofforeignbankingorganizations-anditreached remainedan importantcomponentofbank-intermediated 14 percentin mid-2006?Thegrowingcompetition from credit. According to the latest data from the Shared nonbankinstitutionalinvestorsandtheincreasedliquidity NationalCredit(SNC)Program,syndicatedloancommit ofthesecondarymarkethavereportedlyledtoacompres ments totaled $1.9 trillion in mid-2006, slightly below sion ofcreditspreadsinthesyndicated loan market.This their 2001 peak of$2 trillion (figureA).' The volumeof combination has also reportedly resulted in some easing such commitments expanded 15 percent over the previ of underwriting standards and terms, particularly looser ous year, the largest annual increase this decade. The loancovenants. strong growth was fueled, in part, by the financing of Nonetheless, the credit quality of syndicated loans corporate mergers, acquisitions, and leveraged buyouts. generallystayedsolidin2006.Theshareoftotalcommit Although a wide and growing array of institutional ments that were adversely rated was again around 5 investors areparticipating in thesyndicated loan market, percent last year, a figure in the lower portion of its domestic commercial banks continue to account for a historical range(figure B).3However,thecreditqualityof considerableshareofsuchcommitments.Theshareofall syndicated loan commitments varies significantly by commitments accounted for by domestic banks stood at holder. Classified commitments accounted for roughly 2 44percentinmid-2006,aportionthathasremainedfairly percentoftotalcommitmentsatbothdomesticbanksand steadyoverthepastseveralyears. Bycontrast,theportion foreign banking organizations in mid-2006, but at non ofallsyndicatedloancommitmentsheldbynonbankshas banks they made up nearly 12 percent.4 The relatively trended higher over the same period-mainly at the low portion ofclassified syndicated loancredits at banks likely reflects the fact that banks are predominantly exposed to investment-grade, rather than leveraged, syn dicatedcredits. I. TheSNCProgramgenerallycoverscreditsofatleast$20million thataresharedby threeormoreregulated financial institutions. Credits include syndicated loans and loan commitments, letters ofcredit, and commercialleases,aswellasotherformsofcredit.Creditcommitments 2. Nonbanks includeawide range ofinstitutional investors, such as include both drawn and undrawn portionsofcreditfacilities. Formore brokerage firms, mutual funds, insurance companies, hedge funds, and information, refer to the Board of Governors of the Federal Reserve securitizationvehicles. System (2006), Statistical Release, "Shared National Credit Program" 3. Adverselyrated creditsarethoseconsideredspecial mention,sub (September 29), www.federalreserve.govlboarddocs/presslbcreg/2006/ standard,doubtful,orloss. 20060925. 4. Classifiedcreditsarethoseratedsubstandard,doubtful,andloss. B. Adverselyratedcommitmentsasshareoftotal A. Totalsyndicatedloancommitments, 1989-2006 commitments, 1989-2006 Billionsofdollars Percent - 2,000 - 15 - 1,500 - 10 - 1,000 - 5 500 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 I ! I I I I I I I I I I I I 1990 1992 1994 1996 1998 2000 2002 2004 2006 1990 1992 1994 1996 1998 2000 2002 2004 2006 NOTE: Thedataareannual. NOTE: Thedataareannual. SOURCE: Federal Reserve Board,Statistical Release,"SharedNational SOURCE: Federal Reserve Board,Statistical Release,"Shared National CreditProgram"(www.federalreserve.gov/releaseslsncl). CreditProgram"(www.federalreserve.gov/releaseslsncl). development loans. Such loans expanded at a rate of reflects loanstoresidentialdevelopers,consistentwith 27percentandaccountedformorethanone-thirdofall the strength in housing construction that was evident eREloansattheendof2006(figure7).Aconsiderable until early last year. However, the housing market portion of the rapid growth in recent years likely cooled significantly over the course of2006, and the

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A43 5. Changesindemandandsupplyconditionsatselected 6. Shareofall loansconsistingofcommercialrealestate banks forC&I loans to largeand middle-marketfirms, loans, bybanksize, 1990-2006 1990-2007 Pcrccnl Percent NetpercentageofbanksreportingstrongerdemandI 60 50 40 40 20 + o 30 Otherbanks 20 20 40 60 100largestbanks 10 80 I I I 1 I I 1 I I I I I I I I I I 1 1 I 1 I I I I I I I I 1 I I 1 I 1 I I I I 1990 1992 L994 1996 1998 2000 2002 2004 2006 NOTE: Thedata arequarterly. Other banksare those not included in the Netpercentageofbanksreportingtighterstandards2 100largest. Forthedefinitionofbank ize, refertothegeneral noteon the firstpageofthemaintext. 60 40 respondents reported little change in their standards for approving CRE loans in the first two surveys of 20 2006, butconsiderable netfractions reported tighten ing standards later in the year. + o The competition that led to an easing of lending terms in the C&I loan market also appears to have 20 influencedCRElending.In theJanuary 2007BLPS, a large share of respondents indicated that they had I 1 I I I I I I I 1 I I 1 I I I I I I I I eased lending terms on CRE loans over the past 1991 1993 1995 1997 1999 200I 2003 2005 2007 twelve months, in particularby reducingthespreadof Nom: Thedataaredrawn from asurveygenerallyconductedfourtimes peryear; the lastobservation isfor theJanuary 2007survey, whichcovers loan rates over their cost of funds. More-aggressive 2006:Q4. Netpercentageisthepercentageofbanksreportingan increasein competition from otherbanksornonbank lenders was demand or a tightening of standards less, in each case, the percentage reporting the opposite. The definition for firm size suggested for, and frequently cited as a somewhat important or very generallyusedby,surveyrespondents isthatlargeand middle-marketfimls important reason for easing lending terms. The in havesalesof$50milIionormore. I. SeriesbeginswiththeNovember1991 survey. creasedcompetition may in partreflectfurthergrowth 2. SeriesbeginswiththeMay 1990survey. in the market for commercial-mortgage-backed secu SOURCE: Federal Reserve Board.SeniorLoanOfficerOpinionSurveyon BankLendingPractices(www.federalreserve.gov!boarddocs!snloansurvey). rities, which has increased the number of investors 7. Changeincommercialrealestateloans, by major growth rate of construction and land development components, 1990-2006 loanssteppeddown markedly.Realestateloansbacked by nonfarm nonresidential structures, the largest cat ------------------Percent egoryofCRE loans,grew9.6percentlastyear, apace about equal to the average growth rate over the past 30 decade. CRE loans secured by multifamily dwellings 20 expanded somewhat more slowly than in 2005. The slightly slower growth of CRE loans relative 10 to the previous year appears to reflect shifts in + o demand for such loans as well as a tightening of lending standards (figure 8). Banks responding to the Nonfarm 10 nonresidential BLPS indicated that demand for CRE loans strength ened a touch early in the year but then weakened 20 notably later in the year, a pattern that roughly I I I I I I 1 I I I I I 1 1 I I I I I matches the changes in the growth rates ofconstruc 1990 1992 1994 1996 1998 2000 2002 2004 2006 tion and land development loans. Similarly, survey Nom: Thedataareannual.

A44 Federal Reserve Bulletin 0 July 2007 8. Changesindemandandsupplyconditionsat 9. Levelofrefinancingsofresidential mortgages, selectedbanks forcommercial realestateloans, 1990-2006 1996-2007 January26.1990=I __________________--.:Percent 90 etpercentageofbanksreportingstrongerdemand 60 80 70 40 60 20 50 + o 40 30 20 20 40 10 + o 60 I I I I 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 four-week moving averages. Residential mortgages Netpercentageofbanksreportingtighterstandards include both first- and second-lien loans ecured by one- to four-family residentialproperties. 60 SOURCE: MortgageBankersAssociation. 40 loans on banks' books expanded 7 percent in 2006, a further step-down from the rapid gTOwthearlierin the 20 decade and a pace more reflective of the slowing + housing market. o A slowdown in home equity loan growth in 2006 was particularly notable. After an adjustment for the 20 effect of the consolidation of thrift assets, home I I I I I I I I I I I I I I equity loans expanded just 5 percent, a marked 1997 1999 200I 2003 2005 2007 decrease from the rapid pace ofthe early part of the NOTE: Refertofigure5,generalnoteandsourcenote. 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 participating in the commercial mortgage market. to the deceleration. Some banks reported tightening terms on CRE loans The slowdown in residential real estate lending during 2006; these in titutions often cited concern was mirrored by reports of decreased demand for about thegeneral economicoutlookorabouttheCRE residential real estate loans in the BLPS (figure 10).6 market in general as reasons for tightening terms. Ineachofthesurveysconductedduring2006,consid erable net shares of respondents reported reduced Loans to Households demand for such loans over the preceding three Rising mortgage rates and a slowing housing market months. Terms on residential real estate loans were had a marked effect on bank lending to households reportedlyeasedabit,on net,duringthe middleofthe last year. The higher level of mortgage rates in 2006 year as mortgage rates peaked, but they were tight pushed down residential mortgage originations and enedagain toward theendoftheyear, when mortgage refinancing activity, although there was a bit of a rates reversed a portion oftheirearlier rise. rebound in refinancing at the end of the year as During the past few years, financial institutions mortgage rates came off their midyear peaks (fig introduced a variety ofnontraditional mortgage prod ure 9). The value of residential mortgage loans on ucts, and more mortgages were made to subprime banks' books expanded 15 percent last year. This borrowers. The July 2006 BLPS contained several increase, however, wasduepartlytothe incorporation questions about the importance of these mortgage of assets previously held by nonbanks into the com mercial banking sector as a result of a consolidation 6. Inasking banks how demand for mortgages to purchase homes within alarge holdingcompany ofsomethriftsubsid haschangedoverthe past three months, the BLPS instructs banksto consider only new originations as opposed to the refinancing of iaries with acommercial bank subsidiary. Apart from existing mortgages. However, this distinction may be difficult for the effect ofthis consolidation, residential real estate banksto makein practice.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A45 10. Netpercentageofselectedbanksreportingstronger subprime mortgages during the previous year, for demandforresidential mortgages, 1990-2007 instance, by increasing fees or widening the spreads overthe bank's cost offunds.8 ------------------Percent Consumer lending at banks expanded 6.3 percent - I~,A - 60 in 2006, up from 2.2 percent in 2005. Credit card W\ loans, which account for slightly less than half of - ~ - 40 consumer loans, rose at banks of all sizes. By con - - 20 trast, growth in otherconsumer lending was confined + 0 to the ten largest banks. Consumer lending may have VV - - VV - 20 been restrained in recent years as homeowners with drew equity from their houses to finance purchases. - - 40 \ The rebound in consumerlending in 2006 may reflect - \ - 60 in partadeclinein this substitution as rising mortgage - - 80 rates and slower home-price appreciation made the I I I I 1 1 I I I 1 1 I I I I I I I I ! I use ofhome equity less attractive. 1991 1993 1995 1997 1999 2001 2003 2005 2007 The expansion in consumer lending occurred de NOll;: SeriesbeginswiththeOctober 1990survey.Fordefinitionofresi spite repeated reports of weaker demand for such dential mongages, refer to figure 9, general note. Refer also to figure 5, generalnoteandsourcenote. loans by BLPS respondents. On average last year, a net fraction of around one-third of respondents indi products for commercial banks.? According to the cated that consumer loan demand had weakened. responses, commercial banks generally appear not to Standards for approving consumerloans were report have been involved significantly in making nontradi edly not much changed on net during 2006 (fig tional and subprime mortgages. About 45 percent of ure 11). Most lending terms also did not change banks indicated that less than 5 percent of their much; however, a sizable fraction ofbanks indicated mortgage holdings were nontraditional loans. About that they had increased the minimum percentage of half the respondents did not answer the questions on outstanding creditcard balances that they required to subprime lending; the nonresponse suggests that they be repaid each month. are not engaged in this type of lending. In addition, about 70 percent of those that did respond indicated Other Loans and Leases that subprime loans accounted for less than 5 percent Other loans and leases grew a modest 3 percent of loans on their books. Some banks, however, did during 2006. Loans to purchase or carry securities, report that these products were a significant part of which are relatively volatile,expanded 25 percent.As their residential real estateportfolios. Aboutone-fifth in 2005, the fiscal position of many state and local ofthe respondents indicated that nontraditional mort governments was supported by rising incomes and gages accounted for more than 20 percent of the property valuations; nevertheless, lending to these residential mortgages on their books. One-tenth of entities grew robustly in 2006, possibly to finance a banks responding to the subprime loan questions pickup in construction-related expenditures. Agricul indicated that these loans accounted for more than tural loans expanded at a pace roughly in line with 20 percentofthe residential mortgages loans on their that of the preceding two years; loans in most farm books. A few banks reported that they had tightened loan categories continued to rise.9 Growth in the their price-related terms for both nontraditional and 7. TheJuly2006BLPSdefined"nontraditionalmortgageproducts" 8. In September 2006, federal banking regulators provided guid to include, but not be limited to, adjustable-rate mortgages with ance to financial institutions on managing the risks associated with multiple payment options, interest-only mottgages, and so-called nontraditional mortgage products. The guidance also proposed con "alt-A"products,suchas mortgages with limited income verification sumerprotectionpractices;refertotheOfficeoftheComptrollerofthe and mortgages secured by non-owner-occupied properties. Respon Currency,BoardofGovernorsoftheFederalReserveSystem,Federal dentstothatsurveywereinstructedtoexcludestandardadjustable-rate Deposit Insurance Corporation, Office of Thrift Supervision, and mortgages and common hybrid adjustable-rate mortgages--those on NationalCreditUnionAssociation(2006),"FederalFinancial Regula which the interest rate is initially fixed for a multiyear period and tory Agencies Issue Final Guidance on Nontraditional Mortgage subsequently adjusts more frequently. Subprime mortgages were ProductRisks," pressrelease,September29,www.federalreserve.govf defined as loans made to borrowers who had one or more of the boarddocsfpressfbcregf2006. following characteristics at the time oforigination: weakened credit 9. Using it Survey ofTerms of Bank Lending to Farmers, the histories that include paymentdelinquencies, charge-offs,judgments, Federal Reserveestimatesnon-real-estatebankloansmadetofarmers and/or bankruptcies; reduced repayment capacity as measured by by purpose of the loan, such as to obtain farm equipment and creditscoresordebt-to-incomeratios;orincompletehistories.Respon machinery or to coveroperating expenses. This information is pub dentswereaskedtoconsideronlyfirst-lien loans. lished quarterly in the Board of Governors of the Federal Reserve

A46 Federal Reserve Bulletin0 July 2007 11. Netpercentageofselectedbanksreportingtighter 12. Changeinselecteddomesticliabilitiesatbanks, standardsforconsumerlending, 1996-2007 1990-2006 Percent ___________________Percent Consumerloansotherthancreditcards 25 20 15 20 10 15 5 10 + o 5 + 5 o 10 5 _ Smalltimedeposits 15 10 20 I I I I 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 Creditcardloans NOTE: Thedataareannual.Savingsdepositsincludemoneymarketdeposit 50 accounts. 40 in their investment accounts picked up in 2006 from 30 its slow pace in 2005. By contrast, holdings of 20 Treasury securities and of securities issued by state 10 and local governments declined. + o Liabilities 10 Bank liabilities increased 12.1 percent in 2006, an I I I I I I I I I I I I I I 1997 1999 200I 2003 2005 2007 advance about in line with bank assets. Core deposits grew only 5.8 percent, the slowest rate since 1999. NOTE: Refertofigure5,generalnoteandsourcenote. Transaction deposits contracted for the second con secutive year, and the rate of expansion of savings remaining components of other loans, such as lease deposits slowed (figure 12). By contrast, small time financing receivables and loans and leases to deposi deposits grew 17 percent, their largest advance since tory institutions, which accountfor around halfofthe 1989. Interest rates on liquid deposits, which include total, was.about flat or declined last year.to both transaction and savings deposits, tend to move Securities sluggishly, so rising market rates increase the oppor tunity costofholding these deposits and restrain their Banks expanded their seCUrIties holdings a robust growth; interestrateson smalltimedeposits generally 11.5 percent last year. Growth was particularly rapid track market rates closely, and as short-term rates for securities held in banks' trading accounts, which rose, the attractiveness of these deposits relative to can fluctuate considerably year to year; the rise liquid deposits increased. Core deposits are generally reflected increased holdings of a wide variety of a more important funding source for smaller banks security types. than larger institutions, and the growth rate of core Holdings of securities in banks' investment ac deposits at banks outside the 100 largest was 8.2 per counts grew at a more moderate rate of 6.9 percent. cent last year, noticeably faster than at larger banks. Banks' accumulation of mortgage-backed securities 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 System, Statistical Release E.15, "Agricultural Finance Databook," sectionA,www.federalreserve.gov/releases/eI5. banks.Thesefunding sourcesnowaccountfor44per 10. The decline in lending to depository institutions was due in cent ofthe liabilities ofall banks, the largest share in large part to the consolidation ofsubsidiaries within a large holding the past two decades. The rapid growth in managed company. [n the absence ofthis consolidation, growth in this "other loans"categorywouldhavebeenroughly flat. liabilities was supported by theexpansion ofdeposits

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A47 booked in foreign offices, the largest component of 13. Regulatorycapitalratios, 1990-2006 managed liabilities. Large time deposits, the next largestcomponentofmanagedliabilities, alsogrewat ------------------Percent a solid rate.ll 14 Total(tierI+tier2) 13 Capital 12 Banks' capital expanded arapid 14.7percent in 2006, II nearly double the rateofgrowth in 2005.There was a Tier1 10 sizable expansion in goodwill as the result ofmerger 9 andconsolidationactivityinvolvingsomelargebanks. Leverage 8 Retained earnings continued to be strong and also 7 added notably to capital.As in previous years, banks' 6 capital was also boosted by funding from parent I I I I I I I I I I I I I I I I I I I I holding companies and shares issued to the public. 1990 1992 1994 1996 1998 2000 2002 2004 2006 Regulatory capital expanded smartly last year. NOTE: Thedataareasofyear-end.Forthecomponentsoftheratios,refer Tier I capital grew 11.8 percent, and tier 2 capital totextnotes12and 13. increased 17.1 percent.12 Risk-weighted assets ex panded 11.6 percent, a touch slower than total assets. Derivatives The difference is due, in part, to the slightly more The notional principal value of derivative contracts rapid growth in assets having relatively lower risk held by banks rose 30 percent last year, surpassing weights, such as mortgage-backedsecuritiesand first $130trillion (table2).Even though the notional value lien residential mortgages. As a result, banks' tier I ofderivative contracts grew at banks ofall sizes, the and total capital ratios ended the year higher than in share of industry contracts accounted for by the 10 2005 (figure 13). The leverage ratio, which is based on tangible average assets, also edged higher.13 The largest banks hascontinuedto edgehigherand is now above98 percent. Theshareofcontracts at the largest share of assets held at well-capitalized banks was banks likely reflects their role as dealers in deriva above 99 percent in 2006, and the average margin by tives markets.As dealers, these banks often enterinto which banks remained well capitalized moved up offsetting positions, which significantly boost the some after having slipped a bit over the preceding few years (figure 14).14 notional value of their derivative contracts. The fair market value of derivative contracts held by banks, which reflects their replacement cost, is far smaller II. Thethriftconsolidationboostedthegrowthratesofalltypesof than the notional principal amount. The fair market liabilities, buttheonlycategoryfor whichtheimpactwassubstantial was "federal funds purchased and securities sold under repurchase value ofcontracts with a positive value in 2006 was agreements." about $1.2 trillion. This value edged down for the 12. Tier Iandtier2capitalareregulatory measures.Tier Icapital second consecutive year. The fair market value of consistsprimarilyofcommonequity(excludingintangibleassetssuch asgoodwillandexcludingnetunrealizedgainsoninvestmentaccount contracts with a negative value, which was also securities classified as available for sale) and certain perpetual pre roughly $1.2 trillion in 2006, slipped lower as well. 15 ferred stock. Tier 2 capital consists primarily ofsubordinated debt, Oneimportant way for banks to hedge interest rate preferredstocknotincludedintier Icapital,andloan-lossreservesup toacapof1.25percentofrisk-weightedassets. Risk-weightedassets risk, including that related to interest-sensitive assets are calculated by multiplying the amount of assets and the credit equivalent amount of off-balance-sheet items (an estimate of the potential creditexposure posed by the items) by the risk weight for computed as follows: Among the leverage, tier I, and total capital eachcategory.Theriskweightsrisefrom0to Iasthecreditriskofthe ratiosofeachwell-capitalizedbank,theinstitution's"tightest"capital assets increases. The tier 1 ratio is the ratio of tier I capital to ratio isdefinedastheoneclosesttotheregulatorystandardfor being risk-weightedassets;thetotalratioistheratioofthesumoftier Iand well capitalized.Thebank's margin isthen defined as thepercentage tier2capitaltorisk-weightedassets. pointdifferencebetweenitstightestcapitalratioandthecon'esponding 13. Theleverageratioistheratiooftier Icapitaltotangibleassets. regulatory standard. The average margin among all well-capitalized Tangible assets are equal to total average consolidated assets less banks-themeasurereferredtoinfigure 14-istheweightedaverage assets excluded from common equity in the calculation of tier I ofalltheindividual margins;theweightsareeachbank'sshareofthe capital. total assetsofwell-capitalizedbanks. 14. Well-capitalized banksarethosewithatotal risk-based capital 15. Thepositiveand negative fair marketvaluesofbanks' deriva ratioof LO percentorgreater,atier 1risk-based ratioof6percentor tives contractsare ofroughly thesameaggregate magnitude because greater, a leverage ratio of 5 percent or greater, and a composite thevastmajorityoftheactivityisaccountedforbyafewlargedealers. CAMELS rating of Ior2. Each letterin CAMELS stands for akey Thesimilarityinsizedoesnotmeanthatbanks'aggregateexposureto elementofbankfinancialcondition----Capitaladequacy,Assetquality, the marketand creditrisk associated with thecontractsare offsetting Management,Earnings,Liquidity,andSensitivitytomarketrisks.The because, for example, the counterparties to banks' positive- and estimatedaverage margin by which banks were well capitalized was negative-valuedcontractsmaydiffer.

A48 Federal Reserve Bulletin0 July 2007 14. Assetsandregulatorycapitalatwell-capitalizedbanks, 15. Notionalamountsofcreditderivatives forwhich 1990-2006 bankswerebeneficiariesorguarantors,2000-06 Percent TrillionsofdolJars Shareofindustryassetsatwell-capitalizedbanks 4.5 4.0 100 3.5 .t- 3.0 80 I 2.5 t 2.0 60 1.5 40 1.0 Beneficiary .-.. Guarantor .5 20 + o I I I I I I I I I I I I I I I I I I I I 2~ 200] 2002 2003 2~ 2005 2~ Percentagepoints NOTE: Thedataarequanerly. Averagemarginbywhichbankswerewellcapitalized 3.5 contracts pushed the proportion of total derivative 3.0 contracts accounted for by interest rate derivatives down 2 percentage points, to 81 percent. 2.5 One of the fastest growing components of banks' derivative portfolios in recent years has been credit 2.0 derivatives. The notional value ofsuch derivatives at banks jumped 55 percent, but this increase was only 1.5 about one-third of that registered in 2005. However, I I I I I I I I I I I I I I I I I I I I the fair market value of such contracts increased 1m 1m 1m I~ Im2~D22~2~ 90 percent in 2006, a somewhat faster pace than in NOTE: Thedata areannual. Forthe definitions of"well capitalized"and 2005.The 10 largest banks held more than 99 percent ofthemarginbywhichbanksremainwellcapitalized,refertotextnote14. of the notional value of all the industry's credit such as mortgages and mortgage-backed securities, is derivative contracts at the end of 2006. As dealers, through the use ofinterest rate swaps.16These swaps these banks buy and sell contracts, an activity that are the most common type of derivative that banks makes them, respectively, beneficiaries ofcredit pro use, and they account for around 60 percent of the tection or providers of protection (also referred to as notional value of banks' derivative contracts. The guarantors). Typically, banks are net beneficiaries of notional value of these derivatives increased 26 per protection and generally were again in 2006. How centin 2006, arateofexpansion aboutin line with the ever,thedifferenceatyear-end between the$4.52tril average pace over the past decade. The solid growth lion in contracts for which they were beneficiaries of in the notional value of these instruments likely protection and the$4.50trillion incontractsfor which reflects the overall growth of the derivatives market they were the guarantors of protection was consider and the role that some of the largest banks playas ablysmallerthan itwas attheendof2005 (figure 15). dealers in that market. In addition to swaps, banks Banks also use derivatives related to foreign ex employ other types of interest rate derivative con change,equities,and commodities. Collectively, how tracts, such as futures, forwards, and options con ever, these instruments accountforonly 12percentof tracts, although not nearly to the same extent. The the notional value ofthe derivative contracts held by notional value of these derivative contracts also banks.Thenotional valueofbanks' foreign-exchange expandedatabriskrate lastyear. Despitethe increase related contracts grew 29 percent in 2006; much of in different types ofinterest rate derivative contracts, the increase was due to a rise in the notional value of even faster growth in the use of other derivative options contracts. Banks' notional holdings ofequity and commodity derivatives surged 75 percent in 16. Interestrateswapsareagreementsinwhichtwopartiescontract 2006, a jump influenced importantly by one institu toexchangetwopaymentstreams,onebasedonafloatinginterestrate tion thathascontinuedtoexpandrapidly its tradingof and one based on a fixed interest rate; the payment streams are calculatedonthebasisofaspecificnotional principalamount. commodity derivatives. I

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A49 2. Change in notional value and fair valuederivatives, all U.S. banks, 2001-D6 Percent MEMO Item 2001 2002 2003 2004 2005 2006 ( D bi e l c li . o 2 n 0 s 0 o 6 f dollars) Totalderivatives Notionalamount . ............... 11.47 24.14 26.54 23.69 15.38 29.75 132,145 Fairvalue Positive ............ ... ...... 26.42 85.41 .36 13.71 -<i.46 -4.52 1,205 Negative ....... ............. 20.82 89.18 1.00 13.75 -5.78 -4.29 1,193 Interestratederivatives Notionalamount.... ... .... 15.93 26.83 27.62 22.07 11.92 27.10 107,399 Fairvalue Positive .. ............ .... 63.87 108.20 -5.95 13.14 -5.52 -14.55 839 Negative .. ...... ... ....... 56.55 113.02 -5.07 12.94 -5.15 -15.06 816 Exchangeratederivatives Notionalamount... ..... .... -7.00 7.34 18.81 21.03 7.69 29.27 12,564 Fairvalue Positive ........ .... ........ -16.21 8.67 41.81 14.86 -35.84 22.68 180 Negative .. ... ...... ...... -15.65 15.73 38.81 12.74 -37.36 21.21 175 Creditderivatives Notionalamount .. .... ....... -1.20 52.47 55.98 134.52 148.09 54.92 9,019 Guarantor ..... ....... ...... 21.84 38.57 61.82 139.07 137.87 67.69 4,496 Beneficiary... ..... ......... -16.89 66.36 51.13 130.46 157.53 44.02 4,523 Fairvalue Guarantor .................... n.a. 0.3. 68.31 69.92 81.43 92.95 69 P N o e s g i a ti t v iv e e . .. . . . . . . ... .. . . . . ... . . . . . . . . . . . . .. . n n . . a a . . n n . . a a. . - 3 < 7 i 8 8 . .8 0 7 9 3 7 8 4 . . 3 5 7 6 8 - 2 5 7 . . 6 9 2 8 2 - 0 1 1 . . 5 3 9 6 5 1 0 9 Beneficiary................... n.a. n.a. 19.85 51.28 83.50 90.25 78 Positive. ..... ..... ...... n.a. n.a. -<i3.13 2.64 505.51 3.96 23 Negative.... ..... ....... n.a. n.a. 295.74 66.36 2.79 187.44 55 Otherderivatives' Notionalamount. .......... -12.06 6.70 3.77 32.66 29.43 75.17 3,163 Fairvalue Positive ....... ......... .... -34.72 20.28 3.16 8.55 58.51 18.99 113 Negative .......... .... -42.63 24.62 -5.25 19.73 74.29 24.15 128 NOTE: Dataarefromyear-endtoyear-endandareasofApril 13,2007. I. Otherderivativesconsistofequityandcommodityderivativesandothercontracts. n.a. Notavailable. TRENDS IN PROFITABILITY banks that incurred losses rose for the second year in a row, to 7.4 percent, but such banks accounted for The profitability of the commercial banking industry just under 0.5 percent of industry assets, the lowest remained quite strong in 2006. Although mergers share on record. boosted the goodwill component of reported equity The flattening of the yield curve and ongoing again in 2006, return on equity (ROE) moved up to competitive pricing pressure, particularly in the C&I 13.67 percent last year, a level well within the high loan anddepositmarkets, reportedlycausedtheindus rangethathasprevailedsincethe mid-1990s.17Banks' try net interest margin to edge lower last year. The return on assets (ROA) increased to 1.39 percent, decline was concentrated at the ten largest banks, for matching the peak annual level reached in 2003. Last whom pricingcompetition may beespecially intense; year's rise in both ROE and ROA can be traced to banks of other sizes experienced stable net interest large banks and to those specializing in credit card margins, and those specializing in credit card loans loans; these two broad measures of profitability saw a sizable increase in margins. Non-interest in declined modestly for other banks.ls The fraction of come 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 17. Forinformationontheeffectsoflarge mergersonbankcapital and profitability in 2005, referto ElizabethC. Kleeand GretchenC. related to investment banking activity at the ten Weinbach (2006), "Profits and Balance Sheet Developments at U.S. largest banks and a sharp rise in income related to Commercial Banks in 2005," Federal Reserve Bulletin, vol. 92, securitization at large banks drove the increase in www.federalreserve.gov/pubslbulletin. 18. The adjustments made to the data take account of mergers non-interest income. Banks' investment banking ac betweenbanksbutdonotcapturetheeffectsofmergersbetweenbanks tivity may have been lifted by the waveofmergerand and thrifts. However, the sizable thrift-to-bank consolidation in the fourthquarterof2006(notedabove)didnothaveamaterialimpacton aggregateindustryprofitabilitymeasures in 2006. Forinformationon and Nelson, "Profits and Balance Sheet Developments at U.S. Com the merger adjustments to the data, refer to the appendix in English mercial Banksin 1997,"p. 408.

A50 Federal Reserve Bulletin DJuly 2007 16. Bankstock prices, by marketvalueofbank,and 17. Premiumoncreditdefaultswapsonsubordinateddebt theS&P500,2001-07 atselectedbank holdingcompanies,2002-07 January2006=100 Basispoints 120 80 100 60 80 40 60 20 40 225largestbanks I I I I I I 200I 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007 NOTE: ThedataaremonthlyandextendthroughMarch2007.Stockprices NOTE: ThedataaremonthlyandextendthroughMarch2007. areweightedbymarketvalue. SOURCE: Markit. SOURCE: Standard& Poor'sandAmericanBanker. Interest Income and Expense acquisition activity. The continued trend decline in the ratio ofnon-interestexpense to total revenue also For a second year in a row, the average rates of contributedtoprofitability. Profits wereboosted in the interest earned on banks' assets and paid on banks' fourth quarterby arise inextraordinary items because liabilities rose in 2006; both were lifted in part by the ofan asset trade between two large banks. This event monetary policy tightenings in the first half of the is estimated to have boosted industry ROA 2 basis year. However, the average rate earned increased less points for 2006 as a whole. than the average rate paid, and the industry net Asset quality generally remained solid in 2006, a interest margin narrowed 7 basis points, to 3.47 per factor that helped buoy bank profits. The health of cent. Last year's decline extended the downward business and household balance sheets was supported trend in this measure that has been evident since the by continued economic growth, hefty corporate prof mid-1990s (figure 18). The industry net interest mar its, and increases in household wealth stemmingfrom gin declined early in 2006 but widened in the fourth gains inequity prices. Indeed, the delinquency rateon quarter; at year-end it stood a few basis points above all loans and leases averaged 1.57 percent again last its year-earlier level. year. However, some pockets of distress in the real The decline in the industry net interest margin last estate sector became evident in the second half of year was driven almost entirely by a decrease of 2006, when theoverall delinquency rate rose 18 basis 11 basis points at the 10 largest banks; net interest points, reaching 1.69 percent by year-end. Banks margins for banks outside the 10 largest, by contrast, continued to provision for losses at about the same remained aboutflat. Atthe 10largestbanks, however, low average rate as a share of assets as in 2005 the share of interest-earning assets rose to its highest providing support for profits. On a quarterly basis: level since 1993, and the return on such assets in banks increased theirprovisioning moderately toward creased 96 basis points. But the ratio of interest the end ofthe year, bearing liabilities to interest-earning assets reached Supported by strong profitability, the growth of anotherrecord high, likely areflection ofthese banks' dividend payments surged in 2006. The share of increased reliance on managed liabilities (noted ear profits paid out as dividends increased several per lier),andinterestexpenseasashareofinterest-earnino centage points last year, and, as a result, retained '" assets rose 107 basis points. Still, netinterest margins earnings expanded only a bit. Nevertheless, retained at the ten largest banks rose significantly in thefourth earnings remained high in 2006 and provided support quarter; these banks registered a particularly large forequitycapital.Againstthis backdrop,thestocksof increase in interest income on loans that quarter.t9 bank holding companies outperformed the robust gains posted by the S&P 500 in 2006 (figure 16). Credit default swap premiums on banks' subordi 19. Thefourth-quarterincreaseinthenetinterestmarginattheten nated debt moved down a bit further last year from largest banks did not appear to have been driven by the sizable already low levels (figure 17), thrift-to-bankconsolidationthatquarter.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 AS! 18. Netinterestmargin,bysizeofbank, 1990-2006 19. Netpercentageofselecteddomesticbanksreporting increasedspreadsofratesonC&lloansovercostof ___________________PcrcenL funds, bysizeofborrower, 1990-2007 Allbanks ------------------Percem 4.50 60 4.25 40 4.00 20 + o 3.75 20 3.50 40 60 I I I I I I I I I I I 80 I I I I I I I I I I I I I I I I I I I I 4.75 1991 1993 1995 1997 1999 2001 2003 2005 2007 4.50 NOTE: Refertofigure5,generalnoteandsourcenote. 4.25 putting downward pressure on net interest margins. 4.00 Growth of generally lower-cost core deposits was 3.75 down last yearfrom 2005. By contrast, the growth of 3.50 managed liabilities surged in 2006, liftingtheshareof 3.25 these higher-cost liabilities in total interest-bearing liabilities to a five-year high. 3.00 The downward pressure on banks' net interest I I 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 margins lastyearwas partiallyoffsetby higherreturns on assets funded with non-interest-bearing liabilities NOTE: The data are annual. Net interest margin is net interest income dividedbyaverageinterest-earningassets.Fordefinitionofbanksize,referto and capital.2o Because these instruments, by defini thegeneralnoteonthefirstpageofthemaintext. tion, have noexplicitinterestexpense, the level ofthe return on bank assets, which rose significantly last The increases in rates earned by banks last year year-rather than the spread between the average were highest for credit card and other consumer rates earned on assets and those paid on liabilities, loans. Indeed, the net interest margins of banks that which declined last year-helped to buoy banks' net specialized in creditcard loans rose for the third year interest margins. However, after holding aboutsteady in a row, and the profitability of these banks moved in 2005, the shareofinterest-earningassetsfunded by up considerably more than for the industry as a non-interest-bearing instruments declined somewhat whole. Rates earned on C&I loans increased signifi lastyearbecauseofaconsiderably smallerincreasein cantly last year, but their rise was the lowest among non-interest-bearing savings deposits. major loan components. The increase in C&I loan Non-interest Income and Expense rates was particularly small for the ten largest banks. As noted earlier, significant net fractions of respon Non-interestincomegrewbriskly in2006-its 11 per dents to BLPS surveys had trimmed spreads of C&I centrise was the highestin 7 years. The share oftotal loan rates over their cost of funds last year, which revenueaccountedforby non-interestincomeclimbed likely helped to restrain the rise in these loan rates to almost 44 percent last year, the high end of its (figure 19).The survey banks, which tend to be large, range this decade (figure 20). The rise in this share have reported lower C&I loan rate spreads, on bal was nearly fully accounted for by a surge in trading ance, since the middle of 2003. Nearly all the banks revenue, which is highly concentrated at the ten thattrimmed their rate spreads on C&I loans lastyear indicatedthatmore-aggressivecompetitionfrom other banks or nonbank lenders was the most important 20. For more discussion, refer to box "The Role ofNon-Interest reason for having done so. BearingInstrumentsintheNetInterestMargin"in MarkCarlsonand Roberto Perli (2004), "Profits and Balance Sheet Developments at The average rates that banks paid on deposits rose U.S. Commercial Banks in 2003," Federal Reserve Bulletin, vol. 90 in 2006 by the largest amount in more than 15 years, (Spring),p. 173.

A52 Federal Reserve Bulletin0 July 2007 20. on-interestincomeandselectedcomponentsas 21. Depositfee incomeasaproportionoftotaldomestic aproportionofrevenue, 1990-2006 deposits, 1990-2006 ------------------Percent Percent Total .80 45 .75 .70 40 .65 35 .60 .55 30 .50 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 1990 1992 1994 1996 1998 2000 2002 2004 2006 Selectedcomponents N01E: Thedataareannual. 30 Othernon-interestincome 25 Although therateofgrowth in non-interestexpense in 2006 was somewhat higher than its historical 20 average, non-interest expense as a share of total 15 revenue moved lower, boosting banks' profitability (figure22). Brisk growth in salariesand benefitscosts Fiduciaryincomeplustradingincome --------- 10 accounted for most of last year's increase in non interest expense, but the share of industry revenue Depositfees 5 accounted for by salaries and benefits held about I I I I I I I I I I I I I I I I I I I I steady after rising in each ofthe previous four years. 1990 1992 1994 1996 1998 2000 2002 2004 2006 The number ofbank employees rose a bit faster than NOTE: The data are annual. Revenue is calculated as the sum of non its average rate ofthe past several years, and pay per interestincomeandnetinterestincome. employeemoved up. Expensesassociated with banks' premises grew at a relatively slow rate, and they largest banks. Increases in equity- and foreign declined as a share of total revenue. Other compo exchange-related trading income drove the pickup in nents of non-interest income also grew at a slower industry trading revenue. The rise in equity-related pace than total revenue. trading income coincided with broad gains in share prices last year. In addition, after notable growth in Loan Performance and Loss Provisioning 2005, industry trading revenue associated with inter est rate and commodity exposures rose further in Overall credit quality generally remained solid last 2006, perhaps because of banks' expanding deriva year, although delinquency rates for some loan cat tives activities.Althoughgrowth in both fiduciary and egories may have bottomed out around the middle of deposit fee income picked up relative to 2005, each last year. Delinquency rates on both residential and declined slightly as a share of total revenue. Despite commercial real estate loans turned up noticeably in the highergrowth in depositfee income, it was again the second half of the year-especially in the fourth exceeded by the expansion in deposits, and the ratio quarter-albeit from very low levels. By contrast, ofdepositfees to deposits moved down for the fourth delinquency rates on C&I loans declined last year, straight year (figure 21). and those on consumer loans moved up only a little. Taken together, the other components of non Charge-off rates on all loans and leases declined interest income rose about in line with industry further, reaching their low point in the fourth quarter revenue lastyear. Income related tosecuritization and ofthe year. Meanwhile, banks provisioned for losses investment bankingactivity grew briskly.Theconsid at a relatively low rate, although provisioning rose a erable amount of merger and acquisition activity and bit late in the year. In the January 2007 BLPS, banks relatively hefty volume of corporate bond issuance reported that they expected a deterioration in the last year likely fueled, at least in part, the pickup in quality of their loans to both businesses and house banks' income related to investment banking activity. holds during the year, a judgment based on the

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A53 22. Non-interestexpenseandselectedcomponentsas 23. Delinquencyandcharge-offratesforloans to aproportionofrevenue, 1990-2006 businesses,by typeofloan, 1990-2006 Percent Percent Total Delinquencies 70 12 68 Commercialrealestate 9 66 64 6 62 3 60 + o 58 I I I I I I I I I I I I I I I I I Selectedcomponents Netcharge-offs 35 3.0 Other 30 2.5 25 2.0 20 1.5 15 1.0 ~misesandfixedassets 10 .5 + o 5 t I I I I I I I I I I I I 1 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 1990 1992 1994 1996 1998 2000 2002 2004 2006 1990 1992 1994 1996 1998 2000 2002 2004 2006 NOTE: Thedataareannual. NOTE: The data are quarterly and seasonally adjusted; the data for commercialrealestatebeginin 1991.Delinquentloansareloansthatarenot accruinginterestandthosethatareaccruinginterestbutaremorethanthirty assumption that economic activity progresses in line dayspastdue.Thedelinquencyrateistheend-of-periodlevelofdelinquent loans divided by the end-of-period level of outstanding loans. The net with consensus forecasts. The net fraction of banks charge-offrateistheannualizedamountofcharge-offsovertheperiod,netof recoveries,dividedbytheaveragelevelofoutstandingloansovertheperiod. that anticipated deterioration this year was notably Forthecomputationoftheserates,commercialrealestateloansexcludeloans higher than in the year-earlier survey. notsecuredbyrealestate(refertotable I,note2). C&I Loans loans edged up acouple ofbasis points last year on a quarterly average" basis, it remained exceptionally The credit quality of banks' C&I loan portfolios low. improved further in 2006. The delinquency rate on C&I loans drifted lower for the fourth straight year Commercial Real Estate Loans and dropped below 1.2 percent in the fourth quarter, the lowestlevel in morethan 15 years(figure23).The The credit quality of commercial real estate loans decline wasconcentrated at the 100 largestbanks, but generally remained strong in 2006, although it ap the rest ofthe industry registered an improvement in peared to deteriorate some in the second half of the C&I loan quality as well. The continued high credit year. As noted earlier, fundamentals in the sector qualityofC&I loans likely reflectedgenerallyhealthy continuedto improve lastyear---commercial property corporate balance sheets-the interest-payment ratio values and rents rose, vacancy rates in both the office for nonfinancial corporations remained quite modest and industrial sectorscontinued to driftdown, and the last year (figure 24)-and a very low incidence of vacancy rate for retail buildings remained low. Ac corporate default. Moreover, the rapid growth in C&I cordingly, both delinquency and net charge-off rates loans over the past two years may have temporarily on commercial real estate loans generally remained reduced delinquency rates because loans are presum around historically low levels. Delinquency rates ably less likely to become delinquent soon after they drifted lowerduring the first halfoflastyear, butthey areextended.Although the netcharge-offrateon C&I rose noticeably over the second half at banks of all

A54 Federal Reserve Bulletin0 July 2007 24. Interest-paymentratioforbusinesses,andfinancial 25. Delinquencyandcharge-offratesforloans obligationsratio forhouseholds, 1990-2006 tohouseholds,bytypeofloan, 1990-2006 ------------------Percent Percent Interest-paymentratiofornonfinancialcorporations Delinquencies 22 6 20 5 18 4 16 3 14 2 12 10 I I I I Financialobligationsratioforhouseholds _ Netcharge-offs 7 - 19 6 5 - 18 4 3 - 17 2 Otherconsumer I + o 16 Residentialrealestate 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 I I I I I I I I I I I I 1990 1992 1994 1996 1998 2000 2002 2004 2006 1990 1992 1994 1996 1998 2000 2002 2004 2006 NOTE: Thedata arequarterly. Theinterest-paymentratio iscalculatedas NO'rE: The data are quarterly and seasonally adjusted; data for de interestpaymentsasapercentageofcashflow.Thefinancialobligationsratio linquenciesand for netcharge-offsofresidential real estate loans begin in isanestimateofdebtpaymentsandrecurringobligationsasapercentageof 199I. Fordefinitionsofdelinquenciesand netcharge-offs,refertothenote disposablepersonalincome;debtpaymentsandrecurringobligationsconsist forfigure23. of required payments on outstanding mortgage debt, consumerdebt, auto leases,rent,homeowner'sinsurance,andpropertytaxes. SOURCE: Forinterest-paymentratio,nationalincomeandproductaccounts real estate loans climbed in the second half of 2006, and Federal Reserve Board;for financial obligations ratio, Federal Reserve Board(www.federalreserve.gov/releaseslhousedebt). 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 sizes. The upturn was concentrated in loans for 1990s. The rise in delinquencies on residential real construction and land development, a category of estate loans in the second half of last year was funding that includes loans to residential real estate widespread: Delinquency rates rose for mortgages on developers. By contrast, net charge-offs on commer one-to four-family residencesand on revolving home cial real estate loans held about steady at a low level equity loans, and they rose at banks ofall sizes. Last over the four quarters of last year. In credit markets, year's increase may have been, at least in part, the spreads on commercial-mortgage-backed securities result of higher variable-rate mortgage rates, on bal widened a bit, on average, in 2006 but remained ance, and a slowing in home-price appreciation in the relatively narrow. second halfofthe year, a combination offactors that likely put pressure on households with variable-rate Loans to Households mortgages. Indeed, broad measures of delinquency Even though bank-intermediated householddebtgrew rates on variable-rate subprime mortgages moved up more slowly in 2006 than in 2005, household credit considerably last year. (For further discussion, refer quality deteriorated somewhaton balance last year to box "CreditQualityofSubprimeResidentialMort higher interest rates increased households' debt ser gages.") Netcharge-offrates on residential real estate vicepaymentsfurtherand liftedtheirfinancial obliga loans edged higher in 2006 but remained at very low tions ratiotoan all-timehigh.Afterholding steady for levels. Charge-off rates on one- to four-family resi several quarters, the delinquency rate on residential dential mortgages ticked down over the first half of

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 ASS 26. Creditcarddelinquencyrateand household institutions indicated no change in their lending poli bankruptcyfilings, 1993-2006 cies for these credit card loans in response to the bankruptcy reform; only two reported that they had Percent PerJ00.000persons tightened credit standards for approving credit card Creditcarddelinquencies 900 loan applications. In addition, aboutone-fourth stated 5.0 that, after accounting for changes in their lending 800 standards and terms, they anticipated thatcharge-offs 4.5 700 on their credit card loans would be lower in the long 600 term because ofthe reform. 4.0 500 In theApril 2006 BLPS, banks were queried about their minimum required payment on credit card bal 3.5 400 ances for individuals and households. One-third of Bankruptcyfilings 300 respondents, on net, had increased their required 3.0 200 minimum payment over the previous year.23 Despite I I I I tit I I I I I I I I I I concerns raised by some industry commentators 1994 1996 1998 2000 2002 2004 2006 regarding theeffects ofhigher minimum paymentson NOTE: Thedataarequarterlyandseasonallyadjusted.Theseriesshownfor defaults and loan losses, these increases do notappear bankruptcyfilingsbeginsin 1995:QI.Fordefinitionofdelinquencies,referto thenoteforfigure23. to have had a significant effect on such measures. SOURCE: Forbankruptcyfilings,staffcalculationsarebasedondata from The delinquency rate on other consumer loans LundquistConsulting. edged lower,on average, in2006,and charge-offrates on such loans stepped down significantly. On a theyear, butthey increasedoverthesecond halfwhen quarterly basis, however, delinquency and charge-off gains in homeowners' equity cooled. rates on otherconsumer loans rose in the second half The rate of household bankruptcy filings plunged oflast year; their levels at year-end were above those in the wake of the bankruptcy reform law that took registered early in the year. effect in October 2005, and a markedly lower rate of bankruptcy prevailed in 2006 (figure 26).21 Nonethe Securitized Loans less, the delinquency rateoncreditcard loans rose, on average, last year. The increase occurred in the first After declining in 2005, the delinquency rates on halfofthe year--creditcard delinquencies receded in many types of securitized loans registered mixed the second half but ended the year at 3.9 percent, changes last year but remained relatively low. Al somewhat above their year-earlier level. By contrast, though the average delinquency rate on securitized the net charge-offrate on creditcard loans on banks' residential mortgages was unchanged relativeto2005, booksfell significantly lastyearrelativeto2005,even it dipped markedly in the first quarter of 2006 and after excluding the large fluctuation in charge-offs then increased steadily over the remainder of the caused by the new bankruptcy law.22 Last year's year: Atyear-end 2006, this rate stood 50basis points decline continued the downward trend in credit card higher than its year-end 2005 level, but that was still charge-offs that has been evident, on balance, for the below the year-end levels of the previous several past few years. years.Forthe third year inarow, the delinquency rate Banks were queried about the effects ofthe bank on securitized home equity loans moved up. By ruptcy reform legislation on their lending policies for creditcard loans to individuals and households in the 23. Theincreases in required minimum payments in 2006 may be January 2007 BLPS survey. Nearly all domestic related to guidance that was issued by federal banking regulators in January 2003 governing account management and loss allowance practices for creditcard lending. Theguidanceoutlined the supervi 21. For a discussion of the change in bankruptcy law that was sory agencies' expectations for prudent risk management, income implemented in 2005 and itseffecton creditcard loans, referto box recognition, and loss allowance practices and provided guidance for "The New Bankruptcy Law and Its Effect on Credit Card Loans" in minimum payments and negative amortization. When the guidance KleeandWeinbach,"ProfitsandBalanceSheetDevelopmentsatU.S. wasissued,itwasrecognizedthatsomebanksmightrequireadditional Commercial Banksin2005,"p.A89. timetoimplementchangesinpolicies,practices,andsystems.Referto 22. The new bankruptcy law caused a surge in the rate ofcredit the Board ofGovernors ofthe Federal Reserve System, the Federal cardcharge-offsin the fourth quarterof2005 thatwas followed bya Deposit Insurance Corporation, the Office ofthe Comptrollerofthe relatively low rate in the first quarter of2006 (figure 25). Excluding Cun'ency,andtheOfficeofThriftSupervision(2003),"FFIECAgen thesevalues,therateofcreditcardcharge-offsaveraged4.3percentin cies Issue Guidance on Credit Card Account Management and Loss 2005 and 3.7 percent in 2006 (without excluding those values, Allowance Practices," press release, January 8, www. charge-offratesaveraged4.7 percentand3.5percentrespectively). federalreserve.gov/newsevents.htm.

A56 Federal Reserve Bulletin 0 July 2007 Credit Quality of Subprime Residential Mortgages Seriousdelinquency rates on residential mortgages-that underwriting basedon both principal and interestobliga is, the fraction ofloans that are ninety days or more past tions at the fully indexed rate with a fully amortizing due or are in foreclosure-have moved higher, on bal repayment schedule, plus a reasonable estimate for real ance, since mid-20OS. This rise is largely accounted for estate taxes and insurance. The statementalso cautioned by a sharp increase in the delinquency rate on subprime about risk-layering features. The consumer protection residential mortgages (figure A).J By contrast, delin practicesincludedclearand balancedproductdisclosures quencyrateson primeresidential mortgages,which make to customers and limits on prepayment penalties that up the majority of outstanding residential loans, have allow for a reasonable period of time for customers to remained fairly low and stable over this period. The refinance beforetheexpirationofthe initial fixed interest deterioration in the subprime sector has been concen rate period without penalty. trated among borrowers whose mortgages have variable Available evidence suggests that commercial bank interest rates; serious delinquency rates on subprime exposure to troubled subprime mortgages is generally fixed-rate mortgages have barely budged, on net (figure small.Delinquencyratesonall residential mortgageloans B). Amid slowing house-price appreciation and rising on banks' books have risen a bit since mid-2005, but interest rates, one would expect residential mortgage these rates have remained relatively low. Disaggregating defaults to rise because borrowers have slimmer equity these delinquency rates reveals that the increase in such cushionswith which tobufferincreasesintheirmortgage rateshasoccurredatbanksthatheldafairlysmall portion payments or other sources of financial stress. However, of all residential mortgage loans (figure C). Banks that adjustable-rate subprime loans originated in 2006 have respondedtothespecialquestionsintheJuly2006Senior also been plagued by so-called "early paymentdefaults," LoanOfficerOpinion Survey on Bank LendingPractices inwhichtheborrowerdefaultswell beforetheirmortgage reported that their holdings ofsubprime mortgages were paymentresets. generally small-just 3 of the 56 banks surveyed indi In June 2007, the federal financial regulatory agencies cated that their holdings of subprime mortgages ac issued a"Statement on Subprime Mortgage Lending" to counted for more than 20 percent of all residential addressissuesrelatingtocertainadjustable-ratemortgage mortgages on their books at that time. And although the products that can cause payment shock.2 The statement dollar amount of foreclosed residential properties on describedtheprudentsafetyandsoundnessandconsumer banks' books rose to $2.5 billion at the end of 2006, protection practices that institutions should follow to comparedwithalevelofaround$1.5billionattheendof ensure borrowers obtain loans that they can afford to both 2005 and 2004, such assets accounted for less than repay. The safety and soundness practices included loan 0.2 percent of all outstanding residential real estate loans? Finally, banks may beexposed to subprime mort gages through their holdings ofmortgage-backed securi I. Thesubprimecategoryofresidential mortgages typicallyincludes loansmadetoborrowerswhohadoneormoreofthefollowingcharacter ties, but these holdings are largely backed by the U.S. isticsatthetimetheloanswereoriginated:weakenedcredithistoriesthat governmentorbygovernment-sponsoredenterprises. includepaymentdelinquencies, charge-offs,judgments,orbankruptcies; reduced repayment capacity as measured by credit scores or debt-to The credit quality of residential mortgages is signifi income ratios; or incomplete credit histories. The prime category of cantly lowerin some areas ofthe U.S. than in the nation residentialmortgagesincludesloansmadetoborrowerswhotypicallyhad relativelystrong.well-documentedcredithistories;relatively highcredit scores;andrelativelylowdebt-to-incomeratiosatthetimetheloanswere originated. 3. Thesefiguresarebasedonthesumoftwocomponentsofotherreal 2. Formoreinformation,refertotheBoardofGovernorsoftheFederal estate owned reported on the Call Reports: "1-4 family residential ReserveSystem,FederalDepositInsuranceCorporation, NationalCredit propertiesindomesticoffices"and"foreclosedpropertiesfrom 'GNMA Union Administration, Office ofthe Comptrollerof the Currency, and (Government National Mortgage Association) loans.''' Excluding the OfficeofThriftSupervision(2007),"FederalFinancialRegulatoryAgen GNMAitem, which was added to theCall Reports in March2006, the ciesIssueFinalStatementonSubprimeMortgageLending," pressrelease, totalforyear-end2006was$1.7billion,upfromanaverageof$1.5bil June29,www.federalreserve.govlboarddocs/presslbcreg/2007/. lionatyear-endforboth2005and2004. contrast, the delinquency rate on securitized credit aboutthesameaverage rate as in2005.24Measuredas card receivables continued its multiyear decline in a share of average net consolidated assets or as a 2006, although thedecreasewas much smallerthan in proportion of total revenue, banks' provisioning for previous years. loan and leaselossesdeclined acoupleofbasis points Loss Provisioning 24. Banks boosted their provisioningin the third and fourth quar ters of200S becauseofthesurgein personal bankruptciesassociated With credit quality generally remaining strong in withthebankruptcy reform lawthattookeffectinOctober200S and 2006, banks continued to provision for loan losses at theeffectsofHurricanes Katrinaand Rita.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 AS7 as a whole. According to the Mortgage BankersAssocia Mississippi early this year, states where losses related to tion, theshareofresidential loansofall types in foreclo HurricanesKatrinaandRitahavebeensignificant. Banks sure in the first quarter of 2007 was highest in Ohio, that experienced losses in 2006 were not particularly Indiana,andMichigan-statesthathavebeenparticularly concentrated in these states, but the average return on hard-hit by recent troubles in the auto industry. Fore assetsofbankslocatedinthesestateswas lowerthan that closures were also relatively high in Louisiana and in fortheindustry as a whole last year. A. Rateofseriousdelinquencyonresidential mortgages, B. Rateofseriousdelinquencyonsubprimeresidential byloancategory,2000-07 mortgages,bytypeofinterestrate,2000-07 Percent --------------Percent 6 II 10 5 9 4 8 Allloans 2 6 Primeloans l--r I I I I I I I I I I I I I I I I I I 2000 2001 2002 2003 2004 2005 2006 2007 2000 200I 2002 2003 2004 2005 2006 2007 NOTE: Thedataarequarterly and exlend through 2007:QI. Seriously NOTE: ThedataaremonthlyandextendthroughMarch2007.Seriously delinquentloansareninetydaysormorepastdueorinforeclosure. The delinquentloansareninetydaysormorepastdueorinforeclosure. primecategorycontainssomenear-primeloans. SOURCE: FirstAmericanLoanPerformance. SOURCE: MortgageBankersAssociation,NationalDelinquencySurvey. C. Rateofseriousdelinquencyonresidential realestateloans, 1991-2007 ------------------------------------Percent 6 5 4 -- - 2 = - I I I I I I I I 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 NOll': Thedataarequarterlyandextendthrough2oo7:QI.DelinquencyratesareforInansninetydaysormorepastdueornon-accrual.The90thand 95thpercentilesareweightedbyresidentialrealestateloanportfolios. last year (figure 27). By either measure, the rate of a share ofaverage assets last year than in 2005, their provisioning continued to be in the low end of the provisioning rose significantly in the fourth quarter. range seen over the past two decades. On a quarterly Provisioning outpaced charge-offs in 2006, so that basis, banks' provisioning was moderately higher in loan-loss reserves increased in dollar terms, but the thefourth quarteroflastyear relative to the first three ratioofloss reserves to total loansand leasesdeclined quarters, a reflection of a rise in provisioning by the further (figure 28). However, the ratio of reserves to ten largest banks and by small banks.Although banks delinquent loans remained near the high end of its that specializein creditcard loans provisioned less as range ofthe past two decades. Reserves as a share of

A58 Federal Reserve Bulletin0 July 2007 27. Provisionsforloanandleaselossesasa 2006. Rapid growthinbanks' lendingandderivatives proportionoftotalrevenue, 1990--2006 activities with Asian economies lifted U.S. institu tions' total exposure to such countries as a share of Pcrcenl tier I capital to nearly 35 percent (table 3).25 By this measure, banks' exposure to China tripled over the - 20 pastthree years, butitremained belowtheirexposure to India and well below that to Korea. Banks' expo sure to Latin American and Caribbean economies - \5 surged in terms of dollars, but it edged down as a share oftier I capital. - \0 DEVELOPMENTS IN EARLY2007 5 U.S. economic activity slowed in the first three I I I I I I I I I I I I I I I I I I I months of 2007. Growth in business expenditures 1990 1992 1994 1996 1998 2000 2002 2004 2006 stepped down somewhat relative to 2006-spending NOTE: Thedataareannual. onfixed investmentaccelerated, butinventory invest ment slowed. Although mergerand acquisition activ net charge-offs increased in 2006-as it has in three ity reportedly stayed elevated, corporate profits re out ofthe past four years-and stood near its highest mained strong, and firms reduced their demand for level ofthe past decade. external financing. Consumer spending picked up, andjob growth continued at a solid pace through the Us. INTERNATIONAL OPERATIONS OF first quarterof2007. However, thefinancial condition COMMERCIAL BANKS of some households deteriorated as terms reset on variable-rate subprime mortgages and house prices The share ofassets ofU.S. banks booked in foreign leveled out. Readings on core inflation ticked up in offices increased 115 basis points, to 12.9 percent, in the first two months ofthe year before coming back down in March. Measures of inflation expectations 28. Reservesforloanand leaselosses, 1990--2006 posted small mixed changes-inflation expectations Percent basedonTreasury inflation-protectedsecuritiesrose a bit, but longer-term survey-based measures edged Asapercentageoftotalloansandleases 3.0 lower. Against this backdrop, the Federal Open Mar 2.5 ket Committee maintained its target for the federal 2.0 funds rate at its first two meetings in 2007. Intermediate-term interest rates declined somewhat 1.5 over the first three months of the year, and longer 1.0 term interest rates held about steady, on balance. I I I I I t I I I I I Itt I I t In lateFebruary 2007, volatility in global financial Asapercentageofdelinquentloans marketsjumped,andprices ofrisky assetsdroppedas 100 investors appeared to reduce theirexposure to risk. In particular, concerns about conditions in the U.S. 80 subprime residential mortgage market and possible 60 spillover to the broader economy grew as delin 40 quency rates on such mortgages climbed and poten tially high exposures to troubled subprimemortgages I I t I I I I I t I I surfaced at some financial entities. By the end ofthe Asapercentageofnetcharge-offs first quarter, measures of implied volatility in Trea 500 sury markets and the volatility ofthe S&P 500 index 400 had retreated somewhat but remained higher than 300 earlier in the year. 200 Datafrom theFederalReserveshowthatgrowthof 100 domestic banks' assets stepped down abit in the first I I I I I I I t 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. For definitions of delinquencies and net 25. Exposures consist of lending and derivatives exposures for charge-oft's,refertothenoteforfigure23. cross-borderand localofficeoperations.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A59 3. Exposure ofU.S. banks to selected economies at year-end relative to tier I capital, 1997-2006 Percent Total Asia LatinAmericaandtheCaribbean Eastern exposureto Year I I I I I Europe developing All China India Korea All Mexico Brazil economies 1997 . 25.4 1.0 1.5 7.4 29.7 5.5 9.7 3.5 77.9 1998 . 28.2 1.0 2.4 7.1 42.9 9.9 11.3 3.5 100.1 1999 . 26.1 .8 2.4 6.6 39.0 9.5 10.5 2.9 90.7 2000 .. 24.0 .8 2.6 6.4 37.9 9.1 11.2 4.4 87.9 2001 . 22.4 .9 2.6 5.8 54.1 26.0 3.0 4.3 100.3 2002 . 21.9 .9 2.7 5.8 38.9 20.8 8.4 5.5 84.8 2003 . 22.8 1.3 3.9 5.5 32.9 18.0 6.8 5.4 79.8 2004 . 32.2 1.4 4.2 15.0 31.8 16.7 6.5 6.1 89.2 2005 . 30.7 2.4 4.9 12.9 31.8 17.4 6.9 5.9 86.4 2006 .. 34.7 4.1 6.1 13.6 30.8 16.9 5.7 6.5 92.6 MEMO Totalexposure(billiolls ofdollars) 1997 . 87.1 3.5 5.1 25.3 10I.7 18.8 33.4 11.9 267.1 1998 . 69.1 2.3 5.4 17.3 104.7 24.2 27.6 8.5 244.7 1999 . 67.9 2.0 6.2 17.2 101.6 24.8 27.3 7.4 236.4 2000 .......•.....•.•. 68.0 2.2 7.5 18.1 107.3 25.7 31.6 12.3 249.1 2001.. .....•.. . . 67.2 2.7 7.7 17.5 162.4 78.0 39.0 12.9 301.4 2002 . 69.5 2.7 8.7 18.4 123.5 66.2 26.6 17.6 269.4 2003 . . 79.9 4.4 13.6 19.2 115.2 63.0 23.7 19.1 280.1 2004 .. . 125.8 5.3 16.3 58.7 124.4 65.2 25.5 23.8 348.9 2005 . 134.8 10.4 21.6 56.7 139.7 76.1 30.4 25.7 378.8 2006 .. 190.5 22.7 33.6 74.8 168.9 92.5 31.5 35.5 508.2 OTE: Exposures consist of lending and derivatives exposures for cross The year·end 2006 data cover 66 banks with a total of$549.0 billion in borderand local officeoperations. Respondents may file information on one tier Icapital. bankoron the bankholdingcompanyasawhole. Forthedefinition oftier I SOURCE: Federal Financial Institutions Examination Council (2007), Stat· capital,seetext note 12. istical Release E.16. "Country Exposure Lending Survey" (March 30), www.ffiec.gov/EI6.htm. quarter of 2007 relative to 2006.26 As businesses Despite banks' generally strong balance sheets and sought less external financing, C&I loan growth continued profitability in the first quarter of2007, an slowed at banks of all sizes. Aside from a sizable index of the stock prices of the 225 largest banks bank-to-thrift conversion in the first quarter, loans underperformed the S&P 500 index over the period secured by real estate continued to expand at around (figure 29). Investors apparently became concerned the same pace as in 2006. By contrast, loans to about possible implications of the troubles in the consumers picked up a bit, consistent with the rise in subprime mortgage sector for banks' earnings. The consumer spending. With steady growth in core bank stock index dropped about 10 percent in late deposits in the first quarter of 2007 and the lower February and early March-about twice as much as growth in assets, theexpansion ofmanaged liabilities the broader market-but some of this decline later dropped back. reversed in March. Credit default swap premiums on Although the tone of first-quarter earnings reports 29. Bankstockprices, by marketvalueofbank, of major bank holding companies was mixed, indus and theS&P500,2006-07 try profitability generally appeared to have held up in early 2007. Several banks reported that their profit January6.2006=100 ability was supported by continued strong non interest income, such as from trading activities. Net 115 interest income rose at some institutions; others indi cated that their margins remained under pressure. 110 Decreased demand for new mortgages and write-offs of servicing income on existing mortgages weighed 105 on the profitability of several institutions. Credit quality reportedly generally stayed solid, but some 100 banks noted increased losses in their mortgage port folios. 95 I I 2006 2007 26. BoardofGovernorsoftheFederal ReserveSystem, Statistical Release H.8, "Assets and Liabilities of Commercial Banks in the NOTE: ThedataareweeklyandextendthroughMarch2007.Stockprices United States" (www.federalreserve.gov/releases/h8). The H.8 in areweightedbymarketvalue. cludesonlydomesticassets. SOURCE: Standard& Poor'sandAmerieallBallker.

A60 Federal Reserve Bulletin 0 July 2007 banks' subordinated debt moved higher for a time in at the end ofMarch. Bank mergers in the first quarter lateFebruary; these premiums subsequently retreated of2007 occurred ataboutthe same paceas in thefirst some but remained above their year-end 2006 levels quarterof2006. 0 AppendixtablesstartonpageA6/ I

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 I I I I I I I I I Item 1997 1998 1999 2000 200I 2002 2003 2004 2005 2006 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interesl-earningassets....................... .. 87.15 86.76 87.03 87.13 86.49 86.42 86.08 86.90 86.82 86.85 Loansand leases(net) .., .•.. . . 58.72 58.33 59.34 60.48 58.95 57.83 56.88 56.98 57.88 58.26 Commercialandindustrial . 15.77 16.36 17.07 17.16 16.08 14.07 12.18 11.06 11.17 11.43 U.S. addressees..... . . 13.17 13.61 14.43 14.67 13.69 12.04 10.48 9.52 9.64 9.73 Foreignaddressees........... . . 2.60 2.75 2.64 2.49 2.39 2.04 1.70 1.54 1.53 1.70 Consumer . 11.50 10.41 9.71 9.38 9.23 9.35 9.06 9.18 9.12 8.53 Creditcard . 4.62 4.02 3.51 3.52 3.63 3.78 3.55 3.86 4.05 3.73 Installmentandother . 6.88 6.39 6.20 5.87 5.60 5.57 5.51 5.31 5.06 4.80 Realestate . 25.00 24.85 25.44 27.04 27.10 28.39 29.91 30.78 32.40 33.19 Indomesticoffices . 24.39 24.28 24.87 26.49 26.60 27.91 29.45 30.24 31.84 32.61 Constructionandlanddevelopment . 1.73 1.86 2.18 2.51 2.85 2.98 2.99 3.26 3.90 4.73 Farmland . .55 .55 .56 .56 .55 .56 .54 .54 .54 .53 One-tofour-family residential . 14.41 14.25 14.10 14.96 14.67 15.40 16.96 17.42 18.26 18.23 Homeequity.. . . 1.94 1.89 1.76 1.96 2.18 2.80 3.40 4.34 4.95 4.71 Other . 12.47 12.37 12.34 13.00 12.49 12.60 13.57 13.08 13.31 13.52 Multifamilyresidential . .83 .82 .88 .99 .97 1.02 1.05 1.06 1.08 1.06 Nonfamlnonresidential ..•....... 6.88 6.80 7.15 7.48 7.56 7.95 7.91 7.97 8.06 8.07 Inforeign offices ........ .. ...... .61 .57 .57 .54 .50 .48 .46 .53 .56 .58 Todepositoryinstitutionsand acceptancesofotherbanks . 1.93 1.91 1.96 1.87 1.83 1.87 1.98 2.11 1.73 1.65 Foreigngovernments .. . . .18 .15 .16 .12 .10 .09 .08 .08 .06 .04 Agriculturalproduction. . .. .90 .89 .83 .78 .75 .70 .63 .59 .56 .55 Otherloans . ......... . .. 2.80 2.78 2.75 2.58 2.34 2.06 2.00 2.35 2.09 2.19 Lease-financingreceivables . 1.87 2.12 2.51 2.63 2.58 2.44 2.11 1.79 1.58 1.43 LESS: Unearnedincomeonloans . -.09 -.07 -.06 -.05 -.04 -.05 -.04 -.04 -.03 -.03 LESS: LossreservesI.. .. .. -1.13 -1.07 -1.04 -1.02 -1.04 -1.11 -1.04 -.91 -.79 -.71 Securities .. 20.40 20.37 20.40 20.02 19.53 21.27 21.90 22.57 22.04 21.32 Investmentaccount...... .. . . 17.23 17.48 18.33 17.59 16.82 18.30 18.97 18.99 17.87 16.89 Debt .. 16.74 16.93 17.73 16.93 16.48 17.99 18.72 18.79 17.71 16.73 U.S.Treasury . 3.38 2.71 2.14 1.66 .85 .78 .90 .89 .62 .47 U.S.governmentagencyand corporationobligations. 9.73 10.28 10.85 10.31 10.08 11.46 12.26 12.37 11.51 10.65 Govemment-backedmortgagepools. 4.93 5.16 5.24 4.75 5.13 6.09 6.75 7.13 6.78 6.43 Collateralizedmortgageobligations .. 1.93 2.12 2.15 1.92 1.95 2.35 2.34 2.01 1.80 1.58 Other.......... .. .. 2.86 2.99 3.46 3.63 2.99 3.02 3.17 3.22 2.93 2.65 Stateandlocalgovernment . 1.59 1.57 1.62 1.52 1.49 1.49 1.48 1.41 1.36 1.34 Privatemortgage-backedsecurities .50 .67 .88 .95 1.09 1.25 1.30 1.41 1.76 1.87 Other............ .. .. 1.54 1.70 2.24 2.48 2.98 3.01 2.78 2.72 2.47 2.39 Equity....... . . .50 .55 .61 .66 .34 .31 .25 .20 .16 .16 Tradingaccount............ .. 3.16 2.90 2.06 2.43 2.72 2.97 2.93 3.59 4.17 4.43 Grossfederal fundssoldandreverseRPs . 5.18 5.37 4.61 4.12 5.11 4.81 4.85 4.58 4.75 5.29 Interest-bearingbalancesatdepositories 2.86 2.69 2.68 2.52 2.90 2.52 2.45 2.76 2.15 1.97 Non-interest-earningassets . 12.85 13.24 12.97 12.87 13.51 13.58 13.92 13.10 13.18 13.15 Revaluationgainsheldin tradingaccounts.. 2.59 2.95 2.57 2.28 2.37 2.42 2.70 2.19 1.82 1.64 Other........ .. .. 10.26 10.29 10.41 10.58 11.15 11.16 11.22 10.91 11.36 11.51 Liabilities . 91.57 91.51 91.52 91.58 91.25 90.85 90.96 90.57 89.91 89.84 Coredeposits ... . .. 50.89 49.43 48.60 46.52 47.07 48.98 49.18 48.56 47.52 45.57 Transactiondeposits..... . . 15.76 14.10 12.58 11.07 10.36 10.06 9.73 9.10 8.46 7.45 Demanddeposits .. 12.15 10.99 9.78 8.61 8.00 7.67 7.26 6.58 6.16 5.41 Othercheckabledeposits . 3.61 3.11 2.81 2.46 2.36 2.39 2.47 2.52 2.30 2.04 Savingsdeposits(including MMDAs) . 19.76 20.87 22.47 22.43 24.53 28.13 30.12 31.19 30.83 29.50 Smalltimedeposits . 15.37 14.46 13.55 13.01 12.18 10.80 9.33 8.27 8.23 8.61 Managed liabilities' . 34.13 34.97 36.59 38.83 37.42 35.05 34.61 35.69 36.25 38.28 Largetimedeposits ~.. 7.25 7.67 7.89 8.77 8.89 8.30 8.09 8.00 9.11 10.08 Depositsbookedinforeign offices . 10.48 10.59 10.96 11.43 10.66 9.42 9.38 10.25 10.39 11.18 Subordinatednotesanddebentures . . 1.15 1.30 1.36 1.37 1.43 1.40 1.33 1.30 1.34 1.40 Grossfederal funds purchasedandRPs . 8.13 7.98 7.97 7.83 7.95 7.77 7.75 7.24 7.05 7.52 Othermanagedliabilities . 7.13 7.43 8.40 9.44 8.49 8.16 8.06 8.91 8.37 8.11 Revaluation lossesheldin tradingaccounts . 2.64 2.97 2.52 2.29 2.21 2.09 2.30 1.95 1.67 1.51 Other . 3.91 4.14 3.81 3.94 4.54 4.73 4.87 4.36 4.47 4.47 Capitalaccount ... 8.43 8.49 8.48 8.42 8.75 9.15 9.04 9.43 10.09 10.16 MEMO Commercialrealestateloans3 ...•.••.••.••••••• 9.98 10.11 10.87 11.58 12.09 12.57 12.47 12.78 13.52 14.35 Otherrealestateowned4 .11 .08 .06 .05 .05 .06 .06 .06 .04 .05 Mortgage-backedsecurities. 7.37 7.96 8.27 7.63 8.17 9.69 10.39 10.56 10.33 9.88 FederalHome Loan Bankadvances. n.a. 0.3. o.a. 0.3. 2.89 3.17 3.19 3.07 3.04 3.07 Averagenetconsolidatedassets (billionsofdollars)........................ 4,737 5,148 5.439 5.907 6.334 6,635 7,249 7,879 8,592 9,425

A62 Federal Reserve Bulletin 0 July 2007 A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006-Continued A.Allbanks-Continued Item 1997 I 1998 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 Effectiveinterestrate(percent)' Ralesearned Interest-earningassets.......................... 8.17 8.01 7.71 8.20 7.37 6.10 5.29 5.09 5.71 6.64 Taxableequivalent .............•.....•.. 8.23 8.07 7.76 8.26 7.42 6.15 5.34 5.13 5.75 6.68 Loansandleases,gross ...................... 9.03 8.85 8.47 9.00 8.15 6.89 6.15 5.91 6.52 7.54 Netoflossprovisions.................. 8.50 8.30 7.97 8.33 7.15 5.84 5.47 5.47 6.10 7.18 Securities .................. ...... 6.54 6.45 6.27 6.47 6.04 4.95 3.96 3.86 4.18 4.71 Taxableequivalent ..................... 6.73 6.63 6.46 6.65 6.22 5.10 4.10 3.99 4.30 4.83 Investmentaccount........................ 6.50 6.38 6.25 6.45 6.05 5.04 4.00 3.96 4.29 4.85 U.S.Treasurysecuritiesand U.S. governmentagencyobligmions (excluding MBS)............... n.a. n.a. n.a. n.a. 5.76 4.42 3.29 3.11 3.46 4.19 Mortgage-backedsecurities.............. n.a. n.a. n.a. n.a. 6.45 5.44 4.24 4.38 4.60 5.08 Other .............................. n.a. n.a. n.a. n.a. 5.60 4.74 4.08 3.76 4.23 4.80 Tradingaccount..................... 6.75 6.85 6.47 6.63 6.01 4.38 3.71 3.35 3.72 4.16 Gross federal fundssoldandreverse RPs ..... 5.45 5.29 4.78 5.56 3.86 1.93 1.40 1.40 2.66 4.31 Interest-bearingbalancesatdepositories ..... 6.23 6.32 5.95 6.48 4.01 2.79 2.09 1.98 3.70 5.09 Ratespaid Interest-bearingliabilities....................... 4.92 4.88 4.47 5.17 4.15 2.54 1.87 1.77 2.69 3.90 Interest-bearingdeposits .....•.....•......... 4.39 4.31 3.87 4.45 3.61 2.11 1.47 1.36 2.06 3.04 In foreignoffices.......................... 5.44 5.66 4.91 5.61 3.95 2.38 1.62 1.72 2.77 3.92 Indomesticoffices ........................ 4.16 4.01 3.63 4.17 3.54 2.06 1.44 1.29 1.91 2.85 Othercheckabledeposits ................ 2.25 2.29 2.08 2.34 1.96 1.06 .75 .77 1.41 1.88 Savingsdeposits(includingMMDAs).... 2.93 2.79 2.49 2.86 2.19 1.13 .74 .72 1.24 2.01 Largetimedeposits" .................... 5.45 5.22 4.92 5.78 5.04 3.38 2.59 2.35 3.19 4.38 Othertimedeposits" .................... 5.54 5.48 5.09 5.69 5.43 3.70 2.88 2.56 3.14 4.10 Grossfederal funds purchasedandRPs ....... 5.17 5.19 4.73 5.77 3.84 1.88 1.30 1.49 3.07 4.57 . Otherinterest-bearingliabilities ........... .. 6.94 6.89 6.48 6.97 5.92 4.32 3.59 3.26 4.50 6.19 Incomeandexpenseasapercentageofaveragenetconsolidatedassets Grossinterestincome .......................... 7.15 6.98 6.73 7.18 6.38 5.27 4.54 4.44 4.98 5.84 Taxableequivalent ........................ 7.21 7.03 6.78 7.22 6.43 5.31 4.58 4.48 5.02 5.88 Loans....................................... 5.41 5.27 5.12 5.53 4.92 4.06 3.56 3.42 3.82 4.47 Securities ................................... 1.11 1.10 1.14 1.15 1.00 .89 .74 .74 .77 .84 Grossfederal fundssoldandreverseRPs ..... .29 .29 .23 .23 .20 .09 .07 .07 .13 .23 Other .............. ........................ .35 .32 .24 .27 .27 .22 .18 .21 .26 .31 Grossinterestexpense ......................... 3.48 3.46 3.22 3.76 2.98 1.79 1.30 1.25 1.89 2.79 . Deposits ................................. .. 2.48 2.43 2.20 2.56 2.09 1.23 .86 .81 1.23 1.84 Gross federal funds purchasedandRPs ....•.. .43 .43 .39 .45 .31 .15 .10 .11 .22 .36 Other ....................................... .57 .60 .63 .75 .58 .41 .33 .33 .44 .59 Netinterestincome ........................... 3.68 3.52 3.52 3.41 3.40 3.48 3.24 3.19 3.09 3.05 Taxableequivalent ........................ 3.73 3.57 3.56 3.46 3.45 3.52 3.28 3.23 3.12 3.08 Lossprovisions7 ............................... .41 .42 .39 .50 .68 .68 .45 .30 .30 .27 Non-interestincome ........................... 2.23 2.41 2.66 2.59 2.54 2.54 2.54 2.39 2.33 2.37 Servicechargesondeposits ............... .39 .38 .40 .40 .42 .45 .44 .42 .39 .38 Fiduciaryactivities .......................... .35 .37 .38 .38 .35 .32 .31 .32 .31 .30 Tradingrevenue ............................. .17 .15 .19 .21 .20 .16 .16 .13 .17 .20 Interestrateexposures.................... .08 .05 .07 .08 .09 .08 .07 .03 .05 .05 Foreignexchangerateexposures .......... .08 .09 .09 .08 .07 .07 .07 .07 .07 .08 • Othercommodityandequityexposures.... .01 .03 .04 .03 .01 .02 .03 .04 .07 Other ..................................... 1.32 1.50 1.69 1.61 1.57 1.61 1.63 1.51 1.46 1.48 Non-interestexpense....................... .. 3.61 3.77 3.76 3.66 3.57 3.47 3.36 3.34 3.19 3.13 Salaries,wages,andemployeebenefits ....... 1.53 1.55 1.58 1.51 1.49 1.51 1.50 1.46 1.44 1.44 Occupancy .................................. .47 .47 .48 .45 .44 .44 .43 .42 .41 .39 Other ....................................... 1.62 1.76 1.70 1.70 1.64 1.52 1.43 1.46 1.34 1.30 Netnon-interestexpense .................. . .... 1.38 1.36 1.11 1.07 1.03 .93 .82 .96 .86 .76 • • Gainsoninvestmentaccountsecurities.......... .04 .06 -.04 .07 .10 .08 .04 -.01 Incomebeforetaxesandextraordinaryitems .... 1.92 1.81 2.02 1.81 1.77 1.% 2.05 1.97 1.93 2.01 T E a x x tr e a s or . d . i . n . a . r . y .. it . e . m .. s . , . n . e . t .. o . f .. in .. c . o . m .. e . t . a . x . e . s ... .. . . . . . . . • .68 . .0 6 1 2 • .72 • .63 -. . 0 5 1 9 • .65 . .0 6 1 7 • .64 • .62 . . 6 0 5 3 Netincome.................................... 1.25 1.20 1.31 1.18 1.17 1.31 1.39 1.33 1.31 1.39 Cashdividendsdeclared ..................... .90 .80 .% .89 .87 1.01 1.07 .76 .75 .87 Retained income ............................ .35 .40 .35 .29 .31 .30 .31 .58 .56 .52 MEMO: Returnonequity ....................... 14.84 14.07 15.39 13.97 13.40 14.36 15.35 14.14 12.99 13.67 OTE:DataareasofApriI13,2007. 5. When possible. basedontheaverageofquarterlybalancesheetdatare I. Includesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCall Report. 2. Measuredasthesumoflargetimedeposits in domesticoffices,deposits 6. Before 1997. large time deposit open accounts were included in other booked in foreign offices, subordinated notes and debentures. federal funds timedeposits. purchased and securities sold under repurchase agreements. Federal Home 7. Includesprovisionsforallocatedtransferrisk. Loan Bankadvances. andotherborrowedmoney. • Inabsolutevalue, lessthan0.005percent. 3. Measuredasthesumofconstructionandlanddevelopmentloanssecured n.a. Notavailable. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MMDA Money marketdepositaccount. bymultifamilyresidentialproperties;and loanstofinancecommercialreales RP Repurchaseagreement. tate,construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. MBS Mortgage-backedsecurities. 4. Other real estate owned is a component ofother non-interest-earning assets.

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 largestbanksbyassets I I I I I I I I I Item 1997 1998 1999 2000 200I 2002 2003 2004 2005 2006 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interest-earningassets . 81.84 81.25 81.49 82.23 81.74 81.68 81.39 83.54 83.96 84.67 Loansandleases(net) ..............••.... 50.91 50.76 53.37 55.22 53.86 53.61 52.20 51.29 51.35 52.04 Commercialandindustrial . 16.90 18.07 19.20 19.87 18.82 16.16 12.98 10.54 10.61 11.18 U.S. addressees.. . . 10.24 11.76 13.14 13.95 13.42 11.69 9.40 7.49 7.74 8.07 Foreignaddressees 6.66 6.31 6.06 5.92 5.41 4.47 3.59 3.06 2.87 3.1I Consumer . 6.40 6.04 5.94 5.43 6.17 7.82 7.96 8.49 8.80 8.23 Creditcard . 1.34 1.30 1.36 1.34 1.64 2.90 2.81 3.19 3.60 3.1I Installmentandnther . 5.06 4.74 4.58 4.09 4.53 4.92 5.15 5.30 5.21 5.12 Realestate . 17.42 16.51 16.96 19.82 19.23 20.78 22.68 23.21 24.55 25.48 Indomesticoffices..... . . 15.69 15.08 15.55 18.48 18.05 19.70 21.74 22.21 23.52 24.47 Constructionandlanddevelopment.. .68 .77 .90 .98 1.27 1.42 1.36 1.40 1.70 2.01 Farmland . .09 .09 .10 .11 .11 .12 .10 .10 .10 .10 One-to four-familyresidential .. 11.02 10.33 10.77 13.37 12.41 13.51 16.03 16.71 17.73 18.28 Homeequity 1.70 1.72 1.54 1.61 1.78 2.35 2.96 4.04 5.22 5.40 Other . 9.31 8.61 9.22 11.76 10.63 11.17 13.07 12.67 12.52 12.88 Multifamilyresidential .39 .38 .43 .60 .51 .55 .47 .45 .44 .44 Nonfarmnonresidential 3.52 3.51 3.35 3.42 3.76 4.09 3.78 3.55 3.55 3.64 Inforeign offices . 1.73 1.43 1.41 1.34 1.18 1.08 .94 1.00 1.03 1.01 Todepositoryinstitutionsand acceptancesofotherbanks 4.20 4.05 4.34 3.78 3.23 3.20 3.54 4.10 3.15 2.97 Foreigngovernments . .45 .35 .38 .28 .20 .20 .17 .16 .12 .07 Agricultural production . .31 .28 .26 .23 .28 .23 .19 .22 .20 .20 Otherloans . . 4.15 3.74 3.96 3.75 3.51 2.94 2.87 3.32 2.81 2.88 Lease-financingreceivables . 2.24 2.81 3.40 3.07 3.43 3.44 2.87 2.08 1.78 1.60 LESS: Unearnedincomeonloans.. -.07 -.06 -.05 -.04 -.04 -.08 -.06 -.04 -.04 -.02 LESS: LossreservesI .........•. -1.08 -1.01 -1.03 -.97 -.97 -1.12 -1.02 -.80 -.65 -.56 Securities . 20.00 19.72 18.34 18.98 17.81 20.54 21.22 22.95 23.37 23.04 Investmentaccount . 10.97 12.12 13.08 13.71 12.14 14.35 15.31 15.99 15.58 15.1I Debt . 10.55 11.64 12.57 13.03 11.88 14.13 15.1I 15.83 15.44 14.96 U.S.Treasury 1.56 1.70 1.98 1.96 .68 .59 .82 .86 .56 .43 U.S. governmentagencyand corporationobligations . 5.34 6.31 6.35 6.59 6.84 8.69 9.20 9.92 9.69 9.47 Govemment-backedmortgagepools.. 4.26 5.13 5.03 4.88 4.99 6.38 7.59 8.64 8.65 8.63 Collateralizedmortgageobligations .. .93 .93 .79 .93 1.11 1.52 .91 .70 .54 .52 Other . .15 .26 .52 .78 .74 .79 .70 .58 .50 .32 Stateandlocalgovernment .51 .47 .45 .51 .55 .59 .59 .57 .58 .64 Privatemortgage-backedsecurities .32 .60 .57 .51 .58 .92 1.10 .96 1.18 1.06 Other . 2.81 2.57 3.22 3.47 3.22 3.34 3.40 3.52 3.43 3.37 Equity . .42 .47 .51 68 .26 .22 .20 .16 .14 .15 Tradingaccount 9.03 7.60 5.25 5.26 5.67 6.18 5.91 6.96 7.79 7.93 Grossfederal fundssoldandreverseRPs . 7.56 7.81 6.64 5.02 6.38 5.26 5.79 6.37 6.96 7.60 Interest-bearingbalancesatdepositories . 3.37 2.96 3.14 3.01 3.69 2.28 2.18 2.93 2.28 1.99 Non-interest-eamingassets . 18.16 18.75 18.51 17.77 18.26 18.32 18.61 16.46 16.04 15.33 Revaluationgainsheld intradingaccounts.. 7.36 7.62 6.66 5.66 5.48 5.40 5.79 4.45 3.50 3.07 Other . 10.80 11.13 11.85 12.11 12.78 12.93 12.83 12.01 12.54 12.27 Liabilities 92.61 92.58 92.28 92.36 92.14 91.52 91.94 91.64 90.81 91.07 Coredeposits 31.66 32.94 33.76 33.28 36.38 40.61 41.07 42.02 40.18 37.99 Transactiondeposits.... . . 10.19 9.45 8.55 8.01 8.40 8.34 7.74 6.65 6.05 5.40 Demanddeposits . 8.98 8.46 7.83 7.28 7.50 7.40 6.72 5.43 4.90 4.31 Othercheckabledeposits . 1.21 .99 .72 .74 .90 .95 1.02 1.22 1.15 1.09 Savingsdeposits(includingMMDAs) 15.32 17.07 18.94 19.24 22.21 26.82 28.99 31.54 30.11 28.08 Smalltimedeposits ... 6.15 6.42 6.26 6.03 5.77 5.44 4.34 3.83 4.02 4.51 Managed liabilities' 46.02 44.42 45.49 46.84 43.41 38.89 38.60 39.33 40.83 43.77 Largetimedeposits . 4.17 5.04 5.19 5.55 5.46 5.13 5.53 5.21 6.28 6.84 Depositsbookedinforeignoffices 23.39 21.23 22.22 22.76 20.28 17.31 16.62 17.20 17.51 18.48 Subordinatednotesanddebentures ..... 1.80 1.89 1.98 2.10 2.16 2.1I 1.92 1.78 1.89 1.99 Grossfederal fundspurchasedandRPs 10.26 9.78 8.84 8.89 9.04 8.83 8.62 7.79 8.39 9.51 Othermanaged liabilities . . 6.40 6.49 7.27 7.55 6.47 5.53 5.90 7.35 6.76 6.94 Revaluation lossesheld intradingaccounts 7.53 7.67 6.51 5.69 5.10 4.63 4.88 3.95 3.21 2.83 Other .. 7.39 7.55 6.52 6.55 7.26 7.39 7.40 6.34 6.60 6.47 Capitalaccount . 7.39 7.42 7.72 7.64 7.86 8.48 8.06 8.36 9.19 8.93 MEMO Commercialrealestateloans' 5.45 5.61 5.69 5.87 6.68 6.92 6.31 5.99 6.33 6.73 Otherrealestateowned4 . .13 .09 .06 .04 .04 .03 .03 .03 .02 .03 Mortgage-backedsecurities . 5.52 6.65 6.40 6.32 6.68 8.82 9.60 10.30 10.36 10.21 Federal Home Loan Bankadvances . 0.3. n.3. n.3. n.a. .82 .82 .84 .79 .63 .75 Averagenetconsolidatedassets (billionsofdollars) . 1.514 1,820 1.935 2,234 2.527 2.785 3,148 3.654 4.232 4,765 I

A64 Federal Reserve Bulletin 0 July 2007 A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006-Continued B.Tenlargestbanksbyassets-Continued Item 1997 I 1998 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 Effectiveinterestrate(percent)' Ratesearned lnterest--earningassets ......................... 7.57 7.55 7.37 7.76 6.83 5.82 4.99 4.71 5.29 6.25 Taxableequivalent ...................... 7.60 7.57 7.39 7.78 6.86 5.85 5.01 4.73 5.31 6.27 Loansandleases,gross .......... .......... 8.25 8.21 7.99 8046 7.50 6.52 5.76 5.52 6.15 7.26 Netoflossprovisions ................... 8.10 7.77 7.65 7.92 6.55 5.30 5.19 5.29 5.84 6.94 Securities .................................. 6.78 6.83 6.58 6048 6.23 5.04 4.15 4.04 4.27 4.67 Taxableequivalent ...................... 6.85 6.89 6.65 6.55 6.31 5.1I 4.21 4.10 4.32 4.72 love tmentaccount...................... 6.76 6.78 6.59 6.40 6.23 5.30 4.26 4.37 4.63 5.08 U.S.Treasurysecuritiesand U.S. governmentagencyobligations (excludingMBS) .................... n.a. n.a. n.a. n.a. 5.01 3.74 2.62 2.92 3.29 4.15 Mortgage-backedsecurities .......... n.a. n.a. n.a. n.a. 6042 5.55 4.51 4.83 4.92 5.27 Other ........................ n.a. n.a. n.a. n.a. 6.34 5.30 4.28 3.76 4.26 4.77 Tradingaccount........................... 6.81 6.92 6.56 6.70 6.24 4046 3.87 3.32 3.57 3.89 Grossfederal fundssoldandreverseRPs ..... 5045 5.20 4.52 4.93 3.86 2.20 1.60 1043 2046 4.06 Interest-bearingbalancesatdepositories ..... 6.91 7.16 7.22 7.43 3.73 3.40 2049 1.80 4.06 5.59 Ratespaid Interest-bearingliabilities....................... 5041 5.29 4.79 5.37 4.09 2.54 1.85 1.80 2.82 4.10 Interest-bearingdeposits .................. 4.54 4040 3.82 4040 3.27 1.94 1.34 1.29 2.01 2.96 Inforeignoffices.......................... 5.52 5.83 4.99 5.67 4.02 2.59 1.74 1.81 2.77 3.88 Indomesticoffices ....................... 3.69 3.39 3.04 3.51 2.84 1.67 1.18 1.08 1.70 2.55 Othercheckabledeposits .............. 1.97 1.67 1.44 1.61 1.67 .93 .80 .97 2.27 2.46 Savingsdeposits(includingMMDAs).. 2.68 2045 2.11 2043 1.92 1.02 .73 .71 1.15 1.87 Largetimedeposits· ....... ......... 5.17 4.53 4.36 5.32 4040 3.26 2.36 2.14 3.06 4.31 Othertimedeposits· ................ 5045 5.21 4.95 5.53 5.11 3.44 2.70 2.61 3040 4.05 Gross federal funds purchasedandRPs . 5.02 5.18 4.53 5047 3.81 2.02 1.39 1.59 3.11 4.62 Otherinterest-bearingliabilities .............. 9.13 8.85 8.61 8.15 7.01 5.40 4.27 3.69 5.25 7046 Incomeandexpenseasapercentageofaveragenetconsolidatedassets Grossinterestincome ...................... 6.31 6.21 6.01 6.39 5.55 4.77 4.05 3.94 4047 5.39 Taxableequivalent ..... ................ 6.33 6.22 6.03 6041 5.57 4.79 4.07 3.96 4048 5041 Loans............ ....................... 4.31 4.27 4.35 4.74 4.13 3.57 3.04 2.86 3.19 3.85 Securities ......................... .73 .81 .85 .88 .72 .73 .63 .69 .72 .79 Grossfederal fundssoldandreverseRPs ..... 045 042 .30 .25 .25 .12 .10 .10 .18 .31 Other ..... .......... ................... .82 .70 .51 .51 .44 .35 .28 .30 .38 .45 Grossinterestexpense ................... .... 3.55 3048 3.16 3.60 2.69 1.65 1.19 1.20 1.89 2.86 Deposits ................................. 2.26 2.20 1.97 2.33 1.74 1.05 .74 .74 1.17 1.72 Gross federal funds purchasedandRPs ....... .54 .54 .40 .49 .35 .18 .13 .13 .27 047 Other ....................................... .75 .74 .79 .78 .59 Al .33 .33 045 .67 Netinterestincome ............................ 2.76 2.73 2.84 2.78 2.87 3.12 2.86 2.74 2.58 2.54 Taxableequivalent ........................ 2.79 2.75 2.86 2.80 2.89 3.14 2.88 2.76 2.59 2.56 Lossprovisions7 ...................... .16 .31 .26 .38 .59 .73 .35 .16 .20 .21 Non-interestincome ........................... 2.12 2.15 2.55 2.54 2.26 2.31 2.32 2.21 2.37 2.24 Servicechargesondeposits ................. .32 .33 .37 .40 .44 048 046 045 042 AI . Fiduciaryactivities ................... .. .34 .32 .31 .27 .29 .25 .26 .24 .27 .23 Tradingrevenue .... ..... ................ .43 .33 046 048 043 .32 .30 .23 .31 .36 Imerestrateexposures..................... .23 .10 .17 .20 .20 .15 .12 .07 .11 .09 Foreignexchangerateexposures ........... .20 .20 .19 .18 .14 .14 .14 .12 .12 .14 Othercommodityandequityexposures. ... • .03 .09 .11 .08 .03 .04 .04 .07 .13 Other .................................... 1.04 1.17 1.41 1.39 1.10 1.26 1.30 1.28 1.38 1.24 Non-interestexpense.................. ....... 3.24 3047 3045 3.31 3.13 3.16 3.02 3.1I 2.99 2.80 Salaries,wages,andemployeebenefits ....... 1.45 1045 1.57 1.46 1.38 1.41 1.39 1.34 1.38 1.39 Occupancy ............................ .... 047 047 .50 .47 045 046 045 043 043 .40 Other ................... ........... 1.33 1.54 1.38 1.39 1.30 1.28 1.18 1.33 1.19 1.01 Netnon-interestexpense ...................... 1.12 1.32 .90 .77 .87 .85 .70 .91 .62 .56 • Gainsoninvestmentaccountsecurities........ .08 .11 .03 -.03 .08 .13 .11 .07 -.01 Incomebeforetaxesandextraordinaryitems .. 1.56 1.22 1.71 1.60 1.48 1.67 1.92 1.74 1.75 1.76 T E a x x tr e a s or . d . i . n . a . r . y .. i . te . m .. s . , . n .. etofincometaxes .. . . .. • .58 • .44 • .66 • .60 -. 0 0 4 1 9 • .56 • .63 • .56 • .57 . .5 0 7 2 Netincome.................................... .98 .78 1.05 1.00 .99 1.11 1.29 1.18 1.18 1.21 Cashdividendsdeclared ...... ............ .82 .53 .79 .86 .66 1.05 .99 .65 .59 .63 Retainedincome ............................ .15 .25 .26 .13 .32 .06 .30 .53 .59 .58 MEMO: Returnonequity ...... ............ 13.22 10.53 13.58 13.04 12.55 13.14 16.06 14.07 12.86 13.58 NOTE: DataareasofApril 13,2007. 5. When possible, basedon theaverage ofquarterlybalancesheetdatare I. Includesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCallReport. 2. Measuredasthesumoflargetimedeposits in domesticoffices,deposits 6. Before 1997, large time deposit open accounts were included in other booked in foreign offices, subordinated notes and debentures, federal funds timedeposits. purchased and securities sold under repurchase agreements, Federal Home 7. Includesprovisionsforallocatedtransferrisk. Loan Bankadvances,andotherborrowedmoney. • Inabsolutevalue, lessthan0.005percent. 3. Measuredasthesumofconstructionandlanddevelopmentloanssecured n.a. Notavailable. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MMDA Money marketdepositaccount. bymultifamilyresidentialproperties;and loanstofinancecommercialreales RP Repurchaseagreement. tate,construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. MBS Mortgage-backedsecurities. 4. Other real estate owned is a component of other non-interest-earning assets.

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. Banksranked IIthrough 100byassets Item 1997 I 1998 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interest-earningassets..... 87.50 87.85 88.40 88.67 88.09 88.34 88.10 88.18 87.87 87.05 Loansandleases(net) ....... 63.89 64.37 64.22 64.88 62.14 60.00 59.48 60.63 63.37 62.80 Commercialandindustrial .... 19.01 18.92 19.40 18.19 15.84 13.27 11.96 11.90 12.18 12.16 U.S.addressees ..................... 17.78 17.59 18.18 17.64 15.36 12.94 11.66 11.64 11.91 11.84 Foreignaddressees ..... ...... 1.22 1.33 1.22 .55 .48 .33 .30 .26 .27 .32 Consumer ........... 15.62 14.52 13.57 13.79 13.20 12.79 12.57 12.73 12.84 11.83 Creditcard .... .................. 8.50 7.67 6.78 6.97 6.97 6.56 6.35 6.90 7.44 7.00 Installmentandother.. ................ 7.12 6.86 6.79 6.82 6.23 6.22 6.21 5.83 5.39 4.84 Realestate....................... 22.99 24.59 24.80 26.21 27.29 28.94 30.67 32.16 34.89 35.36 Indomesticoffices...................... 22.85 24.42 24.62 26.12 27.21 28.88 30.54 31.97 34.73 35.15 Constructionand landdevelopment.... 1.69 2.03 2.43 3.00 3.31 3.36 3.22 3.51 4.21 5.31 Farmland .......................... .14 .17 .19 .22 .23 .22 .20 .19 .19 .17 One-tofour-family residential ....... 13.88 14.86 14.15 14.51 15.51 17.05 18.79 19.52 21.05 20.32 Homeequity....................... 2.22 2.17 2.08 2.49 2.90 3.92 4.74 5.90 6.04 5.02 Other............. .............. .. 11.65 12.69 12.07 12.02 12.60 13.13 14.05 13.62 15.01 15.30 Multifamilyresidential... .93 1.00 1.02 1.11 1.16 1.20 1.32 1.34 1.45 1.46 Nonfarm nonresidential . 6.21 6.36 6.82 7.28 6.99 7.05 7.00 7.41 7.83 7.89 Inforeignoffices ....... ............... .15 .18 .19 .09 .09 .06 .13 .20 .16 .21 Todepositoryinstitutionsand acceptancesofotherbanks.........•. 1.30 1.09 .93 1.05 1.40 1.44 1.21 .54 .56 .44 Foreigngovernments .09 .06 .06 .03 .03 .02 .02 .01 .02 .01 Agriculturalproduction . .................. .29 .33 .33 .37 .32 .27 .23 .19 .19 .18 Otherloans ............ 3.18 3.35 2.99 2.57 2.03 1.80 1.59 1.87 1.62 1.87 Lease-financingreceivables ........... 2.70 2.71 3.27 3.82 3.18 2.65 2.35 2.30 2.07 1.83 LF.ss: Unearnedincomeonloans. -.05 -.04 -.04 -.03 -.02 -.02 -.02 -.02 -.01 -.01 LF.ss: Lossreserves' .. -1.24 -1.16 -1.11 -1.12 -1.13 -1.17 -1.10 -1.06 -.97 -.87 Securities ............... 15.80 16.66 17.79 17.32 19.00 20.30 21.16 21.28 19.96 19.19 Investmentaccount... ................. . ... 15.D7 16.13 17.28 16.10 17.71 19.17 20.09 20.12 18.80 17.69 Debt ........... ......... . 14.58 15.58 16.64 15.50 17.32 18.82 19.88 19.96 18.69 17.56 U.S.Treasury ........................ 2.81 2.25 1.70 1.12 .67 .74 .95 .89 .60 .44 U.S. govemmentagencyand corporationobligations 8.98 9.93 10.57 9.70 10.09 11.45 12.99 12.80 11.62 10.08 Government-backedmongagepools.. 5.17 4.98 5.12 4.31 5.19 6.00 6.08 5.74 4.83 4.05 Collateralizedmongageobligations 2.13 2.83 2.89 2.55 2.42 2.79 3.72 3.42 3.39 2.93 Other.. 1.68 2.12 2.56 2.84 2.48 2.65 3.19 3.64 3.40 3.10 Stateandlocalgovemment .88 .92 .99 .96 .99 .97 .95 .96 .98 1.01 Privatemongage-backedsecurities .73 .96 1.35 1.66 2.01 2.13 2.14 2.65 3.58 4.28 Other ...... ............ 1.18 1.53 2.02 2.06 3.56 3.53 2.85 2.66 1.90 1.75 Equity.... ........... .49 .55 .65 .60 .39 .34 .21 .16 .11 .12 Tradingaccount......... .73 .54 .51 1.22 1.29 1.13 1.07 1.16 1.16 1.51 Grossfederalfundssoldandreverse RPs .. 4.38 3.57 3.34 3.76 4.06 4.71 4.20 2.98 2.30 2.86 Interest-bearingbalancesatdepositories ...... 3.43 3.24 3.06 2.71 2.88 3.33 3.26 3.29 2.24 2.20 Non-interest-earningassets 12.50 12.15 11.60 11.33 11.91 11.66 11.90 11.82 12.13 12.95 Revaluationgainsheldintradingaccount.... .69 .75 .56 .40 .55 .47 .60 .42 .33 .30 Other ............... 11.81 11.40 11.04 10.92 11.37 11.19 11.30 11.40 11.80 12.65 Liabilities 91.85 91.63 91.66 91.57 91.15 90.79 90.65 89.87 88.86 88.12 Coredeposits ........... 51.51 49.89 48.35 46.28 46.28 47.07 47.93 46.55 48.18 46.98 ............... Transactiondeposits 16.12 14.15 12.12 9.93 8.37 7.49 7.29 7.06 6.64 5.75 Demanddeposits 14.17 12.39 10.52 8.61 7.17 6.32 5.96 5.65 5.35 4.55 Othercheckabledeposits ............... 1.95 1.75 1.60 1.32 1.20 1.17 1.33 1.41 1.29 1.21 Savingsdeposits(includingMMDAs) . 21.7\ 22.5\ 23.90 24.02 26.62 30.07 32.34 31.75 33.33 32.75 Smalltimedeposits ................ 13.69 13.24 12.32 12.33 11.28 9.51 8.30 7.74 8.21 8.47 Managedliabilities' ...................... 36.60 38.1I 39.83 41.98 40.81 39.48 38.12 39.29 37.05 37.54 Largetimedeposits ...... ............. 7.37 7.83 8.17 9.54 9.72 8.99 8.20 8.76 10.10 11.47 Depositsbookedinforeign offices 8.08 8.37 8.19 7.56 7.05 6.28 6.54 7.21 6.02 6.44 Subordinatednotesanddebentures .... 1.48 1.66 1.71 1.54 1.53 1.44 1.38 1.39 1.31 1.33 Gross federal fundspurchasedand RPs.. 9.36 9.48 9.77 9.28 9.71 9.66 9.69 8.95 7.17 6.71 Othermanaged liabilities ..... 10.31 10.77 11.99 14.07 12.79 13.1I 12.30 12.97 12.44 11.58 Revaluation lossesheldintradingaccounts . .68 .76 .58 .41 .52 .44 .56 .40 .34 .30 Other .. 3.05 2.87 2.90 2.91 3.54 3.80 4.05 3.64 3.30 3.31 Capitalaccount 8.15 8.37 8.34 8.43 8.85 9.21 9.35 10.13 11.14 11.88 MF.MO Commercialrealestateloans' .............. 9.44 10.11 11.00 12.06 12.06 12.24 12.10 12.85 13.93 15.13 Otherrealestateowned· .06 .04 .03 .03 .04 .05 .06 .05 .04 .05 Mongage-backedsecurities. 8.03 8.76 9.36 8.52 9.63 10.93 11.93 11.81 11.81 11.26 Federal Home Loan Bankadvances.. n.a. n.a. n.a. n.a. 4.07 4.85 4.75 4.65 5.19 5.56 Averagenet consolidatedassets (billionsofdollars)............. 1,604 1,745 1,881 2,031 2,130 2,124 2,287 2,376 2,403 2,575

A66 Federal Reserve Bulletin0 July 2007 A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006-Continued C. Banksranked II through 100byassets-Colltilllled I I I I I I I I I Item I997 1998 1999 2000 200I 2002 2003 2004 2005 2006 Effectiveinterestrate(percent)' Ralesearned Interest-earningassets . 8.33 8.12 7.84 8.44 7.54 6.03 5.30 5.26 6.05 7.06 Taxableequivalent ..............•....... 8.36 8.16 7.88 8048 7.58 6.07 5.33 5.29 6.08 7.09 Loansand leases,gross ..............•....... 9.03 8.81 8.50 9.14 8.26 6.80 6.1I 5.98 6.63 7.72 Netoflossprovisions . 8.27 8.14 7.80 8.25 6.96 5.59 5.11 5.19 5.91 7.17 Securities , .. 6.55 6.31 6.32 6.64 5.96 4.79 3.80 3.63 4.18 5.05 Taxableequivalent . 6.70 6.46 6046 6.77 6.08 4.91 3.90 3.73 4.29 5.16 Investmentaccount. . . 6.57 6.33 6.34 6.66 6.04 4.86 3.87 3.64 4.11 4.90 U.S.Treasurysecuritiesand U.S. governmentagencyobligations (excludingMBS)....... . . n.a. n.a. n.a. n.a. 5.83 4.28 3.17 2.94 3047 4.29 Mortgage-backedsecurities . n.a. n.a. n.3. n.a. 6.60 5.34 4.20 4.02 4.34 5.02 Other . n.a. n.a. n.a. n.a. 5.13 4.22 3.61 3.29 4.06 5.18 Tradingaccount.... . . 6.05 5.86 5.58 6.25 4.83 3.59 2.56 3.39 5.30 6.86 Grossfederal fundssoldandreverseRPs . 5045 5.46 5.12 6.06 3.86 1.68 1.14 1.25 3.24 4.98 Interest-bearingbalancesatdepositories 5.76 5.67 4.81 5049 4.38 2.46 1.93 2.27 3.20 4.21 Ralespaid Interest-bearingliabilities . 4.79 4.77 4.38 5.22 4.16 2041 1.80 1.71 2.68 3.88 Interest-bearingdeposits . 4.22 4.15 3.76 4042 3.60 1.96 1.35 1.29 2.03 3.07 Inforeign offices. ... . . 5.23 5.22 4.70 5.38 3.67 1.70 1.23 1.42 2.76 4.10 Indomesticoffices . . 4.04 3.96 3.60 4.26 3.60 1.99 1.36 1.27 1.95 2.95 Othercheckabledeposits . 2.01 2041 2.03 2.57 2.32 .94 .64 .72 1.29 2.1I Savingsdeposits(includingMMDAs) . 2.84 2.76 2049 2.94 2.30 1.08 .66 .65 1.30 2.14 Largetimedeposits· . 5047 5.32 4.96 5.88 5.11 3.37 2.70 2.49 3.31 4046 Othertimedeposits· . 5043 5.35 5.03 5.73 5042 3.68 2.95 2.58 3.03 4.09 Grossfederal fundspurchasedandRPs . 5.29 5.22 4.87 6.02 3.86 1.73 1.20 1.37 3.04 4048 Otherinterest-bearingliabilities .......•.. 5.85 5.81 5.41 6.36 5.30 3.54 3.02 2.76 3.87 5.17 f---------------------------- Incomeandexpenseasapercentageofaveragenetconsolidatedassets Grossinterestincome . 7.26 7.15 6.98 7.54 6.70 5.31 4.67 4.67 5.34 6.20 Taxableequivalent . 7.30 7.19 7.02 7.57 6.73 5.34 4.70 4.70 5.37 6.23 Loans . 5.87 5.78 5.56 6.05 5.28 4.15 3.72 3.72 4.27 4.96 Securities . .98 1.00 1.10 1.09 1.06 .90 .75 .73 .77 .88 Grossfederal fundssoldandreverse RPs . .22 .19 .18 .22 .15 .08 .04 .03 .06 .14 Other.................... . . .19 .18 .14 .18 .21 .18 .15 .19 .22 .23 Grossinterestexpense . 3041 3045 3.26 3.96 3.14 1.77 1.30 1.26 1.94 2.82 Deposits ,.. 2.23 2.23 2.02 2041 2.01 1.09 .77 .74 1.18 1.85 Grossfederal fundspurchasedandRPs . .51 .51 .51 .56 .38 .17 .12 .13 .23 .30 Other . .68 .71 .74 .99 .75 .51 AI .40 .53 .67 Netinterestincome . 3.85 3.70 3.72 3.58 3.56 3.54 3.37 3041 3.40 3.38 Taxableequivalent ....•... . . 3.89 3.73 3.75 3.61 3.59 3.57 3.40 3.44 3.43 3041 Lossprovisions7 ..................•.......•. .60 .53 .55 .68 .91 .80 .67 .55 .52 042 Non-interestincome . 2.76 3.09 3.36 3.18 3.35 3.30 3.29 3.05 2.75 3.13 Servicechargesondeposits . .44 042 Al 042 042 042 042 .40 .37 .35 Fiduciaryactivities . .44 049 048 .52 042 042 .37 042 .35 AI Tradingrevenue . .08 .09 .08 .07 .08 .08 .09 .07 .06 .07 Interestrateexposures.................. .. .02 .03 .02 .02 .04 .04 .04 -.01 -.01 .02 Foreignexchangerateexposures _.. .05 .06 .05 .04 .03 .04 .04 .05 .04 .05 • • • • • • • Othercommodityandequityexposures . .01 .03 .02 Other . 1.79 2.09 2.39 2.18 2043 2.37 2041 2.16 1.98 2.30 Non-interestexpense............... . . 3.85 4.05 4.12 4.00 3.95 3.73 3.64 3.55 3.36 3.51 Salaries,wages,andemployeebenefits . 1.51 1.53 1.53 1.44 1047 1.49 1.47 1045 1.37 1.34 Occupancy..... . . 046 046 045 043 .42 .40 Al .39 .37 .33 Other . 1.88 2.06 2.14 2.14 2.07 1.84 1.76 1.70 1.62 1.83 Netnon-interestexpense . 1.10 .95 .76 .82 .60 043 .35 .50 .61 .38 Gainsoninvestmentaccountsecurities . .02 .03 -.01 -.05 .09 .10 .06 .03 -.03 Incomebeforetaxesandextraordinaryitems . 2.18 2.24 2.40 2.02 2.14 2.41 2042 2.39 2.27 2.56 Taxes..... . . • .77 •.78 •.86 • .70 • .74 • .82 • .82 • .82 .77 .87 Extraordinaryitems, netofincometaxes .01 .07 Netincome.................... . . 1.42 1045 1.54 1.32 1.39 1.59 1.59 1.57 1.50 1.76 Cashdividendsdeclared .. .93 .96 1.16 .94 .96 .99 1.05 .95 1.00 1.38 Retainedincome ... . . 048 049 .38 .38 043 .60 .54 .62 .50 .38 MEMO: Returnonequity . 17.36 17.37 18046 15.72 15.74 17.24 17.03 15.54 13048 14.80 NOTE: DataareasofApril 13,2007. 5. When possible, basedon theaverage ofquarterly balancesheetdatare I. Includesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCall Report. 2. Measuredasthesumoflargetimedepositsin domesticoffices,deposits 6. Before 1997, large time deposit open accounts were included in other booked in foreign offices, subordinated notes and debentures, federal funds timedeposits. purchased and securities sold under repurchase agreements, Federal Home 7. Includesprovisionsforallocatedtransferrisk. Loan Bankadvances, andotherborrowedmoney. • Inabsolute value, lessthan0.005percent. 3. Measuredasthesumofconstructionandlanddevelopmentloanssecured n.a. Notavailable. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MMDA Money marketdepositaccount. bymultifamilyresidentialproperties;and loanstofinancecommercialreales RP Repurchaseagreement. tate.construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. MBS Mortgage-backedsecurities. 4. Other real estate owned is a component of other non-interest-earning assets.

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. Banksranked 101 through 1,000byassets Item 1997 I 1998 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interest-earningassets...... 91.34 91.38 91.68 91.50 91.16 91.36 91.34 91.56 91.32 91.06 Loansandleases(net) ...... 62.34 61.23 61.48 62.15 62.46 61.46 61.32 63.33 65.15 67.05 Commercialandindustrial .. ........... 12.38 12.45 12.64 12.95 13.03 12.38 11.51 11.52 11.78 11.69 U.S. addressees ........... 12.14 12.12 12.32 12.60 12.65 12.06 11.20 II.21 11.48 11.45 Foreignaddressees ........... .23 .32 .32 .36 .38 .31 .31 .31 .30 .23 Consumer ................. . ............... 14.36 12.56 10.79 10.19 9.76 8.13 6.79 6.33 5.42 5.50 Creditcard .............. . 5.87 4.78 3.37 3.27 3.61 2.63 1.82 1.91 1.24 1.63 Installmentandother. ........... 8.49 7.78 7.41 6.92 6.15 5.50 4.97 4.42 4.18 3.87 Realestate...... ........... 33.10 33.83 35.90 36.93 37.64 38.92 40.96 43.38 45.86 47.88 In domesticoffices...... 33.08 33.81 35.87 36.91 37.62 38.89 40.91 43.32 45.78 47.78 Constructionandlanddevelopment.. 2.68 2.87 3.48 4.15 4.90 5.40 5.89 7.01 8.86 10.99 Farmland .52 .56 .58 .65 .66 .73 .80 .91 .99 1.07 One-tofour-family residential 18.08 18.14 18.26 17.17 16.18 15.39 15.71 15.33 15.17 14.75 Homeequity ..................... 2.29 2.14 1.99 2.10 2.21 2.51 2.92 3.46 3.60 3.24 Other.... ........... 15.78 16.00 16.26 15.06 13.97 12.88 12.79 11.87 11.57 11.51 Multifamilyresidential..... 1.28 1.25 1.44 1.58 1.69 1.83 2.00 2.24 2.37 2.32 Nonfarm nonresidential .... 10.52 10.99 12.12 13.36 14.18 15.55 16.51 17.82 18.39 18.64 Inforeign offices ... .02 .02 .02 .02 .02 .03 .05 .06 .08 .10 Todepositoryinstitutionsand acceptancesofotherbanks .59 .52 .46 .37 .38 .37 .37 .25 .13 .14 Foreigngovernments ................. .02 .03 .03 .03 .03 .02 .02 .01 * * Agricultural production .................... .73 .80 .78 .82 .85 .86 .83 .82 .81 .85 Otherloans ............................... 1.47 1.30 1.25 1.22 1.22 1.18 1.25 1.32 1.36 1.20 Lease-financingreceivables ..... .99 .99 .78 .75 .74 .75 .67 .75 .75 .75 LESS: Unearnedincomeonloans -.10 -.09 -.08 -.08 -.07 -.06 -.06 -.06 -.06 -.06 LESS: Lossreserves' .................. -1.19 -1.15 -1.06 -1.04 -1.12 -1.10 -1.02 -.98 -.90 -.88 Securities ................. 23.37 24.18 25.17 24.34 22.81 23.86 24.36 23.59 21.57 19.65 Investmentaccount..................... 23.26 24.08 25.09 24.25 22.70 23.80 24.23 23.54 21.50 19.57 Debt ......................... 22.65 23.39 24.33 23.46 22.28 23.30 23.79 23.18 2I.21 19.30 U.S.Treasury .................. 4.94 3.91 2.53 1.81 1.32 1.22 1.00 1.02 .83 .60 U.S. governmentagencyand corporationobligations ....... 13.91 15.08 16.29 15.56 14.70 15.85 16.96 16.70 15.05 13.61 Government-backedmortgagepools 6.20 6.45 6.72 6.22 6.27 6.55 7.03 6.80 5.73 4.84 Collateralizedmortgageobligations. 3.00 3.21 3.52 3.04 3.08 3.69 3.69 3.41 3.16 2.85 Other........................... 4.71 5.42 6.05 6.30 5.35 5.60 6.24 6.49 6.16 5.92 Stateand localgovernment 2.43 2.69 2.91 2.91 2.90 2.89 2.95 2.92 2.78 2.75 Privatemortgage-backedsecurities .59 .65 1.00 .99 .94 .99 .87 1.08 1.17 1.10 Other ...................... .78 1.06 1.60 2.19 2.42 2.34 2.01 1.46 l.37 1.24 Equity.............. .61 .69 .77 .79 .43 .50 .43 .36 .29 .27 Tradingaccount........ .10 .11 .08 .09 .11 .06 .14 .05 .08 .Q7 GrossfederalfundssoldandreverseRPs .. 3.59 4.16 3.35 3.40 4.20 4.15 3.85 2.95 2.83 2.69 Interest-bearingbalancesatdepositories ... 2.05 1.80 1.68 1.60 1.68 1.89 1.81 1.69 1.76 1.68 Non-interest-earningassets ..................... 8.66 8.62 8.32 8.50 8.84 8.64 8.66 8.44 8.68 8.94 Revaluationgainsheldintradingaccounts... * * .01 .02 .01 .01 * * * .03 Other ........... 8.66 8.62 8.31 8.49 8.84 8.64 8.66 8.44 8.68 8.91 Liabilities ................ . 90.78 90.55 90.90 90.95 90.32 89.93 89.69 89.18 89.10 89.00 Coredeposits ............... ...... . ......... 64.06 63.87 62.48 60.80 60.33 61.26 61.31 60.40 59.03 58.03 Transactiondeposits ........... . 18.05 16.08 13.94 12.29 11.48 11.37 11.50 11.77 11.15 9.83 Demanddeposits ............ 13.11 11.87 10.19 8.97 8.23 8.05 7.96 8.13 7.87 7.01 Othercheckabledeposits .. 4.94 4.22 3.75 3.32 3.25 3.32 3.54 3.64 3.28 2.83 Savingsdeposits(includingMMDAs) . 23.97 26.43 28.55 28.55 29.40 32.34 34.00 34.42 33.75 32.81 Smalltimedeposits ................ 22.05 21.36 19.99 19.96 19.46 17.55 15.81 14.20 14.13 15.39 Managed liabilities2 ......................... 24.89 24.65 26.33 28.01 27.75 26.57 26.40 26.98 28.38 29.32 Largetimedeposits ..................... 9.68 10.09 10.30 11.98 12.60 12.17 11.92 12.12 13.64 15.23 Depositsbookedinforeignoffices 1.23 1.31 1.20 1.28 1.24 .88 .64 .65 .57 .52 Subordinatednotesanddebentures .... .33 .37 .35 .30 .31 .34 .35 .35 .27 .24 Gross federal funds purchasedand RPs.. 7.06 6.15 6.90 6.30 5.77 5.27 5.35 5.52 5.54 5.40 Othermanaged liabilities ............ 6.59 6.73 7.57 8.15 7.84 7.90 8.13 8.34 8.35 7.92 Revaluation lossesheldin tradingaccounts .01 .01 .01 * .01 .01 * * * .01 Other ................ ................. 1.82 2.02 2.10 2.13 2.23 2.08 1.98 1.81 1.69 1.64 Capitalaccount 9.22 9.45 9.10 9.05 9.68 10m 10.31 10.82 10.90 11.00 MEMO Commercialrealestateloans' .................. 14.72 15.33 17.28 19.32 21.03 23.05 24.62 27.28 29.84 32.21 Otherrealestateowned' ......... ........... .11 .09 .08 .07 .08 .10 .11 .10 .08 .08 Mortgage-backedsecurities.................... 9.79 10.30 11.24 10.25 10.29 11.24 11.59 11.29 10.06 8.79 Federal Home Loan Bankadvances............. n.a. n.a. n.a. n.a. 5.27 5.71 6.29 6.46 6.42 6.10 Averagenetconsolidatedassets (billionsofdollars)........ 971 938 972 986 1,002 1,022 1,072 1,080 1,152 1,245 I

A68 Federal Reserve Bulletin 0 July 2007 A.1. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006--Continued D. Banksranked 101 through 1,000byassets-Colltilllled I I I I I I I I I Item 1997 1998 1999 2000 200I 2002 2003 2004 2005 2006 Effectiveinterestrate(percent)' Ratesearned Interest-earningassets...... . . 8.54 8.38 7.83 8.48 7.86 6.43 5.60 5.46 6.12 6.98 Taxableequivalent......... . . 863 8.47 7.92 8.56 7.94 6.51 5.68 5.53 6.19 7.05 Loansand leases,gross . 9.53 9.42 8.74 9.42 8.76 7.32 6.57 6.25 6.90 7.76 Netoflossprovisions . 8.79 8.79 8.26 8.75 7.88 6.56 6.02 5.87 6.64 7.52 Securities . 6.43 6.31 6.03 6.45 5.97 4.95 3.81 3.79 4.03 4.50 Taxableequivalent ..................•... 669 6.57 6.29 6.71 6.25 5.21 4.06 4.04 4.28 4.77 Investmentaccount . 6.43 6.30 6.03 6.45 5.96 4.93 3.82 3.78 4.02 4.50 U.S.Treasurysecuritiesand U.S. governmentagencyobligations (excludingMBS) .. n.a. n.a. n.a. n.a. 5.85 4.54 3.42 3.15 3.47 4.16 Mortgage-backedsecurities . n.a. n.a. n.a. n.a. 6.33 5.38 3.95 4.01 4.23 4.61 Other .. n.a. n.a. n.a. n.a. 5.40 4.51 4.07 4.21 4.42 4.80 Tradingaccount....................... .. 6.37 6.84 7.33 9.30 6.60 14.05 3.07 10.30 6.59 4.92 GrossfederalfundssoldandreverseRPs . 5.42 5.31 4.98 6.15 3.91 1.73 1.27 1.57 3.31 4.94 Interest-bearingbalancesatdepositories . 5.44 5.77 5.07 5.76 3.94 1.79 1.26 1.47 3.29 4.59 Ratespaid Interest-bearingliabilities . 4.67 4.60 4.19 4.93 4.11 2.54 1.88 1.73 2.48 3.55 Interest-bearingdeposits . 4.34 4.28 3.84 4.46 3.82 2.28 1.61 1.44 2.09 3.09 Inforeignoffices . 5.42 5.55 5.07 6.13 4.45 2.14 1.43 1.43 3.05 4.50 Indomesticoffices . 4.32 4.25 3.82 4.43 3.81 2.28 1.61 1.44 2.08 3.08 Othercheckabledeposits . 2.17 2.15 1.99 2.27 1.81 1.06 .74 .72 1.18 1.73 Savingsdeposits(includingMMDAs) . 3.08 2.96 2.65 3.07 2.22 1.17 .76 .74 1.27 2.05 Largetimedeposits· . 5.56 5.51 5.17 6.00 5.27 3.34 2.58 2.33 3.21 4.39 Othertimedeposits· ... 5.57 5.64 5.11 5.74 5.51 3.77 2.86 2.51 3.10 4.16 Grossfederalfunds purchasedand RPs . 5.20 5.14 4.82 5.95 3.83 1.83 1.29 1.45 2.94 4.51 Otherinterest-bearingliabilities . 6.08 5.99 5.36 6.45 5.41 4.17 3.60 3.37 4.00 4.74 1---------------------------- Incomeandexpenseasapercentageofaveragenetconsolidatedassets Grossinterestincome . 7.79 7.66 7.19 7.79 7.16 5.85 5.08 4.99 5.57 6.37 Taxableequivalent . 7.87 7.74 7.27 7.86 7.24 5.93 5.16 5.06 5.64 6.44 Loans..................... . . 6.05 5.89 5.47 5.96 5.59 4.57 4.08 4.01 4.55 5.27 Securities . . 1.49 1.50 1.51 1.58 1.33 1.15 .91 .88 .86 .89 Grossfederal fundssoldandreverseRPs . .19 .22 .17 .21 .16 .07 .05 .05 .09 .13 Other . .06 .06 .04 .04 .08 .06 .05 .05 .07 .09 Grossinterestexpense . . 3.47 3.45 3.20 3.79 3.14 1.92 1.41 1.29 1.84 2.66 Deposits . 2.69 2.70 2.44 2.87 2.48 1.49 1.04 .92 1.34 2.03 Grossfederal funds purchasedandRPs . .37 .32 .34 .38 .22 .09 .07 .08 .16 .24 Other . .42 .42 .42 .54 .44 .34 .30 .29 .34 .39 Netinterestincome . 4.32 4.22 3.99 4.00 4.02 3.93 3.68 3.70 3.73 3.72 Taxableequivalent . 4.39 4.29 4.07 4.07 4.10 4.00 3.75 3.77 3.79 3.78 Lossprovisions' . .58 .49 .39 .52 .65 .55 .40 .30 .24 .23 Non-interestincome . 2.07 2.26 2.31 2.35 2.37 2.37 2.31 2.26 2.02 1.98 Servicechargesondeposits .. .40 .39 .38 .36 .39 .41 .41 .39 .36 .35 Fiduciaryactivities . .32 .37 .38 .44 •.40 • .35 .34 .37 .35 .30 Tradingrevenue . .01 .02 .02 .01 .01 .01 .01 .01 • • Interestrateexposures . .01 .01 .01 .01 -.01 .01 .01 .01 Foreignexchangerateexposures .. . . • • • • • • • • • • • • • • • • • • • • Othercommodityandequityexposures . Other .. 1.34 1.49 1.53 1.55 1.58 1.61 1.55 1.49 1.30 1.32 Non-interestexpense . 3.73 3.86 3.70 3.84 3.88 3.73 3.60 3.54 3.37 3.34 Salaries.wages,andemployeebenefits . 1.50 1.56 1.56 1.59 1.61 1.64 1.64 1.64 1.61 1.58 Occupancy....... . . .46 .47 .47 .47 .46 .45 .43 .43 .41 .40 Other .. 1.77 1.83 1.68 1.78 1.81 1.64 1.53 1.47 1.36 1.35 Netnon-interestexpense . 1.66 1.60 1.39 1.48 1.52 1.36 1.29 1.29 1.35 1.36 Gainsoninvestmentaccountsecurities . .02 .04 -.01 -.04 .05 .04 .05 .02 -.01 -.01 Incomebeforetaxesandextraordinaryitems 2.10 2.16 2.20 1.96 1.90 2.06 2.03 2.13 2.13 2.12 Taxes . • .73 .74 .74 • .67 .66 • .67 .66 •.68 •.68 • .69 Extraordinaryitems, netofincometaxes .. .. .06 .01 .01 .03 Netincome . 1.37 1.47 1.47 1.29 1.25 1.38 1.39 1.45 1.45 1.43 Cashdividendsdeclared . 1.10 1.01 1.06 .92 1.33 1.19 1.64 .78 .87 .89 Retainedincome .. .28 .46 .40 .37 -.08 .19 -.25 .68 .58 .54 MEMO: Returnonequity . 14.89 15.60 16.11 14.21 12.93 13.75 13.53 13.42 13.33 13.02 NOTE: DataareasofApril 13,2007. 5. When possible, basedon theaverageofquarterly balancesheetdata re I. Includesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCall Report. 2. Measuredasthesumoflargetimedeposits indomesticoffices,deposits 6. Before 1997, large time deposit open accounts were included in other booked in foreign offices, subordinated notes and debentures, federal funds timedeposits. purchased and securities sold under repurchase agreements, Federal Home 7. Includesprovisionsforallocatedtransferrisk. Loan Bankadvances,andotherborrowed money. • Inabsolutevalue, lessthan0.005 percent. 3. Measuredasthesumofconstructionandlanddevelopmentloanssecured n.a. Notavailable. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MMDA Moneymarketdepositaccount. by multifamilyresidential properties;and loanstofinancecommercialreales RP Repurchaseagreement. tate,construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. MBS Mortgage-backedsecurities. 4. Other real estate owned is a component of other non-interest-earning assets.

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. Banksnotrankedamongthe 1000largestbyassets I I I I I I I I I ltem 1997 1998 1999 2000 200I 2002 2003 2004 2005 2006 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interest-earningassets ...............•.......... 92.45 92.64 92.55 92.52 92.26 92.22 92.14 92.34 92.30 92.37 Loansandleases(net) . 58.75 59.11 59.76 62.31 62.67 62.72 62.32 63.80 65.44 66.65 Commercialandindustrial .............•.. 10.16 10.33 10.64 11.09 11.10 10.71 10.42 10.29 10.21 10.17 U.S.addressees ..............•........ 10.08 10.25 10.55 11.02 11.02 10.64 10.37 10.25 10.15 10.13 Foreignaddressees .. .08 .08 .08 .07 .08 .06 .05 .04 .06 .05 Consumer . 8.98 8.46 8.17 7.98 7.42 6.77 6.16 5.45 4.97 4.63 Creditcard . .85 .70 .69 .59 .57 .49 .51 .40 .36 .38 Installmentandother . 8.14 7.76 7.47 7.39 6.85 6.28 5.64 5.05 4.61 4.25 Realestate . 35.55 36.04 36.83 39.29 40.30 41.52 42.30 44.75 46.98 48.53 Indomesticoffices . 35.55 36.04 36.83 39.29 40.30 41.52 42.30 44.75 46.98 48.53 Constructionandlanddevelopment . 2.82 3.02 3.28 3.70 4.23 4.51 4.99 6.01 7.46 9.10 Farmland . 2.69 2.83 2.95 3.06 3.04 3.08 3.13 3.22 3.25 3.26 One-tofour-family residential . 18.16 18.04 17.66 18.43 18.24 17.91 17.08 17.17 17.12 16.70 Homeequity . 1.24 1.21 1.17 1.28 1.37 1.62 1.79 2.1I 2.20 2.06 Other . 16.92 16.83 16.49 17.15 16.87 16.29 15.29 15.06 14.93 14.63 Multifamilyresidential . .95 .93 .98 1.04 1.06 1.16 1.28 1.41 1.48 1.47 Nonfarmnonresidential . 10.93 11.22 11.96 13.06 13.71 14.86 15.82 16.94 17.66 18.01 Inforeign offices . • • • • • • • • • • Todepositoryinstitutionsand acceptancesofotherbanks . .20 .14 .14 .12 .12 .10 .09 .07 .05 .05 • • • • • • • • Foreigngovernments ~. .01 .01 Agricultural production . 4.05 4.27 4.06 3.85 3.76 3.64 3.40 3.26 3.21 3.22 Otherloans .. .67 .67 .67 .69 .67 .65 .66 .68 .70 .70 Lease-financingreceivables . .25 .24 .26 .27 .27 .31 .26 .25 .24 .26 LESS: Unearnedincomeon loans ........•. -.24 -.20 -.15 -.11 -.09 -.07 -.06 -.06 -.05 -.05 LESS: LossreservesI . -.87 -.86 -.87 -.88 -.88 -.90 -.92 -.89 -.87 -.87 Securities .. 28.24 26.70 26.91 25.40 22.80 23.34 23.47 23.34 21.92 20.55 Investmentaccount .. 28.21 26.66 26.88 25.38 22.79 23.33 23.43 23.33 21.90 20.53 Debt .. 27.68 26.12 26.34 24.82 22.49 23.05 23.12 23.07 21.70 20.35 U.S.Treasury .. 6.70 5.05 3.34 2.12 1.33 1.04 .90 .81 .71 .61 U.S.governmentagencyand corporationobligations . 15.58 15.43 16.89 16.95 15.27 16.07 16.23 16.57 15.64 14.73 Government-backedmortgagepools.. 4.01 3.90 3.95 3.47 3.78 4.54 4.84 4.76 4.23 3.62 Collateralizedmortgageobligations .. 2.19 2.02 2.00 1.70 1.94 2.30 2.20 1.96 1.70 1.50 Other .. 9.38 9.51 10.93 11.78 9.56 9.23 9.19 9.85 9.70 9.61 Stateandlocalgovernment . 4.60 4.80 4.96 4.64 4.51 4.56 4.73 4.67 4.49 4.30 Privatemortgage-backedsecurities . .19 .16 .26 .23 .27 .26 .21 .19 .22 .24 Other................... .. . .61 .68 .89 .88 1.11 1.12 1.05 .83 .65 .48 Equity . .52 .54 .53 .56 .30 .27 .31 .26 .20 .17 Tradingaccount.............. . . .03 .04 .03 .02 .01 .01 .04 .01 .02 .02 Gross federalfundssoldandreverseRPs .. 3.95 5.13 4.17 3.22 5.01 4.26 4.27 3.33 3.24 3.53 Interest-bearingbalancesatdepositories . 1.49 1.72 1.71 1.59 1.78 1.90 2.08 1.86 1.70 1.65 Non-interest-eamingassets . 7.55 7.36 7.45 7.48 7.74 7.78 7.86 7.66 7.70 7.63 Revaluationgainsheldintradingaccounts . • • • • • • • • • • Other . 7.55 7.36 7.45 7.48 7.74 7.78 7.86 7.66 7.70 7.63 Liabilities .........................•........... 89.63 89.54 89.75 89.88 89.59 89.73 89.58 89.55 89.49 89.35 Coredeposits . 74.58 73.75 72.74 70.87 69.92 70.04 69.97 69.24 67.68 65.74 Transactiondeposits . 24.48 24.26 23.87 23.20 22.35 22.66 23.18 23.36 22.71 20.81 Demanddeposits . 13.09 13.08 12.80 12.64 12.16 12.24 12.58 12.77 12.76 11.97 Othercheckabledeposits . 11.39 11.18 11.07 10.57 10.19 10.42 10.60 10.59 9.95 8.84 Savingsdeposits(includingMMDAs) . 19.00 19.05 19.77 19.19 19.38 21.32 22.43 23.24 22.98 22.65 Smalltimedeposits . 31.10 30.43 29.10 28.48 28.19 26.05 24.36 22.64 21.98 22.27 Managedliabilities2 . 14.02 14.76 16.09 18.08 18.67 18.79 18.78 19.57 21.04 22.77 Largetimedeposits . . 10.51 11.11 11.52 12.51 13.55 13.21 13.07 13.16 14.53 16.50 Depositsbookedinforeign offices .10 .07 .08 .05 .06 .07 .06 .07 .06 .06 Subordinatednotesanddebentures . .01 .01 .01 .02 .02 .04 .03 .04 .03 .03 Gross federal funds purchasedandRPs . 1.67 1.49 1.79 2.06 1.55 1.51 1.52 1.76 1.74 1.82 Othermanaged liabilities . 1.73 2.08 2.69 3.44 3.49 3.96 4.09 4.54 4.68 4.36 Revaluation lossesheldintradingaccounts . • • • • • • • • • • Other................... .. .. 1.02 1.03 .92 .93 1.00 .90 .84 .74 .77 .84 Capitalaccount .. 10.37 10.46 10.25 10.12 10.41 10.27 10.42 10.45 10.51 10.65 MEMO Commercialrealestateloans' .....•.......... 14.80 15.27 16.33 17.91 19.15 20.67 22.23 24.50 26.77 28.80 Otherrealestateowned4 .. .16 .13 .11 .11 .12 .14 .15 .14 .13 .12 Mortgage-backedsecurities . 6.39 6.07 6.22 5.39 5.99 7.10 7.25 6.91 6.15 5.36 Federal Home Loan Bankadvances . o.a. o.a. o.a. o.a. 3.34 3.71 3.87 4.32 4.47 4.14 Averagenetconsolidatedassets (billionsofdollars)... . . 647 644 652 655 675 704 742 768 805 839

A70 Federal Reserve Bulletin 0 July 2007 A.I. Portfolio composition, interest rates, and income and expense, U.S. banks, 1997-2006--Continued E. Banksnotrankedamongthe 1000largestbyassets-Continlled Item 1997 I 1998 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 Effectiveinterestrate(percent)' Ratesearned Interest-earningassets.......................... 8.50 8.35 8.05 8.44 7.94 6.79 5.94 5.73 6.23 7.01 Taxableequivalent ...................... 8.63 8.48 8.18 8.56 8.05 6.91 6.05 5.84 6.33 7.10 Loansand leases,gross ...................... 9.80 9.69 9.28 9.51 9.03 7.83 7.08 6.72 7.17 7.95 Netoflossprovisions ................... 9.49 9.35 8.89 9.14 8.59 7.39 6.72 6.45 6.94 7.75 Securities ....... ........................ 6.26 6.04 5.88 6.15 5.86 5.03 3.87 3.74 3.87 4.28 Taxableequivalent ................. ..... 6.65 6.46 6.29 6.54 6.28 5.43 4.26 4.11 4.24 4.65 Investmentaccount................ ... 6.26 6.04 5.89 6.15 5.86 5.02 3.87 3.73 3.87 4.28 U.S.Treasurysecuritiesand U.S. governmentagencyobligations (excludingMBS)................... n.a. n.a n.a. n.a. 5.97 4.80 3.74 3.39 3.53 4.12 Mortgage-backedsecurities.... ......... n.a. n.a. n.a. n.a. 6.20 5.47 3.58 3.90 4.17 4.59 Other ........................... n.a. n.a. n.a. n.a. 5.29 4.87 4.43 4.18 4.16 4.25 Tradingaccount.......................... 6.33 5.26 3.60 4.01 6.43 15.38 2.89 18.95 7.52 7.19 Grossfederal fundssoldandreverse RPs ..... 5.51 5.36 4.96 6.24 3.83 1.63 1.08 1.32 3.21 4.95 Interest-bearingbalancesatdepositories ...... 5.62 5.67 5.69 6.38 4.56 2.68 1.97 2.03 3.21 4.65 Ratespaid 4.60 4.60 4.28 4.80 4.40 2.92 2.13 1.87 2.43 3.43 Interest-bearingliabilities....................... 4.54 4.53 4.22 4.67 4.32 2.78 2.02 1.75 2.29 3.28 Interest-bearingdeposits ..................... 4.77 5.08 4.34 5.13 3.97 1.67 .85 1.04 2.86 4.27 Inforeign offices.......................... 4.53 4.52 4.22 4.67 4.32 2.78 2.02 1.75 2.29 3.28 Indomesticoffices .................... 2.46 2.44 2.28 2.47 1.97 1.16 .78 .69 1.00 1.45 Othercheckabledeposits .............. 3.36 3.39 3.21 3.56 2.81 1.72 1.13 1.05 1.53 2.34 Savingsdeposits(includingMMDAs). 5.53 5.53 5.21 5.89 5.53 3.62 2.78 2.47 3.21 4.37 Largetimedeposits6 .................. 5.66 5.63 5.25 5.70 5.60 3.88 2.96 2.55 3.04 4.12 Othertimedeposits· ......... .. 5.22 4.99 4.73 5.69 3.92 1.85 1.31 1.45 2.89 4.37 Grossfederal funds purchasedandRPs ....... 6.32 6.45 5.64 6.24 5.74 5.31 4.06 3.68 4.02 4.70 Otherinterest-bearingliabilities .............. Incomeandexpenseasapercentageofaverage netconsolidatedassets Grossinterestincome .......................... 7.90 7.75 7.48 7.83 7.35 6.31 5.46 5.32 5.78 6.50 Taxableequivalent ........................ 8.02 7.87 7.61 7.95 7.45 6.41 5.56 5.42 5.88 6.58 Loans. ..................................... 5.86 5.80 5.62 5.99 5.75 5.01 4.47 4.35 4.76 5.35 Securities ............. ....... ...... 1.76 1.59 1.58 1.57 1.32 1.16 .89 .87 .85 .88 Gross federal fundssoldandreverseRPs ..... .24 .29 .22 .21 .20 .07 .05 .05 .11 .18 Other ....................................... .04 .06 .06 .05 .08 .06 .06 .05 .06 .08 ..... Grossinterestexpense ......... ........ 3.48 3.46 3.26 3.64 3.34 2.22 1.60 1.41 1.82 2.56 Deposits .................................... 3.28 3.25 3.02 3.30 3.08 1.98 1.42 1.22 1.58 2.27 Grossfederal funds purchasedand RPs ...... .08 .07 .08 .12 .06 .03 .02 .02 .05 .08 Other ....................................... .11 .13 .15 .21 .20 .21 .17 .17 .19 .21 Netinterestincome ..... ................. .... 4.42 4.29 4.23 4.20 4.01 4.08 3.86 3.91 3.96 3.94 Taxableequivalent ........................ 4.54 4.41 4.35 4.31 4.12 4.19 3.96 4.00 4.05 4.03 Lossprovisions? ........................ ...... .27 .29 .31 .32 .36 .35 .29 .23 .21 .20 Non-interestincome ........................... 1.41 1.52 1.44 1.32 1.31 1.39 1.47 1.38 1.34 1.31 Servicechargesondeposits . . . . . . . . . . . .. . . . . .. . . . . . . . . . . . .44 .42 .42 .43 .44 .45 .43 .43 40 .38 T F r id a I d u n c i t n e ia r g e ry s r t e a v r c a e t t n i e v u i e e t x ie . p s . o . s . . u . . r . . e . . s . . . . . . . .. . . . . . . . .. . .. . . . . .. . . .. . . . . . . . . . . .. .. . . . . . • • .20 • • .23 • • .26 • . .2 0 1 1 • • .25 • • .27 • • .28 • • .32 • • .33 • • .37 O Fo th re e i r gn co e m x m ch o a d n i g ty e a ra n t d e e e q x u p i o ty su e re x s po . s . u .. re .. s . . . • • • • • • • • • • • • • * • • • • • • Other ........... .............. .77 .86 .75 .68 .62 .67 .76 .64 .61 .56 Non-interestexpense ....... .... 3.69 3.74 3.73 3.58 3.55 3.57 3.56 3.52 3.49 3.49 Salaries,wages,andemployeebenefits ....... 1.80 1.82 1.82 1.78 1.79 1.82 1.82 1.81 1.79 1.82 O O c th c e u r pa . n . c . y ... . . .. ........ ... .... . . . . . . . . . . .. ........ . . .. . . . 1 . . 4 4 9 0 1 . . 4 43 9 1 . . 4 4 9 2 1 . . 4 3 7 2 1 . . 4 2 7 9 1 . . 4 2 6 8 1 . . 4 2 5 8 1 . . 4 2 5 6 1 . . 4 2 4 5 1 . . 4 2 3 4 Netnon-interestexpense ....................... 2.28 2.23 2.29 2.26 2.24 2.18 2.09 2.14 2.15 2.18 Gainsoninvestmentaccountsecurities....... .01 .02 • -.01 .04 .05 .04 .01 * -.01 Incomebeforetaxesandextraordinaryitems .... 1.89 1.79 1.62 1.61 1.45 1.60 1.53 1.55 1.60 1.55 Taxes ................................. .... .59 •.53 •.47 •.45 •.39 .41 .38 .37 .38 .36 Extraordinaryitems,netofincometaxes ..... * -.01 * * * * Netincome.. .............. 1.30 1.26 1.15 1.17 1.06 1.18 1.14 1.17 1.21 1.19 Cashdividendsdeclared ................. ... .74 .82 .70 .79 .64 .68 .67 .64 .67 .65 Retainedincome ............................ .56 .44 .45 .38 .42 .49 .47 .54 .54 .54 MEMO: Returnonequity ....................... 12.53 12.02 11.26 11.52 10.17 11.46 10.97 11.24 11.54 11.17 NOTE: DataareasofApril 13,2007. 5. Whenpossible, basedon theaverageofquarterly balancesheetdata re I. 1ncludesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCall Report. 2. Measuredas thesumoflargetimedeposits indomesticoffices.deposits 6. Before 1997, large time deposit open accounts were included in other booked in foreign offices, subordinated notes and debentures, federal funds timedeposits. purchased and securities sold under repurchase agreements, Federal Home 7. Includesprovisionsforallocatedtransferrisk. Loan Bankadvances,andotherborrowedmoney. • Inabsolutevalue. lessthan0.005percent. 3. Measuredasthesumofconstructionandlanddevelopmentloanssecured n.a. Notavailable. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MMDA Moneymarketdepositaccount. by multifamilyresidential properties;and loanstofinancecommercialreales RP Repurchaseagreement. tate,construction,and landdevelopmentactivitiesnotsecuredbyrealestate. MBS Mortgage-backedsecurities. 4. Other real estate owned is a component of other non-interest-earning assets.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006 A71 A.2. Report ofincome, all U.S. banks, 1997-2006 Millionsofdollars Item 1997 I 1998 I 1999 I 2000 I 2001 I 2002 I 2003 I 2004 I 2005 I 2006 Grossinterestincome.... ........... 338,869 359,536 366,144 423,846 404,406 349,731 329,334 349,721 427.976 550,644 Taxableequivalent ............... 341,303 362,000 368,771 426,481 407,093 352,478 332,116 352,705 430,930 553,898 Loans ................... 256,144 271,300 278,539 326,804 311,664 269,519 257,813 269,509 328,296 421,619 Securities ................ .............. 52.660 56,599 62,117 67,667 63,089 59,315 53.317 58,579 65,868 78,848 Grossfederal fundssoldandreverse repurchaseagreements 13,659 15,001 12,331 13,546 12,649 6,223 5,015 5,142 11,045 21,240 Other... ........... 16,406 16,637 13,155 15,829 17,006 14,672 13,189 16.490 22,764 28,936 Grossinterestexpense ................ 164,693 178,162 174,946 222,161 188,799 118,778 94,140 98,544 162,504 263.170 Deposits .................... 117.351 125,218 119.665 151,147 132,352 81,733 62,403 63.642 105.925 173.743 Grossfederalfundspurchasedand repurchaseagreements 20,439 22.182 21,130 26.860 19.590 9.920 7.590 8.842 19,161 33,722 Other................. 26,903 30.760 34,149 44,155 36.854 27,126 24.147 26,059 37,419 55.705 Netinterestincome.... 174,176 181.374 191,198 201.685 215.607 230.953 235,194 251,177 265,472 287,474 Taxableequivalent .... 176,610 183.838 193,825 204,320 218.294 233,700 237,976 254.161 268,426 290,728 Lossprovisions 19,402 21.403 21.186 29.386 43,238 45.278 32,766 23.895 25,580 25.249 Non-interestincome .. 105,640 124.051 144,430 153,163 160.925 168.281 183,887 187.988 200,405 223,059 Servicechargesondeposits. 18,558 19,770 21,497 23,720 26,873 29.630 31,693 33.456 33,831 36,161 Fiduciaryactivities 16.584 19.268 20.502 22.220 21.989 21.404 22,456 25,102 26.387 28.342 Tradingrevenue... 8,018 7,693 10,429 12,235 12.382 10.748 11,605 10,303 14.375 19.172 Other. ............ 62,480 71,319 92,001 94,988 99,679 106.501 118,133 119,128 125.810 139,386 Non-interestexpense ..... ............ 171,063 194.118 204.634 216.434 226,027 230.293 243,290 263,349 274.142 294,744 Salaries,wages.andemployeebenefits ... 72,348 79.548 86.153 89,038 94.209 100,454 108,460 115.271 124:041 135.800 Occupancy................. 22.080 24.164 25.866 26,766 27,945 29.316 31,317 33,256 35.052 36.366 Other............ 76.634 90,405 92.616 100.631 103,875 100.521 103,512 114.823 115.049 122.577 Netnon-interestexpense .... 65,423 70,067 60,204 63,271 65,102 62,012 59.403 75,361 73,737 71.685 Gainsoninvestmentaccountsecurities 1.825 3,090 250 -2.280 4,625 6,411 5,633 3.393 -220 -1.232 Incomebeforetaxes . 91.178 92,995 110,056 106.745 II1,891 130.076 148.656 155.317 165,934 189.309 Taxes..... ..................... 32.001 31,957 39.211 37,250 37,284 42.817 48.530 50.267 53,568 61,082 Extraordinaryitems,netofincometaxes ... 56 506 169 -31 -324 -78 427 59 241 2,652 Netincome .................. 59,232 61,542 71,013 69,464 74,284 87,181 100,554 105,108 112,606 130,880 Cashdividendsdeclared 42,801 41,205 52,102 52,547 54.844 67.230 71,757 59,539 64,622 82,296 ••••a·•••••• Retainedincome 16,430 20,337 18,912 16,917 19,438 19.951 22.798 45.568 47,984 48.584 NOTE: DataareasofApril 13,2007. I

A73 December 2007 The 2006 HMDA Data Robert B. Avery, Kenneth P. Brevoort, and Glenn B. dating virtually all the reported information.2 The Canner, of the Board's Division of Research and nearly 8,900 lenders currently covered by the law Statistics, prepared this article. Rebecca Tsang and account for an estimated 80 percent of all home Sean M. Wallace provided research assistance. lending nationwide. Because of its expansive cover age, the HMDA data likely provide a broadly repre Since 1975, the Home Mortgage Disclosure Act sentative picture of home lending in the United (HMDA) has required public disclosures from most States. mortgage lending institutions with offices in metro After briefly summarizing previously published politan areas. The release of the information, which assessments of the 2004 and 2005 HMDA data and includes the geographic location and other character reviewing someprominentissues surrounding pricing istics of the home mortgages lenders originate or in the mortgage market, this article analyzes the 2006 purchase during a calendar year, is intended to help data.3 As in the analyses of the previous two years, the public determine whether institutions are ad this review focuses primarily on the pricing informa equately serving their communities' housing finance tion included in the HMDA data and differences needs; the disclosures are also intended to facilitate observed across lending institutions, geographic ar enforcement of the nation's fair lending laws and eas, and population groups. The article concludes guide investment in both the public and private with an assessment of factors that account for the sectors. Under the 1975 act, the Federal Reserve variation in rates ofserious delinquency on mortgage Board implements the provisions ofHMDA through loans acrosscounties as ofMarch 31, 2007, including regulation. The Federal Financial Institutions Exami information drawn from the HMDA data on the nation Council (FFIEC) is responsible for facilitating incidence of higher-priced lending and from a data public access to the HMDA data and for aggregating file ofcredit scores by geographic area. the data by metropolitan statistical area.I Increases in marketinterestrates overthecourseof For a given calendar year, lenders covered by 2004 and 2005 were an important contributor to the HMDA publjcly release their loan data beginning on substantial increase between those years in the re March 31 of the subsequent year; in the following ported incidence of higher-priced lending as mea September, the FFIEC releases summary tables per sured by the HMDA data. For 2006, the relatively taining to each lender and lending activity in each subdued increases in marketinterestrates contributed metropolitan statistical area, along with a file consoli- to a moderation in the growth of higher-priced lend ingfor2006.Thecurrentdisturbances in thesubprime NOTE:TheauthorsexpresstheirappreciationforthelateEdwardM. sector of the mortgage market emerged primarily in Gramlich, member of the Federal Reserve Board from November the later portions of 2006. The effects of those 1997 to August 2005. His vision and persistence in seeking what became the 2002 amendments to the Board's HMDA regulations disturbances and of the associated changes in the yieldedthe loan pricinginformationthat hassoenrichedthevalueof regulatory environment will be reflected primarily in the HMDAdata. the HMDAdata for 2007 and subsequent years. I. TheFFLEC(ffiec.gov)wasestablishedbyfederal lawin 1979as aninteragencybodytoprescribeuniformexaminationprocedures,and At the outset, HMDA disclosures were limited to to promote uniform supervision, among the federal agencies respon summary totals covering loan extensions by type of siblefortheexaminationandsupervisionoffinancial institutions.The memberagenciesare the BoardofGovernorsofthe Federal Reserve System, the Federal Deposit Insurance Corporation, the National 2. Between March and September, the FFlliC member agencies Credit Union Administration, the Office of the Comptroller of the systematically check the data for errors oromissions. To protectthe Currency, and the Office ofThrift Supervision. In 1980, federal law identity of borrowers, the public data exclude the dates of loan gavetheFFLECresponsibilityforpublicaccesstoHMDAdataandfor applicationsandthedatesofcreditdecisions. the aggregation of annual HMDA data, by census tract, for each 3. The previously published assessments are Robert B. Avery, metropolitan statistical area. In accordance with the 1980 law, the Glenn B. Canner, and Robert E. Cook (2005), "New Information FFLEC established an advisory State Liaison Committee (SLC), Reported under HMDAand ItsApplication in FairLending Enforce composed of representatives from the Conference of State Bank ment," Federal Reserve Bulletin, vol. 91 (Summer), pp. 344-94;and Supervisors,theAmericanCouncilofStateSavingsSupervisors,and Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner(2006), the National AssociationofStateCredit Union Supervisors. In 2006, "Higher-Priced Home Lendingand the 2005 HMDA Data," Federal theSLCjoinedtheFFIECasavoting member. ReserveBulletin, vol.92(September8),pp.A123-66.

A74 Federal Reserve Bulletin0 December 2007 loan foreachcensus tractbutincluded no information HIGHLIGHTS OF THE 2004 AND 2005 DATA on loan pricing or applications for loans that were deniedby the lender. Overthe years, theCongresshas For both the 2004 and 2005 HMDA data, nearly extended the reach of the law to a broader range of 80percentofthe reporting institutions weredeposito institutions and expanded the types of information ries (commercial banks, savings associations, and that mustbe reported and disclosed. The mostsweep credit unions); accounting for the rest were indepen ingofthe legislative amendments toHMDA, adopted dent mortgage companies and mortgage companies in 1989, required disclosure of the disposition of affiliated with banking institutions or their holding applications for home loans and the income, sex, and companies. Although mortgage companies repre race orethnicity ofthe individuals applying for those sented only 22 percent of the reporting institutions, loans. they submitted information on more than 60 percent Analyses of the new information revealed wide ofall the reported loans and applications. disparities in the rates of approval of loan applica Most lenders reported relatively little home lend tions across racial and ethnic lines and prompted ing. The most active lenders (those providing infor widespread public discussion about the fairness of mation on at least 5,000 loans or applications) mortgage lending decisions.4 With the 1989 amend accounted for about5 percentofthe reporting institu ments, the HMDA data thus formed a new basis for tions and nearly 90 percent of all the reported loans public scrutiny of the fairness of mortgage lending and applications. and became an important aspect of fair lending A comparison of the HMDA data for 2004 and enforcement. 2005 with those from earlier years documented a In response to significant changes in the mortgage number of trends, including a growing share of market during the 1990s, particularly the emergence lending to non-owner occupants, the growth of"pig and growth ofsubprime lending, the Federal Reserve gyback" lending(homebuyers simultaneously obtain Board in 2002 revised its Regulation C, which imple ing two loans--one a first lien and the other ajunior ments HMDA (for details, refer to the appendix).5 lien-to finance the purchase of a home), and a The revision substantially increased the type and substantial decline in home lending insured by the amount of public information available about home Federal Housing Administration (FHA) as a share of lending in HMDA reports, beginning with data for all home lending. 2004. The most important change was the require Because ofits importance, the new information on ment that lenders identify and disclose information loan pricing was thefocus ofmuch ofthe analyses of about mortgages with annual percentage rates (APRs, the 2004 and 2005 data. The reviews found that the which encompass interest rates and fees) above des incidence of higher-priced lending increased from ignated thresholds, mortgages referred to here as about 16 percent ofall loans in 2004 to 26 percentin "higher-priced loans."6 Other new disclosures in 2005. The substantial narrowing of the difference cluded lien status ofthe loan (whetherit is a first lien, between short- and long-term interest rates in 2005 ajunior lien, or unsecured-if the latter, it is a home explained partofthe increasethat yearin the shareof improvement loan), whether it is secured by a manu reported loans that exceeded the pricing thresholds factured home, and whether it is subject to the established by Regulation C.? Estimates suggested protections of the Home Ownership and Equity Pro that the changes in interest rates accounted for about tection Act of 1994. 15 percent of the increase in reported higher-priced lending for conventional fixed-rate home-purchase loans and about 20 percent ofthe increase for similar 4. Forexample,John Goeringand Ron Wienk,eds. (1996), Mort gage Lending, RacialDiscrimination, andFederal Policy (Washing ton: Urban InstitutePress). 7. Additional research on the possible reasons for the increase in 5. HomeMortgageDisclosureAct(12U.S.C.§§280I-II), Regula reported higher-priced lending from 2004 to 2005 is in Michael tion C (12 C.ER. pt. 203), and the staffcommentary accompanying LaCour-Little (2007), "Economic Factors Affecting Home Mortgage RegulationC(12C.ER. pt.203,Supp. I). Disclosure Act Reporting," paper prepared for the American Real 6. For loans with spreads above designated thresholds, revised EstateandUrbanEconomicsAssociationMid-YearMeeting,Washing RegulationCrequiresthereportingofthespreadbetweentheAPRon ton, May29-30.Thestudyfinds that, aftercontrollingforthe mix of aloanandtherateonTreasurysecuritiesofcomparablematurity.The loan types, for credit-risk factors, and for changes in the relationship thresholds for reporting differby lien status: 3 percentage points for betweenshort-and long-terminterestrates, there was nostatistically first liens and 5 percentage points for junior, or subordinate, liens. significant increase in the volumeofhigher-priced lending for loans Furtherdetailsareinnote12,p.A126,ofAvery,Brevoort,andCanner, originateddirectlybylenders,buttherewasanincreaseforsuchloans "Higher-PricedHome Lendingandthe2005HMDAData." originatedthroughindirectchannels.

The 2006 HMDA Data A75 loansfor refinancings.Anotherportionoftheincrease the regulatory agencies have been using theexpanded in higher-priced lending wasattributableto theeffects data in their fair lending enforcement activities. The ofthenarrowingspread between short-and long-term expanded data also increase transparency in the mar interestrates onadjustable-rate lending, butavailable ketplace by identifying lenders active in the higher data limited the ability to quantify this effect. Besides priced segmentofthe marketand by allowing a wide changes in market interest rates, other factors variety of analyses that more fully describe higher changes in borrower credit-risk profiles and changes priced lending. in lender business practices such as an increased willingness to accept higher-risk borrowers-may LOAN PRICING IN THE MORTGAGE MARKET also have led to increased higher-priced lending from 2004 to 2005; but again, quantifying the influences Mortgage markets have changed greatly over the was impeded by data limitations. years. Historically, mortgage lenders offered consum Analysis ofthe 2004 and 2005 pricing information ers a relatively limited array of loan products. The alsofound that the incidence ofhigher-priced lending prices (interest rates, points, and fees) at which they varied substantially by geography and loan character offered their loans varied mainly by istic and across borrower groups. The incidence was • loan type-for example, conventional or found to be elevated for borrowers residing in census government-backed tractscharacterized by largerproportions ofindividu • loan type characteristic-including amount bor als with lower credit scores and lower high-school rowed, term to maturity, and LTV ratio graduation rates; and in census tracts with larger • loan/typeofstructuresecuring the loan-traditional proportions of lower-income households, minority "site built" home, factory-manufactured unit, or households, and shares of loan applicants that were multifamily units deniedcredit.8The incidenceofhigher-pricedlending • ownership status-owner occupied or non-owner was also elevated for smaller loans and piggyback occupied loans, for loans made by depository institutions out side their local communities, and for loans originated The prices did not, however, vary to any great degree by independent mortgage companies regardless of by the creditworthiness of the borrower; effectively, location. borrowers eitherdid ordid not meet the underwriting Results ofan analysis along racial and ethnic lines criteria for a particular loan product, and the borrow wereconsistentwith the results by geography: Blacks ers who met thecriteriaall paid about the sameprice. and Hispanic whites were more likely, and Asians In the pastquartercentury, advances in technology, somewhat less likely, to have received higher-priced improvements in access to the credit histories of loans than non-Hispanic whites. Information included individuals, and the emergence ofa robust secondary in the HMDA data on characteristics of borrowers marketfor loans overthefull spectrum ofcredit risks and loans-such as income, amount borrowed, and have helped spurremarkablechanges in the mortgage property location-does not account fully for the market. The most prominent of those developments variation in loan pricing across geographies and has been the explicit risk-based pricing of credit. groups. However, many factors routinely used by Overthis period, more so than in the past, differences lenders to underwrite and price loans-including in the creditworthiness of different borrowers led to loan-to-value (LTV) ratios and measures ofborrower different prices for the same product.9 Less credit history (for example, a credit history score) creditworthy applicants, or those either unwilling or are not included in the HMDA data and, conse unable to document theircreditworthiness or income, quently, cannot be included in an analysis of pricing found itincreasingly likely thatthey wouldbegranted differences that relies on the HMDAdata alone. a loan but that it would be offered at a price higher The expanded HMDA data have both raised con than that for more-creditworthy applicants. cerns about the fairness of the lending process and Explicit risk-based pricing has expanded opportu created new avenues for lenders, regulators, and the nities for homeownership and allowed individuals, public to addressfairness. Lenders are responsiblefor including those who otherwise have little access to their compliance with fair lending laws, and the credit, to more readily purchase homes or borrow HMDA data can both encourage and facilitate the improvement of their compliance efforts. Likewise, 9. Refer, for example, to Souphala Chomsisengphet and Anthony Pennington-Cross (2006),"TheEvolutionoftheSubprimeMortgage 8. Theterm"minority"asused inthisarticlereferstoanyracialor Market," FederalReserveBankofSt.Louis,Review,vol.88(January! ethnicidentityotherthan non-Hispanicwhite. February),pp.31-56.

A76 Federal Reserve Bulletin0 December 2007 against the equity they have accumulated in their affordability of home purchases and mortgage refi homes. Recent developments in mortgage markets nancings, at least in the short term. However, these havecaused some lenders to tighten underwriting and loan products sometimes are accompanied by mini chargehigherprices tocompensateforperceivedrisk. mal down payments (or a piggyback loan), and the However, risk-based pricing continues to be a feature limited or zero repayment ofprincipal in the amorti of the mortgage market. Although risk-based pricing zation scheduleofmanyofthese loan products means has broadened opportunities for many consumers, it that mortgage payments generate little or no addi has been accompanied by growing concerns, some of tional equity in the first few years. These loans also which are noted below. generally involve an increase in monthly payments at some point later in the life of the loan. Recent Segments ofthe Market evidence indicates, however, thatthese so-called non traditional loan products have elevated incidence of Broadly, borrowers in the higher-priced mortgage defaultandforeclosure, particularly whenextended in market generally fall into one of two "nonprime" combination with other indicators of elevated credit marketsegments: "subprime" and "nearprime." Indi risk, such as a low credit score or no documentation viduals in the subprime category pay the highest of income. Such loan products have also drawn prices because they are considered to pose the great considerable attention from regulatory authorities, est risk of default or prepayment.tO Such borrowers which haveprovided guidanceto banking institutions may also impose highercosts oforigination, as itcan on the risks posed by those products and the impor be more difficult and time consuming to assess their tance of providing clear disclosure ofthe loan terms creditprofiles. Borrowers in the prime marketpay the and conditions.l2 lowest prices for loans, subprime borrowers pay the highest prices, and near-prime borrowers pay prices The Role ofBrokers somewhere in between. In practice, the dividing line between subprime and nearprime is amorphous, as is Another notabledevelopmentin the mortgage market the line between the prime and nonprime markets. was the emergence of brokers as the intermediary The distinctions between all these market segments through which the majority of individuals obtain a change over time as market interest rates move, as mortgage.13 Historically, prospective borrowers vis lenders' appetite for interest rate risk and the risks of ited an office of a local banking institution to apply prepayment and default changes, and as the ability to for a loan. Today, a mortgage broker, often working price risk more exactly changes. as an independent entity, may take loan applications Industry sources provide some data on the relative on behalf of a banking institution or other mortgage sizes ofthese market segments. Forexample, in 2006 lender and may provide the only direct contact with about 20 percent of mortgages were subprime, and the borrower until closing, when the loan documents about 13 percentwere nearprime(often referred to as are signed and the mortgage is issued. In such cases, "alt_A" mortgages).11 the mortgage broker plays an important role in pric ing the loan, and frequently the compensation re Nontraditional Loan Products ceived by the broker is based, in whole or in part, on the interest rate and fees paid by the consumer. Over the first half of this decade, home values in The large role played by brokers in the lending many areas of the country rose sharply, as did the process gained increased attention in the past year or competitive pressures on lenders to innovate. Those so as delinquencies, defaults, and foreclosures in forces encouraged lenders to develop loan products creased, particularly in the subprime portion of the that were intended to hold down required monthly mortgage market. Among the issues that have drawn payments, at least for the first few years of the loan. Among those products were interest-only loans, adjustable-rateloans withdiscounted("teaser") initial 12. For example, on September 29, 2006, the federal financial regulatory agencies (Board of Governors of the Federal Reserve rates, and payment option loans, which increased the System,FederalDepositInsuranceCorporation,NationalCreditUnion Administration,OfficeoftheComptrolleroftheCurrency,andOffice ofThriftSupervision)issued thepressrelease"InteragencyGuidance 10. Prepayment penalties are a common feature of loans in the on NontraditionalMortgageProductRisks,"www.federalreserve.gov/ subprime market and are intended to address the elevated risk of boarddocs/presslbcreg/2006120060929/default.htm. prepayment. 13. Industrysourcesindicatethatmortgagebrokersinitiated58per II. Inside Mortgage Finance (2007), The 2007Mortgage Market cent of the mortgage originations in 2006, down somewhat from StatisticalAnnual,vol. I: ThePrimaryMarket(Bethesda,Md.: Inside 63 percent in 2005 (Lew Sichelman, 2007, "Broker Market Share MortgageFinancePublications). Downto58%," NationalMortgageNews, July9, p. I). I

The 2006 HMDA Data An increased scrutiny to brokers are whether they pro Third, concerns have been raised about whether vide consumers with sufficient information to make competition is adequate to ensure that borrowers in sound choices in selecting a mortgage product and the higher-priced segment of the loan market have whether fraud has sometimes been involved in the access to the full range ofcredit opportunities. Some broker'scharacterizationofthe borrower'screditwor believe that prime-market lenders are not present or thiness or in the appraisal of the home being pur do not offer or promote their prime products suffi chased. Also, brokers and, many times, the lenders cientlyincertaingeographicmarkets,includingneigh originating the loan do not bear the credit risk ofthe borhoods that have larger minority populations. In loans they sell but share in the profits from originat this view, reduced access to prime lenders and their ing the loan. As a result, the broker or other originat products limits the opportunities for borrowers in ing party may not have the incentive to fully pass affected communities to access lower-priced loans. along to the loan purchasers all relevant information Finally, the elevated default and foreclosure rates needed to gaugethe accuracy andcompletenessofthe currently experienced in the higher-priced portion of information used to underwrite and price the loan.14 the loan market have raised concerns about the sus tainability of homeownership, the adverse effects on Concerns about Loan Pricing neighborhoods with higher concentrations of these loans, and the hardship on borrowers who are losing As price flexibility has emerged in the mortgage their homes. Recognizing these concerns, the federal market, so haveconcernsaboutthefairne sofpricing and state financial institution regulatory agencies outcomes. Such concerns generally fall into four have encouraged lenders and servicers of loans to broad categories. First are concerns about possible work with mortgage borrowers facing financial diffi discrimination based on the race or ethnicity of the culties.ls borrower. Such concerns are heightened becauseloan These various concerns about the functioning of prices are not always determined strictly on the basis the mortgage market raise important public policy ofcredit risk orcostfactors butcan involve elements issues that are beyond the scope of this article. ofdiscretion by loan officers or loan brokers, such as Nonetheless, theexpandedHMDAdataprovideinfor seeking prices that differ from the lender's baseline mation that has proven useful in understanding and price guidance typically conveyed in the form ofrate addressing many ofthese issues. sheets. Second are concerns about whether borrowers in GENERAL FINDINGS FROM THE 2006 HMDA the higher-priced segment of the loan market are DATA sufficiently informed and whether they are willing or able to shop effectively for the loan terms most For 2006, lenders covered by HMDA reported infor appropriate to their circumstances. For example, it mation on 27.5 million applications for home loans. may be difficult for borrowers to determine where Almost all the applications were for loans to be they fit along the credit-risk spectrum. Also, some secured by one- to four-family (so-called single borrowers may fail to shop or negotiate for the best family) houses, as follows: 10.9 million applications available rates and terms because they need funds to purchase a home, 2.5 million to make home immediately; such borrowers tend to focus primarily improvements, and 14.0 million to refinance an exist on the amount they can borrow and the size of the ing home loan. The balance (about 0.1 million) was monthly payment. Such borrowers may not fully for loans secured by multifamily dwellings-those appreciate the potential longer-run consequences of certain loan terms such as prepayment penalties, 15. On April 17,2007, the federal financial regulatory agencies adjustable interest rates, negative amortization, and issuedguidancetoencouragesupervisedinstitutionstoworkconstruc balloon payments. Such borrowers may be more tively with homeowners who are financially unable to continue easily exploited by loan officers or brokers. Also, meetingtheirmortgagepayments(www.federalreserve.gov/boarddocs/ srletters/2007/SR0706). On September4, 2007, the federal financial aggressive marketing tactics may confuse such bor regulatory agencies and the Conference of State Bank Supervisors rowers about the cost and terms of loans. (CSBS) issued a statementencouraging federally regulated financial institutions and state-supervisedentities that servicesecuritized resi dential mortgagestodeterminethefull extentoftheirauthority under pooling and servicing agreements to identify borrowers at risk of 14. Insomecases,brokersandloanoriginatorsaresubjecttoforced default and pursue appropriate loss mitigation strategies designed to repurchaseofaloanthatwassoldifitperformspoorlysoonafterloan preservehomeownership("FederalFinancialRegulatoryAgenciesand origination or ifrepresentations and warranties were violated; but in CSBS Issue Statementon Loss Mitigation Strategies forServicersof practice, brokers and some of the firms they sometimes work with Residential Mortgages," www.federalreserve.gov/newsevents/press/ havelimitedcapacityto fund arepurchase. bcreg/20070904a.htm).

A78 Federal Reserve Bulletin 0 December 2007 I. Home loan and reporting activity ofhome lenders covered under HMDA, 1990-2006 Number Applicationsreceivedforhomeloansonone-tofour-family properties, andhomeloanspurchasedfromotherlenders(millions) Disclosure Year Applications I Loans Total' Reporters reports2 Home I I Home purchased purchase Refinance improvement Total' 1990..........•... 3.3 l.l 1.2 5.5 1.2 6.7 9.332 24.041 1991 .........•. .... 3.3 2.1 1.2 6.6 1.4 7.9 9.358 25,934 1992. ........... 3.5 5.2 1.2 10.0 2.0 12.0 9.073 28.782 1993. ............ 4.5 7.7 1.4 13.6 1.8 15.4 9.650 35.976 1994. ......... 5.2 3.8 1.7 10.7 1.5 12.2 9.858 38.750 1995... ............ 5.5 2.7 1.8 10.0 1.3 11.2 9.539 36.611 1996.... ...... .... 6.3 4.5 2.1 13.0 1.8 14.8 9,328 42.946 1997... .... ..... 6.8 5.4 2.2 14.3 2.1 16.4 7.925 47,416 1998. .......... ... 8.0 11.4 2.0 21.4 3.2 24.7 7,836 57.294 .. 1999.. ...... 8.4 9.4 2.1 19.9 3.0 22.9 7.832 56.966 2000..... .......... 8.3 6.5 2.0 16.8 2.4 19.2 7.713 52.776 ... 2001 . ... ...... 7.7 14.3 1.9 23.8 3.8 27.6 7.631 53.066 2002 .... .... ...... 7.4 17.5 1.5 26.4 4.8 31.2 7.771 56.506 2003 .. ............. 8.2 24.6 1.5 34.3 7.2 41.5 8.121 65.808 2004.. ............. 9.8 16.1 2.2 28.1 5.1 33.3 8,853 72.246 2005 ........... .... 11.7 15.9 2.5 30.2 5.9 36.0 8.848 78,193 2006. .............. 10.9 14.0 2.5 27.5 6.2 33.7 8.886 78,638 NOTE: Here and in subsequent tables except table 3, applications exclude 2. Areportcoversthemortgagelendingactivityofalenderinasinglemet requests for pre-approval thatwere denied by the lenderorwereacceptedby ropolitanstatisticalareain whichithadanofficeduringtheyear. the lenderbut notactedupon bythe borrower. In this article,applicationsare SOURCE: Hereandinsubsequenttablesandfiguresexceptasnoted.Federal definedasbeingfor aloan onaspecificproperty; they are thus distinct from Financial Institutions Examination Council. data reported under the Home requestsforpre-approval. whicharenotrelatedtoaspecificproperty. Mortgage DisclosureAct(www.ffiec.gov/hmda). I. Applications for multifamily homes are included only in the total col umns; for2006, theseapplicationsnumbered nearly52.380. for five or more families (table 1).These applications depository institutions nor affiliates of bank holding resulted in nearly 14million loan extensions. Lenders companies (data derived from table). The total num also reported information on 6.2 million loans they ber of reporting institutions was about the same as had purchased from other institutions and on 411,000 that in 2005, as was the distribution of reporters by requests for pre-approvals of home-purchase loans; type ofinstitution. the pre-approval requests either were turned down by the lender or (not shown in table) were granted but Activity and Size ofLender not acted on by the applicant. As in earlier years, most ofthe institutions reporting The total number of reported applications and HMDAdataare small whether measured by assetsize purchased loans fell 2.3 million, or 6 percent, from or by some indicator of lending activity such as the 2005; most of the decline was for refinancings. The number of reported applications or loans (table 3). number of applications for loans to refinance an For 2006, 60 percent of the reporting institutions, existing loan fell 1.9 million, or about 12 percent; the numberdeclined mostlikely becauseshort-term inter 2. Distribution ofhome lenders covered by HMDA, by type est rates increased from the end of 2005 through ofinstitution, 2006 much of 2006 and thereby reduced the number of existingloans thatcould be refinanced ata lowerrate. Type Number Percent Slower house-price appreciation and, in some areas, Depositoryinstitution outrightdeclines in property values also likely dimin Commercialbank............ 3,900 43.9 Savingsinstitution .. 946 10.6 ished the attractiveness ofrefinancing or the borrow Creditunion 2.036 22.9 er's ability to refinance. All ............. 6.882 77.4 For 2006, HMDA reporting requirements covered Mortgagecompany Independent . 1,328 14.9 8,886 institutions-including 3,900 commercial Affiliated' ... 676 7.6 banks, 946 savings institutions, 2,036 credit unions, All .............. 2.004 22.5 and 2,004 mortgage companies (table 2). Of the Allinstitutions.............. 8,886 100 mortgage companies, two-thirds were independent I. Subsidiary ofa depository institution or an affiliate ofa bank holding entities-that is, they were neither subsidiaries of company.

The 2006 HMDA Data A79 each of which provided information on fewer than rates are higher for refinancings and for home 250 loans or applications, accounted forjust 1.7 per improvement loans than for home-purchase loans, cent of all the reported data. At the other extreme, perhaps because ofthe prequalification and financial 5 percent of reporting institutions, each of which counselingactivities that manyprospectiveborrowers provided information on 5,000 or more loans or go through before purchasing a home (table 4). applications, accounted for 87 percent of all the Denial rates are lower for government-backed loans reported data. than forconventional loans butareespecially high for Many HMDA reporters are affiliated with each loans to purchase manufactured homes. Overall, the other. IfindividualHMDAreporters areaggregated to denial rate for all home loans in 2006 was 29 percent, theirhighestlevelofcorporateorganization (suchas a compared with 27 percent in 2005. holding company), the concentration of mortgage lending nationwide is evident. The twenty-five orga Conventional and Government-Backed Loans nizations reporting the largest numberofapplications Consistent with earlier years, most reported home and loans accounted for 54 percent ofthe 2006 data, loan activity in 2006 involved conventional loans roughly the sameproportions as in the 2004and 2005 that is, non-government-backed loans (table 4). Such HMDAdata (data not shown in tables). loans accounted for about 95 percent of all loans Disposition ofApplications, Loan Types, and originated in 2006. FHA-insured loans accounted for HOEPA-Related Activities about three-fourths of the government-backed loans, and most of the rest involved guarantees by the For purposes ofanalysis, loan applications and loans Department ofVeteransAffairs (VA) (data not shown can be grouped in many ways; here the analysis in tables). The share of all HMDA-reported loans focuses on twenty-five distinct product categories backed by the FHA has fallen over the past several characterized by loan and property type, purpose of years, from about 16 percent in 2000 to less than the loan, and lien and owner-occupancy status. Each 3 percent in 2005 and 2006 (data not shown in productcategory contains information on the number tables).I? (TheFHAshareoffirst-lien home-purchase of total and pre-approval applications, application loans has also been trending down and in 2006 was denials, originated loans, loans with prices above the about 5 percent.) The development in recent years of thresholds, loans covered by the Home Ownership many conventional loan products that feature more and Equity ProtectionActof 1994 (HOEPA), and the flexible and quicker underwriting has attracted bor mean and medianAPRspreadsfor loans priced above rowers who, in thepast, mighthavesoughtloans with the designated reporting thresholds (tables4 and 5).16 FHA backing. Among the newer conventional loan products are those intended to serve borrowers who Disposition ofApplications are seeking to minimize theirdown paymentorinitial monthly payments or who are unable or unwilling to HMDAdata are the only publicly available source of document their incomes. Also, in some areas of the information on the disposition of individual applica country, high home prices havediminished the attrac tionsfor home loans. Thedata includeinformation on tiveness of the FHA program, as increases in the the race, ethnicity, and sex ofapplicants as well as the maximum loan value that the FHA will insure have type and purpose of the loan and the location ofthe failed to keep pace with increases in local home property, so the disposition of applications can be values. assessed along many dimensions. For each loan made, the HMDA data show the The HMDA data for 2006, like those from earlier amount borrowed and the incomes ofthe borrowers. years, indicate that lenders approve most of the The analysis that follows immediately in this section applications they receive, although the proportion considers four loan categories: (1)conventional loans approved or denied varies by loan purpose, type of that met the definition of higher-priced loans under loan and property, and lien status. In general, denial HMDA, (2) all other conventional loans, (3) FHA insured loans, and (4) VA-guaranteed loans. The 16. Transition rules governing the reporting of the expanded analysis is limited to site-built, owner-occupied, one- HMDAdatacreated problems for assessing the dataon loan pricing, manufactured-home lending, and pre-approvals. The transition rules hadalargeinfluenceonthedatareportedfor2004andamuchsmaller effectonthe2005data. Inthe2006data,transitionrulesaffectedonly 17. VA-backed lending has also fallen some in recent years as a about 6,000 applications and I,I00 loans; the pre entation here shareoftheoverallmarket,butnottothesameextentasFHA-backed excludes those applications and loans for analyses that pertain to lending. Forexample,VA-guaranteedloansaccounted for3.5percent pricing, manufactured-homelending,andpre-approvals. ofhomepurchaseloansin2000andabout2percentin2006.

A80 Federal Reserve Ilulletin 0 December 2007 3. Distribution ofhome lenders covered by HMDA, by type oflender and the number ofapplications they receive, 2006 Typeoflender,and 1-99 100-249 250-999 I subcategory(assetsize inmillionsofdollars, Percentof Percentof Percentof Percentof Percentof Percentof oraffiliation) lendertypeI I subcategory2 lendertype1 I subcategory2 lendertypeI I subcategory2 Depositoryinstitution Commercialbank Lessthan250 75.8 60.5 63.1 28.7 25.4 9.9 250-999 19.2 26.9 32.0 25.4 60.5 41.3 1,000ormore 5.0 17.7 5.0 10.0 14.1 24.2 All .... ........... 100 44.4 100 25.3 100 21.7 Savingsinstitution Lessthan250 84.4 46.9 64.3 34.9 22.5 16.2 250-999.... ........... 12.7 8.7 33.6 22.4 66.5 58.8 1,000ormore 2.9 4.7 2.1 3.3 11.1 23.3 All ...................... 100 25.8 100 25.2 100 33.4 Creditunion Lessthan250 .. . ....... ... 96.0 62.8 82.3 26.8 34.9 10.3 250-999.. 3.8 8.4 16.8 18.4 57.9 57.1 1,000ormore .............. .2 1.7 .8 3.5 7.1 27.0 All .. 100 47.6 100 23.6 100 21.4 All depositoryinstitutions Lessthan250 83.1 59.9 68.7 28.6 27.4 10.7 250-999............... 13.6 19.7 27.9 23.4 61.0 47.8 1,000ormore .. 3.3 12.7 3.4 7.7 11.6 24.4 All .. 100 42.8 100 24.8 100 23.2 Mortgagecompany Independent 37.7 12.1 63.6 13.2 77.0 30.2 Affiliated 62.3 39.1 36.4 14.8 23.0 17.8 All .. ....... .... 100 21.2 100 13.7 100 26.0 All institutions ............... 37.9 22.3 23.8 MEMO Percentofallapplications, bynumberreported bylender............ .5 1.2 3.8 NOTE: Refertotable2, note I.Asstatedinthegeneral notetotable I,ap 2. Distributionsumshorizontally. Forexample,thesecondcolumn,firstrow plications in the presenttable include requests for pre-approval that werede showsthat60.5percentofcommercialbankswithassetsoflessthan$250mil nied by the lenderor were accepted by the lender but nOlacted upon by the lionreceived 1-99applicationsin2006. borrower. ... Notapplicable. I. Distribution sums vertically. For example, the first column, first row shows that75.8 percentofcommercial banks that received 1-99applications in2006hadassetsoflessthan$250million. to four-family units, and the four categories are States and 50 percent higher for such a property in applied separately to home-purchase loans and refi Alaska and Hawaii and in Guam and the U.S. Virgin nancings. Islands. The size limits for conforming loans are As noted, distinguishing higher-priced loans from higher for structures accommodating two, three, or others is one way to differentiate lending activity. A four families. However, the HMDA data do not second approach is to distinguish between loans distinguish among properties with fewer than five originated for a "conforming" loan amount and those units, so in this article the discussion of 2006 loans that were larger (jumbo loans).18 Fannie Mae and with a conforming size refers to the $417,000 limit Freddie Mac hold some of their purchased loans in for single-family properties in the continental United their own portfolios, but they convert most of them States, asize that included most home loans extended into securities, which they sell to investors. For 2006 in 2006.19 the size limit for conforming loans was $417,000 for Indeed, for 2006, about90 percentofconventional a single-family property in the continental United loans for purchase and likewise for refinancing, whether higher-priced or not, were within the single family conforming loan-size limit (table 6). Higher 18. Thegovernment-sponsoredenterprisesFannieMaeandFreddie priced loans tended to be somewhat smaller than Mac are permitted to purchase only those mortgages that are in conformance with annually adjusted size limits and certain other underwritingcriteria.The HMDAreports do not provideall the data needed to determine whether a loan is conforming, so a mortgage 19. The2006limits,whichrangedupto$801,950forafour-family falling within the"conforming loan amount" limit may not meet the unit, are given in Fannie Mae(2005), "FannieMaeAnnounces 2006 othercriteriafor conformingloansand thus might notbeeligiblefor Conforming Loan Limit of $417,000," press release, Nov. 29, purchaseby FannieMaeand FreddieMac. www.fanniemae.com/newsreleasesI2005/3649.jhtml.

The 2006 HMDA Data A81 3. Distributionofhome lenders covered by HMDA, by type oflenderand the numberofapplications they receive, 2006-Conlinued Typeoflender,and 1,00Q-4,999 5,000ormore Any MEMO subcategory(assetsize I I I I in millionsofdollars, Percentof Percentof Percentof Percentof Percentof Percentof Numberof Percentof oraffiliation) lendertypeI subcategory2 lendertypeI subcategory2 lendertypeI subcategory2 lenders applications Depositoryinstitution Commercialbank ........... Lessthan250 .. 6.3 .7 5.0 .2 55.6 100 2,170 1.1 250-999..... ... .... ..... 30.9 6.4 .0 .0 31.7 100 1,238 1.6 I.000ormore ..... ...... 62.9 32.7 95.0 15.5 12.6 100 492 22.0 All ......... ............ 100 6.6 100 2.1 100 100 3,900 24.7 Savingsinstitution Lessthan250 ... ... . ....... 6.4 1.4 5.6 .7 46.4 100 439 .3 250-999..... ...... ....... 35.1 9.2 5.6 .8 37.7 100 357 .9 1,000ormore ... .......... 58.5 36.7 88.9 32.0 15.9 100 150 9.9 All ........... ..... .... 100 9.9 100 5.7 100 100 946 Il.l Creditunion Lessthan250 ......... .... 1.5 .1 .0 .0 72.7 100 1,480 .6 250-999..... ......... .. 51.5 16.1 .0 .0 21.7 100 441 .9 1,000ormore ........ ..... 47.1 56.5 100 11.3 5.7 100 115 1.3 All .. ..... ....... ..... 100 6.8 100 .6 100 100 2.036 2.8 Alldepositoryinstitutions Lessthan250 .. ......... 4.9 .6 4.8 .2 59.4 100 4,089 20 250-999..... .... ... ..... 37.5 9.0 2.0 .2 29.6 100 2,036 3.4 1,000ormore ........ ..... 57.6 37.1 93.2 18.1 11.0 100 757 33.1 ............ All ....... 100 7.1 100 2.1 100 100 6,882 38.5 Mortgagecompany . Independent ... ..... ...... 78.7 28.0 70.7 16.6 66.3 100 1,328 36.7 Affiliated .. .......... 21.4 14.9 29.3 13.5 33.7 100 676.0 24.7 All ... .... ........... 100 23.6 100 15.5 100 100 2,004 61.5 ... ... ... Allinstitutions ............... 10.8 5.2 100 8,886 100 MEMO Percentofall applications, bynumberreported .. bylender..... ...... ...... ... 7.5 . 87.0 ... 100 8,886 100 others; for example, among conventional home income about 20 percent lower than borrowers not purchase loans, the mean size ofhigher-priced mort paying higher prices. gages was $209,000, compared with $246,000 for others (table 6, memo item). Non-Owner-Occupant Lending By their nature, government-backed loans tend to Part of the strong performance of housing markets be considerably smaller than conventional loans; the over the first half ofthis decade can be traced to the difference reflects the relatively low guarantees or growth in sales of homes to investors or individuals insurance limits in the government-backed programs purchasing second or vacation homes, units collec and the focus ofthe programs on lower- and middle tively described as "non-owner occupied." HMDA income borrowers. In 2006, for example, the mean data can document the role of investors and second size of FHA-insured home-purchase loans was home buyers in the housing market because the data $133,000, and nearly halfofsuch loans were for less indicate whether the subject property is intended as than $125,000, whereas only about one-fourth ofthe the borrower's principal dwelling (that is, as an conventional loans were in that size range. owner-occupied unit).2o A limitation on this type of Borrower incomes differ substantially by loan analysis is that some buyers do not use home mort product (table 7). Not surprisingly, the mean income gages to finance their purchase; rather, they pay cash of borrowers with conventional loans was substan for the properties or, in some instances, take out tially larger than that of borrowers with government commercial loans. After declining in the early 1990s, backed loans. Among those obtaining conventional home-purchase mortgages, the mean income of indi viduals with a loan ofconforming size was $82,400, 20. An investmentpropertyisanon-owner-occupieddwellingthat versus a mean income of $258,000 for those with a is intended to be continuously rented. Non-owner-occupied units jumbo loan. And, again among borrowers using con vacationhomesandsecondhomes-thatarefortheprimaryuseofthe ownerare notconsidered investment properties.The HMDAdata do ventionalloans, those using higher-priced loanseither not, however, distinguish between these two types of non-owner to purchase a home or to refinance had a mean occupieddwellings.

A82 Federal Reserve Bulletin0 December 2007 4. Disposition ofapplications for home loans, and origination and pricing ofloans, by type ofhome and type ofloan, 2006 Applications Loansoriginated Acted uponbylender LoanswithAPRspreadabovethethresholdI Distribution,bypercentage Typeofhomeandloan Number pointsofAPRspread submitted Number Number Percent Number Number Percent denied denied 3-3.99 4-4.99 ONE-TOFOUR-FAMILY NON8USI ESS RELATED' Owneroccupied Site-built Homepurchase Conventional Firstlien .. .......... 6,209,040 5,440,857 1,010,083 18.6 3,893,634 983,350 25.3 24.9 13.6 Juniorlien .......... 2,092,637 1,858,700 386,435 20.8 1,259,933 575,488 45.7 .. ... Governmentbacked Firstlien ............. 518,564 459.083 55,711 12.1 382.091 6,805 1.8 89.9 4.6 Juniorlien ........... 808 611 67 11.0 504 16 3.2 ... ... Refinance Conventional Firstlien ............. 10.3%,764 7.945.231 2,840,921 35.8 4,262,866 1,320,984 31.0 28.5 16.8 Juniorlien ........... 2,073,910 1.759,118 531,231 30.2 1,010.349 281,464 27.9 ... ... Governmentbacked Firstlien ............. 186,746 157.536 34,557 21.9 109,238 3,348 3.1 78.0 12.4 Juniorlien ..... ..... 524 424 75 17.7 328 14 4.3 ... ... Homeimprovement Conventional Firstlien ............. 801,434 690,940 280,138 40.5 348,731 103,414 29.7 37.3 19.5 Juniorlien ........... 1,120.356 1,017,604 366,647 36.0 545.297 94.234 17.3 ... ... Governmentbacked Firstlien ............. 5,955 5.195 1,326 25.5 3,479 160 4.6 70.6 13.8 Juniorlien ........... 4,479 3,674 1,589 43.2 1.723 1,030 59.8 ... ... Unsecured(conventional o ba r c g k o e v d e ) rn . m .. e . n .. t ...... 351,726 343,747 167,873 48.8 149.829 ... .. . ... ... Manufactured Conventional,firstlien Homepurchase .... 348,818 335,776 163,799 48.8 100,883 50,927 50.5 30.1 23.8 Refinance .............. 171,666 154,688 77,918 50.4 59,538 31,946 53.7 34.0 26.7 Other................ ... 145,212 130,837 52,631 40.2 68,788 15,667 22.8 28.5 11.9 Non-owneroccupietJ4 Conventional,first lien Homepurchase ......... 1,327,514 1,180,975 225,054 19.1 838,486 239,543 28.6 51.3 15.8 Refinance .............. 1,003,827 852,129 240,862 28.3 523,263 155,057 29.6 41.5 14.6 Other.................. .. 495,094 434,143 121,602 28.0 262.974 128,449 48.8 4.3 1.8 BUSINESSRELATED' Conventional,first lien Homepurchase ......... 21.997 20,062 2,003 10.0 17.239 1.121 6.5 53.1 12.4 Refinance .............. 23,007 21,046 2,625 12.5 17.598 1,011 5.7 53.1 13.4 Other..................... 7.362 6,738 1,104 16.4 5,253 246 4.7 28.0 9.8 MULTIFAMILY' Conventional.firstlien Homepurchase ......... 65,093 59,320 3,923 6.6 51,710 5,992 11.6 50.5 16.8 Refinance .............. 54,099 47,047 4,477 9.5 38.353 5,148 13.4 59.8 14.2 Other.................... 25,306 21,817 2,849 13.1 16.978 3,692 21.7 3.9 2.1 Tntal ................... 27,451,938 22,947,298 6,575,500 28.7 13,969,065 4,009,106 28.7 22.4 11.6 OTE:Excludestransition-periodapplications(thosesubmittedbefore2004) 3. Business-relatedapplicationsandloansarethoseforwhichthelenderre andtransition-periodloans(thoseforwhich theapplication wassubmittedbe portedthattherace,ethniciry.andsexoftheapplicantorco-applicantarenot fore2004). applicable;allotherapplicationsandloansarenonbusinessrelated. I. Annual percentagerate(APR)spreadisthedifferencebetween theAPR 4. Includesapplicationsandloansforwhichoccupancystarnswas missing. on the loan and the yield on a comparable-maturity Treasury security. The 5. Includes business-relatedand nonbusiness-relatedapplications and loans threshold for first-lien loans isaspreadof3 percentage points; forjunior-lien forowner-occupiedand non-owner-occupiedproperties. loans,itisaspreadof5percentagepoints. ... Notapplicable. 2. Loans covered by the Home Ownership and Equity Protection Act of 1994,whichdoesnotapply tohome-purchase loans.

The 2006 HMDA Data A83 4. Disposition ofapplications for home loans, and origination and pricingofloans, by typeofhomeand typeofloan, 2006-Colltinued Loansoriginated MEMO LoanswithAPRspreadabovethethreshold1 Transition-periodapplications(thosesubmiuedbefore2004) Distribution.bypercentage APRspread Loansoriginated pointsofAPRspread (percentagepoints) Numberof Numberof HOEPA- Number Number Percent Percentwith HOEPA· 9or covered submiued denied denied APRspread covered 5-6.99 7-8.99 more Mean Median loans2 Number above loans2 threshold 51.5 9.6 .5 5.3 5.5 1,875 123 11.0 527 3.6 58.9 37.2 4.0 6.8 6.7 69 4 8.9 23 17.4 2.8 2.4 .3 3.5 3.2 129 10 20.0 17 17.6 75.0 25.0 .0 6.2 6.3 0 0 0 0 0 44.9 9.7 .1 5.1 5.2 3,894 2,472 84 7.2 93 4.3 0 55.5 37.1 7.5 6.9 6.8 2,655 33 2 10.5 6 0 0 7.8 1.7 .1 3.7 3.2 16 80 12 21.4 II 9.1 0 42.9 42.9 14.3 7.0 7.3 0 0 0 0 0 0 0 34.3 8.0 .7 4.9 4.6 1,578 8 0 0 3 0 0 46.7 35.1 18.2 7.4 7.2 3,720 14 0 0 I 0 0 12.5 2.5 .6 3.9 3.5 I 1 0 0 0 0 0 41.7 33.0 25.3 7.7 7.3 99 0 0 0 0 0 0 0 0 0 0 0 30.2 12.0 3.9 5.3 4.8 32 I 5.9 6 0 28.7 8.6 2.0 4.9 4.6 1.384 50 3 13.0 2 50.0 0 23.8 23.8 12.0 6.1 5.6 1.023 8 25.0 2 0 0 25.8 6.3 .7 4.6 3.9 369 12 5.6 83 7.2 35.0 8.4 .5 4.9 4.5 347 235 5 4.8 18 5.6 0 35.0 34.2 24.6 7.6 7.4 276 16 2 18.2 7 42.9 0 30.4 3.8 .3 4.5 3.9 7 0 0 6 0 30.7 2.7 .2 4.4 3.9 2 4 0 0 3 0 0 44.3 14.6 3.3 5.4 5.3 3 0 0 2 0 0 18.7 12.1 1.9 4.8 4.0 175 II 7.1 109 2.8 19.7 5.9 .4 4.3 3.7 35 449 2 0.9 191 1.0 0 49.1 31.6 13.3 6.9 6.7 141 40 7 28.0 8 0 0 46.6 16.7 2.7 5.6 5.7 15,172 6,069 279 8.6 1,118 4.2 0 theshareofnon-owner-occupantlendingamong first- 2006, the share fell somewhat, to 16.5 percent. Furlien loans to purchase one- to four-family site-built ther, in line with the experience for home-purchase homes began rising in 1994, and it has risen in every loans to owner-occupants, the number of convenyear between 1996 (when it was 6.4 percent) and tiona] first-lien loans to purchase homes by non- 2005, when it reached 17.3 percent (table 8). For owner-occupants fell about 17 percent from 2005.

A84 Federal Reserve Bulletin0 December 2007 5. Home-purchase lending that began with a request for pre-approval: Disposition and pricing, by type ofhome, 2006 Applicationsprecededbyrequests Loanoriginationswhoseapplicationswere Requests forpre-approval forpre-approvalI precededbyrequests forpre-approval LoanswithAPRspread Acteduponbylender abovethethreshold' Typeofhome Number Number Percent Number acted upon Number denied denied submitted bylender Number Number Number Percent denied ONE-TOFOUR-FAMILY NONBUSINESSRELATE))3 Owneroccupied Site-built Conventional Firstlien........... 782,978 192,997 24.6 478,986 417,401 35,416 344,575 33,668 9.8 Juniorlien ....... .. 158,359 37,834 23.9 103,306 92.200 7,924 72,364 19,054 26.3 Governmentbacked Firstlien. .. ... ... 77,970 22,654 29.1 55,250 48,701 3,996 42,201 1,063 2.5 Juniorlien ............. 58 8 13.8 54 48 5 42 3 7.1 Manufactured Conventional,first lien... 40,506 20,489 50.6 37.589 33,069 18,032 8,357 5,793 69.3 Other ....... ............ 5.079 1,533 30.2 3,811 3,117 515 2,452 149 6.1 NOli-owneroccupied" Conventional,firstlien ...... 89,459 17,789 19.9 67,177 57,720 7,102 44,834 8,890 19.8 Other ............ 16,448 3,246 19.7 13,714 11,573 1.591 8,318 4,352 52.3 BUSINESSRELATED' Conventional,first lien ... 2,976 198 6.7 2,813 2,370 126 2,161 84 3.9 Other .................. .. 388 31 8.0 368 265 23 192 70 36.5 MULTrFAMILY' Conventional,first lien ...... 295 30 10.2 275 240 18 212 44 20.8 Other ...... .... .. ... 126 5 4.0 125 107 4 99 8 8.1 Total........... ... ....... 1,174,642 296,814 25.3 763,468 666,811 74,752 525,807 73,178 13.9 NOTE: Excludestransition-period requestsforpre-approval(thosesubmitted 3. Business-relatedapplicationsandloansarethoseforwhichthelenderre before2004). Refertogeneral notetotable I. portedthattherace,ethnicity,andsexoftheapplicantorco-applicantare"not I. These applications are included in the total of 27,451,938 reported in applicable";all otherapplicationsandloansarenonbusinessrelated. table4. 4. Includesapplicationsand loansforwhichoccupancystatuswasmissing. 2. Refertotable4, note I. 5. Includes business-relatedand nonbusiness-relatedapplicationsand loans forowner-occupiedand non-owner-occupiedproperties. ... Notapplicable. Piggyback Lending 20 percent of the purchase price. Some borrowers have chosen a piggyback loan instead of a loan Many first-time homebuyers have relatively limited backed by PMI in part because, until recently, bor assets and thus cannot qualify for other than a mort rower payments for PMI could not be itemized for gage with a high loan-to-value ratio. Otherborrowers federal incometaxpurposes, whereas the interestpaid have the financial capacity to make a large down on piggyback loans could be. Also, without the payment but prefer not to do so. Lenders and piggybackloan, somehomepurchases mightnothave secondary-marketpurchasers often require loans with been possible because the underwriting standards high LTV ratios to beprotectedwith privatemortgage applied by PMI companies may have been more insurance (PMI), carried at the expense of the bor conservative than those used by the lender providing rower, to indemnify them, at least in part, against the the piggyback loan. elevated risk ofdefault on such loans. The expanded HMDA data document substantial In recent years, so-called piggyback loans have growth in piggyback lending since2004 and, together emerged as an alternative to PMI. In piggyback with data reported by PMI companies, suggest that lending, borrowers simultaneously receive a first such lending played an important role in home sales mortgage and a junior-lien (piggyback) loan. The overthepastfew years.2J In 2006, lenderscovered by piggyback loan finances the portion of the purchase price not being financed by the first mortgage and 21. PiggybackloansarenotidentifiedexplicitlyintheHMDAdata. sometimes any cash payment that might have been However,bymatchingjunior-lienhome-purchaseloanswithfirst-lien made; the junior loan may amount to as much as home-purchaseloansextendedatthesametimetoborrowerswiththe

The 2006 HMDA Data A85 5. Home-purchase lending that began with a request for pre-approval: Disposition and pricing, by type ofhome, 200~Continued Loanoriginationswhoseapplicationswere MEMO precededbyrequestsforpre-approval Applicationswithtransition-periodrequests for LoanswithAPRspreadabovethethreshold2 pre-approval(requestsubmittedbefore20(4) APRspread Distribution.bypercentagepointsofAPRspread Loansoriginated (percentagepoints) Number Number Percent Percent 9or Mean Median submitted denied denied withAPR 3-3.99 4-4.99 5-6.99 7-8.99 Number more spread spread spreadabove threshold 44.7 17.3 3\.0 6.0 .9 4.7 4.3 35 2 8.7 14 0 58.1 34.1 7.9 6.9 6.7 3 0 0 2 0 72.2 18.8 5.9 3.0 .1 3.8 3.4 9 I 11.1 7 42.9 66.7 33.3 0 6.2 6.4 0 0 0 0 0 20.0 24.4 40.0 13.5 2.1 5.4 5.2 0 0 0 0 0 83.9 .7 3.4 12.1 0 3.8 3.3 0 0 0 0 0 60.0 18.0 16.6 4.3 \.2 4.3 3.7 10 1 16.7 5 0 0 0 22.8 36.1 4\.2 8.6 8.5 3 0 0 I 0 60.7 7.1 17.9 11.9 2.4 4.6 3.5 3 0 0 1 0 1.4 \.4 37.1 3\.4 28.6 7.8 7.7 0 0 0 0 0 47.7 18.2 27.3 4.5 2.3 4.6 4.2 0 0 0 0 0 12.5 0 62.5 12.5 12.5 7.6 6.2 0 0 0 0 0 30.8 12.4 36.1 15.5 5.3 5.5 5.3 63 4 9.1 30 10.0 HMDA reported on 1.43 million junior-lien loans to An individual whose loan request is too large to purchase homes; almost all of them were conven meet the conforming size limits also has a reason to tional loans, and the quantity was about 4 percent takeoutapiggybackloan: Itcan beused to divide the greater than in 2005 (data not shown in tables). total loan amount so that the size ofthe first lien will Almost 24 percent ofthe 2006 first-lien conventional be conforming. We estimate that in 2006, 9.6 percent home-purchase loans on owner-occupied site-built ofpiggyback loans were used for that purpose (down homes for one to four families involved a piggyback from 10.1 percent in 2005). Looked at from the loan as identified here, a proportion that was 2.7 per borrower perspective, ofthe individuals in 2006 who centage points higher than the comparable figure for borrowed a total exceeding the conforming loan 2005. The overall increase from 2005 to 2006 in the amount, 17.8 percentused apiggyback loan to create numberofreportedjunior-lien loans used to finance a a first lien with a conforming size (up from 13.6 per home purchase is notable because the number of cent in 2005). reported conventional first-lien home-purchase loans fell nearly 12 percent from 2005 to 2006. Further, in Manufactured-Home Lending 2006 piggyback lending apparently continued to gain market share at theexpense ofPMI, as the numberof Manufactured homes, which often sell for less than home-purchase loans backed by PMI declined about site-built homes, are an important option for many 6 percent from 2005 to 2006.22 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 same characteristics and census tract location, an estimate of the manufactured unitscarryrelatively high interestrates. incidenceofpiggybackloans,atleastforthoseoriginatedbythesame lender,canbederived.About85 percentofjunior-lien loansreported in the HMDAdatacanbematched inthis manner. 22. Annual PM!dataarepublishedbytheFFlECandareavailable 23. Unlike site-built homes, manufactured homes are generally atwww.ffiec.gov. assembled infactoriesandshippedtoahomesite.

A86 Federal Reserve Bulletin D December 2007 6. Cumulativedistribution ofhome loans, by loan amount and by purpose, type, and pricing ofloan, 2006 Percent Homepurchase Refinance Upperboundof loanamount Conventional Conventional o (t f h d o o u l s l a a n rs d ) s ' No p t ri h c i e g d her I H pr ig ic h e e d r I Total FHA VA No p t ri h c i e g d her I H pr i i g c h e e d r I Total FHA VA 24 . ........... .... .3 .6 .4 .1 .0 .9 1.3 1.0 .1 .2 .. 49 .. ..... . ..... 1.9 3.4 2.3 2.5 .5 3.9 4.7 4.1 2.1 3.3 .............. 74 ... 6.6 12.6 8.1 12.9 3.2 9.8 12.9 10.8 9.7 12.2 .. 99 .... ......... . 13.6 23.3 16.0 30.1 10.7 17.1 22.8 18.9 23.4 25.6 124 ... ........... 23.7 34.6 26.5 48.4 21.6 26.2 33.6 28.5 40.0 40.0 149 ................. 34.5 44.6 37.1 67.4 36.7 34.7 43.5 37.4 57.5 55.3 174 ... ......... 43.9 52.9 46.2 81.3 52.0 43.4 52.5 46.2 71.4 67.0 199 ................. 51.9 59.9 54.0 90.0 64.7 50.7 60.0 53.6 81.4 76.2 224 . ............... 59.5 66.2 61.2 94.4 74.0 58.0 66.7 60.7 88.4 83.2 249. .. ............ 65.2 71.3 66.7 96.8 81.8 63.5 71.8 66.1 92.3 88.5 274 .. ....... .... 70.3 75.5 71.6 98.1 87.3 68.8 76.3 71.1 94.9 92.4 299 ................. 74.4 79.3 75.6 98.8 91.3 72.9 79.9 75.0 96.5 94.9 324. ..... ....... 78.4 82.7 79.5 99.2 94.2 77.0 83.3 79.0 97.6 96.8 349 ................. 81.3 85.3 82.3 99.5 96.2 80.0 85.9 81.8 98.4 97.9 374 .......... ...... 84.0 87.7 84.9 99.8 97.6 83.0 88.2 84.6 99.6 98.8 399 ... ...... ...... 86.1 89.6 87.0 99.8 98.7 85.3 90.0 86.7 99.7 99.4 417 ................. 89.1 91.0 89.6 99.9 99.6 88.5 91.4 89.4 99.8 99.9 449 ................. 90.2 92.8 90.9 99.9 99.7 89.8 93.1 90.8 99.9 99.9 499 .. ....... -..... 92.2 95.1 92.9 100 99.8 92.1 95.2 93.1 100 99.9 549 ........... .... 94.0 96.7 94.7 100 99.9 94.0 96.7 94.9 100 100 599 ................. 95.2 97.7 95.8 100 100 95.3 97.6 96.0 100 100 649 .......... ...... 96.3 98.4 96.8 100 100 96.4 98.3 97.0 100 100 699 ....... ......... 97.0 98.8 97.5 100 100 97.2 98.8 97.7 100 100 749 .... ....... .... 97.5 99.1 97.9 100 100 97.6 99.0 98.1 100 100 799 ...... .......... 97.9 99.3 98.3 100 100 98.0 99.3 98.4 100 100 Morethan799 ...... 100 100 100 100 100 100 100 100 100 100 MEMO Loanamount (thol/sallds ofdollars) Mean .. ...... .... 245.8 208.7 236.4 133.0 184.6 245.6 207.5 233.8 150.2 154.1 Median' ...... 192 165 185 127 171 196 167 186 138 141 I. LoanamountsarereportedunderHMDAtothenearest$1,000. FHA Federal HousingAdministration. VA DepartmentofVeteransAffairs. Beginningwith the2004data, HMDArules require resulting lendercaution is reflected in very high rates lenders to include a code to identify applications and of denial for home-purchase applications on such loans involving manufactured homes.24 The 2006 properties (table 4). (The elevated credit risk also is data indicate that 4,477 lenders extended about reflected in elevated loan prices, as discussed below.) 256,000 manufactured-home loans, a loan volume Becausethe useofmanufacturedhomes variesgreatly little changed from 2005 (data not shown in tables). across populations and geographies, analyses of Despite the large numberoflendersextending at least denial-rate differences across groups should differen one mortgagefor a manufactured home, such lending tiate between site-built and manufactured housing. is relatively concentrated: 83 percent of the reported manufactured home loans were reported by just ten Loans Covered by HOEPA lenders. About three-fifths ofreported manufactured home loans were used to purchase homes, and a Under the Home Ownership Equity Protection Actof relatively large portion of those mortgages were 1994, certain types ofmortgage loans that have rates FHA-insured (18 percent, versus about 5 percent on or fees above specified levels require additional dis the purchase ofsite-built homes). closures to consumers and are subject to certain Delinquency rates on manufactured homes tend to restrictions on loan terms.25 Under the 2002 revisions be higher than for othertypes ofhome loans, and the to Regulation C, the expanded HMDAdata include a code to identify whether a loan is subject to the protections ofHOEPA. 24. In the years preceding2004, the Department ofHousing and Urban Development(HUD) helped usersofthe HMDAdata identify, albeit imperfectly, applications and loans related to manufactured homesbyproducingeachyearalistofreportinginstitutions(typically about twenty) that it believed were primarily in the business of 25. HOEPAisimplementedbytheFederal ReserveBoard's Regu extendingsuchcredit(www.huduser.orgldatasets/manu.html). lationZ(www.federalreserve.gov/regulationsldefault.htm).

I The 2006 HMDA Data A87 7. Cumulative di tribution ofhome loans, by borrowerincome and by purpose, type, and pricing ofloan, 2006 Percent Homepurchase Refinance Upperboundof borrowerincome Conventional Conventional o (t f h d o o u l s l a a n r d s) s ' No p t ri h c i e g d her I H pr i i g c h e e d r I Toml FHA VA No p t ri h c i e g d her I H pr i i g c h e e d r I Total FHA VA 24 .. ............. 2.9 3.6 3.1 5.9 1.0 2.9 4.6 3.5 4.6 3.0 49 .. .............. 22.5 29.3 24.2 50.6 31.0 23.1 33.0 26.2 39.5 31.4 74 .. ..... ......... 46.3 56.1 48.8 83.2 69.2 48.8 62.3 53.0 76.3 69.4 99 ... .....~......... 64.8 73.9 67.1 94.5 89.2 68.1 79.8 71.8 93.1 88.5 124. 76.8 84.3 78.7 97.7 96.6 80.0 88.6 82.7 98.0 96.0 149 ................ 83.8 89.9 85.4 98.7 98.8 86.5 92.8 88.5 99.3 98.6 199 ................. 91.6 95.7 92.6 99.5 99.8 93.2 96.8 94.3 99.8 99.8 249 ............. 94.9 97.6 95.6 99.7 99.9 96.0 98.2 96.6 99.9 100 299 .. 96.5 98.4 97.0 99.8 100 97.2 98.7 97.7 99.9 100 Morethan299 100 100 100 100 100 100 100 100 100 100 MEMO Borrowerincome. byselectedloan type(thousands ofdollarsf All Mean ...........•... 105.3 86.1 100.5 55.2 66.0 98.6 78.1 92.1 60.1 65.8 Median' .......•.... 79 68 76 49 60 76 63 72 56 60 Conforming Mean . 5.3 74.0 82.4 80.9 67.8 76.7 Median' 72 64 70 70 60 66 Jumbo Mean ... 271.6 212.1 258.8 234.7 191.0 223.7 Median' 199 168 190 175 150 168 OTE: For loans with two or more applicants, HMDA-covered lenders re ... Notapplicable. pondataononlytwo. Incomefortwoapplicantsisreponedjointly. FHA FederalHousingAdministration. I. IncomeamountsarereponedunderHMDAtothenearest$1,000. VA DepartmentofVeteransAffairs. 2. Bysize,all loansbackedbytheFHAorVAareconforming. Coverage under HOEPA is determined by a two quires using the yield on the Treasury security of part test that considers both the APR and the dollar comparable maturity for the fifteenth day of the amount of points and fees. The APR portion of the month preceding the date on which the loan rate was coverage test is similar to that used to determine set. For HOEPA, however, the APR portion of the which loans are higher priced under HMDA. In the coverage test requires using the yield on theTreasury case of HMDA, identifying higher-priced loans re- security ofcomparable maturity for the fifteenth day of the month preceding the month in which the 8. on-owner-occupied lending as a share ofall first liens application was received. Another difference is that to purchase one- to four-family site-built homes, by number and dollar amount ofloans, 1990-2006 the APR spreads for determining HOEPA coverage are higher than for determining which loans must be Percent reported as higher-priced under HMDA. HOEPA Vear Number I Dollaramount coverageis basedon spreadsthatexceed8percentage points and 10 percentage points for first- and junior 1990 . 6.6 5.9 1991 .. 5.6 4.5 lien loans, respectively, versus minimum spreads of 1992 .. 5.2 4.0 1993 .. 5.1 3.8 3 percentage points and 5 percentage points, respec 1994 . 5.7 4.3 tively, in HMDA higher-priced loans. 1995 .. 6.4 5.0 Before the release ofthe 2004 data, little informa 1996 . 6.4 5.1 1997 .. 7.0 5.8 tion was publicly available about the extent of 1998 . 7.1 6.0 1999 . 7.4 6.4 HOEPA-related lending or the number or type of 2000 . 8.0 7.2 institutions involved in that activity. Although the 2001 . 8.6 7.6 expanded HMDA data provide important new infor 2002 .. 10.5 9.2 2003 .. 11.9 10.6 mation, the data fail to capture all HOEPA-related 2004 .. 14.9 13.1 lending. Some HOEPA loans are extended by institu 2005 .. 17.3 15.7 2006 .. 16.5 14.8 tions notcovered byHMDA, and someHOEPAloans made by HMDA-covered institutions are not reported I

A88 Federal Reserve Bulletin 0 December 2007 underRegulationC, which implementsHMDA. Most • First-lien home-purchase loans extended to non notably, if the proceeds of a home-secured loan are owner occupants had a higher incidence of higher not used to refinance an existing home loan or to priced lending than did comparable loans to owner finance home improvements, then the loan may be occupants. covered by HOEPA but is not reportable under Regu lation C. The extent of HOEPA-related lending not Rate Spreads for Higher-Priced Lending reported under HMDA is unknown. For 2006, roughly 1,200 lenders reported extend The 2006 variation in APR spreads between home ing about 15,200 loans covered by HOEPA (table 4). purchase loans and loans used in refinancings was Only 17 lenders made 100ormoreHOEPAloans, and much smaller than the variations in incidence noted most lenders did not report any such loans (data not above. For example, for higher-priced conventional shown in tables). A majority of the HOEPA loans first-lien loansfor an owner-occupied site-builthome, involved a refinancing, and about two-thirds ofthese the mean APR spreads were about 5 percentage were first-lien loans. In the aggregate, HOEPA points above the yieldson comparableTreasury secu related lending accounts for a very small proportion rities both for purchase loans and refinancings of the loan market: HOEPA loans accounted for less (table 4). A similar pattern is found for conventional than 0.1 percent of all the originations of home junior-lien loans: They show a mean spread ofabout secured refinancings and home-improvement loans 7 percentagepoints whether they were used for home reported for 2006 (data derived from table 4). purchase or refinancing. As noted, loans backed by manufactured homes were substantially more likely to be higher-priced THE 2006 HMDA DATA ON LOAN PRICING than loans backed by site-built properties. However, The sections that follow analyze the loan-pricing foreach ofthose two products, the mean spreads paid information in the 2006 HMDA data by lender, loan by those with higher-priced loans were roughly the product, geography, and characteristics of borrowers same whether the loan was for home purchase or and their neighborhoods. refinancing. As in 2004 and 2005, only a relatively small Incidence ofHigher-Priced Lending proportion (about 10 percent) of first-lien loans in 2006 had very large spreads-7 percentage points or As with most loans reported in 2004 and 2005, most more. Similarly, only a relatively small proportion of loans reported in 2006 were not higher-priced as junior-lienloans had spreadsof9percentagepointsor defined under the Board's Regulation C.26Among all more. the HMDA-reported loans, 28.7 percent were higher pricedin 2006, upfrom 26.2percentin2005 (table4). Lenders and Higher-Priced Lending Later sections of this article focus on the changes in the incidence of higher-priced lending from 2005 to The concentration of higher-priced lending among 2006; this section focuses on 2006 pricing patterns institutions covered by HMDA fell somewhat in across loan products. 2006, although it remained fairly high. About 5,000 The incidence of higher-priced lending in 2006 of the nearly 8,900 lenders covered by HMDA in differed by loan product (table 4). Forexample, 2006 reported extending fewer than 10 higher-priced loans (data not shown in tables). At the other end of • Loans backed by the government-either insured the spectrum, the roughly 1,250 lenders that reported by the FHAor guaranteed by the VA-had a much making at least 100 higher-priced loans in 2006 lower incidence of higher-priced lending than did accounted for 97 percent ofall such loans. The share conventional loans used for the same purpose. ofsuch lending attributable to the lO lenders with the • First-lien home-purchase loans had a lower inci largest volume of higher-priced loans dropped from dence of higher-priced lending than did junior-lien 59 percent in 2005 to 35 percent in 2006. loans used for that purpose. Another aspect of concentration is the extent to • Manufactured-home loans exhibited the greatest which institutions that extend higher-priced loans incidence ofhigher pricing regardless ofpurpose. may be considered to be "specialists" in that activity, that is, to have a large proportion oftheir loans in the 26. Refertonotes5and6andtheappendix. higher-priced category. Such specialized institutions

The 2006 HMDA Data A89 9. Higher-priced lending: Distribution by type oflender, and incidence ateach type oflender, 2004-06 Percent 2004 2005 2006 Typeoflender Hjgher-pricedloans I I MEMO: Higher-pricedloans I I MEMO: Hjgher-pricedloans lI MEto: I All loans. I All loans, 1 All loans, Distribution Incidence distribution Distribution Incidence distribution Distribution Incidence distribution Independentmortgage company ............. 50.6 25.5 27.8 52.0 41.4 31.0 45.7 41.5 31.2 Depository ................ 25.9 8.0 45.2 22.8 12.8 43.8 28.5 18.7 43.4 Subidiaryofdepository ... 11.5 9.0 17.9 13.0 20.7 15.5 12.4 22.9 15.4 Affiliateofdepository ..... 12.0 18.6 9.1 12.2 30.9 9.7 13.4 37.9 10.1 Total ........ ............ 100 14.0 100 100 24.7 100 100 28.4 100 NOTE:Conventional,first-lien mortgagesforsite-builtproperties. can have a business orientation that is quite different The recent turmoil in the subprime sector has from that of other lenders.27 Taking 60 percent of cau ed a number of lenders, primarily independent loans as the criterion for defining higher-priced spe mortgagecompanies, to ceaseoperations,curtail their cialists, about25 percentofthe roughly 1,250 lenders activities, or transfer or sell their business to others. reporting at least 100 higher-priced loans were spe As aconsequence, the2007HMDAdata may reveal a cialists, or about 4 percent of all reporting institu notable change in the sources of higher-priced lend tions. The HMDA data on pricing can only approxi ing, likely with a diminished share coming from matelyindicatetheextenttowhichalenderspecializes independent mortgage companies. in subprime loans because some prime loans are higher-priced, and some subprime loans are not. Factors that Influence Higher-Priced Higher-priced lending activity may also be de Lending scribed by type of lender. Four groupings are pro Asdescribed inourassessmentofthe2005 data, three vided here-depository institutions and threetypesof basic factors may cause the higher-priced share of mortgagecompany, namely, independents,directsub lending that is reported underHMDAto change from sidiaries of depository institutions, and affiliates of year to year: (l) changes in the interest rate environ depository institutions. Regarding conventional first ment, particularly increases in short-term interest lien loans for site-built homes in both 2004 and 2005, rates; (2)changes in the business practices oflenders, independent mortgage companies originated about particularly in the products offered and the willing 50 percent of the higher-priced loans and about ness or ability of lenders to bear credit risk; and 30 percent of all such loans; in contrast, depository (3) changes in the borrowing practices or credit-risk institutions originated about 25 percentofthe higher profiles of consumers, Among the borrowing prac priced loans and about 45 percent of all such loans ticesatissuearetherelativepreferenceforadjustable (table 9). rate versus fixed-rate loans and for interest rate The market hares for all types of home lending reduction versus cash-out equity when refinancing; a were virtually unchanged from 2005 to 2006 across change in credit-risk profiles would include changes the fourcategorie oflender. However, somechanges in the distribution ofcredit scores among borrower, in market shares of higher-priced lending appeared in the down payments they make, and in their levels acros the four groups. Depository institutions in ofmonthly mortgagepaymentrelativeto income.Our creased their share of the higher-priced loan market previous analysis suggestedthatall threefactors were about 6 percentage points, while the market share of likely responsible for the very large increase from independent mortgage companies fell about the same 2004 to 2005 in the reported incidence of higher number of percentage points. Notably, the incidence priced lending. Quantifying the precise contribution of higher-priced lending for independent mortgage ofeachofthe e factors to the changein higher-priced companies was unchanged from 2005, which sug gests thattheincreasein marketsharefordepositories lending proved difficult, however, largely because of a lack of available information within the HMDA was not caused by independent mortgage companies data.28 abandoning that segment ofthe market. 27. For example. specialists in higher-priced lending may use differentmarketingpracticesandmayrelymoreheavilyontheability 28. LaCour-Little, "Economic Factors Affecting Home Mortgage tosell loanstosecondary-marketpurchasers. DisclosureActReporting."

A90 Federal Reserve Bulletin 0 December 2007 As noted, the incidence of higher-priced lending 1. Spreadbetween interestrateson thirty-yearand five-yearTreasurybonds, 1977-2006 increased about 2.5 percentage points overall from 2005 to 2006, but, by loan product, changes in the Percentagepoints incidence differed considerably over the two years. The most notable changes were increases in the 2.0 incidence of higher-priced lending for conventional 1.5 first-lien refinancings on owner-occupied properties, 1.0 for home-improvement lending, and for lending on non-owner-occupied homes.29Thefollowing sections - .5 + analyze those increases in the incidence of higher o priced lending from 2005 to 2006 in terms of the .5 three factors listed above. 1.0 The Changing Interest Rate Situation 1.5 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 1978 1982 1986 1990 1994 1998 2002 2006 loan is higher priced by comparing its APR with the NOTE: The data are monthly. After March 2002, the spread is between yield on a Treasury security that matches the stated twenty-yearandfive-yearTreasurybonds. SOURCE: FederalFinancialInstitutionsExaminationCouncil."FFIECRate maturity ofthe loan (refer to notes 5and 6). Thus, the SpreadCalculator," www.ffiec.gov/ratespread/default.aspx. regulation effectively requires lenders to use longer term interest rates to determine whether to report a Fixed-ratelendingandthe incidenceofhigher-priced loan as higher priced because the stated maturity of lending. Thechanging interest rateenvironmentfrom most home loans, particularly first-lien loans, typi 2005 through 2006 likelyexplains partofthe increase cally exceeds twenty years. In contrast, because a from 2005 in theshareofreported loans thatexceeded mortgage tends to be paid off before its stated matu the pricing thresholds established by Regulation C. rity, lenders use relatively shorter-term interest rates Throughout2004 and 2005, long-term ratesexceeded to help set mortgage rates.30Thus, a mismatch exists short-term rates (theyieldcurvewas upward sloping), between the longer-term yields used to determine but the difference narrowed over this period as higher-priced lending under HMDA and the shorter shorter-term rates increased rather steadily (the slope term yields used to set mortgage prices. ofthe yield curve flattened). The yield curve contin A yield curve shows the relationship between the ued to flatten overmuch of2006 as shorter-term rates yield on a debt instrument and its term to maturity increased, further narrowing the gap between short (figure 1,and box"TheYieldCurve").Aconsequence and long-term rates. ofthe mismatch just described is that a change from Using the methodology similarto that described in oneyeartothe next in the relationship between short our analysis of the 2005 data, we estimate that, ifall and long-term rates-a change in the slope of the loans were thirty-year fixed-rate loans, the flattening yield curve--can cause a change in the proportion of ofthe yield curve would have made the 2005-06 rise loans that are reported as higher priced, all other in the incidence of reported higher-priced lending things being equal. Most notably, if shorter-term higher than it would have been in the absence ofthe interest rates increase in a given year relative to yield-curve flattening, as follows (data not shown in longer-term rates, both the number and proportion of tables): The flattening would have increased the rise loans that exceed the HMDA price-reporting thresh in higher-priced lending for conventional first-lien olds in that year will be higher than they would have home-purchase loans by 1.9 percentage points, and it been in the absence of the change in rates even if would have increased the rise for similar loans for lender business practices and borrower behavior refinancings by about 2.3 percentage points,3l The remain the same. 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. 29. The increase from 2005 to 2006 in the incidence of higher Those actual figures imply that if all of the loans pricedlendingforhome-purchaseloansonnon-owner-occupiedprop reported in HMDA were fixed-rate loans, the change ertieswasnotable-from20.3percentto28.6percent. Incontrast,the incidence for the purchase of owner-occupied properties increased onlyslightlyovertheperiod,from24.6percentto25.3percent. 31. The methodology is described on pp. A147-50 in Avery, 30. Most mortgages are paid off in a relatively short period Brevoort, and Canner, "Higher-Priced Home Lending and the 2005 (typically well beforethe stated term ofthe loan is reached) because HMDA Data."Although the maturitiesoffixed-rate home loans vary theindividual movesandprepaystheloan,orrefinances,ordefaults. somewhat,theoverwhelmingmajorityofthemarethirty-yearloans.

The 2006 HMDA Data A91 Additional analysissuggeststhatanotherportion of The Yield Curve the increase in higher-priced lending arises from the effects of the flattening of the yield curve on The yield curve describes the relationship between adjustable-rate lending. Evidence provided below interestrates on financial instrumentsofdifferent maturi ties (figureA). suggests that the effects of the flattening ofthe yield The yield curve is typically upward sloping because curve on adjustable-rate lending might be larger than longer-term investments ordinarily involve greater risk on the effect on fixed-rate lending. (credit risk, market interest rate risk, and inflation pre mium),andconsequentlyinvestorsrequireahigherreturn Adjustable-rate lending and the incidence ofhigher tobewillingtoinvesttheirfunds forlongerperiods.Over pricedlending. Asteeply upward sloping yield curve the past twenty years, longer-term interest rates (for suggests that the market expects short-term interest example,asrepresentedbytheannual yieldonthirty-year rates to rise. Yet the method of calculation specified Treasurysecurities)havealmostalwaysexceededshorter under Regulation Z for deriving the APR for term interest rates (for example, as represented by the adjustable-rate loans assumes that interest rates will yield on five-year Treasury securities). Figure I, in the stay the same. Because of this regulatory construct, main text, portrays this relationship with the spread, or an upward-sloping yield curve causes the APRs for difference,betweentheyieldsonthirty-yearand five-year adjustable-rate loans to be below those for fixed-rate Treasuries.Asshown in figure I (andas illustratedby the selected dates shown in figure A), the yield curve was loans of similar term and credit risk. Thus, the especiallysteepinthe2002-04period-whenshort-term flattening of the yield curve can have two effects. rates were quite low by historical standards-but has First, it can narrow the gap between the longer-term become much flatter since then and has in fact inverted rates used for the HMDA reporting threshold for for short periods. higher-priced loans and the shorter-term rates used to price loans in the marketplace. Second, aflattening of A. YieldcurvesonTreasurysecurities, July 10,2003and2006 the yield curve can narrow or even invert the APR gap between adjustable- and fixed-rate loans because, Percent as short-term interest rates increase, the flattening reduces the effect of the comparatively low APR ~---------- 5.0 calculations for adjustable-rate loans. The APR gap July10,2006 can be inverted because the expected durations of 4.0 adjustable- versus fixed-rate loans differ-adjustable rate loans are expected to be outstanding for shorter 3.0 periodsoftime.TheAPRcalculations assumethatthe durations are the same for both adjustable- and fixed 2.0 rate loans and thus underweight the value to the July 10.2003 consumer of low teaser rates offered on many 1.0 adjustable-rate loans.Forthesereasons, alikely result of a flattening (or inversion) of the yield curve is an , ! ! t I I I I I I I I I I I I I I I 1 I I I I I I I I I I I 5 10 15 20 25 30 increasein the proportion ofadjustable-rateloans that Maturity(years) exceed the HMDA price-reporting thresholds. NOTE: Smoothed yield curves estimated from off-the-run Figure 2 illustrates these effects of a flattening Treasurycouponsecurities. Yieldsshownarethoseonnotional par Treasurysecuritieswithsemiannualcoupons. yield curve. The bottom three lines of the figure represent the differences (spreads) between theAPRs between 2005 and 2006 in the incidence of higher of three loan types (the top three lines) and the priced lending for first-lien home-purchase loans HMDA reporting threshold. The APRs in the figure would have been a modest decline of about 1.2 per are the average rates being offered for prime (best centage points (0.7 less 1.9), as opposed to a modest credit-quality) loans for those periods as reported by increase. The increase in the incidence for similar FreddieMac.32The three loan types are all thirty-year refinancing loans would have been about half of the actual reported increase in higher-priced lending (5.3 32. The rates are from Freddie Mac's Primary Mortgage Market less 2.3). Overall, our estimate of the roughly 2 per Survey for2004-06. The Freddie Macseries for five-year adjustable centage pointeffecton fixed-rate loans between 2005 rates did not begin until January I, 2005. For 2004, we estimated five-year adjustable rates from astatistical model using the one-year and 2006 is similarto ourestimateofthe correspond adjustablerateandthirty-yearfixed ratereportedbyFreddieMacand ing effect between 2004 and 2005. theone-and five-yearrates forTreasurysecurities.

A92 Federal Reserve Bulletin D December 2007 2. APRsofthreeselected loan types, and thespread rate loans was much larger.Thus, the gap between the betweenthemand theHMDA price-reporting APRs on fixed- and adjustable-rate loans, which was threshold,2004-06 substantial at the beginning of 2004, had been virtu ally eliminated by early 2005; then the relationship Percentagepoints between the two loan types inverted, with APRs on adjustable-rate loans somewhat higher than those on 9.0 thirty-year fixed-rate loans during most of 2005 and all of2006.The finding suggests that, as an artifactof 8.0 regulation, geographic areas may have shown differ 7.0 ing incidences of higher-priced lending over the past three years merely because they had differing shares 6.0 of fixed-rate versus adjustable-rate loans. That is, APR,5-yearadjustable areas with largershares ofadjustable-rate loans likely 5.0 had fewer higher-priced loans than areas with larger shares of fixed-rate loans in 2004. This effect should 4.0 have reversed overthecourseof2005 and throughout 3.0 2006 as APRs on adjustable-rate loans moved above those on fixed-rate loans. 2.0 In the analysis of the 2005 HMDA data, we used information on the mix of adjustable- and fixed-rate 1.0 loans for each state to derive a rough approximation + ofthe differential effect ofthe flattening of the yield 0 curve on the proportion of adjustable-rate and fixed I I I I rate loans that exceeded the HMDA price-reporting 2004 2005 2006 thresholds.33 The analysis indicated that states with NOTE: Thedataareweekly.Thresholdandannualpercentagerates(APRs) higher levels of adjustable-rate lending had both are for prime,conventional, first-lien mortgages amortized on thirty years. relatively low levels ofhigher-priced lending in 2004 Forexplanationofthreshold,refertotext. SOURCE: APRsareestimatedfrom FreddieMac,PrimaryMortgageMar and larger increases in such lending from 2004 to kelSurvey. 2005, a pattern that would have been predicted from the narrowing of the APR gap between adjustable loans, butfor oneofthem the interestrate is fixed for and fixed-rate loans. the life ofthe loan whereas the rates for the othertwo Thedata illustrated in figure 2 suggestthat the mix reset after one and five years respectively. As thirty of adjustable- and fixed-rate mortgages should be year first-lien loans, they each have the same HMDA related to changes in the incidence of higher-priced higher-priced reporting threshold-3 percentage lending between 2005 and 2006, although the differ points above the yield on the thirty-year Treasury ences between these two years are substantially security. The gap between the APR of the typical smaller than those between 2004 and 2005. The data prime thirty-year fixed-rate loan and the reporting support that inference for home-purchase loans, al threshold narrowed from 215 basis points at the though the effects are very mild. States with the beginning of 2004 to 144 basis points at the begin highest proportion of adjustable-rate mortgages ning of2006 and oscillated over the remainderofthe showed a greater increase in the incidence ofhigher year, For prime one-year adjustable-rate loans, the priced home-purchase lending than other states gap narrowed much more, from about 400 basis (table 10). The pattern for refinancings was not points at the beginning of 2004 to 52 basis points at consistent: The states with the largest share of the beginning of 2006, then declined further to end adjustable-rate mortgages showed about an average the year at only 20 basis points. Thus, at the end of increase in the incidence ofhigher-priced lending for 2006, a one-year adjustable-rate mortgage with a refinancings, which suggests that other factors, such contract rate only 20 basis points above the rate for as opportunities to extract equity, played a more prime loans as reported by Freddie Mac would have dominant role inexplainingdifferences between2005 been reported as higher-priced under the HMDA reporting rules. The differences between the APRs and the report 33. The mix ofadjustable- and fixed-rate loans was derived from ing threshold decreased for both the fixed-rate and data obtained from First American LoanPerformance, www.loanper adjustable-rate loans, but the decrease for adjustable- formance.com.

The 2006 HMDA Data A93 10. Incidenceofhigher-priced lending in states grouped by share oforiginated loans that had an adjustable rate, and the change in incidence, by quintile and type ofloan, 2006 Homepurchase Refinance Quintileofstates Change,2005--06 Change,2005--06 2006(percent) I (percentagepoints) 2006(percent) I (percentagepoints) Lowest . 19.0 .8 38.3 6.7 Secondlowest . 20.6 1.4 33.6 5.8 Middle . 23.6 1.6 31.8 5.0 Secondhighest . 21.6 -.1 29.0 5.3 Highest . 26.4 4.6 31.2 5.3 MEMO: California' 30.2 1.4 23.3 4.6 Total. 24.1 1.9 30.2 5.3 NOTE: Spreadsare unadjusted. Quintiles basedonshareofloansoriginated I. Californiaisshownseparatelybecauseitaccounts foralarge numberof in2006thathadanadjustablerate. Fordefinitionofhigher-pricedlending,re loansandhasahighincidenceofadjustable-ratelending. fertotext. and 2006 in theincidenceofhigher-priced lendingfor lenders nor in the credit-risk profiles ofconsumers.34 refinancings. The role of these factors is discussed The importance ofthe lattertwo factors in explaining below. changes in the "real" incidence of higher-priced Above, we estimated that if all loans were fixed lending is difficult to gauge. rate, then the effects of the flattening of the yield The housing market, and economic conditions curve would have been to add approximately 2 per moregenerally, werefavorable in the2004-05 period. centage points to the reported incidence of higher Sales of both new and existing homes in 2005 priced lending for first-lien loans in the 2006 HMDA eclipsed the historic highs reached in 2004. Housing data. However, adjustable-rate first-lien mortgages marketconditions began moderating in 2006: For the are notas homogenous as fixed-rate loans; substantial year, homepricesrose moreslowly in manyareas and proportions of the adjustable-rate loans have vari declined in some others. Nationally, the median price ously, for example, one-year, five-year, and seven forexistinghomesincreasedthroughout2005,reached year introductory (fixed-rate) periods. We estimate a high in July 2006, and then declined over the remainder of the year. Nonetheless, the overall me that, if all loans had adjustable rates, the yield-curve dian price of existing homes was higher at year-end effect would have added on the order of 4 or 5 per 2006 than at year-end 2005. In addition, a steady centage points-depending on the mix ofadjustment climb in short-term interest rates pushed up monthly terms-to the reported incidence of higher-priced paymentsforsomeexistingborrowerswithadjustable lending. Thus, depending on the overall mix offixed rate loans and for those taking out new such loans.35 and adjustable-rate loans and the mix oftypes among Thus, nationally, housing affordability fell from 2005 loans with adjustable rates, the effect of the yield to 2006, which suggests that more borrowers may curve flattening on the incidence of higher-priced have had to stretch financially to purchase or refi loans would havebeento increasetheincidencebyan nance the mortgages on their homes.36 amountsomewhere between thatfor the all-fixed-rate Moreover, higher interest rates altered the mix of assumption and that for the all-adjustable-rate individuals seeking to refinance their loans. Histori assumption-thatis, on theorderof3or4percentage cally, individuals have refinanced their loans for one 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 inci 34. As discussed in the preceding section, the yield-curveeffects dence for refinancings would have shown only a are an artifactofthe Regulation Cdefinition ofa higher-priced loan modest increase. and the specification in Regulation Z of the method of calculating APRs(particularlyforadjustable-rateloans). 35. Because many adjustable-rate loans have an initial periodata fixed rate (often two or three years from loan origination), some Real Effects on the Incidence ofHigher-Priced borrowers withsuchloansdonotexperiencean immediatechangein Lending their payments if interest rates increase. For new bon'owers, an increa e in short-term rates generally results in a corresponding To theextent that changes in the incidence ofhigher increaseintheinitial rateontheloan. 36. Informationonthesales,prices,andaffordabilityofhomesisin priced lending arecaused by yield-curveeffects, they U.S. DepartmentofHousingand UrbanAffairs, u.s. HOl/singMarket are nota result ofchanges in the business practicesof Conditions, www.huduser.org/periodicals/ushmc.html.

A94 Federal Reserve Bulletin0 December 2007 orboth ofthe following reasons: to lower the interest in credit quality seems to have taken place in the rate on the debtortoextractsome oftheaccumulated near-prime, or "alt-A," portion of the market. For equity in their home. The latter purpose (sometimes example, estimates show that from 2005 to 2006, the referred to as cash-out refinancing) is accomplished subprime share of all mortgage originations held by borrowing more than is needed to cover the steady at about 20 percent, whereas, over the same closingcostsofthenew loan plustheexisting balance period, the alt-A portion of the market rose from ofthe old loan. Increases in interestrates during 2005 12.2 percent to 1304 percent.39 and the first partof2006reduced theopportunitiesfor individuals to benefit from rate-reduction refinanc ings, so the proportion of borrowers in the refinance DIFFERENCES IN LENDING OUTCOMES BY market who were seeking equity extraction likely RACE, ETHNICITY, AND SEX OF BORROWER rose in 2006.37 The less-favorable conditions in the housing mar One purpose ofthe HMDAdata is to allow compari ket and in the interest rate environment in' 2006 sons of lending outcomes across borrowers grouped relative to 2005 undoubtedly accountfor much ofthe by their race, ethnicity, or sex. Three types of out decline in the number of mortgage originations comes often assessed are the incidence of higher reported in the HMDA data for 2006, particularly priced lending (that is, the percentage of loans that with regard to thesharpdeclinein refinancings(about were higher priced), the price spreads on the higher 15 percent). It also likely explains the increase from priced loans (that is, the amount by which the APRs 2005, apartfrom theeffects ofthe yield-curve flatten on those loans were above the HMDA reporting ing, in the proportion of borrowers who obtained threshold), and denial rates. Analysis ofthe 2004 and higher-priced loans in the market for refinancings. 2005 HMDA data found that differences across The rise in the incidence of higher-priced lending in groups in mean spreads paid by those with higher the refinance market (particularly when compared priced loans were generally small. However, the with the home-purchase market) seems to have come analysis revealed substantial differences across racial primarily from the aforementioned rise in the propor and ethnic lines in the incidence of higher-priced tion of borrowers in the refinance market who were lending and in denial rates; further, it showed that seeking to raise cash-and equity extraction is a such differences could not be fully explained by major reason for borrowers in the higher-priced seg factors included in the HMDAdata. ment market to refinance.38 In short, the increase in In examining 2006 lending outcomes by the race, the incidence of higher-priced lending in the refi ethnicity, and sex of borrowers, the present analysis nance market, at least relative to the home-purchase focuses on home-purchase and refinancing loans that market, appears to have been driven mainly by a are conventional first liens on owner-occupied, one decrease in the number of prime borrowers in this tofour-family, site-builthomes.Thosetypesofhome market rather than by an increase in borrowers with purchase and refinancing loans together represent, by weakercredit profiles. far, the largest number of reported mortgages in the Industry data provide additional support for the HMDA data: For 2006, the home-purchase category view that real credit quality declined from 2005 to comprised 6.2 million applications and 3.9 million 2006, albeit modestly. However, most of the change loans; the refinancing category comprised lOA mil lion applications and 4.3 million loans (table 4). The HMDA data include only some of the many 37. Data published by Freddie Mac indicate that the share of factors directly considered by lenders in the process refinancingsinvolvingacash-outrosesteadilyoverthecourseof2005 of credit underwriting and pricing. Among the and through the third quarter of2006 (www.freddiemac.comlnews/ borrower-related items in the HMDA data that are finance/refi_archives.htm). 38. Thisconclusion follows from the beliefthatthecredit profiles likely related to the loan underwriting and pricing of those extracting equity are, in general, worse than those that process are property location, income relied on in refinance purely to benefit from interest rate reductions. Empirical underwriting, loan amount, time of year when the evidence on delinquency rates for refinancings involving equity extraction is generally consistent with this belief. However, in areas loan was made, and presence of a co-applicant. that have experienced exceptional increases in home values, the Because of the focus here on specific loan product expected credit profiles ofthoseextractingequity may not be worse categories, the analysis already accounts in broad 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 ofhigher-priced lendingforhomepurchases.Californiawasamongthestateswiththe 39. Estimate derived from Inside Mortgage Finance, The 2007 largestincreasesin homevaluesin recentyears. MortgageMarketStatisticalAnnual.

The 2006 HMDA Data A95 terms for loan type and purpose, type of property Incidence ofHigher-Priced Lending by Race securing the loan, lien status, and owner-occupancy and Ethnicity status. The 2006 HMDA data, like the 2004 and 2005 data, In comparing lending outcomes across racial and indicate that black and Hispanic borrowers are more ethnic groups, one can match for the sex of the likely, and Asians borrowers less likely, to obtain applicant and co-applicant. Accounting for sex in the loans with prices above the HMDApricing reporting analysisisintendedtobetterdistinguishpricingissues thresholds than are non-Hispanic white borrowers. related purely to the race orethnicity ofthe borrower Theserelationshipsarefound for bothhome-purchase from those that could be related to sex. In assessing loans and refinancings (table 11).41 Gross differences lending outcomes by sex, onecan match for race and in the incidence of higher-priced lending between ethnicity, once again to make comparisons as precise non-Hispanic whites, on the one hand, and blacks or as possible. Hispanic whites,on theother, are large, butborrower The pricing analysis here focuses on both the plus-lender-modified differences are substantially re incidenceofhigher-priced lendingand the meanAPR duced. Most ofthe reduction in the difference in the spreads paid by borrowers with higher-priced loans. incidence across groups comes from adding the con Comparisons of these outcomes are made across trol for lender to the control for borrower-related eleven groups-nine racial or ethnic groups and the factors, an indication that the pricing differences in a two sexes. Comparisons of average outcomes for given lender's underwritingaretypically smallerthan each group are made both before and after modifying the differences among loans across lenders. the results for (1) differences in the borrower-related For home-purchase loans in 2006, the gross mean factorscitedearlierand(2)differencesintheborrower incidence of higher-priced lending was 53.7 percent related factors plus the specific lending institution for blacks and 17.7 percent for non-Hispanic whites, used by the borrower.40The methodofcontrollingfor a difference of 36.0 percentage points (table II, top these factors is to gather borrower data into cells or panel). Borrower-related factors included in the groupings; in each cell, borrowers are similar along HMDA data accounted for about one-sixth of the the dimensions considered. The methodology used unmodified difference. Controlling further for lender here is the same as that described in the previously reduces the remaining gap to 12.6 percentage points. cited articles in the Federal Reserve Bulletin assess In comparison, in 2005, the unmodified mean inci ing the 2004 and 2005 HMDAdata. dence of higher-priced lending for such loans was Comparisons for lending outcomes across groups 54.7 percent for blacks and 17.2 percent for non are of three types: gross ("unmodified"), modified to Hispanic whites, a difference of 37.5 percentage accountforborrower-relatedfactors ("borrowermodi points. For 2005, borrower-related factors accounted fied"), and modified for borrower-related factors plus for about one-fifth of the unmodified difference, and lender ("borrower-plus-lender modified"). For pur controlling further for borrower and lender reduced poses of presentation, the borrower-mod~fied and the remaining gap to 10 percentage points, a some borrower-plus-Iender-modified outcomes shown in whatsmaller"unexplained"differencethan thatfound the tables are normalized so that, for the base com in the 2006 data. parison group (non-Hispanic whites in the case of For refinancings in 2006, the difference between comparison by race and ethnicity, and males in the blacks and non-Hispanic whites in the unmodified case ofcomparison by sex), the mean ateach modifi meanincidenceofhigher-pricedlendingwas27.1 per cation level is the same as the gross mean. Conse centage points, and the borrower-plus-Iender-related quently, the borrower-modified and borrower-plus difference was 7.3 percentage points; once again, lender-modified outcomes for any other group most of the reduction in differences came from the represent the expected average outcome if the mem addition of the control for lender (table 11, bottom bersofthat group had the samedistributionofcontrol factors as that ofthe base comparison group. 41. Applicants are placed under only one category for race and ethnicity, generallyaccording to the race and ethnicity ofthe person listed firston the application. However, underrace,theapplication is designatedasjointifoneapplicantreportedthesingledesignationof 40. Torecall,theborrower-relatedfactorsareincome,loanamount, white and the other reported one or more minority races. If the metropolitan statistical area (MSA) of the property, presence of a application is not joint but more than one race is reported, the co-applicant, and (in the comparisons by race and ethnicity) sex. following designations are made: Ifat least two minority races are Excludedfromthepricinganalysisareapplicantsresidingoutsidethe reported,theapplicationisdesignatedastwoormoreminorityraces; fiftystatesandtheDistrictofColumbiaandapplicationsdeemedtobe ifthefirstpersonlistedonanapplicationreportstworaces,andoneis businessrelated. white,theapplicationiscategorizedundertheminorityrace.

A96 Federal Reserve Bulletin 0 December 2007 11. Incidence ofhigher-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 ofloan and by race, ethnicity, and sex of borrower, 2005 and 2006 Percentexceptasnoted 2005 2006 Modifiedincidence,by Modifiedincidence,by Race,ethnicity.andsex1 Numberof Unmodified modificat I ionfactor Numberof Unmodified modificat I ionfactor loans incidence Borrower- Borrower- loans incidence Borrower- Borrowerltd relatedplus ltd relatedplus reae lender reae lender Homepurchase RaceolherIhall whileollly American IndianorAlaskaNative 27,766 35.3 29.5 21.8 21,615 34.2 30.5 24.5 Asian ......... ............ 237,383 16.6 15.8 16.6 187,187 16.8 15.3 16.8 BlackorAfricanAmerican.. ....... 312,451 54.7 47.0 27.2 318,650 53.7 47.6 30.3 NativeHawaiianorotherPacificIslander. 23,450 34.8 30.4 21.0 18.773 34.0 29.2 22.9 Twoormoreminorityraces 2,112 30.4 28.7 20.8 2,112 27.6 28.6 20.7 joint............ 51,881 18.2 23.0 19.0 44,666 17.5 23.8 19.8 Notavailable.. ........... . 431,159 32.4 33.6 21.6 377,985 29.2 31.8 23.3 While, byelhllicity Hispanicwhite 464,634 46.1 34.2 21.9 464.291 46.6 35.1 24.0 Non-Hispanicwhite ................... 2,789,265 17.2 17.2 17.2 2,406,570 17.7 17.7 17.7 Sex Onemale .............. 1,392,947 31.7 31.7 31.7 1,255,567 32.3 32.3 32.3 Onefemale 1,021,006 30.8 29.8 30.8 925.029 30.9 30.2 31.2 Twomales .. 44,278 23.1 23.1 23.1 36,405 23.9 23.9 23.9 Twofemales .................... 36,140 24.7 22.4 23.9 31,062 26.2 22.5 23.4 Refinance RaceolherIhallwhileollly American IndianorAlaskaNative 37,213 28.9 32.1 24.1 27,748 32.8 36.1 29.5 Asian ............... 165,011 15.2 18.9 21.1 127,873 19.6 23.7 25.3 BlackorAfricanAmerican.............. 441,299 49.3 45.0 27.2 397.452 52.8 50.0 33.0 NativeHawaiianorotherPacificIslander. 31,453 28.4 32.2 24.3 24;078 33.6 37.5 30.0 Twoormoreminorityraces 3,650 28.6 29.5 24.2 2,913 28.0 28.9 30.8 joint............ ............... 61,200 19.3 26.2 22.4 41,875 26.2 33.3 26.9 Notavailable............... 752,573 32.2 38.0 24.5 570,431 38.2 43.7 30.6 While, byelhllicity Hispanicwhite .... ... ........ 478.381 33.8 31.5 23.6 437.163 37.7 37.0 29.7 Non-Hispanicwhite 3,496,425 21.0 21.0 21.0 2,596;873 25.7 25.7 25.7 Sex Onemale ...........• .................. 1,424,721 30.3 30.3 30.3 1,197,165 34.6 34.6 34.6 Onefemale . 1,229,138 31.\ 30.0 30.4 1,033,700 35.3 34.3 34.5 Twomales ........ .. 37,442 21.2 21.2 21.2 27,336 26.6 26.6 26.6 Twofemales ................ 41,572 27.0 23.5 22.5 31.179 34.1 29.9 26.6 NOTE: Excludestransition-periodloans(thoseforwhichtheapplicationwas intoracialandethniccategoriesanddefinitionsofcategories,refertotextnote submitted before 2004). Fordefinition ofhigher-priced lending and explana 41. Loans taken outjointlybya male and female are not tabulated here be tionsofspreadadjustmentandofmodification factors, refertotext. causetheywouldnotbedirectlycomparablewith loanstakenoutbyonebor I. Categoriesforraceandethnicityreflecttherevisedstandardsestablished rowerorbytwoborrowersofthesamesex. in 1997 by the Office ofManagementand Budget. For method ofallocation panel). In comparison,in 2005, the unmodifieddiffer The situation for Asians differs greatly from that ence in incidence between blacks and non-Hispanic for blacks or Hispanic whites: Compared with non whites was 28.3 percentage points, and the borrower Hispanic whites, Asians had a lower unmodified plus-lender-related difference was 6.2 percentage mean incidence of higher-priced lending in 2006 for points. As in 2006, most of the reduction in 2005 home-purchaseand refinance loans. Borrower-related came from the addition of the control for lender. factors plus lender do not alter the gap in incidence Relationships are similar for comparisons made be but narrow it for refinancings. tween Hispanic whites and non-Hispanic whites, but the unmodified difference in incidence between these Rate Spreads by Race and Ethnicity two groups (12 percentage points in 2006) is notably smaller than that between blacks and non-Hispanic The 2006 data indicate that among borrowers with whites, and much of the difference is attributable to higher-priced loans, the unmodified mean spread of borrower-related factors and lender. prices paid by blackborrowers are moderately higher,

The 2006 HMDA Data A97 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 ofloan and by race, ethnicity, and sex ofborrower, 2005 and 2006 Percentagepointsexceptasnoted 2005 2006 Modifiedmeanspread,by Modifiedmeanspread,by Race,ethnicity,andsex h N ig u h l m e o r a b - n p e s r r ic o e f d m U e n a m n o s d p i r fi e e a d d Bor m l r o t o d d w i e fi ~ cat I io r n e B l o f a a r t c e r t d o o w r p e lu ~ s hi N g u h l m e o r a b - n p e s r r ic o e f d m U e n a m n o s d p i r fi e e a d d Bor m r l o o t w d d i e f r i - cat I io r n e B l f o a a r t c e r t o d o w r p e l r u - s reae lender reae lender Homepurchase Raceotherthanwhiteonty American IndianorAlaskaNative. 9,799 4.6 4.8 4.8 7,388 5.2 5.2 5.2 Asian .................. 39,471 4.6 4.7 4.7 31,395 5.0 5.1 5.1 BlackorAfricanAmerican........ .... 171,009 5.0 4.9 4.9 171,238 5.7 5.6 5.3 Native HawaiianorotherPacificIslander. 8,162 4.6 4.8 4.8 6,376 5.2 5.2 5.1 Twoormoreminorityraces 641 4.8 4.9 4.8 583 5.4 5.4 5.3 Joint ... 9,468 4.6 4.8 4.8 7,802 5.3 5.3 5.2 Notavailable.... 139,740 4.9 4.9 4.8 110,527 5.5 5.5 5.3 White. byethnicity Hispanicwhite 214,415 4.6 4.7 4.8 216.422 5.3 5.2 5.2 Non-Hispanicwhite ........... 479,338 4.7 4.7 4.7 426,138 5.1 5.1 5.1 Sex . Onemale ..................... ....... 441,919 4.8 4.8 4.8 405,414 5.3 5.3 5.3 Onefemale ........... 313,959 4.8 4.8 4.8 285.937 5.3 5.3 5.3 Twomales .. ............................ 10,213 4.5 4.5 4.5 8.716 5.2 5.2 5.2 Twofemales .................. 8,943 4.7 4.6 4.5 8,142 5.4 5.3 5.2 Refinance : Raceotherthan whiteonly American IndianorAlaskaNative 10,770 4.8 4.8 4.8 9,096 5.1 5.1 5.1 Asian ................ 25,119 4.7 4.8 4.8 25,096 4.9 5.0 5.1 BlackorAfricanAmerican 217,351 5.0 5.0 4.9 209,910 5.4 5.3 5.2 NativeHawaiianorotherPacificIslander.. 8,945 4.8 4.8 4.8 8,102 5.1 5.1 5.1 Twoormoreminorityraces 1043 4.9 4.9 4.8 815 5.2 5.3 5.2 Joint ............. 11,815 4.7 4.8 4.8 10,958 5.0 5.1 5.1 Notavailable...... 242.666 5.0 5.0 4.8 217,915 5.3 5.3 5.1 White, byethnicity . Hispanicwhite ............ .............. 161,713 4.8 4.8 4.8 164,748 5.1 5.1 5.1 Non-Hispanicwhite 733,290 4.8 4.8 4.8 668,337 5.1 5.1 5.1 Sex Onemale ................ 432,386 4.9 4.9 4.9 414,387 5.2 5.2 5.2 Onefemale ................ 382,071 4.9 4.9 4.9 365,368 5.2 5.2 5.2 Twomales ........... 7,937 4.8 4.8 4.8 7,276 5.0 5.0 5.0 Twofemales .... ............ 11,208 4.8 4.8 4.8 10,646 5.1 5.1 5.0 NOTE: Spread-unadjusted APR is the difference between the APR on the reponedbyFreddieMacforathiny-yearfixed-rateloanintheirPrimaryMon loanandtheyieldonacomparable-maturityTreasurysecurity.Spread-adjusted gageMarketSurvey. Excludestransition-periodloans(thoseforwhich theap APR is the difference between the APR on the loan and the estimated APR plicationwassubmittedbefore2004). Referalsotonote I, table II. and those paid by Hispanic white borrowers are have a slightly lower incidence of higher-priced slightly higher, than those paid by non-Hispanic lending than sole male borrowers for home-purchase white borrowers (table 12). The spread ofprices paid loans both before and after accounting for borrower by Asian borrowers with higher-priced loans was related factors plus lender (table 11). Similarly, the about the same, on average, as that by non-Hispanic average spreads on prices paid by females with whites with higher-priced loans. These relationships higher-priced loans are virtually the same as those are generally consistentfor both types ofloan and are paid by males after accounting for the presence or little influenced by borrower-related factors or the absence ofa co-borrower (table 12). specific lender used by the borrowers. Denial Rates by Race, Ethnicity, and Sex Pricing Differences by Sex Analyses of the HMDA data from earlier years has The HMDA data for 2006, like those for previous consistently found that denial rates vary by applicant years, reveal little difference in pricing outcomes by race and ethnicity. For the 2006 home-purchase and sex. For example, sale female borrowers generally 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 ofloan and by race, ethnicity, and sex ofapplicant, 2006 Percentexceptasnoted Homepurchase I Refinance Modifieddenialrate,by Modifieddenial rate,by Race,ethnicity,andsex Numberof modificationfactor Numberof modificationfactor a a p c p te li d ca u t p io o n n s U de n n m ia o l di r f a i t e e d BO~o~r Ir~I~7e~w~~s a a p c p te li d ca u ti p o o n n s U d n en m ia o l di r f a i t e e d Borrower- I Borrowerbylender bylender ltd relatedplus reae lender reae lender Raceotherthanwhiteonly American IndianorAlaskaNative.. 34,646 25.9 22.2 18.2 63,757 44.7 44.8 37.7 Asian ....................... 264,397 17.0 14.5 14.8 215,172 27.7 33.2 34.6 BlackorAfricanAmerican...... 553,168 31.6 27.7 21.5 883,842 44.9 46.2 38.7 NativeHawaiianor otherPacificIslander .... ... ..... 29,104 23.4 20.3 17.4 47,437 36.4 41.8 37.5 Twoormoreminorityraces.......... 3,139 20.2 18.0 17.2 5,878 40.5 42.9 37.3 Joint ................................ 57,781 13.6 17.0 14.9 74,030 34.0 40.3 34.4 . Notavailable.................. .... 611,069 24.2 23.7 18.1 1,448,614 48.0 49.6 38.3 White, byethnicity... .... ....... Hispanicwhite .... ................. 719,166 25.4 20.3 17.5 801,813 33.5 36.6 35.8 Non-Hispanicwhite ..-..... .... 3,063,436 13.1 13.1 13.1 4,343,279 30.6 30.6 30.6 Sex Onemale .. .... ... ..... ........ 1.833,621 21.7 21.7 21.7 2,324,086 37.6 37.6 37.6 T O w ne o f m em al a e l s e .. · . · . ···.·...e... . . ... . . ... . . . . . . ... . . . . . . .. 1,3 5 3 0 4 , , 5 4 0 9 5 8 2 1 1 9 . .2 0 2 1 0 9 . . 5 2 2 1 0 9 . . 9 2 1,9 5 2 0 6 , , 8 08 7 9 0 3 3 6 6 . . 1 5 3 3 6 5 . . 5 0 3 36 5 . . 5 9 Twofemales ...................... 43,322 19.5 17.4 17.7 60,185 39.5 36.8 36.1 NOTE: Ineludestransition-periodapplications(thosesubmittedbefore2004). Forexplanationofmodificationfactors,refertotext. Referalsotonote I,table II. basis,American Indians, blacks, and Hispanic whites With regard to the sex of applicants, sale male had higher denial rates than non-Hispank whites; applicants have nearly the same denial rate as sole blacks had the highest rates; and Hispanic whites had females. For home-purchase loans, co-applicants, rates between those for blacks and those for non whether male orfemale, have somewhat lowerdenial Hispanic whites. The pattern was less consistent for rates than single individuals. Asians, who had higher denial rates than non Hispanic whites for home purchase but lower rates Limitations ofthe Data on Differences across for refinancings (table 13). Groups For home-purchase lending, controlling for borrower-related factors in the HMDA data reduces The 2006 HMDAdata, like those for 2004 and 2005, thedifferences in denial rates among racial andethnic show that the incidence of higher-priced lending for groups.Accountingfor thespecific lenderused by the blacks and Hispanic white borrowers is notably applicant almost always reduces differences further, greater than for non-Hispanic whites and, forAsians, although unexplained differences remain between that the incidence is fairly close to that for non non-Hispanic whites and other racial and ethnic Hispanic whites. The borrower-plus-lender adjust groups. For example, for home-purchase loans, the ment, discussed above, is insufficient to accountfully gross mean denial rate was 31.6 percent for blacks for racial or ethnic differences in the incidence of and 13.1 percent for non-Hispanic whites, a differ higher-priced lending; significant differences remain ence of 18.5 percentage points (table 13). Borrower unexplained. Similarpatterns are shown in racial and related factors reduce the difference to 14.6 percent ethnk differences in denial rates. By contrast, only agepoints, and lenderadjustmentfurther reduces itto small differences across groups were found in the 8.4 percentage points. The borrower-plus-Iender mean spreads paid by those receiving higher-priced modified differences for refinance loans are similarto loans. Regarding the sex of borrowers, only small those for home purchase, although unmodified differ differences were found in lending outcomes. ences in denial rates tend to be smaller. The gross In our analysis ofthe 2005 HMDA data regarding difference between denial rates for blacks and non differencesby race,ethnicity, and sex in the incidence Hispanic whites for refinancings is 14.3 percentage of higher-priced lending and in the spreads paid by points, a difference cut about in half by borrower those with higher-priced loans, we presented differ plus-lender adjustment. ences both before and after adjusting the APRs to

The 2006 HMDA Data A99 remove theeffects ofthe flattening ofthe yieldcurve. focused on the utility ofcredit scoring and its effects Here,for2006,wepresentonlythe differences before on credit availability and affordability for different making the APR adjustment; they are similar to the populations.42 Otherstaffresearch has considered the differences remaining after that adjustment. But the relationship between the accuracy ofcredit reporting changes in group differences between 2005 and 2006 and access to credit.43 Most ofthis research has been are narrowed by the APR adjustment. For example, undertaken using nationally representativesamplesof controlling for borrower-related factors plus lender, the credit records of individuals (with no personally the gap in the incidence of higher-priced lending identifiable information in the data). These data between black and non-Hispanic white home include the full range ofinformation contained in the purchase borrowers rose from 10.0 percentage points credit records of these individuals as assembled by to 12.6percentagepoints between 2005 and 2006; the TransUnion, oneofthe three national credit-reporting comparable differences are 9.0 percentage points and agencies.44 10.5 percentagepoints when adjustedAPRs are used. Asecond type ofcredit-record-related information Thus, theAPRadjustment narrowed the 2005-06 rise has also been used in the Board staff's research: in the gap from 2.6 percentage points to 1.5 percent summary statisticsaboutthecreditscoresofindividu age points. For refinancings, the unadjusted differ als aggregated at the census-tract level.45 These data, ence in the incidence of higher-priced lending be also provided by TransUnion, include, for each cen tween blacks and non-Hispanic whites rose from 6.2 sus tract, information on the mean credit scores and to 7.3 percentage points, whereas the gap after the the distribution of credit scores for individuals with APR adjustment was 5.6 percentage points in both an outstanding mortgage and for otherindividualsfor years. These results suggest that at least a portion of whom TransUnion couldcalculate acreditscore. The the apparent widening of gaps in the incidence of statistics were constructed by TransUnion using their higher-priced lending across racial groups for home TransRisk Account Management Score (TransRisk purchase lending was due to the further flattening of Score).46 The data also include the percentage of the yield curve during 2006. For refinancings, the individuals who have acredit record butcould not be yield-curve effects may explain all ofthe changes. scored at the time the data were assembled, most The unexplained differences in the incidence of often because their credit accounts were not suffi higher-pricedlendingand in denial rates stem, at least ciently numerous or did not show enough recent in part, from credit-relatedfactors notavailable in the activity to calculate a TransRisk Score. The thresh HMDA data, such as measures of credit history olds selected for the different segments of the credit (including credit scores), LTV ratios, debt-to-income score distribution correspond roughly to the cutoffs (DTI) ratios, and differences in choice of loan prod that, based on credit scores alone, would place indi uct. Differential costs of loan origination and the viduals in the prime, near-prime, and subprime price competitive environment also likely bear on the dif ranges. The census-tract credit-score data are con ferences in pricing; so may differences in financial structed from the credit records of approximately literacy, which can lead to differences in credit shopping activities and negotiating. Differences in 42. Board of Governors of the Federal Reserve System (2007), pricing and underwriting outcomes may also reflect Report 10 the Congress on Credit Scoring and Its Effects on the AvailabilityandAffordabilityofCredit(Washington: BoardofGover discriminatory treatmentofminoritiesorotheractions nors, August), www.federalreserve.govlboarddocs/RptCongress/ by lenders, including marketing practices. Further creditscore/creditscore.pdf. research is needed to assess the extent to which 43. For a discussion of credit-reporting accuracy and access to creditand forreferencestoresearchonthissubject,refertotwo2004 credit- or cost-related factors account for the unex articles by Robert B. Avery, Paul S. Calem, and Glenn B. Canner: plained differences in loan pricing and denial rates. "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 ofBanking andFinance, vol. 28(April),pp.835-56. CREDIT SCORES BYAREA AND HIGHER 44. TransUnionLLC,www.transunion.com.Theothertwonational PRICED LENDING credit-reporting agencies are Equifax, www.equifax.com; and Expe rian,www.experian.com. 45. Refer to Avery, Brevoort, and Canner, "Higher-Priced Home Forsome time, the staffoftheFederal Reserve Board Lendingandthe2005 HMDAData." has been using information on the credit experiences 46. The TransRisk Scores were generated by TransUnion using of consumers as reflected in their credit records and theirproprietarymodel for assessingthecreditriskofexistingcredit accounts.TransRiskAccountManagementScoreisaregisteredtrade by their credit history scores to research related markofTransUnionLLC;othertrademarks,servicemarks,andbrands public policy issues. Some of that research has referredtointhisarticlearethepropertyoftheirrespectiveowners.

ALOO Federal Reserve Bulletin 0 December 2007 14. Distribution ofindividuals, by characteristic ofcensus tract and by type ofcredit record, borrower status, and credit score range, 2005 Percent Scorable Mortgageborrowers Censustractcategory Low Middle High MEMO: andsubcategory Percentof Percent Percent Percent censustract Percentof Percentof Percentof Total ofcensus ofcensus ofcensus population censustract censustract censustract tractsub- tractsub- tractsub- withacredit category" category' category' category' category' category' record' Incomeratio(percentof areamedian)4 Lessthan50 .... 24.9 2.9 16.4 2.0 58.7 0.9 100 4.7 50-79 .... 18.1 21.1 14.4 17.3 67.5 10.0 100 10.7 80-119 ..... 11.2 56.7 10.8 56.0 78.1 50.4 100 20.6 120ormore ........... 5.5 19.3 7.0 24.8 87.5 38.7 100 28.9 Total ..... 100 100 100 Racialorethniccomposition (minoritiesasa percentageof population) Lessthan 10 ... 8.5 34.1 8.9 36.6 82.6 42.3 100 25.9 10-49 ......... 9.4 42.2 9.6 44.0 81.0 46.2 100 20.3 50-79 ..................... 15.3 12.4 13.1 10.9 71.6 7.4 100 12.5 80-100 ..... ....-...... 21.9 11.3 15.9 8.4 62.1 4.1 100 8.7 Total .........•......... 100 100 100 MEMO: Censustractunknown ....... 11.1 10.7 78.2 100 10.2 Toml ....................... 10.2 9.9 79.9 100 19.2 OTE. ThecreditscorerangesarebasedontheTransRiskAccountManage. 2. Distribution sums vertically. Forexample. the second column, first row ment Score (TransRisk Score)as ofDecember31. 2005. TransRisk Account showsthat2.9percentofscorablemortgageborrowerswithcreditscoresinthe ManagementScoreisaregisteredtrademarkofTransUnion LLC. lowrangelivedinacensustractwithanincomeratiooflessthan50percent. I. Distribution sums horizontally. Forexample. the first column, first row 3. Memoitemssumhorizontally. shows that24.9percentofscorable mortgageborrowersincensus tracts with 4. The income ratio ofa census tract is the median family incomeofthe anincomeratiooflessthan50percenthadcreditscoresinthelowrange. tract relative to that ofthe area (MSAor statewide non-MSA) in which the tractislocated. ... Notapplicable. 27 million anonymous individuals drawn from strati are likely quite representative ofthe individuals who fied, nationally representative random samples of all received a mortgage over this period.49 the credit records maintained by TransUnion.47 With the geographic identifiers included in each National Distribution ofCredit Scores data file, the census-tract credit score can be com The analysis here uses the 2005 file of credit scores bined with the HMDA data and with information by census tract because its information is the nearest from the 2000 decennial census. For the analysis in time to the 2006 HMDA data and because it is here, credit scores by census tract (not scores of likely a reasonable approximation ofthe credit scores individuals separately) wereobtained for two specific of individuals taking out mortgages during 2006. dates: December31,2004, and December31,2005.48 Nationally, about 15 percent of individuals with a Given the large proportion of all outstanding mort credit record were unscorable; about 19 percent of gages originated in just the past few years, the individuals had a mortgage, and 66 percent did not census-tract credit-score data for mortgage holders (table 14, memo items).50 The distribution of credit 47. Information on census tract was not available for all indiv idual . 49. As ofDecember2006,accordingtodata from FirstAmerican 48. Thecensus-tractcreditscoresdonotprovideinformationabout LoanPerformance, about 80 percent of outstanding first-lien mort thespecificcreditscorethat may havebeen used toassess thecredit gages had been originated in 2003 or later (www.loanperformance ri kofanyindividualmortgageborrowerincludedintheHMDAdata; .com). that informationisproprietarytothe lenderand isnotreported under 50. Onedifficulty reconcilingtheseshares with otherdatasources HMDA.Also,thesamplesofcreditrecordsdrawn in 2004and 2005 is that credit records are for individuals, whereas the household or were chosen randomly and do not necessarily include the same family istheunitofanalysistypically used instatisticsonhomeown individuals. ershipand mortgage holding. Virtuallyeveryonein the databasewho

The 2006 HMDA Data AWl 14. Distribution ofindividuals, by characteristic ofcensus tractand by type ofcredit record, borrowerstatus, and credit score range, 200S-Continued Percent Scorable Unscorable Others MEMO: Incidence Low Middle High Pe M rc E e M n O t : of c P en er s c u e s nt tra o c f t Percentof of p h ri i c g e h d ero P f e c r e c n e s n u t s c P en er s c u e s nt tr o ac f t o P f e c r e c n e s n u t s c P e e n r s c u e s nt tra o c f t o P f e c r e c n e s n u t s c P en er s c u e s nt tra o c f t Total c p e o n p s u u l s at t i r o a n ct w p i o th pu a la c t r i e o d n it ce c n at s e u g s or tr y a 2 ct lending tractsub- category2 tractsub- categorf tractsub- category2 withacredit record' category! category' category' record' I 49.8 6.9 14.8 4.7 35.4 2.2 100 67.1 28.1 9.6 46.5 38.8 28.3 14.3 23.9 46.8 15.4 100 68.1 21.2 31.5 38.8 26.4 49.7 12.0 51.8 61.6 52.3 100 66.4 13.0 43.8 27.7 16.6 15.1 9.5 19.6 73.9 30.2 100 61.9 9.2 15.1 18.3 100 100 100 100 19.9 24.1 10.1 28.1 70.0 28.1 100 64.4 9.7 20.7 21.7 26.2 43.0 11.9 44.6 61.9 44.6 100 65.8 13.9 42.2 24.8 37.1 16.1 14.2 14.1 48.7 14.1 100 67.1 20.4 18.2 36.3 45.2 16.8 15.6 13.2 39.2 13.2 100 67.7 23.6 19.0 46.6 100 100 100 100 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: the distributions of scores differ across census tracts Overall, about 80 percentofindividuals with a mort grouped by relative income and racial or ethnic gage, but only about 61 percent of other individuals composition. Individuals in higher-income census with a credit score, had relatively high credit scores, tracts (in which the median family income is 120 per that is, scores that (everything else being equal) cent or more ofthe median for the broaderarea) tend would make them eligible for the most attractive to have higher credit scores than individuals in other interest rates available for home loans. At the other areas. These patterns hold both for the population of end of the spectrum, about 10 percent of mortgage individuals with a mortgage and for others. For borrowers and 28 percent of other individuals who example, on average, 88 percentofscorableindividu could be scored had relatively low credit scores, that als with a mortgage who resided in higher-income is, scores that (everything else being equal) would be census tracts had relatively high credit scores, as did consistent with placement in the subprime-Ioan 74 percent of other individuals. By comparison, market. 59 percent of the mortgage borrowers who could be scored and who re ided in low-income census tracts Distribution ofCredit Scores across Census had relatively high credit scores, as did 35 percent of Tracts other scorable individuals in low-income census tracts. Also, the proportion of individuals in higher The broad differences in the distribution of credit incomecensus tracts who were unscorable was nota scores for mortgage borrowers and other individuals, bly smaller than that of individuals in low-income noted above, hold across census tracts grouped along areas-9 percent and 28 percent respectively. a variety of socioeconomic dimensions.51 However, Thedistribution ofcredit scores also differ across census tracts sorted by the proportion ofcensus-tract hadarecordofanout tandingmortgagehadacreditscore.However, population that is minority. In predominantly nonmi althoughsomeindividualswithcreditscoreswerelikelyunscorableat nority census tracts (less than 10 percent minority thetime they received their mortgage loan, they becamescorableas their credit records "thickened" with the reports of their periodic paymentson thedebt. The proportion ofindividuals that are unscor abledependsonthecredit-scoringmodel. Modelbuildersdifferonthe that havesimilarpopulation andeconomiccircumstances.According criteriausedtodetemlinescorability. to the Census Bureau, census tracts usually have a population of 51. Censustractsdifferalongarangeofsocioeconomicmetrics. In between2,500and8,000and,whenfirstdelineated,aredesignedtobe part, these differences are by design, as one of the objectives in homogeneous with respect to population characteristics, economic definingcensus-tractboundaries isto groupsmallergeographicareas status,andlivingconditions(www.census.gov).

A102 Federal Reserve Bulletin0 December 2007 population), about 83 percent of the mortgage bor end of 2005, 45 percent of the homebuyers in 2006 rowers and 70 percent of others with a credit score using conventional first liens to purchase site-built had relatively high credit scores. In census tracts with homes or to refinance such liens had higher-priced a minority population exceeding 80 percent, 62 per loans; in census tracts in'which the share ofmortgage cent of the mortgage borrowers and 39 percent of borrowers with low credit scores was less than 3 per others with a credit score had relatively high credit cent, the incidence ofhigher-priced lending was only scores. Once again, the percentage of individuals 14 percent. without a credit score differs greatly across census Both the relative income of a census tract and the tract groupings. In predominantly nonminority areas, minority percentage are associated with the incidence 10 percent ofthe individuals could not be assigned a of higher-priced lending (table 14). Further analysis creditscore; in contrast, 24 percentofthe individuals (not shown in tables) indicates that the incidence of in census tracts with more than 80 percent minority higher-priced lending across census tracts (after ac individuals were unscorable. counting for the income and racial or ethnic compo Notethatinconsideringdifferences increditscores sition ofthe census tract) can be further explained by across census tracts grouped by racial or ethnic census-tract data on mean credit scores and on the makeup, differences in score arise solely from differ proportion of individuals with credit scores in the encesin thecontentofcreditrecords; so,forexample, categories roughly corresponding to the near-prime two individuals with identical credit records will and subprime markets. Forexample, consider census receiveidentical creditscoresregardlessofany differ tracts arrayed intoquintiles ranked by relative income ence between them in racial or ethnic identity. No and, within each quintile, further subdivided by mean information on location, race or ethnicity, sex, or creditscore: Thecensus tracts with lower mean credit other personal demographic characteristic is used in scores have a higher incidence ofhigher-priced lend calculating generic credit history scores, such as the ing in the 2006 data (by about 4 percentage points) TransRisk Score.52 than census tracts with the same income level but higher mean credit scores. A similar relationship is Distribution ofCredit Scores across Counties found when census tracts are grouped by minority percentage or when the analysis is restricted to non The data on credit scores by census tract can be Hispanic whites. aggregated to broader geographic areas, including counties, metropolitan statistical areas (MSAs), and states. The South and Southwestern sections of the LOAN PERFORMANCE AND THE HMDA DATA country and portions of the Midwest stand out because they have relatively low mean credit scores As ofthis writing, conditions in the mortgage market (figure 3). By contrast, mean scores for mortgage are the subject ofconsiderable concern. Delinquency borrowers in the Northeast, in the upperGreatPlains, andforeclosure rates haverisen substantially,particu and on the West Coast have relatively high mean larly in the higher-priced segment ofthe market, and scores. lax underwriting is widely believed to have contrib uted to the rise in defaults. Also, asignificant shareof Credit Scores and the Incidence ofHigher the higher-priced loans apparently involve adjustable Priced Lending rates; such loans carry the potential to significantly increase monthly payments and, hence, to place Individuals with lowercreditscores are morelikely to greater burdens on many mortgage borrowers. receive higher-priced loans.53 Likewise, the HMDA Although the HMDA data are limjted, they can be data show that census tracts with larger shares of combined with other data to better understand the individuals who have relatively low credit scores and linkages between loan pricing, economic factors, and amortgagealso have largershares ofindividuals who mortgage loan performance. We pursue such an received higher-priced loans (table 15). Forexample, analysis here, focusing on variations in rates of in census tracts in which more than 20 percent ofthe serious delinquency (payment overdue for ninety mortgage borrowers had low credit scores as of the days or more) on mortgages across MSA counties. Specifically, weexaminethe relationship between the rates of serious delinquency on mortgages as of 52. BoardofGovernorsofthe Federal ReserveSystem, Reportto theCongressonCreditScoringandItsEffectsontheAvailabilityand March 31, 2007, and (1) the incidence of higher AffordabilityofCredit. priced lending (from the HMDA data) for 2005 and 53. For example, refer to Board of Govemors of the Federal 2006 and (2) county-level economic indicators mea Reserve System, Report to the Congress on Credit Scoring and Its EffectsontheAvailabilityandAfjiJrdabiliryofCredit. sured over the 2002-06 period.

3. MeanTransRiskScorequintilesofmortgageborrowers,by metropolitanstatisticalareacounty,December31,2005 s9 • Percent ~ ofMSA TransRisk (I> counties Scorerank 0 N c:=J 0 Q ~ 20 Highest 0- ~ f 0:, ~ <== 20" Fourth 'DC\:) ~ c:=J V 20 Third t:l I:l - 20" Second is' ... ~ 20" Lowest ;..l.>.. Source:TransRiskAccountManagementScore(TransRiskScore),fromTransUnionLLC. 0 w

AI04 Federal Reserve Bulletin 0 December 2007 15. Creditscores and the incidence ofhigher-priced revealing. For the most part, MSA counties with lending, 2006 elevated rates of higher-priced lending also had Percent elevated rates of serious mortgage delinquency. No table exceptions in one direction are some MSA Shareofmortgageborrowers Shareofmortgageloans counties inFlorida,California,NewYork, Pennsylva incensustractwhohavelow incensustractthatare creditscores higherpriced nia, and New Jersey that were in the top quintile of the incidence of higher-priced lending but that had 0--2.9 . 13.9 7 3- - - 9 {j . . 9 9 . . 2 1 5 9 . . 3 8 relatively moderate levels of serious delinquency.56 10--14.9 . 27.4 Notableexceptions in the otherdirection are many of 15-19.9.. 34.7 20ormore ........•.. 45.4 the MSA counties in Michigan, Indiana, Ohio, Colo rado, western Pennsylvania, and the southeastern Alltracts.. 27.0 states, which had high levels of mortgage delin NOTE: Lendingcovers first-lien purchaseorrefinancing loans forsite-built quency but were not in the highest quintile of the homes. Referalsotogeneral notetotable 14. incidence ofhigher-priced lending.57 In general, we expect both loan pricing and delin The analysis employs a proprietary database, Tren quency to be driven by economic factors. Unfortu Data, that measures loan performance ata reasonably nately, few high-frequency measures of economic disaggregated geographic level.54 TrenData is based conditions are available at the county level.Available on the credit records of individuals, which makes it items include the unemployment rate, per capita one of the most comprehensive databases on the income, house-price appreciation, and population performance ofmortgages. In particular, the informa growth; credit scores and other information drawn tion has been drawn from the credit records of a from credit records are also available. Each of these geographically stratified random sample of about factors may influence loan performance and the inci 30 million individualsfor each calendarquarter since dence of higher-priced lending, but no single factor 1992. The data (available by county, MSA, and state stands out. Consequently, for our analysis, we con and for the nation as a whole) include more than 200 struct acomposite ofeconomic factors (by regressing measures ofcredit use and loan performance, includ the TrenData delinquency measure of loan perfor ing the proportion ofmortgage borrowers in acounty mance against several county-level indicators) as a who are at least ninety days delinquent on their representative measure ofeconomic circumstances.58 mortgages.55 The coefficient weights from this regression are Using TrenData, we created a map of the fifty used to form the composite economic variable used states showing mortgage delinquency rates by MSA here.Thatvariablecanalsobeviewedasapredictor county (figure 4). MSA counties are grouped into based only on the economic factors described quintiles ranked by their rate of serious mortgage above-of the rate of serious mortgage delinquency delinquency as ofMarch 31, 2007. The counties vary considerably in the level of problem loans, but most areas had rates of serious delinquency that are rela 56. Although these areas have average or lower levels ofserious tively low. About35 percentoftheMSAcounties had delinquency, they are all in the top quintile when measured by the a serious delinquency rate below 1percent, and only increasein ratesofseriousdelinquency from the lastquarterof2004 throughthe firstquarterof2007. 5 percent had a serious delinquency rate greater than 57. The delinquency rates presented here are as ofonly a single 3percent.Areas ofthecountry with the highest levels date-March 31, 2007; some areas of the country that have had ofserious delinquency werein western Pennsylvania, relatively low rates ofserious delinquency have been experiencing sharpincreasesin thoserates morerecently. Ohio, Indiana, and Michigan; in the southeastern 58. Thecomposite measure isconstructed by regressing theTren states and along the restoftheGulfCoastarea; and in Datadelinquency measureofloan performanceagainstthe following Texas, Oklahoma, and Colorado. county-level economic factors: the unemployment rates in 2005 and 2006andthechangeintheunemploymentratefrom2002to2005;the We also mapped the 2006 HMDA data on the ratesofhousepriceappreciationfrom200Ito2004andfrom2004to incidence of higher-priced lending by MSA county 2006; the level ofpercapita income in 2005 and the change in per (figure 5). A comparison of figure 4 with figure 5 is capita income from 2002 to 2005; the population growth rate from 2002 to 2005; and, as ofthe end of2004, the mean credit score of mortgage holders and the percentageofmortgage holders in thetwo 54. TrenData is a registered trademark of TransUnion LLC lowest score groupings as described earlier. We also include the (products.trendatatu.com/faqs.asp). averageshareofHMDAloanssecuredbynon-owner-occupiedhouses 55. All lenders selling their loans to Fannie Mae or Freddie Mac in each county in 2005 and 2006as a measure ofthe importanceof must report loan performance to the three national credit-reporting investoractivity. Dataonhouse-priceappreciationarefromtheOffice agencies. Virtually all banking institutions also report loan perfor ofFederalHousingEnterpriseOversight(www.ofheo.gov);unemploy manceontheloanstheyserviceorholdinportfolio.Otherloans,such mentrates,fromtheBureauofLaborStatistics(www.bls.gov);andper asthosefromsmallerlendersorsellerfinancings,arelesslikelytobe capita incomeand population growth, from the Bureau ofEconomic reported. Analysis(www.bea.gov).

4. Quintilesofmortgagesdelinquent90daysormore,bymetropolitanstatisticalareacounty,March31,2007 ;;2 Percent Actual ofMSA delinquency '" N counties rate(percent) ~ [:=J ,0 20 Lessthan0.81 ~ ~ ~ev 20..0.82-1.13 c=J C> 20 1.14-1.45 \::I 20.. 1.46-1.91 i l s : " l ...... ,pJ/' 20..Greaterthan1.92 ,;J..>.. Source:TrenData,fromTransUnionLLC. o V1

- > 5. Quintilesofincidenceofhigher-pricedlendingforfirst-lien, home-purchaseorrefinanceloansonowner-occupied,site-builthomes, bymetropolitan o 0\ statisticalareacounty,2006 'Tj 3- .(.D.. e:. :;0 (D .[ (.J D..) ,;J < (D t:C S CD C. ::s D t? ~ (D 3 r::r .(.D.. tv § Higher-priced incidence (percent) c=J ,0 20 Lessthan20.1 ~0;,::) .. 20" 20.2-24.1 v c=J 20 24.2-27.9 20..28.0-32.6 '.- """ 20.. Greaterthan32.7

" The 2006 HMDA Data A107 c ,,; for the first quarterof2007. As expected, each ofthe quency (1.27 percent): Holding economic factors factors included in the regression played a role in constant, an increasein the incidenceofhigher-priced predicting future mortgage loan performance. The lending of 10 percentage points in thatcounty would most important factor, however, was house-price raise its rate ofserious mortgagedelinquency0.3 per appreciation, particularly from 2004 to 2006.59 centage point, to 1.57 percent---enough to move that Figure 6 shows counties grouped by ourcomposite county into the next highest quintile of counties economic variable.TheMSAcounties are grouped by ordered by serious loan delinquency (refer to rates of their expected level of delinquency, applying the actual serious delinquency by quintiles of counties, same cutoffs used for the actual delinquency rates in shown in figure 4). figure4. Notsurprisingly, thepatterns in figures 4 and The relationship between the incidence of higher 6 show a high degree of correlation. Notable diver priced lendingand the rateofseriousdelinquencyjust gences appear in Colorado, where most MSA coun described (a 1 percentage point increase in the inci ties had higher levels of actual serious mortgage dence ofhigher-priced lending implies an increase of delinquency (figure4) than would beexpected on the 0.03 percentage point in the delinquency rate) is basisofeconomicfactors as measured here(figure6); robustandofasimilarmagnitudewhen the prediction and inFlorida, where theMSAcountiesgenerally had changes from the level of serious delinquency as of expected rates of delinquency higher than the actual March 2007 to the change in delinquency rates rates. between 2004 and 2007. Finally, some evidence indicates that highernumbers ofadjustable-rate mort FURTHER ANALYSIS RELATING HIGHER gages are associated with higher rates of future PRICED LENDING TO LOAN PERFORMANCE serious loan delinquency, buttheeffectis small and is found only for prime mortgages. However, the data The analysis in the previous section does not explic available here cannot identify which types of mort itly link the HMDA data on the incidence of higher gages within an area are delinquent. Adjustable-rate priced lending to mortgage loan performance. The mortgages may be more prone to delinquency, but figures show similar patterns for the incidence of their delinquency status is not reflected in the aggre higher-priced lending; the comparison of the results gated data used in this study. Also, some evidence from the economic composite variable and the mort indicates that delinquencies in adjustable-rate mort gage delinquency rates are suggestive, but itdoes not gages are a growing problem that may not be fully identify whether loan pricing data have additional reflected in the delinquency rates for March 2007. power in predicting delinquency once economic fac The statistical relationship between the incidence tors are taken into account.To focus on this issue, we ofhigher-priced lending and future loan performance estimated a regression similar to that used to create could be caused by several factors. The relationship the economic composite described above. But we may be direct: Perhaps the higher monthly payments added to the regression a variable reflecting the associated with higher-priced lending are a greater average incidence of higher-priced lending for mort burden on borrowers and lead to greaterdelinquency. gage loans reported in the2005 and2006HMDAdata However, the statistical associations we measure may for each MSAcounty. Other variables were added to also reflect the effects of other economic factors, reflect, for each state, the percentageofsubprime and which we were not able to include in our model and prime loans that had adjustable interest rates (as that are related both to higher rates of delinquency derived from First American LoanPerformance data and to higher-priced lending.6o Such factors may on mortgages). includeexpected changes in home prices, foreclosure Results suggest that the incidence ofhigher-priced laws, the specifictypes ofloans used to buy homes or lending has independent predictive value for loan refinance, and other factors used in underwriting and performance beyond thatofthe economic factors. All pricing loans. else being equal, an increase in the incidence of Our analysis is largely suggestive and is relatively higher-priced lending of 1 percentage point implies parsimonious. However, it does suggest that the an increase in the March 2007 rate of serious mort pricing data in HMDA may be a useful source of gagedelinquencyof0.03 percentagepointinanMSA information in understanding and predicting loan county. Although the effect may seem small, it is, in performance. fact, fairly large given the relatively low level of mortgage delinquency. For example, consider an 60. Additional analysis shows that the economic factor and the MSA county with the median level of serious delin- incidenceofhigher-pricedlendingarehighlycorrelated.Aregression relatingtheincidenceofhigher-pricedlendingin2005and2006with the economic factors included in the economic composite variables 59. TheR-squaredvaluefortheregression was0.40. hadan R-squared valueofabout0,67.

>- .o 6. Expecteddelinquencybasedoneconomicfactors,bymetropolitanstatisticalareacounty,March31,2007 00 "Ii 8- ~.., e:. :;>::l e~ ..n, ~ ~ < ~ t:l:l c: & ::l o o n~ ~ 3 C.~.,T tv § Percent Expected ofMSA delinquency counties rate(percent) c=J "Q 11.3 Lessthan0.81 ~ ~<0 18.2 ..0.82-1.13 c=J \) 25.0 1.14-1.45 30.1 .. 1.46-1.91 -.- "" 15.4..Greaterthan1.92

The 2006 HMDA Data A109 APPENDIX: REQUIREMENTS OF • type REGULATION C - conventional - insured by the Federal HousingAdministration Under the Home Mortgage DisclosureAct (HMDA), - guaranteed by the Veterans Administration lenders use a "loan/application register" (HMDA/ - backed by the Farm Service Agency or Rural LAR) to report information annually to their federal Housing Service supervisory agencies for each application and loan • pre-approval status acted on during the calendaryear. Lenders must make • status their HMDAILARs available to the public by March - first lien 31 following the year to which the data relate, and - junior lien they must remove the two date-related fields (date of - unsecured the loan application and date ofthecreditdecision) to • purpose help preserve applicants' privacy. Lenders must make - home purchase theirdate-modified registeravailable to the publicfor - refinance a period ofthree years. - home improvement Only lenders that have offices (or, for nondeposi • of purchaser (if the lender subsequently sold the tory institutions, are deemed to have offices) in loan) metropolitan areas are required to report under HMDA. However, ifa lender is required to report, it For each applicantorco-applicant must report information on all of its home loan • ethnicity applications and loans in all locations, including • income relied on in credit decision nonmetropolitan areas. TheFederal ReserveBoard'sRegulation C requires For each property lenders to report the following information on home • location, by state, county, and census tract purchase and home-improvement loans and on the • ofstructure refinancing ofsuch loans: - one-to four-family dwelling - manufactured home Foreach application orloan - multifamily property (dwelling with five ormore • applicationdateand the date an action was taken on units) the application • occupancy status (owner occupied or non-owner • action taken on the application occupied) - approved and originated - approved but not accepted by the applicant For loans subjectto price reporting - denied (with the reasons for denial-voluntary • spread above comparableTreasury security for some lenders) - withdrawn by the applicant For loans subjectto HOEPA - file closed for incompleteness • indicatorofwhether loan is subject to HOEPA • pre-approval program used (for home-purchase loans only) Institutions also report information on home loans • amount they purchased during the calendar year.

Reports on the Condition of the US. Banking Industry

B1 April 2007 Report on the Condition of the U.S. Banking Industry: First Quarter, 2006 CHANGE IN REPORTING PANEL aggregate, the already significant influence of the largest companies, moving some measures included Thisreportpresents aggregate time-series datadrawn on table 1, "Financial characteristics ofall reporting primarily from the FRY-9C (Consolidated Financial bankholdingcompanies in the UnitedStates," closer Statementsfor BankHoldingCompanies) andtheFR to the levels for the same measures at the fifty large Y-9LP (Parent Company Only Financial Statements bank holding companies summarized in table 2. For forLargeBankHoldingCompanies)regulatory report example, the capital ratios for all reporting bank forms submitted to the Federal Reserve each quarter holding companies are slightly lower than they were by large bankholdingcompanies (defined within this before the change in the reporting requirements, and report as "all reporting bank holding companies"). the loan to deposit ratio is higher. In addition, by Beginning with the quarter ended March 31, 2006, trimming the number of companies covered in the the Federal Reserve updated the filing requirements reports by more than half, the numbers shown for for these reports. Most notably, it raised the asset both domestic financial holding companies and bank threshold at which bank holding companies are holding companies engaged in nonbanking activities requiredtofilereportsto$500millionfrom $150mil were reduced. (See table 4, "Nonfinancial character lion.1 The changes to the filing requirements miti istics of reporting bank holding companies.") Also, gated regulatory reporting burden because it substan the fifty large bank holding companies now account tially reduced the number of required respondents. for 79 percent of all reporting companies' assets, an Compared with those that filed as of December 31, increase ofnearly 3 percentage points. 2005, thenumberoftop-tierbankholding companies The quarterly comparisons below focus on the that filed these reports as ofMarch 31, 2006, fell by subset of bank holding companies that filed the FR more than 1,200companies.2 Y-9C as of March 31, 2006, and the accompanying Despite the large drop in the number of filers, tables (exceptfor the fifty largecompanies) append a reporting bank holding companies still represented a column of modified year-end financial statistics for substantial majority of all bank holding company these first-quarter FRY-9C respondents. It should be assets. At quarter-end, 5,129 top-tier bank holding companies heldroughly $11.9 trillioninconsolidated noted that the December 31, 2005, data include the assets.3 Among these companies, 1,003 with aggre results for a small number oftop-tier FR Y-9C filers gate consolidated assets of$11.4 trillion filed the FR that subsequently merged into top-tier bank holding Y-9C, representing morethan95percentoftotalbank companies included in the March 31, 2006, fixed holding company assets.4 panel. Including these companies in the December Although the effect ofthe reporting change on the 2005 data improves the comparability of data for volume ofbank holding company assets included in these periods. this report was relatively modest, the substantial reduction in the number of filers enhanced, on the SUMMARY OF CURRENT DEVELOPMENTS FOR THE FIXED PANEL OF REPORTERS 1. In addition, certain lower tier bank holding companies that formerly filedtheFRY-9Carenolongerrequiredtofilethisreport. 2.Somebankholdingcompanieswithconsolidatedassetslessthan Assetsofreportingbankholdingcompaniesincreased the reportingthreshold of$500millioncontinueto file the FRY·9C 4.1 percent ($446 billion) over the first quarter, to andtheFRY-9LPreportsvoluntarilyorforsupervisorypurposes. $11.4 trillion, mainly in money market assets and 3. Consolidatedassets forbankholdingcompaniesthatdonotfile theFRY-9Careapproximatedusingfinancialdataforbanksubsidiar loans. Net income rose sharply from the fourth quar iesreportedontheCallReport. terof2005, owingto robustcapitalmarkets revenues 4.TheremainingbankholdingcompaniessubmitasemiannualFR and exceptional credit quality, which allowed a siz Y-9SP(ParentCompany Only Financial Statements for Small Bank HoldingCompanies)regulatoryreport. able reduction in provisions for loan losses.

B2 Federal Reserve Bulletin0 April 2007 Growth in secunties and money market assets the total risk-based capital ratio edged down 1basis generated more than half of the asset expansion, as point, to 11.75 percent and the tier one capital ratio balances rose 7.0 percent ($280 billion), to $4.3 tril decreased 2 basis points, to 8.96 percent. The lever lion, from year-end 2005. A $155 billion buildup in age ratio dropped 5basis points, to 6.33 percent. federal funds sold and securities purchased under First-quarternetincomeforreportingbankholding agreements to resell, which was accompanied by a companies climbed 7.0 percent, or $2.2 billion, from corresponding rise in money market liabilities the fourth quarter of2005 to $34.3 billion in the first ($179 billion), contributed to most of this increase. quarter of2006. The strong earnings growth boosted Investment securities expanded 4.0 percent ($71 bil returns on assets (up 4 basis points, to 1.21 percent) lion), to $1.8 trillion. and equity (up 34 basis points, to 14.88 percent). Aggregate loans grew at a slower pace, rising Higher non-interest income (particularly trading rev 2.4 percent ($130 billion), to $5.6 trillion. Increases enues and net servicing fees) and lower provisions in home equity loans andconstruction, land develop (down 28 percent, or $2.6 billion) bolsteredearnings ment, and other land loans were relatively strong. growth. In addition, reflecting significant realized Commercial and industrial loans also advanced sub losses booked in the last quarter of2005 in conjunc stantially,increasing4.4percent($43billion).Unused tion with efforts to restructure interest rate risk posi commitmentsto lendexpanded2.4percent($127 bil tions, lower realized securities losses contributed lion), to $5.5 trillion. almost $700 million ofthe improvement in quarterly Deposits grew 2.3 percent (or $126 billion) at the netincome.However,elevatednon-interestexpenses, same time that customer sensitivity to the increased related to incentive-based compensation, weighed on yields available on time deposits caused a shift away earnings growth. Moreover, a still flatter term struc from transaction deposits. The growth in deposits ture and growth in higher-cost certificates of deposit largelykeptpacewithloanexpansion, butnondeposit exerted downward pressure on the aggregate net borrowings (including the $179 billion increase in interestmargin(down9basis points,to2.96percent). federal funds purchased and securities sold under Nonperforming assets edged down 2 basis points, agreements to repurchase noted above) funded most to 0.67 percent of total loans and related assets. oftheassetgrowthoverthequarter,rising7.2percent Nonaccrualloans contracted 3.9 percent, or $1.2 bil ($257 billion), to $3.8 trillion. lion (mostly in first-lien residential mortgages and Shareholders' equity at all reporting bank holding consumer loans), as inflows of nonperfonning loans companies rose 3.6 percent, to $930 billion. Merger fell considerably. The ratio of net charge-offs to adjustments (related,inparticular, to thecombination average loans improved markedly, shrinking to a ofBankofAmerica Corporation and MBNA Corpo historicallylow 0.45 percentfrom 0.74 percentin the ration) and, to a lesser extent, retained earnings fourth quarter of 2005 when credit losses were enlarged the equity base. Risk-based capital ratios, elevatedby an increasein personalbankruptcyfilings which exclude goodwill from the capital base, re related to a change in the bankruptcy law. mainedlargely stable. Comparedwithyear-end 2005,

Report on the Condition ofthe U.S. Banking Industry: First Quarter, 2006 B3 1. Financial characteristics ofall reporting bank holding companies in the United States Millionsofdollarsexceptasnoted,notseasonallyadjusted 2004 2005 2005' 2006 AccountorratioI,2 2001 2002 2003 2004 2005 I I I Q4 QI Q2 Q3 Q4 Q4 Q1 Balancesheet Totalassets....................... 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 4,083,169 4,435,653 5,109,493 5,659,808 5,109,493 5,192,276 5.363,646 5,525,962 5,659,808 5,431,492 5,561,703 Securitiesandmoneymarket......... 2,563,779 2,858,856 3,297.932 3,804,003 4,157,256 3,804.003 4,114,628 4,143,955 4,246,546 4,157,256 4,025,401 4,305.752 Allowanceforloanlosses ........... -68,829 -74,782 -73.817 -74,589 -73,031 -74.589 -73.378 -72,949 -74.097 -73,031 -70,146 -70544 Other. ....................... 1.156.920 1.122.668 1,220,790 1,500,894 1,589,068 1,500.894 1.477,045 1,521.520 1,559.005 1,589,068 1,519.813 1,555.924 Totalliabilities.................... 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 4,356,585 4,705,045 5,249,494 5,700,850 5,249,494 5,349,427 5,448,059 5,563,636 5,700,850 5,427,593 5,553,762 Borrowings ....................... 2,072,505 2,242,717 2,629,293 3,157,578 3,586,922 3,157,578 3,424,013 3,525,137 3,667,710 3,586,922 3,568,417 3,825,102 Other' ........................... 801,756 748.392 842,531 1,045,552 1,105,471 1,045.552 \'046,189 1,061.277 1,096,593 1,105,471 1,012,636 1,043.787 Totalequity ......... .......... 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 Unusedcommiunentstolend4•••••••• 3,482,236 3,651,209 4,097,531 4,823,332 5,437,902 4,823,332 4.929,516 5,064,198 5,245,819 5,437,902 5,393,260 5,520,728 Securitizationsoutstanding5.•.•••.••• 276,717 295,001 298,348 353,978 389,726 353,978 366,430 367,887 375,142 389,726 387,875 394,600 Derivatives(notionalvalue,billions)6•• 48,261 57,866 72,883 89,115 99,077 89,115 92,621 96,653 98,281 99,077 99,060 109.261 Incomestatement Ne N t e in t c i o n m te e re 7 st • in • c .• o • m • e •• . • . . . • ........".".... 22 6 4 7 . , 1 2 2 0 7 8 24 8 5 6 , , 2 0 5 1 1 3 2 1 5 0 6 7 . , 5 8 6 8 2 5 2 1 7 1 8 3 , . 0 3 7 1 5 7 2 1 9 3 5 3 , , 7 0 8 47 9 7 28 0 . , 6 8 5 2 3 2 3 7 2 2 , , 5 4 9 3 8 4 7 3 3 3 , , 1 0 5 7 3 2 7 3 4 4 , ,5 8 4 4 3 8 3 7 2 5. , 3 8 6 3 3 7 3 72 2 , , 6 0 7 3 8 6 7 3 2 4 , . 7 2 2 6 6 6 Provision.sforloanlosses.......... 40,665 45,089 33,052 28,608 32,618 7,793 6,580 6,824 9,972 9,243 9,292 6,662 N N o o n n - i i n n t t e e r r e e s s t te in x c p o e m ns e e .............. . . . . . . . . . . . . . 3 2 0 20 2 , , 5 2 1 0 6 2 2 22 9 2 7 , , 8 0 1 1 5 5 2 3 5 1 1 6 , , 4 3 9 3 6 9 2 3 7 5 0 5 , , 4 6 8 9 5 8 3 29 7 4 0 , , 9 8 3 1 8 4 6 9 8 0 , , 1 0 9 07 2 9 7 1 3 , , 5 4 0 4 5 2 9 7 1 2 , , 4 5 3 4 5 2 9 7 4 7 , , 0 0 5 6 7 7 7 9 1 3 , . 8 8 8 17 3 7 9 1 1 , , 3 5 5 6 8 4 7 9 8 5 , , 4 1 2 1 7 9 MEMO Realizedsecuritiesgainsorlosses. 4,348 4,594 ;,771 5,043 1,332 81 417 1,478 484 -1,047 -1.141 -474 Ratios(percent) Returnonaverageequity ............ 11.98 14.14 16.24 14.35 14.68 13.27 14.71 14.73 15.04 14.23 14.54 14.88 N Re e t t u i r n n te o r n es a t v m er a a rg g i e n a g ss • e • t • s •• . • . • . • .. . . . . . . . . . . . . .. 3. . 6 9 1 2 3 1 . . 7 1 4 2 3 1 . . 5 2 1 6 3 1 . . 3 1 7 6 3 1 . . 0 21 9 3 1 . . 2 11 9 3 1 . . 1 2 6 2 3 1 . .2 0 1 8 3 1 . . 0 2 7 4 3 1 . . 0 1 5 5 3 1 . . 0 1 5 7 2 1 . .2 9 1 6 Efficiencyratio7 .•.•. ...... 66.71 62.24 61.65 63.40 61.70 64.13 61.12 61.47 61.74 63.92 63.77 61.93 Nonp r e e r l f a o te rm d i a n s g se a ts sse . t . s . t . o .. lo , a . n . s .. and 1.44 1.44 1.15 .82 .69 .82 .76 .71 .70 .69 .69 .67 Netcharge-offstoaverageloans ...... .91 1.04 .84 .67 .62 .71 .57 .52 .65 .72 .74 .45 Loanstodeposits .................. 95.25 93.72 94.27 97.33 99.28 97.33 97.06 98.45 99.32 99.28 100.07 100.14 Regulatorycapitalratios TIer1risk-based................... 8.94 9.24 9.59 9.35 9.14 9.35 9.28 9.27 9.17 9.14 8.98 8.96 Totalrisk-based.................... 11.93 12.30 12.61 12.22 11.87 12.22 12.15 12.03 11.91 11.87 11.76 11.75 Leverage ........................ 6.69 6.73 6.88 6.59 6.50 6.59 6.49 6.53 6.54 6.50 6.38 6.33 Numberofbankholding companies .................... 1,842 1,979 2,134 2,254 2,268 2,254 2,282 2,296 2,290 2,268 1,016 1,003 Footnotesappearonp.B6.

B4 Federal Reserve Bulletin0 April 2007 2. Financial characteristics offifty large bank holding companies in the United States Millionsofdollarsexceptasnoted, notseasonallyadjusted 2004 2005 2006 Accountorratio2,9 200t 2002 2003 2004 2005 I I I Q4 QI Q2 Q3 Q4 QI Balancesheet Totalassets....................... 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.................... ...... 2,968.905 3,153,028 3,404,117 3,945,799 4,351,995 3,945,799 4,001,893 4,121.526 4,241,636 4,351,995 4,456,423 Securitiesandmoneymarket......... 2,050,129 2,276,872 2,628,112 2,913,583 3,188,236 2,913,583 3,147,849 3.210.407 3,200,593 3,188,236 3,378,174 O Al t l h o e w r a . n . c . e . f . o . r . l . o . an .. l . o . s . s . es ... .. . . .. . . .. . . . . . . . . . . . - 9 5 3 6 4 , , 7 4 3 8 7 7 - 8 6 8 1 8 , , 3 2 2 48 4 - 9 5 5 9 3 , , 5 4 4 2 8 8 1, - 1 5 6 9 3 . , 6 5 5 1 6 6 1, - 1 5 6 7 2 , , 2 8 1 77 9 1. - 1 5 6 9 3 , , 6 5 5 1 6 6 1, - 1 5 3 8 5 , , 2 5 8 3 7 5 1, - 1 5 6 7 5 , . 5 9 9 2 5 8 1, - 1 5 3 8 1 , , 3 5 6 7 8 2 1. - 1 5 6 7 2 , , 2 8 1 7 9 7 1, - 1 5 9 7 3 , , 4 4 1 7 3 8 Totalliabilities.................... 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.......................... 3,036,830 3,273,801 3,531,832 3,967.576 4,297,653 3,967,576 4,038,580 4,102,410 4.172,538 4,297,653 4,402,954 Borrowings ....................... 1,875,435 2,037,450 2,358,631 2,712,748 3,077,129 2,712,748 2,896,505 3,024,117 3,097,466 3,077,129 3,248.232 Other' ............. ............ 534,184 456,158 502,784 591,365 543,390 591,365 596,555 599,207 527,423 543.390 561,808 Totalequity ...................... 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 Unusedcommitmentstolend4•••..... 3,242,175 3,391,837 3,807,849 4,490.684 5,050,405 4,490,684 4,582,671 4,702,953 4,867,314 5,050,405 5,166,727 Securitizationsoutstanding5..••.••••• 271,825 289,905 293,046 348,986 384,996 348,986 361.524 363,221 370,518 384,996 391,756 Derivatives(notionalvalue,bilhons)6.. 48,144 57,746 72,692 88.671 98,749 88,671 92,136 96.300 97,994 98,749 108.963 Incomestatement Netincome7 •••.................. 53,411 68.756 87,858 90,408 106,132 23,455 26.168 25.326 27,761 26,881 29.074 Netinterestincome............... 166,848 183,553 192,195 206,579 215,352 52,844 53.289 53,668 54,200 54,204 55,423 Provisionsforloanlosses.......... 35,767 39,400 28,573 25.197 29,128 6,748 5,765 6,035 9,031 8,297 6,034 N No o n n - - i i n n t t e e r r e e s s t t i e n ;l c l; o pe m n e se .. .. ,. . . . . . . . . . . .. .. . . . . . . . 2 1 2 7 5 6 , , 1 22 2 6 4 2 1 1 7 6 4 , , 5 2 3 3 3 3 2 1 3 9 0 6 , , 1 96 5 7 8 2 2 1 5 0 9 , . 8 7 1 3 2 2 2 2 3 6 0 6 , , 8 7 6 4 8 7 5 6 5 6 , , 0 8 6 7 1 0 5 6 7 6 , , 8 5 6 6 0 0 5 6 5 5 , , 1 6 2 9 3 4 5 6 9 6 , , 9 6 9 9 7 3 5 6 7 7. , 7 8 9 8 9 4 6 7 4 1 , . 2 9 9 0 9 2 MEMO Realizedsecuritygainsorlosses .... 4.330 5,022 5,217 4,174 1.702 133 227 1.426 469 -420 -117 Ratios(percent) Returnonaverageequity ............ 12.38 14.74 17.43 14.83 15.05 13.90 15.10 14.46 1557 15.04 15.51 Returnonaverageassets ...... .93 1.13 1.31 1.19 1.25 1.18 1.28 1.20 1.30 1.24 1.30 Netinterestmargin8•.••••••.•••.••• 3.39 3.56 3.36 3.21 2.92 3.17 3.01 2.91 2.89 2.86 2.83 Efficiencyratio7 ••.••. ............ 64.36 59.40 58.63 60.57 58.70 61.39 58.Q3 58.81 58.28 61.29 59.28 Nonperfonningassetstoloansand relatedassets.................. 1.56 1.55 1.21 .84 .70 .84 .78 .72 .71 .70 .68 Netcharge-offstoaverageloans ...... 1.03 1.20 .97 .79 .74 .83 .69 .62 .78 .86 .53 Loanstodeposits .................. 97.76 96.31 96.38 99.45 101.26 99.45 99.09 100.47 101.66 101.26 101.21 Regulatorycapitalratios T To ie t r al 1 ri r s i k sk -b -b a a se se d d .. .. .. . . . . . . .. .. . . . . .. . . . . .. .. . . . . . . . . . 1 8 1 . .6 2 1 6 1 8 1. 5 9 5 8 1 8 2 . . 8 21 3 1 8 1 . . 5 8 9 6 1 8 1 . . 4 5 5 6 1 8 1 . . 5 8 9 6 1 8 1 , .8 5 1 4 1 8 1 . .6 4 1 8 1 8 1 . . 4 62 8 1 8 1 . . 4 5 5 6 1 8 1 . . 4 55 3 Leverage ......................... 6.26 6.28 6.38 6.18 6.16 6.18 6.10 6.08 6.17 6.16 6.10 Footnotesappearonp.B6.

Report on the Condition ofthe U.S. Banking Industry: First Quarter, 2006 B5 3. Financial characteristics ofall otherreporting bank holding companies in the United States Millionsofdollarsexceptasnoted.notseasonallyadjusted 2004 2005 2005' 2006 AccountL10 2001 2002 2003 2004 2005 I I I Q4 Ql Q2 Q3 Q4 Q4 Q1 Balancesheet Totalassets. ...... ....... 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 Loans............................ 812,179 875.986 952,217 1,081,393 l.222,260 1,081,393 1,108,765 1,155.948 1,194,967 1.222.260 996,041 1,015,838 Securitiesandmoneymarket......... 357.366 406,771 446,237 470,040 465,922 470,040 468,314 463,460 467.758 465,922 383,635 386,457 Allowanceforloanlosses ....... ... -11,727 -13,021 -13,852 -14,533 -15,343 -14,533 -14.654 -14.901 -15,253 -15.343 -12,526 -12,704 Other ........................ 119,273 131,491 142.706 149,898 173.656 149,898 155,251 163,236 168,725 173,656 145,242 144,318 Totalliabilities..... .............. 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.. .............. ... 975,514 1,064,802 1,150.648 1,262,006 1,396,880 1,262,006 l.291,162 1,325,494 1,370.318 1,396,880 1.124,004 1,143,429 B O o th rr e o r w 3 in • g .• s . . . . . . . . . . . . . . ......... .. .. . . .'" . .. . . . . . . . 1 2 6 5 1 , , 2 4 6 5 7 0 1 3 7 0 6 , , 8 22 9 5 2 2 3 0 3 2 , , 7 89 4 3 8 2 4 2 0 8 . , 3 7 0 5 2 5 2 4 35 6 , , 4 2 0 8 1 4 2 4 2 0 8 , . 3 7 0 5 2 5 2 4 2 2 8 , , 4 4 9 2 1 4 2 4 3 2 8, . 3 2 1 8 3 0 2 4 3 5 4 , , 9 9 0 3 5 4 23 4 5 6 , , 4 2 0 8 1 4 2 4 1 0 0 , , 2 1 9 7 1 0 2 4 06 3 . , 5 7 3 9 5 2 Totalequity ...................... 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 Unusedcommitmentstolend4•.••. ... 229,887 247,466 276,769 319,277 367,264 319.277 332,445 345,663 359,746 367,264 323,206 329,823 Securitizationsoutstanding5.•••...... 4,567 4,358 4.159 2.877 2.885 2.877 2.792 2.667 2.697 2.885 2.878 2.844 Derivatives<notionalvalue.billions)6•. 89 88 94 144 103 144 98 99 100 103 101 86 Incomestatement Netincome7 •..................... 13.659 16,469 17.626 19,244 21.306 4,831 5,154 5,433 5.617 5,102 4,426 4,472 Netinterestincome............... 45,676 50,475 52.266 56.545 62.698 14.723 15,049 15,484 16,116 16.049 13.897 13,294 Provisionsforloanlosses.......... 4.461 5.058 4,262 3,179 3.191 763 684 735 892 881 947 578 Non-interestincome .............. 22,118 24.282 27.311 25.934 26.410 6.299 6.569 6.646 6.930 6.264 5,972 6.063 Non~interestexpense ............. 43,828 46.390 50,672 52.661 56,323 13,681 13.783 13.845 14,325 14.369 12.680 12.252 MEMO Realizedsecuritygainsorlosses .. 727 651 962 531 35 -3 98 61 66 -190 -177 22 Ratios(percent) Returnonaverageequity ........ ... 12.54 13.55 13.08 13.16 13.24 12.60 13.25 13.70 13.74 12.29 12.99 12.91 Returnonaverageassets ............ 1.13 1.25 1.20 1.20 1.21 1.16 1.22 1.25 1.26 1.12 1.19 1.19 E N f e f t ic i i n e t n e c r y es r t a m tio ar 7 gin •• 8 •• . • ...... . . . . . . .......... 63 4 . . 7 2 5 0 61 4 . . 0 2 5 5 62 3 . . 9 9 3 7 62 3 . . 6 9 8 3 61 3 . . 8 9 9 7 64 3 . . 0 9 1 4 62 3 . . 5 9 9 7 61 3 . . 7 9 6 8 6 4 1 . . 0 5 0 4 62 3 . .9 7 3 4 6 4 2 . . 1 2 6 0 6 3 1. . 9 9 8 4 Nonp r e e r l f a o te n d ni a n s g se a ts sse . t . s .. to . l . o . a . n . s .. a . nd ...... .99 1.04 .99 .77 .69 .77 .75 .71 .69 .69 .67 .67 Netcharge-offstoaverageloans .44 .46 .39 .25 .20 .30 .17 .19 .21 .24 .27 .15 Loanstodeposits .. ............ 83.26 82.27 82.75 85.69 87.50 85.69 85.87 87.21 87,20 87.50 88.62 88.84 '" Regulatorycapitalratios Tier1risk-based................... 12.24 12.47 12.61 12.45 12.17 12.45 12.32 12.16 12.12 12.17 11.92 11.93 Totalrisk-based.,.,................ 13.80 14.08 14.30 14.07 13.72 14.07 13.92 13.72 13.67 13.72 13.51 13.50 Leverage ......................... 8.78 8,91 9.07 9.15 9.19 9.15 9.12 9.12 9.15 9.19 9.09 9.17 Numberofotberreportingbankholdiog companies ................... 1,777 1.914 2,069 2,197 2.213 2.197 2.225 2.239 2.233 2.213 962 950 Footnotesappearonp.B6.

B6 Federal Reserve BulletinD April 2007 4. Nonfinancial characteristics ofall reporting bank holding companies in the United States Millionsofdollarsexceptasnoted,notseasonallyadjusted 2004 2005 2005' 2006 Account 2001 2002 2003 2004 2005 I I I Q4 Q1 Q2 Q3 Q4 Q4 Q1 Bankholdingcompaniesthatqualifyas financialholdingcompanies11,12 Domestic T N o u t m al b a e s r se . t . s .. . . . . . . .. . . .. ..,. . . . . . . . . . .. .. .. . . . . . . . . . 5.436. 3 7 8 4 8 3 5.917, 4 1 3 0 4 9 6,605. 4 6 5 8 1 6 7,456, 4 5 7 6 2 9 8,184. 4 6 6 7 1 7 7.456, 4 5 7 6 2 9 7,643, 4 6 7 4 0 9 7,898. 4 3 6 3 8 0 8,068. 4 7 7 4 1 2 8,184.6 46 7 1 7 8,136, 2 6 8 4 8 3 8,468, 2 8 8 0 9 6 Foreign-owned13 Number ........................ 10 11 12 14 14 14 15 15 15 14 13 14 Totalassets .... ...... ...... 621,442 616,254 710.441 1.376,333 1,561,S80 1,376.333 1,526,168 1.516.408 1.625.281 1,561,580 1.460,245 1,689,001 TotalU.s.commercialbank asse~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 8,994,066 8,994,059 9,286,846 Byownership Reportingbankholdingcompanies .. 5,942.670 6,429,231 6,941,106 7,785.988 8.439,788 7.785.988 8.011.264 8.138,007 8.312.461 8.439,915 8.416,815 8,341,350 Otherbankholdingcompanies ..... 230.467 227,016 219,222 209,115 220.133 209,115 204,891 206.367 211,840 220.140 243.101 602,912 Independentbanks ............... 242.944 240.968 237,575 212,611 334.143 212,611 328,259 331,920 333,067 334,011 334,142 342,584 Assetsassociatedwithnonbanking activitiesl2,15 Insurance......................... 426,462 372.405 437,503 579.111 602.258 579,111 587.000 598,669 601,076 602.258 512.058 527,193 Securitiesbroker-dealers ............ n.a. 630,851 656.775 892,571 1,170.659 892,571 1,168.482 1,165.688 1.231.410 1,170,659 1.170,639 1,314,092 Thriftinstitutions .................. 91,170 107,422 133.056 191,201 220,819 191,201 194,267 201,317 210,811 220,819 220,709 231,207 Foreignnonbankinstitutions ......... 138,977 145,344 170,630 216,758 242,408 216,758 219,829 231,566 242,333 242,408 236,225 268,848 Othernonbankinstitutions ........... 1.674,267 561,710 678,086 954,845 969,255 954,845 886,022 910,770 954.085 969.255 962,883 927.934 Numberofbankholdingcompanies engagedinnonbankingactivities12.15 Insurance........... ........... 143 96 102 97 97 97 97 99 98 97 83 81 Securitiesbroker-dealers ........... n.a. 47 50 44 46 44 43 45 46 46 43 41 Thriftinstitutions .................. 38 32 27 27 26 27 27 27 25 26 23 22 Foreignnonbankinstitutions " ...... 32 37 42 39 35 39 38 37 38 35 33 33 Othernonbankinstitutions ........... 743 880 1,042 1,026 845 1,026 926 885 875 845 515 509 Foreign-ownedbankholding companies13 Number .......................... 23 26 27 29 29 29 29 30 30 29 28 24 Totalassets ....................... 764,411 762,901 934,085 1.537,208 1,747,797 1.537,208 1.690.119 1.698,197 1.811,451 1.747,797 1.646,462 1,822,367 Employeesofreportingbankholding companies(full·timeequivalent) .. 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 Assetsoffiftylargebankholding F co ix m e p d a p n a ie n s e 9 l . ( 1 f 6 romtable2) ........... 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 8,645,879 8,970.662 Fiftylargeasofreportingdate ...... 5,732,621 6,032,000 6,666.488 7.940,955 8,631.229 7.940.955 8,206,462 8,417,847 8,489,633 8,631,229 8,631,229 8,970,662 Percentofallreporting bankholdingcompanies........ 76.60 75,50 75.10 76.80 76.20 76.80 76.60 76.80 75.40 76.20 79.10 79.00 NOTE: Alldataareasofthemostrecentperiodshown.Thehistoricalfiguresmaynot 9. Ingeneral,the fifty1arg<bankholdingcompaniesarethe fiftylargestbankholding matchthoseinearlierversionsofthistablebecauseofmergers,significantacquisitionsor companiesasmeasuredbytotalconsolidatedassetsforthelatestperiodshown.Excludesa divestitures.orrevisionsorrestatementstobankholdingcompanyfinancialreports.Datafor fewlargebankholdingcompanieswhosecommercialbankingoperationsaccountforonlya themostrecentperiodmaynotincludealllate-filinginstitutions. smallportionofassetsandearnings. I. Forquarters beginningonorafterMarch31,2006.thisreportcovers top-tierbank 10. Exdudespredecessorbankholdingcompanies thatweresubsequentlymergedinto holdingcompanieswithconsolidatedassetsofatleast$500millionandsomesmallertop otherbankholdingcompaniesinthepaneloffiftylargebankholdingcompanies.Alsoex tierfinnsthatfiledtheFRY-9CasrequiredbyFederalReselVeBanksforsupelVisorypur cludesthosebankholdingcompaniesexcludedfromthepaneloffiftylargebankholding posesoronavoluntarybasis.BeforeMarch31.2006,aggregatedatarefertotop-tierbank companies,becausecommercialbankingoperationsrepresentonlyasmallpartoftheircon holdingcompanieswithconsolidatedassetsofatleast$150mUlionandsmallermultibank: solidatedoperations. holdingcompanieswithdebtoutstandingtothegeneralpublicorengagedincertainnon 11. Excludesqualifyinginstitutionsthatarenotreportingbankholdingcompanies. bankingactivities. l2. Nodatarelatedtofinancial holdingcompaniesandonlysomedataonnonbanking 2. Dataforallreportingbankholdingcompaniesandthefiftylargebankholdingcompa activities were collected on the FR Y-9C report before implementationof the Gramm niesreflectmergeradjustmentstothefiftylargebankholdingcompanies. Mergeradjust Leacb-BlileyActin2000. mentsaccountformergers,acquisitions,otherbusinesscombinations.andlargedivestitures 13. Abankholdingcompanyisconsidered"foreign-owned"ifitismajority·ownedbya thatoccurredduringthetimeperiodcoveredinthetablessothatthehistoricalinformation foreign entity. Datafor foreign-owned companiesdo not include data for branches and oneachofthefiftyunderlyinginstitutionsdepicts,tothegreatestextentpossible,theinsti agenciesofforeignbanksoperatingintheUnitedStates. tutionsastheyexistinthemostrecentperiod.Ingeneral.adjustmentsformergersamong 14. TotalassetsofinsuredcommercialbanksintheUnitedStatesasreponedinthecom bank:holdingcompaniesreflectthecombinationofhistoricaldatafrom predecessorbank mercialbankCallReport(FFIEC031 or041,ReportsofConditionandIncome).Exclodes holdingcompanies.Thedataforthefiftylargebankholdingcompanieshavealsobeenad dataforasmall numberofcommercialbank.<;ownedbyothercommercialbanksthatfile justedasnecessarytomatchthehistoricalfiguresineachcompany'smostrecentlyavailable separatecallreportsyetarealsocoveredbythereportsfiledbytheirparentbanks.Alsoex financialstatement.Ingeneral,thedataarenotadjustedforchangesingenerallyaccepted dudesdataformutualsavingsbanks. accountingprinciples. 15. Datafor thrift. foreign nonbank.andothernonbankinstitutionsaretotalassetsof 3. Includesminorityinterestsinconsolidatedsubsidiaries. eachtypeofsubsidiaryasreportedintheFRY-9LPreport.Datacoverthosesubsidiariesin 4. Includescreditcardlinesofcreditaswellascommerciallinesofcredit. whichthetop-tierbank:holdingcompanydirectlyorindirectlyownsorcontrolsmorethan 5. Includesloanssoldtosecuritizationvehiclesinwhichbankholdingcompaniesretain 50percentoftheoutstandingvotingstockandthathasbeenconsolidatedusinggenerally someinterest,whetherthroughrecourseorseller-providedcreditenhancementsorbyselVic acceptedaccountingprinciples.Dataforsecuritiesbroker--dealersarenetassets(thatis,to ingtheunderlyingassets.SecuritizationdatawerefirstcollectedontheFRY-9Creponfor talassets,excludingintercompanytransactions)ofbroker--dealersubsidiariesengagedinac Jone2001. tivities pursuantto theGrarnm-Leach-BlileyAct, as reportedonschedule HC-M ofthe 6. Thenotionalvalueofaderivativeisthereferenceamountofanassetonwhichanin FRY-9Creport. Dataforinsuranceactivitiesareall insurance-relatedassetsheldby the terestrateorpricedifferentialisappliedwhencalculatingthecontractualpayments.Theto bankholdingcompanyasreportedonscbeduleHC-IoftheFRY-9Creport. talnotionalvalueofabankholdingcompany'sderivativesholdingsisthesumoftheno Beginning in 2002:Ql, insurance totals exclude intercompany transactions and sub· tionalvaluesofeachderivativecontractregardlessofwhetherthebankholdingcompanyis sidiaries engaged in credit-related insurance or those engaged principally in insurance apayororrecipientofpaymentsunderthecontract.Theactualcashflowsandfairmarket agencyactivities.Beginningin2002:Q2,insurancetotalsincludeonlynewlyauthorizedin valuesa<;sociatedwiththesederivativecontractsaregenerallyonlyasmallfractionofthe suranceactivitiesundertheGramm-Leach-BlileyAct. contract'snotionalvalue. 16. Changesovertimeinthetotalassetsofthetime-varyingpaneloffiftylargebankhold 7. Incomestatementsubtotalsforallreportingbankholdingcompaniesandthefiftylarge ingcompaniesareattributableto(1)changesinthecompaniesthatmakeupthepaneland bankholdingcompaniesexcludeextraordinaryitems,thecumulativeeffectsofchangesin (2)toasmallextent,restatementsoffinancialreportsbetweenperiods. accountingprinciples.anddiscontinuedoperationsatthefiftylargeinstitutionsandtherefore n.a. Notavailable willnotsumtoNetincome.Theefficiencyratioiscalculatedexcludingnonrecurringin SOURCE: FederalReselVeReportsFRY-9CandFRY-9LP.FederalReserveNationalIn comeandexpenses. formationCenter,andpublishedfinancialreports. 8. Calculatedonafully-taxable·equivalentbasis.

B7 June 2007 Report on the Condition of the U.S. Banking Industry: Second Quarter, 2006 Totalassetsofreportingbankholdingcompaniesrose assets jumped 8.2 percent ($91 billion), mainly 2.7 percent ($304 billion) overthe second quarter, to among the largestcompanies. $11.7 trillion.! Robust loan growth, concentrated in Deposit growth at 2.8 percent ($153 billion) kept real estate, generated most of the increase. Earnings pace with balance sheet expansion. Mostgrowth was were dampened by continuedpressure on netinterest concentrated in foreign and time deposits, rates on margins and modest growth in fee income, but ben which movedup. Coredeposits-whichexcludetime efited from loan expansion, reduced operating ex deposits in denominations higherthan $100,000, bro penses, and securities gains. Credit quality remained kered deposits, and deposits booked in foreign excellent. offices-stayed roughly flat, with arise in small time Loans expanded at avigorous pace, rising 3.1 per deposits partly offset by further declines in transac cent ($172 billion) for the quarter. Lending activity tion accounts. While deposits funded more than half was particularly strong in the residential mortgage of asset growth, borrowings also advanced 2.6 per segment, which grew 3.7 percent ($71 billion) and cent ($98 billion). accounted for more than 40 percent of loan growth. Higher dividend payouts by larger companies and On balance sheet, commercial real estate loans increases in unrealized losses in available-for-sale primarily loans secured by nonfarm, nonresidential investment account securities that reduced the accu properties and construction, land development, and mulated other comprehensive income component other land loans-also continued to grow rapidly, restrained equity growth for the quarter. Equity was rising3.4percent($39billion).Unusedcommitments upjust 1percent (roughly $9billion). Giventhe more to lend expanded 4.2 percent, to $5.8 trillion, with rapid advance in bank holding company assets, the more than half of the increase driven by credit card equity to assets ratio dropped slightly from 8.19 per lines. cent to 8.06 percent. The tier 1 leverage, tier 1 Securities and money market assets (up 1.7 per risk-based, and total risk-based capital ratios, which cent, or $73 billion) increased more slowly than do not reflect the unrealized losses on available-for loans.Growth wasconstrainedbyasubstantialreduc sale securities, also declined slightly, but remained tion ($48 billion) in money market holdings-with a soundat6.28percent, 8.94percent,and 11.73percent fully offsettingdeclineinmoneymarketliabilities-at respectively. one bank holding company in which operations are Profitability remained strong in the quarter. Return predominantly concentrated at its securities broker on equity increased 26 basis points from the first dealer subsidiary. Excluding this company, securities quarter, to 15.17 percent, while the return on assets and moneymarketassetsincreased3percent, slightly leveled off (up one basis point) to 1.22 percent. Net outpacing asset growth overall. Aggregate trading incomeimproved2.6percent,to$35 billion.Reduced noninterest expenses, due to lower incentive-based compensation atthe largestcompanies, andincreased I. Thisreportpresentsaggregatetime-seriesdatadrawn primarily fromtheFRY-9CandFRY-9LPregulatoryreportformssubmittedto realizedgainson securitiessales(froma$474million the Federal Reserve each quarter by large bank holding companies loss in the first quarter) bolstered earnings. Fee (definedwithinthereportas"allreportingbankholdingcompanies"). income also contributed to growth in earnings, ben BeginningwiththequarterendedMarch31,2006,theFederalReserve updated the filing requirements for these reports. Most notably, it efiting from stronger mortgage-related and invest raised the asset threshold requiring the filing of the reports to ment banking businesses, but was held back by $500 million from $150 million. The changes to the filing require declines in equity trading at the largest institutions. ments mitigatedregulatoryreportingburdenby reducingthe number ofrequired respondents substantially. Despite the large drop in the Despite further margin compression, net interest number offilers, reporting bank holding companies still represent a income grew 1.4 percent ($1 billion) on a larger substantialmajorityofallbankholdingcompanyassets(whenassets average earning assets base. The net interest margin ofnonreportingbankholdingcompaniesareapproximatedusingdata forbanksubsidiaryassets). fell 7 basis points, to 2.89 percent, owing to ahigher

B8 Federal Reserve Bulletin 0 June 2007 cost of deposit funding, a competitive lending envi related assets dropped slightly from 0.67 percent to ronment,andaflattenedyieldcurve.Although60per 0.65 percent as loans expanded briskly. Net charge cent of the companies reduced provisioning, aggre offs increased as the moderating effect oflast year's gateprovisionsforloanlossesincreased$144million reform of the bankruptcy code on credit card losses (2.2 percent). continuedto wane,butremainednearhistoric lows at Nonperforming assets inched up from a low level, 0.48 percent ofaverage loans. 0 but the ratio of nonperforming assets to loans and

Reporton the Condition ofthe U.S. Banking Industry: Second Quarter; 2006 B9 I. Financial characteristics ofall reporting bank holding companies in the United States Millionsofdollarsexceptasnoted.not seasonallyadjusted 2004 2005 2006 Accountorratiol,2 2001 2002 2003 2004 2005 I I I I Q4 Q1 Q2 Q3 Q4 Ql Q2 Balancesheet Totalassets....................... 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 . 3,835.237 4,083,169 4,435,653 5,109,493 5,659.808 5,109,493 5.192.276 5.363,646 5,525,962 5,659,808 5.561.703 5.733,310 Securitiesandmoneymarket . 2,563.779 2,858.856 3.297,932 3,804.003 4,157.256 3.804.003 4,114.628 4,143,955 4,246.546 4,157.256 4.305,752 4.378.775 Allowanceforloanlosses . -68.829 -74,782 -73.817 -74,589 -73.031 -74.589 -73,378 -72.949 -74.097 -73,031 -70.544 -70.759 Other . 1.156.920 1,122.668 1.220.790 1.500.894 1.589,068 1.500.894 1.477.045 1.521.520 1,559.005 1,589,068 1.555.924 1,615.116 Totalliabilities . 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 Deposits . 4,026,460 4.356.585 4.705,045 5,249,494 5.700.850 5.249,494 5,349,427 5,448.059 5.563.636 5.700,850 5.553.762 5.707.211 Borrowings . 2.072.505 2.242.717 2.629.293 3.157,578 3.586,922 3,157.578 3,424,013 3.525,137 3.667.710 3.586.922 3,825,102 3.922.825 Other3 801.756 748.392 842.531 1,045.552 1.105,471 1,045.552 1,046,189 1,061.277 1,096.593 1,105,471 1,043.787 1,087,367 Totalequity 586,386 642,216 703,690 887,178 939,857 887,178 890,941 921,699 929,477 939,857 930,185 939,037 Off-balance-sheet Unusedcommiunentstolend4 3,482,236 3,651.209 4.097.531 4,823,332 5,437.902 4.823,332 4,929,516 5,064,198 5,245,819 5,437.902 5,520,728 5.754,362 Securitizationsoutstanding5 276.717 295.001 298,348 353,978 389.726 353,978 366,430 367,887 375.142 389.726 394.600 388.744 Derivatives(notionalvalue.biHions)6 48.261 57.866 72,883 89,115 99,077 89,115 92.621 96,653 98.281 99.077 109,261 117.992 Incomestatement Netincome7 67.208 86.013 107.885 113.317 133,047 28,653 32.598 33,072 34.543 32.837 34,266 35,148 Netinterestincome " . 224,127 245.251 256.562 278,075 295.789 70.822 72.434 73.153 74.848 75,363 72.726 73.737 Provisionsforloanlosses . 40,665 45.089 33.052 28,608 32,618 7,793 6.580 6,824 9,972 9.243 6,662 6.806 Non-interestincome . 220.516 222.815 251.496 270,485 294,938 68.192 73,442 72,542 77,067 71.883 78,427 79.409 Non-interestexpense . 302,202 297.015 316.339 355.698 370.814 90.007 91.505 91.435 94.057 93.817 95,119 94,182 MEMO Realizedsecuritiesgainsorlosses... 4.348 4,594 5.771 5,043 1.332 81 417 1,478 484 -1,047 -474 49 Ratios(percent) Returnonaverageequity . 11.98 14.14 16.24 14.35 14.68 13.27 14.71 14.73 15.04 14.23 14.91 15,17 Returnonaverageassets . .92 1.12 1.26 1.16 1.21 1.11 1.22 1.21 1.24 1.15 1.21 1.22 Netinterestmargin8 3.61 3.74 3.51 3.37 3.09 3.29 3.16 3.08 3.07 3.05 2.96 2.89 Efficiencyratio7 66.71 62.24 61.65 63.40 61.70 64.13 61.12 61.47 61.74 63.92 61.93 61.37 NonpeJfonningassetstoloansand relatedassets..... . . 1.44 1.44 1.15 .82 .69 .82 .76 .71 .70 .69 .67 .65 Netcharge-offstoaverageloans . .91 1.04 .84 .67 .62 .71 .57 .52 .65 .72 .45 .48 Loanstodeposits . 95.25 93.72 94.27 97.33 99.28 97.33 97.06 98.45 99.32 99.28 100.14 100.46 Regulatorycapitalratios TIer1risk-based....... . . 8.94 9.24 9.59 9.35 9.14 9.35 9.28 9.27 9.17 9.14 8.96 8.94 Totalrisk-based . 11.93 12.30 12.61 12.22 11.87 12.22 12.15 12.03 11.91 11.87 11.75 11.73 I..everage . 6.69 6.73 6.88 6.59 6.50 6.59 6.49 6.53 6.54 6.50 6.33 6.28 Numberofbankbolding companies . 1.842 1.979 2.134 2,254 2.268 2.254 2,282 2.296 2.290 2,268 1.003 995 Footnotesappearonp.B12.

BlO Federal Reserve Bulletin0 June 2007 2. Financial characteristics offifty large bankholding companies in the United States Millionsofdollarsexceptasnoted,notseasonallyadjusted 2004 2005 2006 Accountorratio2,9 2001 2002 2003 2004 2005 I I I I Q4 Q1 Q2 Q3 Q4 Ql Q2 Balancesheet Totalassets........ ........, 5,896,783 6,256,824 6,926,108 7,963,241 8,645,888 7,963,241 8,226,990 8,440,z66 8.515,432 8,645,888 8,970,662 9,282,941 Loans.............. ............. 2,968,905 3,153,028 3,404,117 3,945,799 4,351,995 3,945,799 4,001,893 4,121.526 4,241.636 4,351,995 4,456.423 4.598,577 Securitiesandmoneymarket......... 2,050,129 2.276,872 2,628,112 2,913,583 3,188,236 2.913,583 3,147,849 3,210.407 3,200,593 3,188,236 3,378,174 3,505,834 AllowanceforJoanlosses ..... ..... -56,737 -61,324 -59,548 -59,656 -57,219 -59,656 -58,287 -57.595 -58,368 -57,219 -57.413 -57.432 Other ........................... 934.487 888,248 953.428 1,163,516 1,162,877 1,163,516 1.135,535 1,165,928 1,131.572 1,162,877 1,193,478 1,235,963 Totalliabilities...... ............ 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.......................... 3,036,830 3,273,801 3,531,832 3,967,576 4,297,653 3,967,576 4,038.580 4,102,410 4,172.538 4,297.653 4.402,954 4,540,867 Borrowings ....................... 1.875,435 2,037.450 2,358,631 2,712,748 3,077.129 2,712,748 2,896,505 3,024,117 3,097.466 3,077,129 3,248,232 3,379,098 Other) 534,184 456,158 502,784 591,365 543.390 591,365 596,555 599,207 527,423 543,390 561.808 598,141 Totalequity ..................... 450,334 489,415 532,862 691,552 727,717 691,552 695,351 714,532 718,005 727,717 757,668 764,835 Off-balance-sheet Unusedcommiunentstolend4 3,242,175 3,391.837 3,807,849 4,490,684 5,050,405 4,490,684 4,582,671 4,702.953 4,867,314 5,050,405 5,166,727 5,387,508 Securitizationsoutstanding5 271,825 289,905 293,046 348,986 384,996 348,986 361,524 363.221 370.518 384,996 391.756 385,937 Derivatives(notionalvalue.billions)6 48,144 57,746 72.692 88,671 98,749 88,671 92,136 96,300 97,994 98,749 108,963 117,631 Incomestatement Netincome7. 53.411 68,756 87,858 90,408 106,132 23.455 26,168 25,326 27,761 26.881 29,074 29,689 Netinterestincome............... 166,848 183.553 192,195 206,579 215,352 52,844 53,289 53,668 54,200 54,204 55,423 56,645 Provisionsforloanlosses.......... 35,767 39,400 28,573 25,197 29,128 6,748 5,765 6.035 9,031 8,297 6,034 6,141 Non-interestincome .............. 176,226 174,233 196,967 210,812 230,868 55,061 57,860 55,123 59,997 57,884 64,299 65,147 Non-interestexpense ............. 225,124 216,533 230,158 259,732 266,747 66,870 66,560 65,694 66,693 67,799 71,902 71,201 MEMO Realizedsecuritiesgainsorlosses... 4,330 5,022 5,217 4,174 1,702 133 227 1,426 469 -420 -1l7 374 Ratios(percent) Returnonaverageequity ............ 12.38 14.74 17.43 14.83 15.05 13.90 15.10 14.46 15.57 15.04 15.51 15.60 Returnonaverageassets ............ .93 1.13 1.31 1.19 1.25 1.18 1.28 1.20 1.30 1.24 1.30 1.27 Netinterestmargin8 3.39 3.56 3.36 3.21 2.92 3.17 3.01 2.91 2.89 2.86 2.83 2.76 Efficiencyratio7 64.36 59.40 58.63 60.57 58.70 61.39 58.03 58.81 58.28 61.29 59.28 58.55 Nonperformingassetstoloansand relatedassets ................. 1.56 1.55 1.21 .84 .70 .84 .78 .72 .71 .70 .68 .66 Netcharge-offstoaverageloans ...... 1.03 1.20 .97 .79 .74 .83 .69 .62 .78 .86 .53 .56 Loanstodeposits .................. 97.76 96.31 96.38 99.45 101.26 99.45 99.09 100.47 101.66 101.26 101.21 101.27 Regulatorycapitalratios Tier1risk-based................... 8.26 8.55 8.83 8.59 8.45 8.59 8.54 8.48 8.48 8.45 8.43 8.42 Totalrisk-based............. ...... 11.61 11.98 12.21 11.86 11.56 11,86 11.81 11.61 11.62 11.56 11.55 11,56 Leverage ......................... 6.26 6.28 6.38 6.18 6.16 6.18 6.10 6.08 6.17 6.16 6.10 6.03 Footnotesappearonp.B12.

Report on the Condition ofthe U.S. Banking Industry: Second Quarter; 2006 B11 3. Financial characteristics ofall otherreporting bank holding companies in the United States Millionsofdollarsexceptasnoted.notseasonallyadjusted 2004 2005 2006 Account1,10 2001 2002 2003 2004 2005 I I I I Q4 Q1 Q2 Q3 Q4 Q1 Q2 Balancesheet Totalassets....................... 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.................... ....... 812,179 875,986 952,217 1,081.393 1,222,260 1.081,393 1.108,765 1,155,948 1,194,967 1,222,260 1,015.838 1,044.850 Securitiesandmoneymarket......... 357,366 406,771 446.237 470,040 465,922 470.040 468,314 463,460 467.758 465,922 386,457 375.857 Allowanceforloanlosses ........... -11,727 -13,021 -13.852 -14,533 -t5,343 -14,533 -14.654 -14.901 -15.253 -15.343 -12,704 -12.897 Other...... ....,...... .... 119,273 131,491 142,706 149.898 173.656 149.898 155,251 163.236 168.725 173,656 144.318 151,296 Totalliabilities.................... 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.......................... 975,514 1,064,802 1,150,648 1.262.006 1.396,880 1.262.006 1.291,162 1,325,494 1,370,318 1,396,880 1,143,429 1.158.982 Borrowings .............. ........ 161,450 176,225 202,893 228,755 235,401 228,755 228,424 238,313 234.934 235,401 206,535 213.895 Other3 25,267 30,892 33.748 40,302 46,284 40,302 42,491 42,280 45.905 46,284 43,792 44,040 Totalequity ...................... 114,859 129,308 140,018 155,737 167,930 155,737 155,597 161,658 165,040 167,930 140,152 142,189 Off·balance-sheet Unusedcommitmentstolend4 229.887 247,466 276,769 319,277 367,264 319,277 332.445 345.663 359,746 367.264 329,823 336,227 Securitizationsoutstanding5 4.567 4,358 4.159 2.877 2.885 2,877 2,792 2.667 2.697 2,885 2,844 2,806 Derivatives(notionalvalue,billions)6 89 88 94 144 103 144 98 99 100 103 86 88 Incomestafemrnt Netincome7 13.659 16,469 17.626 19,244 21,306 4.831 5,154 5,433 5.617 5.102 4,472 4,774 Netinterestincome............... 45.676 50,475 52,266 56.545 62,698 14,723 15,049 15,484 16,116 16,049 13.294 13.443 Provisionsforloanlosses.... ..... 4,461 5.058 4,262 3,179 3,191 763 684 735 892 881 578 631 Non-interestincome .............. 22,118 24,282 27,311 25,934 26,410 6,299 6.569 6,646 6.930 6,264 6,063 6,224 Non-interestexpense ............. 43,828 46,390 50.672 52,661 56.323 13,681 13,783 13,845 14.325 14,369 12,252 12,241 MEMO Realizedsecuritiesgainsorlosses... 727 651 962 531 35 -3 98 61 66 -190 22 32 Ratios(percent) Returnonaverageequity ............ 12.54 13.55 13.08 13.16 13.24 12.60 13.25 13.70 13.74 12.29 12.91 13.52 Returnonaverageassets ............ 1.13 1.25 1.20 1.20 1.21 1.16 1.22 1.25 1.26 1.12 1.19 1.24 Netinterestmargin8 4.20 4.25 3.97 3.93 3.97 3.94 3.97 3.98 4.00 3.93 3.94 3.89 Efficiencyratio7 63.75 61.05 62.93 62.68 61.89 64.01 62.59 61.76 61.54 62.74 61.98 61.54 Nonperfonningassetstoloansand relatedassets .................. .99 1.04 .99 .77 .69 .77 .75 .71 .69 .69 .67 .65 Netcharge-offstoaverageloans ...... .44 .46 .39 .25 .20 .30 .17 .19 .21 .24 .15 .18 Loanstodeposits .................. 83.26 82.27 82.75 85.69 87.50 85.69 85.87 87.21 87.20 87.50 88.84 90.15 Regulatorycapitalratios TIer1risk-based................... 12.24 12.47 12.61 12.45 12.17 12.45 12.32 12.16 12.12 12.17 11.93 11.83 Totalrisk-based.................... 13.80 14.08 14.30 14.07 13.72 14.07 13.92 13.72 13.67 13.72 13.50 13.42 Leverage ......................... 8.78 8.91 9.07 9.15 9.19 9.15 9.12 9.12 9.15 9.19 9.17 9.16 Numberofotherreportingbankholding companies .................... 1,777 1,914 2,069 2.197 2.213 2.197 2,225 2,239 2.233 2,213 950 942 Footnotesappearonp.B12.

B12 Federal Reserve Bulletin0 June 2007 4. Nonfinancial characteristics ofall reporting bank holding companies in the United States Millionsofdollarsexceptasnoted,notseasonallyadjusted 2004 2005 2006 Account 2001 2002 2003 2004 2005 I I I I Q4 QI Q2 Q3 Q4 QI Q2 Bankholdingcompaniesthatqualifyas financialholdingcompanies11,12 Domestic Number ........................ 388 434 451 472 461 472 470 468 471 461 289 288 Totalassets .-.....-.......... 5,436.743 5.917,109 6,605.686 7,456,569 8,184,677 7,456,569 7,643,649 7,898,330 8.068,742 8,184,677 8,468,806 8,721,000 Fo N re u ig m n b -o e w r n . e . d .. 13 ............. ...... 10 II 12 14 14 14 15 15 15 14 14 14 Totalassets ...... ......... 621.442 616,254 710,441 1,376,333 1.561,580 1,376.333 1.526,168 1,516,408 1.625,281 1.561,580 1,689,001 1.710,637 '" TotalU.S.commercialbank 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 Byownership Reportingbankholdingcompanies .. 5,942,670 6,429,231 6,941,106 7,785,988 8,439.788 7,785,988 8,011,264 8.138,007 8,312.461 8,439,915 8,203,720 8,595,385 Otherbankholdingcompanies ..... 230.467 227,016 219,222 209,115 220,133 209,115 204,891 206,367 211,840 220,143 740.544 609,203 Independentbanks .............. 242,944 240,968 237,575 212,611 334,143 212,611 328,259 331,920 333,067 334,013 342,584 350,335 Assetsassociatedwithnonbanking I a n c s ti u v r i a ti n e c s e 12 . " . 1 . 5 ...................... 426,462 372,405 437,503 579,lll 602,258 579,111 587,000 598,669 601,076 602,258 527,193 528,828 Securitiesbroker-dealers .... ...... n.a. 630.851 656,775 892,571 J.J70.659 892.571 J.J68,482 J.J65,688 1,231,410 1.170.659 1,314.092 1,298.790 Thriftinstitutions .................. 91.170 107,422 133.056 191,201 220,819 191,201 194,267 201,317 210,811 220,819 231,207 243,863 Foreignnonbankinstitutions 138,977 145,344 170,630 216,758 242,408 216,758 219,829 231,566 242,333 242,408 268,848 267,345 Othernonbankinstitutions ... ...... 1,674,267 561,710 678,086 954,845 969,255 954.845 886,022 910,770 954,085 969,255 927,934 1,018,219 Numberofbankholdingcompanies engagedinnonbankingactivities12,15 Insurance ........................ 143 96 102 97 97 97 97 99 98 97 81 82 Securitiesbroker--dealers ............ O.a. 47 50 44 46 44 43 45 46 46 41 41 Thriftinstitutions .................. 38 32 27 27 26 27 27 27 25 26 22 24 Foreignnonbankinstitutions ......... 32 37 42 39 35 39 38 37 38 35 33 34 Othernonbankinstitutions ........... 743 880 1.042 1,026 845 1,026 926 885 875 845 509 496 Foreign·ownedbankholding companies13 Number .......................... 23 26 27 29 29 29 29 30 30 29 24 24 Totalassets ....................... 764,411 762,901 934,085 1,537,208 1,747,797 1,537,208 1,690,119 1,698,197 1,811,451 1,747.797 1,822,367 1,847,094 Employeesofreportingbankholding companies(full-timeequivalent) .. 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 Assetsoffiftylargebankholding companies9,16 Fixedpanel(fromtable2) .._. ...... 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 9,282,941 Fiftylargeasofreportingdate ..... 5,732,621 6,032,000 6,666,488 7,940,955 8,631.229 7,940,955 8,206,462 8,417,847 8,489,633 8,631.229 8.970,662 9,282,941 Percentofallreporting bankholdingcompanies.. ...... 77 75 75 77 76 77 77 77 75 76 79 80 NOTE: Alldataareasofthemostrecentperiodshown.Thehistoricalfigures maynot 9. In general,thefiftylargebankholdingcompaniesarethe fiftylargestbankholding matchtho~einearlierversionsofthistablebecauseofmergers,significantacquisitionsor companiesasmeasuredbytotalconsolidatedassetsforthelatestperiodshown.Excludesa divestitures.orrevisionsorrestatementstobankholdingcompanyfinancialreports.Datafor fewlargebankholdingcompanieswhosecommercialbankingoperationsaccountforonlya themostrecentperiodmaynotincludealllate-filinginstitutions. smallportionofassetsandearnings. 1. ForquartersbeginningonorafterMarch 31,2006,thisreportcovers top-tierbank: 10. Excludes predecessorbankholdingcompanies thatweresubsequentlymergedinto holdingcompanieswithconsolidaledassetsofatleast$500millionandsomesmallertop otherbankholdingcompaniesinthepaneloffiftylargebankholdingcompanies.Alsoex tierfinnsthatfiledtheFRY-9CasrequiredbyFederalReserveBanksforsupervisorypor cludesthosebankholdingcompaniesexcludedfromthepaneloffiftylargebankbolding posesoronavoluntarybasis.BeforeMarch31,2006.aggregatedatarefertotop-tierbank companies.becausecommercialbankingoperationsrepresentonlyasmallpartoftheircon holdingcompanieswithconsolidatedassetsofatleast$150millionandsmallermultibank solidatedoperations. holdingcompanieswithdebtoutstandingtothegeneralpublicorengagedincertainnon 11. Excludesqualifyinginstitutionsthatarenotreportingbankholdingcompanies. bankingactivities. 12. Nodatarelatedtofinancialholdingcompaniesandonlysomedataonnonbanking 2. Dataforallreportingbankholdingcompaniesandthefiftylargebankholdingcompa· activities were collected on the FR Y-9C report beforeimplementation ofthe Gramm niesreflectmergeradjustmentstothe fiftylargebankholdingcompanies.Mergeradjust Leacb-BlileyActin2000. mentsaccountformergers,acquisitions,otherbusinesscombinations.andlargedivestitures 13. Abankholdingcompanyisconsidered"foreign-owned"ifitismajority-ownedbya thatoccurredduringthetimeperiodcoveredinthetablessothatthehistoricaliofonnation foreign entity. Data for foreign-owned companies do not includedata for branches and oneachofthefiftyunderlyinginstitutionsdepicts.tothegreatestextentpossible.theinsti agenciesofforeignbanksoperatingintheUnitedStates. tutionsastheyexistinthemostrecentperiod.Ingeneral,adjustmentsformergersamong 14. TotalassetsofinsuredcommercialbanksintheUnitedStatesasreportedinthecom bank:holdingcompanies reflect thecombinationofhistoricaldatafrom predecessorbank mercialbankCallReport(FFIEC031or041,ReportsofConditionandIncome).Excludes holdingcompanies.Thedataforthefiftylargebankholdingcompanieshavealsobeenad dataforasmallnumberofcommercialbanksownedbyothercommercialbanksthatfile justedasnecessarytomatchthehistoricalfiguresineachcompany'smostrecentlyavailable separatecallreportsyetarealsocoveredbythereportsfiledbytheirparentbanks.Alsoex financialstatement.Ingeneral.thedataarenotadjustedforchangesingenerallyaccepted cludesdataformutualsavingsbanks. accountingprinciples. 15. Dataforthrift, foreign nonbank, andothernonbank institutionsare totalassetsof 3. Includesminorityinterestsinconsolidatedsubsidiaries. eachtypeofsubsidiaryasreportedintheFRY-9LPreport.Datacoverthosesubsidiariesin 4. Includescreditcardlinesofcreditaswellascommerciallinesofcredit. whichthewp-tierbankholdingcompanydirectlyorindirectlyownsorcontrolsmorethan 5. Includesloanssoldtosecuritizationvehiclesinwhichbankholdingcompaniesretain 50percentoftheoutstandingvotingstockandthathasbeenconsolidatedusinggenerally someinterest,whetherthroughrecourseorseller-providedcreditenhancementsorbyservic acceptedaccountingprinciples.Dataforsecuritiesbroker-dealersarenetassets(thatis,to ingtheunderlyingassets.SecuritizationdatawerefirstcollectedontheFRY-9Creportfor talassets,excludingintercompanytransactions)ofbroker--<iealersubsidiariesengagedinac June2001. tivities pursuanttotheGramm~Leach-BlileyAct, asreported onschedule HC-M ofthe 6. Thenotionalvalueofaderivativeisthereferenceamountofanassetonwhichanin FRY-9Crepon.Datafor insuranceactivities areall insurance-relatedassetsheldby the terestrateorpricedifferentialisappliedwhencalculatingthecontractualpayments.Thew bankboldingcompanyasreportedonscheduleHC-IoftheFRY-9Creport. talnotionalvalueofabankholdingcompany'sderivativesholdingsisthesumoftheno Beginning in 2002:Ql, insurance totals exclude intercompany transactions and sub tionalvaluesofeachderivativecontractregardlessofwhetherthebankholdingcompanyis sidiaries engaged in credit-related insurance or those engaged principally in insurance apayororrecipientofpaymentsunderthecontract.Theactualcashflowsandfairmarket agencyactivities.Beginningin2002:Q2,insurancetotalsincludeonlynewlyauthorizedin~ valuesassociatedwiththesederivativecontractsaregenerallyonlyasmallfraclionofthe suranceactivitiesundertheGramm-Leach~BlileyAct. contract'snotionalvalue. 16. Changesovertimeinthetotalassetsofthetime~varyingpaneloffiftylargebankhold 7. Incomestatementsubtotalsforallreportingbankholdingcompaniesandthefiftylarge ingcompaniesareattributableto(1)changesinthecompaniesthatmakeupthepaneland bankholdingcompaniesexcludeextraordinaryitems,thecumulativeeffectsofchangesin (2)toasmallextent,restatementsoffinancialreportsbetweenperiods. accountingprinciples,anddiscontinuedoperationsatthefiftylargeinstitutionsandtherefore n.a. Notavailable willnotsum toNetincome.TheefTlciencyratioiscalculatedexcludingnonrecurringin SOURCE: FederalReserveReponsFRY-9CandFRY-9LP.FederalReserveNationalIn comeandexpenses. formationCenter.andpublishedfinancialreports. 8. Calculatedonafully-taxable-equivalentbasis.

Legal Developments

CI March 2007 Legal Developments: Fourth Quarter, 2006 ORDERS ISSUED UNDER BANK weighed in the public interest by its probable effect in HOLDING COMPANY ACT meetingtheconvenienceandneedsofthecommunitytobe served.3 Holdingsdoesnotcurrentlycontroladepository institu ORDERS ISSUED UNDER SECTION 3 OF tion. Basedon all thefacts ofrecord, the Boardconcludes thatconsummationofthe proposal would have no signifi THE BANK HOLDING COMPANY ACT cantly adverse effect on competition or on the concentra tion ofbanking resources in any relevant market and that AFNB Holdings, Inc. competitiveconsiderationsareconsistentwithapproval. Houston, Texas FINANCIAL, MANAGERIAL, AND SUPERVISORY Order Approving the Formation of a Bank CONSIDERATIONS Holding Company Section3oftheBHCActrequirestheBoardtoconsiderthe financial and managerial resources andfuture prospects of AFNB Holdings, Inc. ("Holdings") has requested the companies and depository institutions involved in a pro Board's approval under section 3 of the Bank Holding posaland certainothersupervisory factors. The Board has Company Act ("BHC Act")1 to become a bank holding considered these factors in lightofall the facts ofrecord, company and acquire all the voting shares of American including confidential reports of examination and other FirstNationalBank("AFNB"), also ofHouston. confidential supervisoryinformationfrom the Officeofthe Notice ofthe proposal, affording interested persons an Comptrollerofthe Currency ("OCC"), theprimary federal opportunity to submit comments, has been published supervisorofAFNB, publicly reported and otherfinancial (71 Federal Register 57,511 (2006)). The time for filing information,informationprovidedbyHoldings, andpublic comments has expired, and the Board has considered the commentsreceivedonthe proposal. proposal and all comments received in lightofthe factors In evaluating financial factors in proposals involving setforth insection 3oftheBHCAct. newly formed bankholding companies, the Boardreviews Holdings is a newly organized corporation formed to the financial conditionofboththe applicant and the target acquire AFNB. AFNB, with total assets of approximately depository institution. The Board also evaluates the finan $355 million, is the 102nd largest insured depository cial condition ofthe pro forma organization, including its institution inTexas, controlling deposits ofapproximately capital position, asset quality, and earnings prospects, and $313 million, which represent less than I percent of the theimpactofthe proposedfunding ofthetransaction. total amountofdeposits ofinsured depository institutions TheBoardhascarefullyconsideredthefinancial factors inthestate.2 of the proposal. AFNB currently is well capitalized and would remain so on consummation of the proposal. The COMPETITIVE CONSIDERATIONS proposed transaction is structured as a share exchange. Based on its review of the record, the Board finds that Section 3 of the BHC Act prohibits the Board from Holdings has sufficient financial resources to effect the approvinganyproposalthatwouldresultinamonopolyor proposal. that would be in furtherance ofan attempt to monopolize TheBoardalso hasconsideredthemanagerialresources the business of banking in any relevant banking market. oftheorganizationsinvolved.4TheBoardhasreviewedthe 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 3.See 12V.S.c. §1842(c)(l). anticompetitive effects of the proposal are clearly out- 4. Three commenters, including two minority shareholders of AFNB,questionedthecompetenceand integrityofthe currentchair man ofthe board ofAFNB, who also would serve as chairman of 1. 12V.S.c.§1842. Holdingsonconsummationoftheproposal.Thesecommentersalleged 2.Assetdataareas ofSeptember30,2006.Depositdataandstate that the chairman previously demonstrated poor performance and rankingsareasofJune 20,2006, andreflectmergeractivitythrough breachedfiduciary duties whileservingaschairmanand chiefexecu December 6, 2006. In this context. insured depository institutions tive officer ofTexas First National Bank ("TFNB"), Houston. The includecommercialbanks,savingsbanks,andsavingsassociations. Boardhascarefullyreviewedpubliclyavailableinformationaswellas

C2 Federal Reserve Bulletin 0 March 2007 examinationrecord ofAFNB, including assessments ofits connection with the application. For purposes of this management, risk-managementsystems,andoperations.In transaction, theconditionsandcommitmentsaredeemedto addition, the Board has considered its supervisory experi be conditions imposed in writing by the Board in connec ences and those ofthe OCC with AFNB and its record of tion with its findings and decision and, as such, may be compliance with applicable banking laws and anti-money enforcedin proceedingsunderapplicablelaw. laundering laws. The Boardhas also consideredthe super The proposed transaction may not be consummated visory experiences of the OCC with TFNB, which was beforethe 15thcalendarday afterthe effectivedate ofthis previously headedby membersofthe currentmanagement order, orlaterthan three months afterthe effective date of ofAFNB. Inaddition, theBoardhasconsideredHoldings' thisorder,unlesssuchperiodisextendedforgoodcauseby plans for implementing the proposal, including the pro the Board or the Federal Reserve Bank of Dallas, acting posedmanagementafterconsummation.5 pursuanttodelegatedauthority. Basedonallthefactsofrecord,theBoardhasconcluded By order ofthe Board of Governors, effective Decem thatconsiderationsrelating to the financial andmanagerial ber 18, 2006. resourcesandfutureprospectsoftheorganizationsinvolved intheproposalareconsistentwithapproval,asaretheother Votingfor this action: Chairman Bernanke, ViceChairman Kohn, andGovernorsBies,Warsh,Kroszner,andMishkin. supervisoryfactors underthe BHCAct. ROBERT DEY. FRIERSON CONVENIENCE AND NEEDS CONSIDERATIONS Deputy Secretary ofthe Board Inactingonproposalsundersection3oftheBHCAct, the Boardmustalsoconsidertheeffectsoftheproposalonthe Capital One Financial Corporation convenienceandneedsofthecommunitiestobeservedand McLean, Virginia to take into account the records of the relevant insured depositoryinstitutionsundertheCommunityReinvestment Order Approving the Merger of Bank Act ("CRA").6 The Board has considered carefully all the Holding Companies facts of record, including reports of examination of the CRArecord ofAFNB, information provided byHoldings, Capital One Financial Corporation ("Capital One"), a andconfidentialsupervisoryinformation.AFNBreceiveda financial holdingcompanywithinthe meaningofthe Bank "Satisfactory" rating at its most recent CRA performance Holding Company Act ("BHC Act"), has requested the evaluation by the OCC, as ofJanuary 20, 2004. Basedon Board'sapprovalundersection3oftheBHCAct! tomerge all the facts ofrecord, the Board concludes that consider with North Fork Bancorporation, Inc. ("North Fork"), ationsrelatingto the convenienceandneedsfactor andthe Melville, New York, and acquire its subsidiary banks, CRA performance record of AFNB are consistent with North Fork Bank ("NFBank"), Mattituck, New York, and approval. Superior Savings of New England, National Association ("SuperiorSavings"),Branford, Connecticut,2 CONCLUSION Notice of the proposal, affording interested persons an opportunity to submit comments, has been published Based on the foregoing and all the facts of record, the (71 Federal Register 29,627 (2006)). The time for filing Board has determined that the application should be, and comments has expired, and the Board has considered the hereby is, approved. In reaching its conclusion, the Board proposal and all comments received in lightofthe factors hasconsideredall thefacts ofrecordinlightofthe factors setforth insection 3ofthe BHCAct.3 thatitisrequiredtoconsiderunderthe BHCActandother Capital One, with total consolidated assets of approxi applicable statutes. The Board's approval is specifically mately $89.5 billion, is the 36thlargestdepository organi conditionedoncompliancebyHoldingswiththeconditions zationintheUnitedStates,4controllingdepositsofapproxi in this order and the commitments made to the Board in mately$32.6billion,whichrepresentlessthan 1percentof the total amount ofdeposits ofinsured depository institu confidentialsupervisoryinfonnationaboutAFNBandTFNBinassess tions in the United States. Capital One owns three subsidingthefinancialandmanagerialresourcesofAFNBandHoldings.In addition, the Board has consulted with the OCC, also the primary federalsupervisorofTFNB,abouttherecordofthecurrentchairman I. 12 U.S.c. §1842. Capital One and North Fork also have ofAFNB,includinghisserviceaschairmanandchiefexecutiveofficer requested the Board's approval to hold and exercise options to ofTFNB. purchase up to 19.9 percent of each other's common stock. Both 5.TwocommentersexpressedconcernthatthebylawsofHoldings optionswouldexpireonconsummationoftheproposal. would not permit cumulative voting and would thereby reduce the 2. North Forkengagesinasset management, securities brokerage, ability ofAFNB's minority shareholders to electdirectors and exert andthesaleofinvestmentproductsthroughitsnonbanksubsidiaries. influenceonthe managementorpoliciesofAFNB. The Boardnotes CapitalOneproposestoacquirethosenonbanksubsidiariesinaccor thatchangesinthepowersofcommonstockarenotwithinthelimited dancewithsection4(k)oftheBHCAct. statutoryfactorstheBoardmayconsiderwhenreviewingan applica 3. The Board received four comments expressing concerns about tion under the BHC Act. See Western Bancshares, Inc. v. Boardof variousaspectsoftheproposal. Governors.480F.2d749(10thCir. 1973). 4. Assetand national ranking and deposit data are as ofJune 30, 6.12U.S.C. §2901 etseq. 2006.

Legal Developments: Fourth Quarter, 2006 C3 iarydepositoryinstitutionsthatoperateinLouisiana,Texas, the facts ofrecord, the Board is permitted to approve the andVirginia5 and engages in numerous nonbankingactivi proposal undersection3(d)ofthe BRCAct. ties thatarepermissibleunderthe BRCAct. North Fork, with total consolidated assets of approxi COMPETITIVE CONSIDERATIONS mately $59.4 billion, is the 41st largestdepository organi zationintheUnitedStates,controllingdepositsof$37.2bil Section 3 of the BRC Act prohibits the Board from lion.NorthForkownstwosubsidiarydepositoryinstitutions approving a proposal that would result in a monopoly or thatoperateinNewYork, NewJersey, and Connecticut. In would be in furtherance ofany attempt to monopolize the New York, North Fork is the fifth largest depository business of banking in any relevant banking market. The organization, controlling deposits of $33.2 billion. North BRC Act also prohibits the Board from approving a Fork is the 15th largest depository organization in Con proposed bank acquisition that would substantially lessen necticut, controlling deposits of $799.9 million, and the competition in any relevant banking market, unless the 13thlargestdepositoryorganizationinNewJersey,control anticompetitive effects of the proposal are clearly out ling depositsof$3.2billion.6 weighed in the public interest by its probable effect in On consummation ofthis proposal, Capital One would meetingtheconvenienceandneedsofthecommunitytobe become the 24th largest depository organization in the served. 10 United States, with total consolidated assets of approxi Capital One and North Forkdo not compete directly in mately$154billion(includingproformaaccountingadjust any relevant banking market. Based on all the facts of ments). Capital One would control deposits of approxi record, the Board concludes that consummation of the mately$69.8billion,whichrepresentlessthan 2percentof proposal would have no significantly adverse effect on the total amount ofdeposits ofinsured depository institu competitionorontheconcentrationofbankingresourcesin tions intheUnitedStates. any relevant banking market. Accordingly, the Board has determined that competitive factors are consistent with INTERSTATE ANALYSIS approval. Section 3(d) ofthe BRCActallows the Board to approve FINANCIAL, MANAGERIAL, AND SUPERVISORY an application by a bank holding company to acquire CONSIDERATIONS controlofabanklocatedinastateotherthanthehomestate of such bank holding company if certain conditions are Section3oftheBRCActrequirestheBoardtoconsiderthe met. For purposes of the BRC Act, the home state of financial and managerialresources and future prospectsof Capital One is Virginia,? and North Fork is located in companies anddepository institutions involvedin the pro NewYork, NewJersey, and Connecticut.8 posal and certainothersupervisory factors. The Board has Based on areview ofall thefacts ofrecord, including a considered these factors in light ofall the facts ofrecord, review of relevant state statutes, the Board finds that all including confidential reports of examination and other conditions for an interstate acquisition enumeratedin sec supervisoryinformationfrom the primaryfederal andstate tion3(d)oftheBRCActaremetinthiscase.9Inlightofall supervisors ofthe organizations involved in the proposal, publiclyreportedandotherfinancial information, informa tion provided by Capital One, and public comments 5. Capital One owns Capital One Bank, Glen Allen, and Capital One,F.S.B. ("Capital OneFSB"). McLean, bothin Virginia. Capital receivedontheproposal. OnealsoownsCapitalOne,NationalAssociation("CONA"),NewOr Inevaluatingfinancial factorsinexpansionproposalsby leans, Louisiana, fonnedy known as Hibernia National Bank, which banking organizations, the Board reviews the financial Capital One acquired in connection with its merger with Hibernia condition ofthe organizations involved on both a parent Corporationin2005("HiberniaProposal").SeeCapitalOneFinancial only andconsolidatedbasis, as well as the financial condi Corporation, 91 Federal Reserve Bulletin 512 (2005) ("Hibernia Order"). tionofthesubsidiarydepositoryinstitutionsandsignificant 6.StaterankinganddepositdataareasofJune30,2006,andreflect nonbanking operations. In this evaluation, the Board II mergeractivitythroughJuly 7,2006.In thiscontext,insureddeposi toryinstitutionsincludecommercialbanks,savingsbanks,andsavings associations. depositsofinsureddepositoryinstitutionsintheVnitedStatesandless 7. Abank holding company's home stateis the state in whichthe than 30percentofthetotal amountofdeposits ofinsureddepository totaldepositsofallsubsidiarybanksofthecompanywerethelargest institutions in New York, New Jersey, and Connecticut. All other on July I, 1966, or the date on which the company became a bank requirements of section 3(d) of the BHC Act would be met on holdingcompany,whicheverislater(12V.S.c. §I841(0)(4)(C). consummationoftheproposal. 8. Forpurposesofsection 3(d). the Board considers a bank to be 10. 12V.S.C. §I842(c)(l). locatedinthestatesinwhichthebankischarteredorheadquarteredor II.TwocommenterscriticizedtherelationshipsofCapitalOneand operatesabranch(12V.S.c.§§1841(0)(4)-(7)andI842(d)(1)(A)and North Fork with unaffiliated nontraditional providers of financial (d)(2)(B». services. As a general matter, these businesses are licensed by the 9. 12 V.S.c. §§1842(d)(1)(A) and (B), 1842(d)(2)(A) and (B). stateswheretheyoperateandaresubjecttoapplicablestatelaw.The Capital One is adequately capitalized and adequately managed, as Board considered the relationships of Capital One and Hibernia definedbyapplicablelaw.NFBankandSuperiorSavingshavebeenin National Bank (now CONA) with these types of providers in the existence and operated for the minimum period oftime required by HiberniaOrderand herebyreadopts and reaffinnsthose findings and applicable state law (five years). On consummation ofthe proposal, decisionsherein.Capital Onerepresentedthatithas made nosignifi CapitalOnewouldcontrollessthan 10percentofthetotalamountof cant changes to the manner in which Capital One and its affiliates

C4 Federal Reserve Bulletin0 March 2007 considers a variety of infonnation, including capital ad for implementing the proposal, including the proposed equacy, assetquality, and earnings perfonnance. Inassess managementafterconsummation. ingfinancial factors, theBoardconsistentlyhasconsidered Basedonallthefactsofrecord,theBoardhasconcluded capitaladequacytobeespeciallyimportant.TheBoardalso that considerationsrelating to the financial and managerial evaluatesthe financial conditionofthecombinedorganiza resourcesandfutureprospectsoftheorganizationsinvolved tion at consummation, including its capital position, asset intheproposalareconsistentwithapproval,asaretheother quality, and earnings prospects, and the impact of the supervisory factors underthe BHCAct. proposedfunding ofthe transaction. TheBoardhascarefullyconsideredthefinancial factors CONVENIENCE AND NEEDS CONSIDERATIONS ofthe proposal. Capital One, all its subsidiary depository institutions,andallthesubsidiarydepositoryinstitutionsof Inactingonaproposalundersection3oftheBHCAct,the NorthForkcurrentlyarewellcapitalizedandwouldremain Boardmustalsoconsiderthe effectsofthe proposalonthe soonconsummationoftheproposal.Basedonitsreviewof convenienceandneedsofthecommunitiestobeservedand the record, the Board also finds that Capital One has take into account the records of the relevant insured sufficient financial resources to effect the proposal.I2 The depository institutionsundertheCommunityReinvestment proposed transaction is structured as a partial share ex Act ("CRA").14 The CRA requires the federal financial change and partial cash purchase of shares. Capital One supervisory agencies to encourage financial institutions to will use existing resources and the proceeds of long-term help meet the credit needs of the local communities in debttofundthecashpurchaseofshares. which they operate, consistent with their safe and sound TheBoardalsohasconsideredthe managerialresources operation, and requires the appropriate federal financial ofthe organizations involved and the proposed combined supervisory agency to take into account an institution's organization. The Board has reviewed the examination recordofmeeting thecreditneedsofitsentirecommunity, records of Capital One, North Fork, and their subsidiary including low- and moderate-income ("LMI") neighbor depositoryinstitutions,includingassessmentsoftheirman hoods, inevaluatingbankexpansionary proposals.15 agement, risk-management systems, and operations. In The Board has considered carefully all the facts of addition, the Board has considered its supervisory experi record,includingreportsofexaminationoftheCRAperfor encesandthoseoftheotherrelevantbankingagencieswith mancerecords ofthe subsidiary-insureddepository institu the organizations and their records of compliance with tions of Capital One and North Fork, data reported by applicable banking law, including anti-money-Iaundering Capital One and North Fork under the Home Mortgage laws.l3TheBoardalso has consideredCapitalOne's plans Disclosure Act ("HMDA"),16 other infonnation provided by Capital One, confidential supervisory infonnation, and publiccommentsreceivedon the proposal. conduct their lending relationships with such providers since the Two commenters opposed the proposal or expressed Hibernia Proposal. According to Capital One, NF Bank's Middle concern based on the levels of lending by the subsidiary MarketLendingGroup providesbankingservicesto licensedcheck cashingbusinessesinNewYorkandNewJersey,andNFBank'sSmall depository institutions of Capital One and North Fork to BusinessFinancialServicesGroupextendsasmallnumberofloansto LMI communities and the institutions' records of serving nontraditionalprovidersoffinancialservices.CapitalOnerepresented thosecommunitiesthroughcommunitydevelopmentgrants that NF Bank does not play any role in the lending practices or and loans. One of these commenters was particularly credit-reviewprocessesofthesefirms. Inaddition,NorthForkownsa concerned that the acquisition of North Fork would ad check-cashing business licensed by and operated exclusively in NewYork.TheBoardhasconsultedwiththeNewYorkStateBanking versely affect LMI residents in New York City if North Departmentonthischeck-cashingbusiness. Fork's current CRA programs were altered.17 The com- 12.Acommenterrequestedthat,inlightofthecompensationtobe received by certain North Fork executives in connection with the proposal, the Boardconsiderwhetherithasauthoritytoevaluatethe liability by Capital One. According to the terms of the Consent appropriatenessofcompensationarrangements forexecutive officers Judgment,CapitalOneagreednottodistributecertainadvertisements inconnectionwithmergerandacquisitiontransactionssubjecttothe in Minnesotafor aperiodof18monthsafterthedateoftheConsent BHC Act. The Board has taken the compensation arrangements for Judgmentandtopayatotalof$749,999,tobedividedequallyamong NorthFork'sexecutivesintoaccountinevaluatingthisproposalunder Minnesota-based chapters of the Legal Aid Society, the Minnesota thefinancialandmanagerialfactors.Asnoted,CapitalOneandNorth Association ofCommunity Organizations for Reform Now, and the Forkwouldremainwellcapitalizedonconsummationoftheproposal. stateofMinnesota.TheBoardwillcontinuetomonitortheinvestiga Inaddition,informationaboutthesearrangementswasdisclosedtothe tionby theAttorneyGeneral ofWestVirginiaand notes that neither shareholders ofCapital One and North Fork, and they approved the BoardactiononthisproposalnoranysupervisoryactionbytheBoard proposedtransactions. undertheBHCActwouldinterferewiththeAttorneyGeneral'sreview 13.Onecommenteropposedtheproposalinpartbasedonalawsuit orwiththeabilityofacourttoresolveanylitigationpertainingtothis andinvestigationsundertakenbytheAttorneysGeneralofMinnesota matter. andWestVirginiain theirrespective statesrelatingto Capital One's 14. 12U.S.c. §2901 etseq. marketingofitscreditcards.TheBoardconsideredthis matterinthe 15.12U.S.c.§2903. HiberniaOrderandhasreviewedadditionalinformationwithrespect 16.12U.S.C.§2801 etseq. tothese actions, includinginformationprovidedbyCapital One and 17.Thecommentermadespecificrecommendationsforcommunity confidentialsupervisoryinformation.TheBoardnotesthatinFebruary development programs for Capital Oneand its subsidiary bankafter 2006,CapitalOneandthe stateofMinnesotaenteredintoaConsent consummationofthismergerthatweremodeledonpledgespreviously Judgment,whichbyitstermsconstitutedafullandfinalresolutionof made by North Fork. Another commenter expressed concern that all claims broughtbythe stateand was notdeemed an admission of CapitalOnehad notmadecommunitydevelopmentlendingcommit-

Legal Developments: Fourth Quarter, 2006 C5 menters also alleged, based primarily on 2004 and 2005 B. CRA Performance ofCapital One HMDAdata, that Capital One and North Forkengaged in 1. CONA. CONA received an overall "satisfactory" CRA discriminatory treatment of minority individuals in the performance rating at its January 2004 evaluation.21 The home mortgage lending operations of their subsidiary Board previously considered the CRA performance of depository institutions. CONA in the Hibernia Order and hereby reaffirms and readopts its findings and decisions herein. Capital One A. CRA Performance Evaluations represented that it has retained or expanded all CRA programsin placeatCONAsince itacquired the bank.As As provided in the CRA, the Board has evaluated the notedintheHiberniaOrder,examinerscommendedCONA's convenienceandneedsfactorinlightofthe evaluationsby responsiveness to the creditneeds ofits assessment areas, the appropriate federal supervisors of the CRA perfor particularlyinprovidingloanproductstosmallbusinesses. mance records of the relevant insured depository institu Examiners noted CONA's good overall distribution of tions of both organizations. An institution's most recent loans to borrowers of different income levels, adequate CRA performance evaluation is a particularly important levelsofcommunity developmentlending andinvestment, consideration in the applications process because it repre and accessible service-delivery systems in its assessment sents a detailed, on-site evaluation of the institution's areas. Examinersalsocommendeditsexcellentcommunity overall record of performance under the CRA by its developmentservices. appropriatefederal supervisor.18 Sincethe2004CRAevaluation,CapitalOnerepresented CONA,CapitalOne'slargestsubsidiarydepositoryinsti that CONA has originated more than $300 million in tution as measured by total deposits, received a "satisfac community development loans, made or committed to tory"ratingatitsmostrecentCRAperformanceevaluation make qualified investments totaling $34 million, and pro bythe OfficeoftheComptrolleroftheCurrency ("OCC"), vided$1.8 millionincommunitydevelopmentgrants.22 as ofJanuary 12, 2004. Capital OneFSB and Capital One Bank both received "outstanding" ratings at their most 2. Capital One FSB. As noted, Capital One FSB received an overall "outstanding" CRA performance rating at its recent CRAperformance evaluations.19NF Bankreceived July 2005 evaluation.23 The institution received a "high an"outstanding"ratingfromtheFederalDepositInsurance satisfactory"ratingunderthelendingandservicestestsand Corporation("FDIC"),asofAugust 19,2002,andSuperior an "outstanding" rating under the investment test in this Savings received a "satisfactory" rating from the OCC, as evaluation. ofAugust 1, 2005. Capital One has indicated that it does Examiners noted that Capital One FSB's geographic notexpectthe proposedmergerto resultinthe discontinu distributionofconsumerloanswasreasonableinrelationto ation of any products or services offered by North Fork, the demographic characteristics ofits assessmentarea and except to the extent that Capital One offers a comparable that the geographic distribution of mortgage loans and productorservice.20 small loans to businesses was commensurate with both demographic and peerlendingdata. According to examin ers, the percentage ofconsumerinstallment loans made to ments specificto New Jersey and tospecific types oforganizations. LMI borrowers in the institution's assessment area ex TheBoardnotesthattheCRAdoesnotrequiredepositoryinstitutions ceededthepercentageofLMIfamiliesresidinginthatarea. toengageinparticularkindsoflendingorinlendingtospecifictypes CapitalOneFSB'sdistributionofconsumercreditcardsto of organizations. Moreover, the Board views the enforceability of third-partypledges,initiatives,andagreementsasmattersoutsidethe borrowers of different income levels also was reasonable CRA.TheBoardhasexplainedthatan applicantmustdemonstratea comparedwiththedemographic data. Inaddition, examin satisfactoryrecordofperformanceundertheCRAwithoutrelianceon ers noted favorably the institution's special installment plans or commitments for future action. In addition, the Board has loanproductthatwasprimarilyusedbyLMIborrowers.24 consistently found that neither the CRA nor the federal banking agencies' CRA regulations require depository institutions to make pledgesorenterintocommitmentsoragreementswithany organiza tion.See, e.g., WachoviaCorporation,91 FederalReserveBulletin77 21. The evaluation period was from October 18, 1999, through (2005). Instead,theBoardfocuses ontheexistingCRAperformance January 12, 2004, except for the lending test, which was evaluated recordofanapplicantandtheprogramsthatanapplicanthasinplace fromJanuary 1,2000,throughDecember31,2002. toservetheneedsofitsCRAassessmentareasatthetimetheBoard 22.TheseamountswereprovidedfromJanuary 31,2004,through reviewsaproposalundertheconvenienceandneedsfactor. March31,2006.Inaddition,CONAprovidedspecialassistancetothe 18.SeeInteragencyQuestionsandAnswersRegardingCommunity communitiesaffectedbyHurricaneKatrinathroughcharitabledona Reinvestment,66FederalRegister36,620and36,640(2001). tions, fundraising coordination, grantsofpaymentdeferralsforbusi 19.CapitalOneFSB'sandCapitalOneBank'smostrecentevalua ness and individual customers, and extensions oflines ofcredit on tionswerebothasofJuly18,2005,bytheOfficeofThriftSupervision favorableterms. ("OTS") and the Federal Reserve Bank of Richmond ("Reserve 23.TheevaluationperiodwasfromApril I,2003,throughJune30, Bank"),respectively. 2005, except for the review of retail lending, which was evaluated 20. Acommenterexpressed concern that Capital One has limited fromJanuary 1,2003,throughMarch31,2005.CapitalOneFSBisa experienceinbranchservicesandmortgagelending.Asnotedabove, nationwide providerofconsumerand commerciallendingand offers CapitalOneintendstomaintainthecurrentservicesprovidedbyNorth consumerdepositproducts. Fork. In addition, Capital One stated that it intends to retain key 24. This productfeatured alow minimumloan amount of$1,000 managementpersonnelatNorthFork'sbranches. andflexibleunderwritingrequirements.

C6 Federal Reserve Bulletin0 March 2007 Examiners commendedCapital One FSB for increasing C. CRA Performance of North Fork itscommunitydevelopmentlending,whichtotaledapproxi mately $15.8 million during the most recent evaluation 1. NF Bank. As noted, NF Bank received an overall "outstanding"rating in itsAugust 2002 CRAevaluation.27 period. Examiners also noted the innovative nature of Under the lending test, NF Bank received a rating of Capital One FSB's lending arrangements with community "outstanding,"andexaminerscommendedthe bank's level development fund initiatives, affordable housingorganiza oflendingactivityasreflectinganexcellentresponsiveness tions, and other nonprofit organizations that served LMI tothecreditneedsofitsassessmentarea. Examinersfound individuals. NF Bank's overall distribution of loans to borrowers of During the evaluation period, Capital One FSB's quali different income levels to be very good, particularly its fied investments totaled approximately $119.4 million and home purchase loans. During the evaluation period, NF includedpurchasesofqualified mortgage-backedsecurities Bank's percentages of home purchase loans exceeded the and low-income-housing tax credits, investments in small percentages for lenders in the aggregate ("aggregate lend business investmentcorporations, and deposits in commu ers").28 Similarly, the percentage of its home purchase nity development fund initiatives. In addition, examiners loans to LMI geographies exceeded the percentages for noted that Capital One FSB provided approximately aggregate lenders during the evaluation period. Examiners $8.6 million in financial grants during the assessment also noted that the geographic distribution of the bank's period. loans to smallbusinesseswasexcellent.29 AlthoughCapitalOneFSB has no publicoffices, exam Sinceits mostrecentevaluation, NFBankhasremained iners noted that it provided customer-service call centers an active mortgage lender in its assessment area. For withextendedhoursandissuedATMcardstocustomersto example, Capital One represented that NF Bank and its allow themaccess to theirmoney market accounts. Exam mortgage subsidiary, GreenPoint Mortgage Funding, Inc. iners also commended Capital One FSB for the technical ("GreenPoint"), Novato, California, closed more than assistance and financial advice it provided to a variety of $525millionofmultifamilyhousingloansinitsassessment nonprofit organizations in its assessment area and other area in 2004 and $534 million of such loans in 2005. communities in whichCapital OneFSB operated. CapitalOnealsorepresentedthatNFBank'spercentagesof homepurchaseloansandrefinanceloansoriginatedinLMI 3. Capital OneBank. Capital OneBankisengagedprima geographies in New Jersey exceeded the percentages for rily in creditcardoperations and has beendesignated as a aggregate lenders in 2004 and 2005. In addition, Capital limited-purposebank,whichisevaluatedunderthecommu One stated that NF Bank and GreenPoint, on a combined nitydevelopmenttestforCRAperformance.25Inassigning basis, made more than$1.3 billion in smallbusiness loans aratingtoalimited-purposebank,examinersmayconsider inthe New Yorkand New Jersey assessmentareain2004. thebank'scommunitydevelopmentloans,investments,and Examiners commended NF Bank's leadership role in services nationwide rather than only in the bank's assess making community developmentloans that respond to the mentarea. In rating CapitalOneBank"outstanding" atits creditneedsofeconomicallydisadvantagedareas,individu July 2005 evaluation, Reserve Bank examiners noted that als, and small businesses through its community invest Capital One Bank's nationwide qualified investments in ment efforts and innovative and flexible loan practices. creased from $82 million to $128 million during the During the evaluation period, NF Bank made community evaluation period.26 These investments included invest development loans totaling $83.4 million to affordable ments in low-income-housing tax credit projects, entities housing projects, nursing homes serving elderly residents thatsupportmicroenterprisedevelopment,andbondsissued inLMIneighborhoods, andothercommunitydevelopment bytheVirginiaHousingDevelopmentAuthority. groups.NFBankalsooriginatedorpurchased$345million Duringtheevaluationperiod,CapitalOneBankcontrib in affordable multifamily housing loans for properties in uted more than $6.5 million to a variety oforganizations LMI neighborhoods. that primarily assist LMI individuals or areas or support NF Bank has continued its community development microenterprise development. Examiners also noted that lending since its most recent evaluation.30 Capital One Capital One Bankprovided technical assistance and finan cial expertise to organizations dedicated to community development,includingaffordablehousing,socialservices, 27. Theevaluation period was October 1, 1999, through June 30, 2002,withtheexceptionofthelendingtest,forwhichtheevaluation andsmallbusinessdevelopment. periodwasJanuary 1,2000,throughJune3D,2002. 28.Thelendingdataoftheaggregatelendersrepresentthecumula tivelendingforallfinancialinstitutionsthatreportedHMDAdataina givenmarket. 29.Forpurposesoftheevaluation,smallbusinessesarebusinesses withgrossannualrevenuesof$1 millionorless. 30. One commenter expressed concern about NF Bank's CRA 25.See 12CFR228.25(a). programsinNew Jersey. NFBankenteredtheNewJerseymarketby 26. The evaluation period was from April 28, 2003, through acquiringTheTrust Company ofNew Jersey ("Trust Company") in June30,2005. May2004.NFBank'sCRAperformancehasnotbeenevaluatedsince

Legal Developments: Fourth Quarter, 2006 C7 stated that NF Bank provided $650 million in general 2. SuperiorSavings. Superior Savings received an overall communitydevelopmentloans and $450millioninafford "satisfactory"ratinginitsAugust2005evaluation.33Exam able multifamily housing loans in 2004 and 2005. Capital iners concluded that the bank had an adequate level of OnealsorepresentedthatNFBankhasapprovedmorethan community development lending, services, and qualified $6.8millioninfinancingforaffordablehousinginNewJer investmentsinitsassessmentareasandanadequaterespon sey since2004. sivenesstothecreditandcommunitydevelopmentneedsin In the 2002 CRA evaluation, NF Bank received an itsassessmentareas. "outstanding" rating under the investment test, and exam During the 2002 evaluation period, Superior Savings iners commended NF Bankfor taking a leadershiprole in extended $13.7 million in community development loans investing in innovative and complex qualifiedinvestments and$14.7 millioninqualifiedcommunityinvestmentsthat in its assessment area. Examiners reported that during the were primarilyrelatedto affordablehousing andneighbor evaluationperiod,NFBankmadecommunitydevelopment hood revitalization initiatives inLMI areas. Superior Sav investments in its New York assessment area totaling ingsengagedinvariouscommunitydevelopmentprograms $66.1 million, primarily in affordable housing initiatives. in its assessment areas, particularly in the Bronx borough NF Bank also donated $1.2 million to numerous commu of New York City, including financial literacy seminars nitydevelopmentorganizationsengagedinaffordablehous provided by Superior Savings' staff at local charitable ingdevelopment,socialservices,andneighborhoodrevital institutions and schools. Although Superior Savings em izationeffortsinitsassessmentarea. ployed a telemarketing business strategy, examiners noted CapitalOnerepresented thatNFBankmade $86.3 mil that it maintained one of its two branches in the East lioninqualifiedcommunity developmentinvestments,and Tremont neighborhood, an underserved LMI area of the that NF Bank and GreenPoint also made approximately Bronx. $5 million in community development grants on a com bined basis, in 2004 and 2005.31 These community devel D. HMDA and Fair Lending Record opment investments and grants aided a broad range of community and housing developmentgroups inits assess The Board has carefully consideredthe lending records of ment area, including a $10 million investment in housing Capital One and North Fork in light of public comment revenue bonds issued by the New Jersey State Housing received on the proposal. Acommenter alleged, based on Mortgage Finance Agency for development of affordable 2004HMDAdata, thatCapitalOneFSB hadmadehigher housingforLMIfamilies inthe state. cost loans34 more frequently to African Americans and In the 2002CRAevaluation, NFBankalso received an Hispanics than to nonminority borrowers nationwide.35 "outstanding" rating for the service test. Examiners noted Anothercommenter asserted, based on 2005 HMDAdata, thatNFBank'sservice-deliverysystemswereaccessibleto that a relatively high percentage of Capital One FSB's geographies and individuals of different income levels home mortgage loans to African Americans were higher throughoutitsassessmentareasandthatitsbranchnetwork cost loans. In addition, the commenteralleged that Green was well-dispersedgeographically andconduciveto bank Point, a mortgage subsidiary ofNorth Fork, made higher ing by LMI individuals.32 In addition, examiners com costloansnationwidemorefrequentlytoAfricanAmericans mendedthebankforhavingan"excellent"levelofinnova than to nonminorities.36 Further, the commenter asserted tive community development services. Examiners also thaton acombinedbasisin the NewYorkCity Metropoli noted that the bank's outreach efforts included extensive tan Statistical Area ("MSA"), GreenPoint and NF Bank financialliteracyprogramsinLMIareasandsmallbusiness made higher-cost loans morefrequently toAfricanAmeriseminarsproviding financial and technicalassistance. theacquisition.CapitalOnerepresentedthatsinceNorthForkacquired 33. Theevaluation period was from September30, 2002,through Trust Company, North Fork has assigned employees familiar with July 31, 2005. Superior Savings focuses on offering its services community development lending to identify and underwrite those primarilythroughtelemarketingandhasbeendesignatedawholesale typesofloansinNewJersey,andNorthForkstaffhasparticipatedin institutionbytheOCCforCRApurposes. SuperiorSavingsdoesnot outreacheffortsdesignedtopromotehomeownershipopportunitiesfor originatesmallbusinessloans. LMIborrowersandinLMIcommunities. 34. Beginning January I, 2004, the HMDA data required to be 31.AcommenterexpressedconcernthatNFBankengagedinless reportedbylenderswereexpandedtoincludepricinginformationfor philanthropicactivitiesthan otherlocalfinancial institutionsandthat loansonwhichtheannualpercentagerate(APR)exceedstheyieldfor suchactivitieswerenotfocused oncommunitypriorities.TheBoard U.S.Treasurysecuritiesofcomparablematurity3ormorepercentage notes that neitherthe CRAnorthe federal bankingagencies' imple points for first-lien mortgages and 5 or more percentage points for mentingrulesrequirethatinstitutionsmakecharitabledonations. second-lienmortgages(12CFR203.4). 32.CapitalOnealsostatedthatNorthForkhashiredNewJersey 35.Thecommenteralsoalleged,onthebasisof2005HMDAdata, basedemployeesandseniorexecutiveofficerswithsubstantialexperi that GreenPoint made a high percentage of higher-cost loans to enceintheNewJerseymarkettomanagethebank'sretailandlending African-AmericanborrowersinNewark,NewJersey. operations in the state and that, based on reviews conducted by 36. The commenter also contended that NF Bank extended an independent companies of customer service in those branches, NF insufficientnumberofhomemortgageloanstoAfrican-Americanand Bank's New Jersey branches consistently have received excellent Hispanicborrowersinlightofthedemographicprofileofitslending reportsforbranchservice. areas.

C8 Federal Reserve Bulletin0 March 2007 cans than to nonminorities.37 The Board has reviewed consolidated compliance function and that the resultant HMDAdata reported by Capital One FSB, NF Bank, and organization will use bestpractices from bothCapitalOne GreenPoint. 38 and North Fork to ensure that it maintains sound internal Although the HMDAdata might reflect certain dispari controlstopromotecompliance.Aspartofthisintegration, ties in the rates of loan applications, originations, and CapitalOneintendsto provideongoingrole-basedtraining denials among members of different racial and ethnic toallitsemployeestoensurethatthey are well preparedto groups in certain local areas, HDMA data provide an carry out their individual responsibilities in accordance insufficient basis by themselves on which to conclude withapplicableconsumerprotection lawsand regulations. whetherornotCapitalOne's subsidiarydepositoryinstitu The Board also hasconsidered the HMDAdata in light tions, NF Bank, or GreenPoint are excluding orimposing of other information, including the programs described highercreditcostsonany grouponaprohibitedbasis.The above and the overall performance records ofthe subsid Board recognizes that HMDA data alone, even with the iary banksofCapital One and North Forkunderthe CRA. recentadditionofpricinginformation,provideonlylimited These established efforts demonstrate that the institutions informationaboutthe coveredloans.39HMDAdata, there areactiveinhelpingto meetthecreditneedsoftheirentire fore, have limitations that make them an inadequate basis, communities. absentotherinformation, forconcludingthatan institution hasengagedinillegallendingdiscrimination. E. Conclusion on Convenience and Needs and CRA TheBoardis neverthelessconcernedwhenHMDAdata Performance foraninstitutionindicatedisparitiesinlendingandbelieves that all banks are obligated to ensure that their lending TheBoardhasconsideredcarefully all thefacts ofrecord, practicesarebasedoncriteriathatensurenotonlysafeand includingreportsofexaminationoftheCRArecordsofthe soundlendingbutalsoequalaccess tocreditbycreditwor institutions involved, information provided by the appli thy applicantsregardlessoftheirraceorethnicity. Because cant, commentsreceivedonthe proposal, and confidential ofthelimitationsofHMDAdata, theBoardhasconsidered supervisory information. Capital One represented that its these data carefully and taken into accountotherinforma national presence and financial and managerial resources tion, including examinationreports that provide an on-site willenhance the ability ofNF Bankand SuperiorSavings evaluationofcompliance withfairlendinglawsbyCapital toservetheircustomersandbroadentheirgeographicreach One,NorthFork,andtheirsubsidiaries.TheBoardalsohas and that the branch networks of NF Bank and Superior consulted with the Reserve Bank, the OTS, the OCC, and SavingswillallowCapitalOnetoofferabroadervarietyof the FDIC about the fair-lending compliance records of productsandservicestoitscustomers.4OBasedonareview CapitalOneBank,CapitalOneFSB,CONA,andNFBank, ofthe entire record, and for the reasons discussed above, respectively. the Board concludes that considerations relating to the The record, including confidential supervisory informa convenience and needs factor and the CRA performance tion, indicatesthatCapitalOne andNorthForkhave taken recordsoftherelevantdepositoryinstitutionsareconsistent stepsto helpensurecompliancewithfairlending lawsand withapproval. other consumer protection laws. eONA, NF Bank, and GreenPoint each has a fair lending compliance program CONCLUSION thatincludesasecondreviewofallloansmarkedfordenial andan annualfair-lending review ofitsmortgageportfolio Based on the foregoing and all the facts of record, the to determine whether there are any race- or ethnicity Board has determined that the application should be, and related disparities in loan underwriting. Throughout both herebyis,approved.41 Inreachingitsconclusion,theBoard the Capital One and North Fork organizations, employees arerequiredto attendannualfair-lending trainingsessions. 40. One commenter expressed concern that Capital One would In addition, Capital One statedthat itintends to assimilate reduce or change the products and services it currently offers to North Fork's consumer compliance operations into its customers in New Jersey. Capital One represented that it intends to continueofferingNFBank'scurrentproductsandservicestoNewJer seycustomersandthatit may offeradditionalproducts notcurrently 37.TheBoardnotesthatNFBankreportednohigher-costloansin offeredbyNFBank. 2005. 41.AcommenterrequestedthattheBoardholdapublicmeetingor 38. The Board has focused its analysis on the 2005 HMDA data hearingontheproposal.Section3oftheBHCActdoesnotrequirethe reported nationwide byCapital OneFSB, NFBank,and GreenPoint Boardtoholdapublichearingonanapplicationunlesstheappropriate and by GreenPoint in the New York City and Newark, New Jersey supervisory authority for any ofthe banks to be acquired makes a MSAs. timelywrittenrecommendationofdenialoftheapplication.TheBoard 39.Thedata,forexample,donotaccountforthepossibilitythatan hasnotreceivedsucharecommendationfromanysupervisoryauthor institution'soutreacheffortsmayattractalargerproportionofmargin ity.Underitsrules,theBoardalsomay,initsdiscretion,holdapublic ally qualified applicants than other institutions attract and do not meetingorhearingonanapplicationtoacquireabankifameetingor provideabasisforanindependentassessmentofwhetheranapplicant hearing is necessary or appropriate to provide an opportunity for who was denied creditwas, in fact, creditworthy. In addition, credit testimony or other presentations (12 CFR 225.16(e), 262.3(i)(2), history problems, excessive debt levels relative to income, and high 262.25(d)). The Board has considered carefully the commenter's loan amounts relative to the value of real estate collateral (reasons request in light of all the facts of record. In the Board's view. the mostfrequently citedforacreditdenial orhighercreditcost)arenot commenter had ample opportunity to submit comments on the pro availablefromHMDAdata. posal and, in fact, submitted written comments that the Board has

Legal Developments: Fourth Quarter; 2006 C9 has consideredallthe facts ofrecord in lightofthe factors Michigan,controllingdepositsof$4.3billion,whichrepre thatitis requiredtoconsiderunderthe BRCActand other sent 2.8 percent of total deposits of insured depository applicable statutes. The Board's approval is specifically institutionsinMichigan ("statedeposits").2 conditionedoncompliancebyCapital Onewith the condi Republic, with total consolidated assets of approxi tionsinthisorderandthe commitmentsmade tothe Board mately $6.2 billion, operates one insured depository insti in connection with the application. For purposes of this tutionwithbranchesinMichiganandOhio.Republicisthe action, the commitments and conditions are deemed to be 12th largest depository organization in Michigan, control conditions imposed in writing by the Board in connection lingdepositsofapproximately$2.7billion,whichrepresent withitsfindingsanddecisionand,assuch,maybeenforced 1.8percentofstatedeposits. inproceedingsunderapplicable law. Onconsummationofthisproposal,andafteraccounting The proposed transaction may not be consummated for the proposed divestiture, Citizens would become the beforethe 15thcalendarday afterthe effectivedate ofthis seventh largest depository organization in Michigan, con order, orlaterthan three months after the effective date of trolling deposits ofapproximately $6.8 billion, which rep thisorderunlesssuchperiodisextendedforgoodcauseby resent4.6 percentofstatedeposits. the Board or by the Reserve Bank, acting pursuant to delegatedauthority. INTERSTATEANALYSIS By order ofthe Board ofGovernors, effective Novem ber8,2006. Section 3(d) ofthe BRCAct allows the Boardto approve an application by a bank holding company to acquire Voting forthis action: Chairman Bernanke,Vice Chairman Kohn, controlofabanklocatedinastateotherthanthehomestate andGovernorsBies,Warsh,Kroszner,andMishkin. of such bank holding company if certain conditions are met.3 For purposes of section 3(d) of the BRC Act, the ROBERT DEY. FRIERSON Deputy Secretary ofthe Board home state ofCitizens isMichigan,4andRepublic Bankis locatedinMichigan and Ohio.5 Based on a review ofall the facts ofrecord, including Citizens Banking Corporation relevant state statutes, the Board finds that all conditions Flint, Michigan for an interstate acquisition enumerated in section 3(d) of theBRCActaremetinthiscase.6Inlightofallthefactsof Order Approving the Acquisition of a Bank record, the Board is permitted to approve the proposal undersection3(d)ofthe BRCAct. Holding Company COMPETITIVE CONSIDERATIONS CitizensBankingCorporation ("Citizens"), abankholding company within the meaning of the Bank Rolding Com Section 3 of the BRC Act prohibits the Board from panyAct("BRCAct"), hasrequestedtheBoard'sapproval approving a proposal that would result in a monopoly or under section 3 of the BRC Act! to acquire Republic would be in furtherance ofany attempt to monopolize the Bancorp Inc. ("Republic"), Owosso, and its subsidiary bank, Republic Bank, Lansing, bothofMichigan. Notice ofthe proposal, affording interested persons an 2. Assetdataare asofSeptember30, 2006; statewidedepositand ranking data are as of June 30, 2006, and reflect merger activity opportunitytosubmitcomments,hasbeenpublishedinthe throughOctober18,2006. Inthiscontext,insureddepositoryinstitu FederalRegister(71 FederalRegister54,992(2006».The tions includecommercialbanks, savingsbanks,andsavingsassocia time for filing comments has expired, and the Board has tions. considered the application and all comments received in 3. 12U.S.C. §1842. 4. Undersection 3(d)oftheBHCAct, abank holdingcompany's lightofthe factors setforth insection3ofthe BRCAct. home state is the state in which the total deposits ofall subsidiary Citizens,withtotalconsolidatedassetsofapproximately banksofthecompanywerethelargestonJuly 1,1966,orthedateon $7.8 billion, operates two subsidiary-insured depository which the company became abank holding company, whicheveris institutions withbranchesinIowa, Michigan, andWiscon later(12U.S.C.§I841(0)(4)(C)). sin. Citizens' subsidiary banks are Citizens Bank, Flint, 5. Forpurposesofsection 3(d),the Board considers abank to be located in states in which the bank is chartered, headquartered, or Michigan, and F&M Bank-Iowa, Marshalltown, Iowa. operates a branch. See 12 U.S.c. §§1841(0)(4)-(7), 1842(d)(1)(A), Citizens is the ninth largest depository organization in and 1842(d)(2)(B). 6. See 12 U.S.c. §§1842(d)(1)(A)-(B), (d)(2)(A)-(B). Citizens is adequatelycapitalizedand adequately managed,as definedby appli considered carefully in acting on the proposal. The request fails to cable law. Ohio does not require a bank to be in existence for a demonstratewhywrittencommentsdonotpresentitsviewsadequately minimumperiodoftime beforeitsacquisition. Onconsummationof or why a hearing or meeting otherwise would be necessary or theproposal,Citizenswouldcontrollessthan 10percentofthetotal appropriate.Forthesereasons,andbasedonallthefactsofrecord,the amount ofdeposits ofinsured depository institutions in the United Boardhasdeterminedthatapublichearingormeetingisnotrequired States and less than 30 percent of total deposits held in Ohio by orwarrantedinthiscase.Accordingly,therequestforapublichearing insureddepositoryinstitutions.SeeOhioRev. Code 1115.05(B)(1)(a) ormeetingisdenied. (30 percent limit on statewide deposits). All other requirements pursuanttosection3(d)oftheBHCActwouldbemetonconsumma 1. 12U.S.C.§1842. tionoftheproposal.

CIO Federal Reserve Bulletin0 March 2007 business of banking in any relevant banking market. The or indicate that the proposal would have a significantly BHC Act also prohibits the Board from approving a adverseeffectoncompetitionineach market. The number proposalthatwouldsubstantiallylessencompetitioninany and strength offactors necessary to mitigate the competi relevantbankingmarket, unless the anticompetitiveeffects tiveeffectsofaproposaldependonthe sizeoftheincrease oftheproposalareclearlyoutweighedinthepublicinterest and the resulting level of concentration in a banking by the probable effect of the proposal in meeting the market.lO In both markets, the record indicates that the convenienceandneedsofthe community tobe served.? proposal would not have a significantly adverse affect on Citizens and Republic have subsidiary depository insti competition. tutions that compete directly in six markets in Michigan: Flint Banking Market. In the Flint banking market,11 AnnArbor, Detroit, Flint, Jackson, Lansing, and Traverse Citizens' subsidiary, Citizens Bank ("Citizens Bank"), City. The Board has reviewed carefully the competitive Flint, is the largest depository institution in the market, effects ofthe proposalineachofthese banking markets in controlling deposits of approximately $1.5 billion, which lightofall the facts ofrecord. In particular, the Boardhas represent approximately 35 percent of market deposits. consideredthenumberofcompetitorsthatwouldremainin Republic Bank is the third largestdepository institutionin the bankingmarkets, therelative sharesoftotaldeposits in the market, controlling deposits of approximately depository institutions in the markets ("market deposits") $436.9 million, which represent approximately 10 percent controlled by Citizens and Republic,8 the concentration ofmarketdeposits. level of market deposits and the increase in this level as Toreducethepotentialadverseeffectsoncompetitionin measured by the Herfindahl-Hirschman Index ("HHI") the Flintbanking market, Citizenshascommittedtodivest underthe DepartmentofJustice MergerGuidelines ("DOJ seven branches ofRepublic, with at least $210 million in Guidelines"),9 other characteristics of the markets, and deposits, to an out-of-market insured depository organiza commitments by Citizens to divest certain branches of tion.12Onconsummationoftheproposedmerger,and after Republic intheFlintbankingmarket. accounting for the proposed divestiture, Citizens would remain the largest depository institution in the market, A. Two Banking Markets Warranting Special controlling deposits of approximately $1.8 billion, which Scrutiny would represent 41 percent of market deposits. The HHI wouldincrease 350pointsto 2502. Citizens and Republic compete directly in two banking Several factors indicate that the increase in concentra markets that warrant a detailed review: Flintand Jackson. tion in the Flintbanking market, as measured by the HHI Asdiscussedbelow, the post-consummationconcentration andCitizens'marketshare,overstatesthepotentialadverse levelsintheFlintmarket(afteraccountingfortheproposed competitive effects of the proposal in the market. After divestiture)wouldexceedthethresholdsoftheDO}Guide consummation,andtakingintoaccounttheproposeddives lines, and Citizens' resulting market share in the market titure, at least 17 other insured depository institutions wouldexceed35 percent.The post-consummationconcen would continue to operate in the market. In addition, tration level in the Jackson market would exceedthe DO} community credit unions exert an important competitive Guidelines' thresholds. influence in the Flint banking market.13 Eight community The Board has considered carefully whether other fac tors eithermitigate the competitive effects ofthe proposal 10. See NationsBank Corp., 84 Federal Reserve Bulletin 129 (1998). 7. 12U.S.c. §I842(c)(l). II. The Flint banking market is defined as Genesee County; 8.Depositandmarket-sharedataareasofJune30,2006,adjustedto Hazelton,Venice,Vernon,andBumstownshipsinShiawasseeCounty; reflectsubsequentmergersandacquisitionsthroughOctober18,2006, Maple Grove, Taymouth, and Birch Run townships in Saginaw andarebasedoncalculationsinwhichthedepositsofthriftinstitutions County;andArbelaandMillingtontownshipsinTuscolaCounty,allin are includedat 50 percent. The Board previously has indicated that Michigan. thrift institutions have become, or have the potential to become, 12. Citizens has committed that, before consummation of the significant competitors of commercial banks. See, e.g., Midwest proposed merger, it will execute an agreement for the proposed Financial Group, 75 Federal Reserve Bulletin 386 (1989); National divestitureintheFlintbankingmarketwithapurchaserthattheBoard CityCorporation,70FederalReserve Bulletin743(1984).Thus,the determinestobecompetitivelysuitable. Citizensalso has committed Board regularly has included thrift deposits in the market-share tocompletethedivestiturewithin 180daysafterconsummationofthe calculationona50percentweightedbasis.See. e.g., FirstHawaiian, proposed merger. In addition, Citizens has committed that, if it is Inc.,77FederalReserveBulletin52(1991). unsuccessful in completingthe proposeddivestiture withinthat time 9. Under the 001 Guidelines, a market is considered unconcen period,itwilltransfertheunsoldbranch(es)toanindependenttrustee tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated whowillbeinstructedtosellthebranch(es)toanalternatepurchaser if the post-merger HHI is between 1000 and 1800, and highly orpurchasersinaccordancewiththetermsofthis orderandwithout concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof regardtoprice. Boththetrusteeandany alternate purchasermustbe Justice ("001") has informed the Board that a bank merger or acceptablebythe Board.See BankAmerica Corporation, 78 Federal acquisition generally will notbechallenged(in theabsence ofother ReserveBulletin338(1992); UnitedNewMexicoFinancialCorpora factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI tion,77FederalReserveBulletin484(1991). is at least 1800 and the merger increases the HHI more than 200 13. The Board previously has considered the competitiveness of points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds certain active credit unions as a mitigatingfactor. See, e.g., Regions forscreeningbankmergersandacquisitionsforanticompetitiveeffects Financial Corporation, 93 Federal Reserve Bulletin C16 (2007); implicitly recognize the competitive effects oflimited-purpose and Wachovia Corporation, 92 Federal Reserve Bulletin CI83 (2006); othernondepositoryfinancialentities. F.N.B. Corporation,90FederalReserveBulletin481 (2004);Gateway

Legal Developments: Fourth Quarter, 2006 Cl1 credit unions control approximately $887.5 million in In addition, the record of recent entry into the Jackson deposits in the market, which represent approximately banking market evidences the market's attractiveness for 9 percent of market deposits on a 50 percent weighted entry. Within the past five years, three de novo bank basis. Accounting for the revised weightings of these branches have opened in the Jackson market, and all deposits, Citizenswould control approximately 37 percent remain operational. Otherfactors indicatethat the Jackson ofmarket deposits on consummation ofthe proposal, and banking market continues to be attractive for entry. From theHHI wouldincrease 288 pointsto 2077.14 2002 to 2005, the market's annualized population growth Moreover, the record of recent entry into the Flint exceededthe averageannualized populationgrowthfor all banking market evidences the market's attractiveness for metropolitanareasandnonmetropolitancountiesinMichi entry.Withinthepastfiveyears,sixdenovobankbranches gan. Furthermore, the market's annualized income growth and one creditunion have openedin the Flintmarket, and exceeded the average annualized income growth for all all remain operational. Otherfactors indicatethatthe Flint metropolitanareas inMichiganduring the sameperiod. banking market remains attractive for entry. For example, from2002to2005,themarket'saverageannualizeddeposit B. Banking Markets within Established Guidelines growthexceededtheaverageannualizeddepositgrowthfor Consummation ofthe proposal withoutdivestitures would all metropolitanareas inMichigan. Jackson Banking Market. In the Jackson banking mar be consistent with Board precedent and within the thresh ket,15 Citizens Bank is the third largestdepository institu olds of the DOJ Guidelines in the other four banking markets: AnnArbor, Detroit,Lansing, andTraverseCity.J7 tion, controlling deposits of $275.7 million, which repre Onconsummationofthe proposal, theAnnArborbanking sent 19 percent of market deposits. Republic Bank is the fourth largestdepository institutionin the market, control market would remain unconcentrated, the Detroit and lingdepositsof$172million,whichrepresent 12percentof Traverse City banking markets would remain moderately market deposits. On consummation of the proposal, Citi concentrated, and the Lansing banking market would zensBankwouldbecomethe largestdepository institution becomemoderatelyconcentrated,asmeasuredbytheHHI. Numerous competitors would remain in each of the four in the market, controlling deposits of approximately $447.8million.TheHHIinthismarketwouldincrease459 banking markets. points to 1974, and the pro forma market share of the combinedentity would be 31 percent. C. Views of OtherAgencies and Conclusion on Severalfactorsindicatethattheproposalwouldnothave Competitive Considerations a significantly adverseeffect onconcentrationin the Jack TheDOJ also conductedadetailed review ofthe potential son bankingmarket. On consummationofthe proposal, at competitive effects of the proposal and has advised the least 12 other insured depository institutions would con Boardthatconsummationofthe proposal wouldnot likely tinuetooperateinthemarket.TheBoardalsohasevaluated have a significantly adverse effect on competition in any the competitive influence of five active community credit relevantbankingmarket. Inaddition,theappropriatebank unions in this market.Thesecreditunionscontrolapproxi ingagencieshavebeenaffordedanopportunitytocomment mately $192.4 million in deposits in the market, which and have not objected to the competitive effects of the represent approximately 6percentofmarketdeposits on a proposal. 50 percent weighted basis. Accounting for the revised Basedonallthefactsofrecord,theBoardconcludesthat weightings of these deposits, Citizens would control ap consummation of the proposal would not have a signifi proximately 29 percent ofmarket deposits on consumma cantly adverse effect on competition or on the concentra tionoftheproposal,andtheHHIwouldincrease403points tionofresourcesinthesixbankingmarketswhereCitizens to 1747.16 and Republic compete directly or in any other relevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with ap Bank& TrustCo.,90FederalReserveBulletin547(2004).IntheFlint andJacksonbankingmarkets,severalcreditunionsofferawiderange proval. ofconsumerproducts, operate street-level branches,and have mem bershipsopentoalmostalltheresidentsintheapplicablemarket.The Boardhasconcludedthattheactivitiesofsuchcreditunions inthese FINANCIAL, MANAGERIAL, AND SUPERVISORY twomarketsexertsufficientcompetitiveinfluencetomitigate,inpart, CONSIDERATIONS thepotentialadversecompetitiveeffectsoftheproposal. 14.Withthedepositsofthesecreditunionsweightedat50percent, Section3oftheBHCActrequirestheBoardtoconsiderthe Citizenswouldbethelargestdepositoryinstitutioninthemarket,with financial and managerial resources and future prospectsof approximately32percentofmarketdeposits,andRepublicwouldbe the third largest depository institution in the market, controlling the companies and depository institutions involved in the approximately9percentofmarketdeposits. 15.TheJacksonbankingmarketisdefinedasJacksonCountyand theeasterntwotiers oftownshipsinCalhounCounty,includingLee, with approximately 18 percent of market deposits, and Republic Clarence,Marengo,Sheridan,Eckford,Albion,Clarendon,andHomer would be the fourth largest depository institution in the market, townships,allinMichigan. controllingapproximately 11 percentofmarketdeposits. 16.Withthedepositsofthesecreditunionsweightedat50percent, 17. The effects of the proposal on the concentration of banking Citizenswouldbethethirdlargestdepositoryinstitutioninthemarket, resourcesinthesemarketsaredescribedintheappendix.

el2 Federal Reserve Bulletin0 March 2007 proposal and certain other supervisory factors. The Board convenienceandneedsofthecommunitiestobeservedand has considered these factors in light of all the facts of take into account the records of the relevant insured record,includingconfidentialreportsofexamination,other depositoryinstitutionsundertheCommunityReinvestment supervisoryinformationfrom theprimary federal andstate Act ("CRA").18 Citizens Bank and F&M Bank-Iowa re supervisors ofthe organizations involved in the proposal, ceived "outstanding" and "satisfactory" ratings at their publicly reported and other financial information, and most recent CRA performance evaluations by the Federal informationprovidedby Citizens. ReserveBankofChicago,asofJuly 18,2005,andJuly 17, Inevaluatingfinancialfactorsinexpansionproposalsby 2006,respectively.RepublicBankreceiveda"satisfactory" banking organizations, the Board reviews the financial rating at its most recent CRA performance evaluation by condition ofthe organizations involved both on a parent the Federal Insurance Deposit Corporation, as of Au only and on a consolidated basis, as well as the financial gust 12, 2002. After consummation of the proposal, Citi condition of the subsidiary depository institutions and zensplanstoimplementitsCRApoliciesatRepublicBank. significant nonbanking operations. In this evaluation, the Citizens has represented that the proposal will provide Boardconsidersavarietyofinformation, includingcapital greaterconveniencetocustomers through a largernetwork adequacy, asset quality, and earnings performance. In of branches and ATMs and a broader range of financial assessing financial factors, the Board consistently has products and services over an expanded geographic area. consideredcapitaladequacytobeespeciallyimportant.The Based on all the facts ofrecord, the Board concludes that Board also evaluates the financial condition of the com considerationsrelatingtotheconvenienceandneedsofthe bined organization at consummation, including its capital communitytobeservedandtheCRAperformancerecords position, asset quality, and earnings prospects, and the of the relevant depository institutions are consistent with impactofthe proposedfunding ofthe transaction. approval. TheBoardhasconsideredcarefully the financial factors of the proposal. Citizens, all its subsidiary depository institutions, and Republic Bank currently are wellcapital CONCLUSION ized and would remain so on consummation of the pro posal. Based on its review of the record, the Board also Based on the foregoing and all the facts of record, the finds that Citizens has sufficient financial resources to Board has determined that the application should be, and effect the proposal. The proposed transaction is structured hereby is, approved. In reaching its conclusion, the Board as a share exchange and cash payment. The cash portion hasconsidered all thefacts ofrecordin lightofthefactors wouldbe funded from the proceedsofan issuanceoftrust that it is required to consider under the BRC Act. The preferredsecuritiesandcashon hand. Board'sapprovalisspecificallyconditionedoncompliance TheBoardalsohasconsideredthe managerialresources by Citizens with the conditions imposed in this order and of Citizens, Republic, and their subsidiary banks. The thecommitmentsmadetotheBoardinconnectionwiththe Board has reviewed the examination records of these application, including the divestiture commitment dis institutions, including assessments of their management, cussed above. For purposes of this action, the conditions risk-managementsystems, and operations. In addition, the and commitments are deemed to be conditions imposedin Boardhasconsidereditssupervisoryexperiencesandthose writing by the Board in connection with its findings and oftheotherrelevantbankingsupervisoryagencieswiththe decision herein and, as such, may be enforcedin proceed organizations and their records ofcompliance with appli ingsunderapplicablelaw. cable banking laws and with anti-money-laundering laws. The proposed transaction may not be consummated Citizens, Republic, and theirsubsidiary depository institu beforethe 15thcalendarday afterthe effectivedateofthis tions are considered well managed. The Board also has order, orlaterthan three months afterthe effective date of considered Citizens' plans for implementing the proposal, thisorder,unlesssuchperiodisextendedforgoodcauseby including the proposed management after consummation, the Board orthe FederalReserve BankofChicago, acting and has consulted with the other relevant supervisory pursuantto delegatedauthority. agenciesforRepublicBankconcerningthose plans. By order ofthe Board ofGovernors, effective Decem Basedonallthefactsofrecord,theBoardhasconcluded ber 12,2006. thatconsiderationsrelating to the financial and managerial resourcesandfutureprospectsoftheorganizationsinvolved Votingforthis action: Chairman Bernanke, Vice ChairmanKohn, andGovernorsBies,Warsh,Kroszner,andMishkin. intheproposalareconsistentwithapproval,asaretheother supervisoryfactors underthe BRCAct. ROBERT DEY. FRIERSON Deputy Secretary ofthe Board CONVENIENCE AND NEEDS CONSIDERATIONS Inactingonaproposalundersection3oftheBRCAct, the Board also mustconsidertheeffectsofthe proposalonthe 18.12U.S.c.§2901 etseq.;12U.S.c. §1842(c)(2).

Legal Developments: Fourth Quarter, 2006 C13 Appendix CITIZENS AND REPUBLIC BANKING MARKETS IN MICHIGAN CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES WITHOUT DIVESTITURES Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits number of shares HHI HHI (dollars) competitors (percent) AnnArbor-Washtenaw County, excluding Salem township; and Putnam, Hamburg, and Unadilla townships in Livingston County Citizens Pre-Consummation ............... 13 137.5 mil. 2.7 905 16 20 Republic ....................................... 11 154.7 mil. 3.0 905 16 20 Citizens Post-Consummation.............. 7 292.1 mil. 5.7 905 16 20 Detroit-Oakland, Macomb, and Wayne Counties; Hadley, Metamora, Dryden, andAlmonttownships 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 ............... 16 423.5 mil. .5 1,562 1 49 Republic ....................................... 12 530.1 mil. .7 1,562 1 49 Citizens Post-Consummation.............. 9 953.6 mil. 1.2 1,562 I 49 Lansing-Clinton, Eaton, andIngham Counties; PortlandandDanby townships in Ionia County; Handy, Conway, Cohoctah, andDeerfield townships in Livingston County; and Woodland and Castleton townships in Barry County Citizens Pre-Consummation ............... 5 362.6 mil. 6.7 1,090 200 25 Republic ....................................... 2 823.7 mil. 15.1 1,090 200 25 Citizens Post-Consummation.............. 1 1.2 bil. 21.8 1,090 200 25 Traverse City-Antrim County, excluding Banks township; andBenzie, GrandTraverse, Kalkaska, and Leelanau Counties Citizens Pre-Consummation ............... 11 45.7 mil. 2.0 1,428 4 15 Republic ....................................... 12 24.7 mil. 1.1 1,428 4 15 Citizens Post-Consummation.............. 11 70.4 mil. 3.1 1,428 4 15 NOTE: Dataareas ofJune 30,2006.All rankings, marketdeposit shares,andHHIsarebasedonthriftdepositsweightedat50percent.

C14 Federal Reserve Bulletin0 March 2007 Grupo Financiero Banorte, S.A. de C.V. Banorte, with totalconsolidatedassetsofapproximately Monterrey, Nuevo Leon, Mexico $15.1 billion,isthefifthlargestbankinMexico.5Banorteis asubsidiary ofand represents more than 90 percentofthe assets ofGF Norte, a financial services holding company Banco Mercantil del Norte, SA., that owns 96 percent of the shares of Banorte. GF Norte Institucion de Banca Multiple, Grupo currently has no banking operations in the United States; however, it engages through subsidiaries in investment Financiero Banorte advisory and securities brokerage activities in the United Monterrey, Nuevo Leon, Mexico States. INBFinancial, with totalconsolidatedassetsofapproxi mately$1.2billion,controlsoneinsureddepositoryinstitu Banorte USA Corporation tion, Inter National Bank, in Texas. INB Financial is the Wilmington, Delaware 41st largest insured depository organization in the state, controllingdeposits ofapproximately $862million, which Order Approving the Formation of Bank representlessthan 1percentofthetotalamountofdeposits Holding Companies and Acquisition of a ofinsureddepository institutionsin the state.6 Bank FINANCIAL, MANAGERIAL, AND SUPERVISORY Grupo Financiero Banorte, S.A. de C.V. ("GF Norte"), CONSIDERATIONS Banco Mercantil del Norte, S.A., Instituci6n de Banca Multiple,GrupoFinancieroBanorte ("Banorte"), andBan Section3oftheBHCActrequirestheBoardtoconsiderthe orte USA Corporation ("Banorte USA")I (collectively, financial and managerial resources and future prospectsof "Applicants") have requested the Board's approval under the companies and depository institutions involved in the section3oftheBankHoldingCompanyAct("BHCAct")2 proposal and certain other supervisory factors. The Board to become bankholding companies and to acquire 70 per has carefully considered these factors in light of all the centofthe voting securitiesofINB Financial Corporation facts of record, including confidential supervisory and ("INB Financial"), McAllen, Texas, and thereby acquire examination information from the various U.S. banking control of its subsidiaries, INB Delaware Corporation supervisors ofthe institutions involved, publicly reported ("INB Delaware"), Wilmington, Delaware, and Inter Na and other financial information, and information provided tionalBank,McAllen,Texas.3GFNorte, Banorte,Banorte by the Applicants. The Board also has consulted with the USA, INB Financial, and INB Delaware (jointly, "FHC National Banking and Securities Commission ("CNBV"), electors") have also filed with the Board elections to an agency ofthe Mexican Ministry ofFinance and Public become financial holding companies on consummation of Creditthatisresponsibleforthesupervisionandregulation theproposalpursuanttosection4(k)and(1)oftheBHCAct of Mexican banks and financial services holding compa and section225.82oftheBoard'sRegulationy'4 nies, such as GFNorte. Notice ofthe proposal, affording interested persons an Inevaluatingthefinancial factorsinproposalsinvolving opportunitytosubmitcomments,hasbeenpublishedinthe the formation of new bank holding companies, the Board FederalRegister(71 FederalRegister14,894(2006)).The reviews the financial condition of the Applicants and the time for filing comments has expired, and the Board has targetdepository institutions.TheBoardalsoevaluatesthe consideredtheproposalandallcommentsreceivedinlight financial conditionoftheproformaorganization,including ofthefactors setforth insection3oftheBHCAct. its capital position, asset quality, and earnings prospects, and the impactoftheproposedfunding ofthe transaction. TheBoardhascarefully consideredthefinancial factors ofthe proposal. Mexico's risk-based capital standards are 1. GF Norte has represented that Banorte USA would be formed consistent with those established by the Basel Capital beforeconsummationofthetransaction. 2. 12U.S.C. §1842. Accord. The capital ratios of Banorte would continue to 3. Banorte USA will have an option to acquire the remaining exceed the minimum levels that would be required under 30percentofINB Financial's votingsecuritiesatspecified intervals the Accord and are considered equivalent to the capital duringthenextfiveyears. levels that would be required ofa U.S. banking organiza 4. See 12 U.S.c. §1843(k)and (I); 12CFR225.82. FHCelectors tion. Furthermore, INB Financial and Inter National Bank have certified that Inter National Bank is well capitalized and well managedandhaveprovidedalltheinformationrequiredunderRegu arewellcapitalizedandwouldremainsoonconsummation lationY.Basedonallthefactsofrecord,theBoardhasdeterminedthat these elections to become financial holding companies will become effective on consummation of the proposal, if on that date Inter 5.MexicanassetandrankingdataareasofDecember31,2004,and NationalBankremainswellcapitalizedandwellmanaged,andifithas arebasedontheexchangeratethenineffect.Domesticassetsareasof received a rating ofat least "satisfactory" at its most recent perfor June30,2006,anddepositdataandrankingsareasofJune30,2005. mance evaluation under the Community ReinvestmentAct ("CRA") 6.Inthiscontext,depositoryinstitutionsincludecommercialbanks, (12U.S.c. §2901 etseq). savingsbanks,andsavingsassociations.

Legal Developments: Fourth Quarter, 2006 CIS oftheproposal.TheBoardalsohasconsideredthefinancial Inaddition,section3oftheBHCActrequirestheBoard resources of GF Norte and Banorte USA. Based on its to determine that an applicant has provided adequate review of these factors, the Board finds that Applicants assurances that it will make available to the Board such have sufficient financial resources to effect the proposal. informationonitsoperationsandactivitiesandthoseofits The proposed transactionis structured as a share purchase affiliatesthattheBoarddeemsappropriatetodetermineand tobefunded withavailablecashresources. enforce compliance with the BHC ACt.IO The Board has TheBoardalsohasconsideredthe managerialresources reviewed the restrictions on disclosure in the relevant ofthe organizations involved and the proposed combined jurisdictions in which GF Norte and Banorte operate and organization. The Board has reviewed the examination has communicated with relevant government authorities records ofINB Financial and InterNational Bank, includ concerningaccess to information. ing assessments of their management, risk-management Inaddition, GFNorteandBanortehavecommittedthat, systems, and operations. In addition, the Board has con to the extent not prohibited by applicable law, each will sulted with the CNBV about Applicants' managerial re make available to the Board such information on the sources to implement the proposal, including compliance operationsofitsaffiliatesthattheBoarddeemsnecessaryto ofGF Norte andBanortewith applicable laws andregula determine and enforce compliance with the BHC Act and tions. TheBoard also hasconsideredits supervisoryexpe other applicable federal law. GF Norte and Banorte also riences andthoseoftheotherrelevantbankingsupervisory have committedto cooperate with the Boardto obtainany agencies with the U.S. organizations and their records of waivers or exemptions that may be necessary to enable compliance with applicable banking laws and with anti-. their affiliates to make any such information available to money-laundering laws. INB Financial and Inter National the Board. In light of these commitments, the Board has Bank are considered to be well managed. The Board also concluded that GF Norte and Banorte have provided has considered Applicants' plans for implementing the adequate assurancesofaccess to any appropriate informa proposal, including the proposed management after con tiontheBoardmayrequest.Forthesereasons,andbasedon summation. all the facts of record, the Board has concluded that the Basedonallthefactsofrecord,theBoardhasconcluded supervisory factors it is required to consider under sec thatconsiderationsrelating to the financial and managerial tion 3(c)(3) oftheBHCActare consistentwithapproval. resourcesandfutureprospectsoftheorganizationsinvolved inthe proposal are consistentwithapproval. Section 3 ofthe BHCAct also provides that the Board COMPETITIVE CONSIDERATIONS may not approve an application involving a foreign bank unlessthebankis subjectto comprehensivesupervisionor Section 3 of the BHC Act prohibits the Board from regulation on a consolidated basis by the appropriate approving a proposal that would result in a monopoly or authorities in the bank's home country.7 As noted, the would be in furtherance of an attempt to monopolize the CNBVistheprimarysupervisorofMexicanbanks,includ business of banking in any relevant banking market. In ing Banorte. The Board has previously determined, in an addition, section 3 of the BHC Act prohibits the Board application under the International BankingAct involving from approving a proposed bank acquisition that would BBVABancomer,S.A.("Bancomer"),MexicoCity,Mexico, substantially lessen competition in any relevant banking thatBancomerwassubjecttohomecountry supervisionon market, unless the anticompetitive effects ofthe proposal a consolidated basis.8 In this case, the Board has deter areclearlyoutweighedinthepublicinterestbyitsprobable minedthatBanorteis supervisedonsubstantiallythe same effectinmeetingtheconvenienceandneedsofthecommu termsandconditionsasBancomer.Basedonallthefactsof nity to be served.ll Applicants do not currently engage in record, the Boardhas concludedthat Banorte is subjectto banking activities in the United States and, therefore, do comprehensive supervision and regulation on a consoli not compete with Inter National Bank in any relevant dated basisbyits home country supervisor.9 banking market. Accordingly, the Board concludes, based on all the facts of record, that consummation of the proposal would not have a significant adverse effect on 7. See 12U.S.C. §I842(c)(3)(B).Asprovidedin RegulationY,the competitionorontheconcentrationofbankingresourcesin Board detennines whetheraforeign bank is subjectto consolidated anyrelevantbankingmarketandthatcompetitiveconsider home country supervision under the standards set forth in Regula tionK.See12CFR225.l3(a)(4).RegulationKprovidesthataforeign ationsareconsistentwithapproval. bank will be considered subject to comprehensive supervision or regulation on aconsolidated basis ifthe Board determines that the bankissupervisedorregulatedinsuchamannerthatitshomecountry supervisorreceivessufficientinformationontheworldwideoperations MexicanMinistryofFinanceandPublicCredit,overthenonbanking ofthe bank, including its relationship to any affiliates, to assess the subsidiariesofGFNorte.TheCNBVhastheauthority torequireGF bank's overall financial condition and its compliance with laws and Norte to submitreports about its operations on aconsolidatedbasis regulations.See 12CFR211.24(c)(I). andtoconductinspectionsofGFNorte'sprimarynonbankingsubsid 8. See BBVA Bancomer, 89 Federal Reserve Bulletin 146(2003); iaries.TheCNBValsohasauthoritytoimposerestrictionsontransac Grupo Financiero Banamex Accival, 82 Federal Reserve Bulletin tionsbetweenBanorteandrelatedparties.includingGFNorteandits 1047(1996). subsidiaries. 9.TheCNBVhassupervisoryauthorityoverGFNorte.Inaddition, 10.See 12U.S.C.§1842(c)(3)(A). the CNBV has supervisory authority, with other agencies of the II. 12U.S.c.§I842(c)(I).

C16 Federal Reserve Bulletin0 March 2007 CONVENIENCE AND NEEDS CONSIDERATIONS Votingfor this action: ChairmanBernanke, ViceChairman Kohn, andGovernorsKrosznerandMishkin.Absentandnotvoting:Gover Inactingonaproposalundersection3oftheBHCAct, the norsBiesandWarsh. Boardalso mustconsiderthe effectsofthe proposal onthe ROBERT DEY. FRIERSON convenienceandneedsofthecommunitiestobeservedand Deputy Secretary ofthe Board take into account the records of the relevant insured depository institutions under the CRA. An institution's most recentCRAperformance evaluation is a particularly Regions Financial Corporation importantconsiderationintheapplicationsprocessbecause Birmingham, Alabama it represents a detailed, on-site evaluation of the institu tion's overallrecord ofperformance underthe CRAby its appropriatefederal supervisor.!2 Regions Bank TheBoardhascarefullyconsideredtheconvenienceand Birmingham, Alabama needs factor and the CRA performance record of Inter National Bank in light of all the facts of record. As Order Approving the Merger of Bank provided in the CRA, the Board has evaluated the conve Holding Companies, the Merger of Banks, nience and needs factor in light ofthe evaluations by the appropriate federal supervisor of the CRA performance and the Establishment of Branches record ofInterNationalBank.The bankreceiveda"satis factory" rating at its most recentCRAperformance evalu Regions Financial Corporation ("Regions"), a financial ationbytheOfficeoftheComptrolleroftheCurrency,asof holdingcompany withinthe meaningofthe BankHolding April 14, 2003. Company Act ("BHC Act"), has requested the Board's Applicantshaverepresentedthattheyintendtomaintain approval under section 3 of the BHC Act! to merge with InterNationalBank'sCRAprogram.Applicantsexpectthat AmSouth Bancorporation ("Amsouth") and acquire its the proposal will enhance the ability of Inter National subsidiarybank,AmSouth Bank, bothofBirmingham.2In Bank'scustomerstoconductcross-borderfinancialtransac addition, Regions' subsidiary state member bank, Regions tions andbusiness. Bank, also of Birmingham, has requested the Board's In light of all the facts of record, the Board has con approval undersection 18(c)ofthe Federal DepositInsur cluded that considerations relating to the convenience and ance AcP ("Bank Merger Act") to merge with AmSouth needs factor, including the performance record of Inter Bank, with Regions Bankas the surviving entity. Regions National Bank, are consistent with approval of this pro Bank also has applied under section 9 of the Federal posal. ReserveAct ("FRA") to retainand operatebranches atthe locationsofAmSouthBank'smainofficeandbranches.4In CONCLUSION addition, Regions has provided notice under section 25 of the Federal Reserve Act and section 211.5 ofthe Board's Based on the foregoing and in light of all the facts of Regulation K5 ofits intention to acquire Cahaba Interna record, the Board has determined that the proposal should tional, Inc., also ofBirmingham, an agreementcorporation be, and hereby is, approved. In reaching this conclusion, subsidiary ofAmSouthBank.6 the Board has consideredall the facts ofrecord in lightof Notice ofthe proposal, affording interested persons an thefactorsitisrequiredtoconsiderundertheBHCActand opportunitytosubmitcomments,hasbeenpublishedinthe other applicable statutes. The Board's approval is specifi Federal Register(71 Federal Register47,812 (2006» and cally conditioned on compliance by Applicants with the in local publications in accordance with the relevant stat conditions in this order and all the commitments made to utes and the Board's Rules ofProcedure'?As required by theBoardinconnectionwiththe proposal. Forpurposesof theBankMergerAct, reports on the competitiveeffectsof this action, thecommitmentsandconditionsaredeemedto the mergers were requested from the United States Attor be conditions imposed in writing by the Board in connec ney General and the appropriate banking agencies. The tion with its findings and decision and, as such, may be enforcedinproceedingsunderapplicablelaw. 1. 12U.S.C.§1842. The proposed transaction shall not be consummated 2.Inaddition,RegionsandAmSoutheachhasrequestedtheBoard's beforethe 15thcalendarday afterthe effectivedate ofthis approval toexercisean optionto purchase upto 19.9percentofthe order, orlaterthan three months afterthe effectivedate of otherinstitution's stock on the occurrence ofcertain circumstances. thisorder,unlesssuchperiodisextendedforgoodcauseby The options would terminate on consummation ofRegions' merger withAmSouth. the BoardorbytheFederalReserveBankofDallas,acting 3. 12U.S.c.§1828(c). pursuanttodelegatedauthority. 4. 12U.S.c. §321. By order of the Board of Governors, effective Octo 5.12U.S.C.§601 etseq.; 12CPR211.5. ber 13,2006. 6. Regions proposes to acquire the shares of the nonbanking subsidiariesofAmSouthinaccordancewithsection4(k)ofthe BHC Act and the post-transaction notice procedures in section 225.87 of 12.See InteragencyQuestionsandAnswersRegardingCommunity RegulationY(12U.S.C.§1843(k); 12CPR225.87). Reinvestment,66FederalRegister36,620,36,640(2001). 7. 12CPR262.3(b).

Legal Developments: Fourth Quarter, 2006 C17 time for filing comments has expired, and the Board has Basedonareview ofall the facts ofrecord, including a considered the applications, notice, and all comments review of relevant state statutes, the Board finds that all received in lightofthe factors setforth in section 3ofthe conditions for an interstate acquisition enumerated in sec BHCAct, theBankMergerAct, and the FRA.8 tion3(d)ofthe BHCActare metin this case.15In lightof Regions,withtotalconsolidatedassetsofapproximately allthefactsofrecord,theBoardispermittedtoapprovethe $86.1 billion, is the 21stlargestdepository organization in proposal undersection 3(d)ofthe BHCAct. theUnitedStates,controllingdomesticdepositsofapproxi mately$57.2billion,whichrepresentlessthan 1percentof COMPETITIVE CONSIDERATIONS the total amount ofdeposits ofinsured depository institu tionsintheUnitedStates.9Regionsoperatesonesubsidiary TheBHCActandtheBankMergerActprohibitthe Board depository institution, Regions Bank, with branches in 16 from approvingaproposalthatwouldresultinamonopoly states,1O and engages in numerous nonbanking activities or would be in furtherance of any attempt to monopolize thatarepermissibleundertheBHCAct. the business of banking in any relevant banking market. AmSouth, with total consolidated assets of approxi Both acts also prohibit the Board from approving a bank mately $53.9 billion, is the 27th largestdepository organi acquisition that would substantially lessen competition in zationintheUnitedStates,controllingdomesticdepositsof any relevant banking market, unless the anticompetitive approximately$35.8billion.AmSouthoperatesonesubsid effectsofthe proposal areclearlyoutweighedinthepublic iary depository institution, AmSouth Bank, with branches interest by its probable effect in meeting the convenience insevenstates.11 andneedsofthe communitytobe served.16 Onconsummationofthisproposal,andafteraccounting Regions andAmSouth have subsidiary depository insti for all proposed divestitures, Regions would become the tutions that compete directly in 67 banking markets in 13th largest depository organization in the United States, Alabama, Florida, Georgia, Kentucky, Louisiana, Missis with total consolidatedassetsofapproximately $142.4bil sippi,andTennessee.TheBoardhasreviewedcarefullythe lion. Regions wouldcontroldomestic deposits ofapproxi competitiveeffectsoftheproposalineachofthesebanking mately$90.6billion,whichrepresentlessthan2percentof markets in light of all the facts of record and public the total amount ofdeposits ofinsured depository institu comments on the proposal.J7 In particular, the Board has tions inthe UnitedStates. consideredthenumberofcompetitorsthatwouldremainin thebankingmarkets, therelativesharesoftotaldeposits in depository institutions ("market deposits") controlled by INTERSTATE ANALYSIS RegionsandAmSouthinthosemarkets,18theconcentration Section 3(d) ofthe BHCAct allows the Board to approve levelsofmarketdeposits and the increases in these levels, an application by a bank holding company to acquire controlofabanklocatedinastateotherthanthehomestate IS. See 12 U.S.c. §1842(d)(I)(AHB), (d)(2)(AHB). Regions is of such bank holding company if certain conditions are adequately capitalizedand adequately managed, a~ defined byappli met.12 For purposes of section 3(d) of the BHC Act, the cablelaw.AmSouth Bankhasbeeninexistenceand operatedforthe homestateofRegionsisAlabama,13andAmSouthBankis minimum period of time required by applicable law. See Fla. Stat. Ann.§658.2953(threeyears);Ga.Code§7-1-622(b)(1)(threeyears); located in Alabama, Florida, Georgia, Louisiana, Missis La.Rev.Stat.Ann.§538(fiveyears);Miss.Code.Ann.§81-23-9(five sippi,Tennessee, andVirginia.14 years);Tenn.Code.Ann.§45-2-1403(threeyears);andVa.CodeAnn. §6.1-44.20(nominimumperiod).Onconsummationoftheproposal, Regions would control less than 10 percent of the total amount of 8.TheBoardreceived132commentsthatsupportedthetransaction deposits ofinsured depository institutions in the United States and, and 18 comments that either opposed or expressed concern about afteraccountingforallproposeddivestitures,lessthan30percent,or variousaspectsoftheproposal. the applicable percentage established by state law, oftotal deposits 9. Nationwide asset data are as of June 30, 2006. Nationwide heldineachrelevantstatebyinsureddepositoryinstitutions.Allother depositandrankingdataareasof,andreflectmergeractivitythrough, requirementspursuanttosection3(d)oftheBHCActwouldbemeton June30,2006.Inthiscontext,insureddepositoryinstitutionsinclude consummationoftheproposal. insuredcommercialbanks,savingsbanks,andsavingsassociations. 16. 12U.S.C.§1842(c)(l); 12U.S.c.§1828(c)(5). 10.RegionsBankoperatesbranchesinAlabama,Arkansas,Florida, 17. Several commenters expressed general concerns about the Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, competitiveeffectsofthis proposal,includingthatconsummationof Missouri, North Carolina, South Carolina, Tennessee, Texas, and the proposal would violate antitrust law. These concerns were care Virginia. fullyconsideredaspartoftheanalysisdescribedabove. II.AmSouthBankoperatesbranchesinAlabama,Florida,Georgia, 18. Depositand market share data are based on data reported by Louisiana,Mississippi,Tennessee,andVirginia. insureddepositoryinstitutions in thesummaryofdeposits dataas of 12.12U.S.C.§1842. June 30, 2005, adjusted to reflect mergers and acquisitions through 13.Undersection3(d)oftheBHCAct,abankholdingcompany's August3,2006,andarebasedoncalculationsinwhichthedepositsof home state is the state in which the total deposits ofall subsidiary thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhas banksofthecompanywerethelargestonJuly I, 1966,orthedateon indicatedthatthriftinstitutionshavebecome,orhavethepotentialto which the company became a bank holding company, whicheveris become, significant competitors of commercial banks. See, e.g.. later(12U.S.C.§1841(0)(4)(C)). Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); 14.Forpurposesofsection3(d),the Boardconsidersabanktobe National City Corporation, 70 FederalReserveBulletin 743 (1984). located in states in which the bank is chartered, headquartered, or Thus, the Boardregularlyhas included thriftdepositsinthe market operates a branch. See 12 U.S.C. §§1841(0)(4H7), I842(d)(1)(A), share calculation on a 50 percent weighted basis. See. e.g., First and 1842(d)(2)(B). Hawaiian. Inc.,77FederalReserveBulletin52(1991).

Cl8 Federal Reserve Bulletin0 March 2007 as measured by the Herfindahl-Hirschman Index ("HHI") B. Certain Banking Markets with Divestitures underthe DepartmentofJustice MergerGuidelines ("DOJ Guidelines"),19 andothercharacteristics ofthe markets. In AfteraccountingforthedivestituresRegionshasproposed, addition, the Boardhas considered commitments made by consummation ofthe merger would be consistent with the Regions to the Board to reduce the potential that the DOJ Guidelines and Board precedent in 12 banking mar proposal would have adverse effects on competition by kets.24Innineofthesemarkets, Regionsproposestodivest divesting52AmSouthbranches(the"divestiturebranches"), all branches to be acquired from AmSouth and, therefore, whichaccountforapproximately$2.7billionindeposits,20 the levels ofconcentration as measured by the HHI would in 17 banking markets (the "divestiture markets").21 Re notmateriallyincreaseonconsummationofthemergerand gionshasproposedtotransferallbutoneofthebranchesto the proposed divestitures.25 In the otherthree markets, the bedivested to out-of-marketcompetitors.22 HHI would not exceed the DOJ Guidelines and Board precedent on consummation of the merger and the pro posed divestitures.26 Numerous competitors would remain A. Banking Markets within Established Guidelines in these three banking markets. After accounting for the Consummation ofthe proposal withoutdivestitures would proposed divestitures, two banking markets would remain be consistent with Board precedent and within the thresh moderately concentrated, and ten banking markets would olds in the DOJ Guidelines in 42 banking markets.23 On remain highly concentrated on consummation of the consummation ofthe proposal, two ofthese banking mar proposal. kets would remain unconcentrated; 32 banking markets would remain moderately concentrated; and eightbanking C. Thirteen Banking Markets Warranting Special markets would remain highly concentrated, with only Scrutiny moderate increases in market concentration, as measured by the HHL Numerous competitors would remain in each Regions and AmSouth compete directly in 13 banking ofthe42bankingmarkets. markets that warrant a detailed review: Anniston Area, DecaturArea, Etowah County, Gulf Shores Area, Mobile Area, Montgomery Area, and Tuscaloosa Area, all of 19. Underthe DOJGuidelines, a market is considered unconcen Alabama; Panama City Area, Florida; Shreveport-Bossier trated ifthe post-mergerHHI isless than 1000, moderatelyconcen City, Louisiana; Jackson Area, Lauderdale County, and trated ifthepost-mergerHUI isbetween 1000and 1800,andhighly Starkville,allofMississippi;andMcCombArea,ofMissis concentratedifthepost-mergerHHI is morethan 1800.TheDepart ment of Justice has informed the Board that a bank merger or sippi and Louisiana. In each of these markets, including acquisitiongenerally will notbechallenged(in theabsence ofother five withproposeddivestitures andeightwithoutproposed factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI divestitures, the concentration levels on consummation of is at least 1800 and the merger increases the HHI more than 200 the proposalwouldexceedthe thresholdlevelsin the DOJ points. The Department of Justice has stated that the higher-than Guidelines,ortheresultingmarketshareofRegionswould normalHHIthresholdsforscreeningbankmergersforanticompetitive effectsimplicitlyrecognizethecompetitiveeffectsoflimited-purpose exceed35 percent. lendersandothernondepositoryfinancialentities. For each of these markets, the Board has carefully 20.Regionsproposestodivest39AmSouthbrancheswithapproxi considered whether other factors either mitigate the com mately$2billionindepositsinAlabama,sixAmSouthbrancheswith petitiveeffectsoftheproposalorindicatethatthe proposal approximately $304.6 million in deposits in Mississippi, and seven AmSouthbrancheswith approximately$408.3million indeposits in wouldhaveasignificantlyadverseeffectoncompetitionin Tennessee. themarket.Thenumberandstrengthoffactorsnecessaryto 21.Regionshascommittedthat,beforeconsummatingtheproposed mitigatethecompetitiveeffectsofaproposaldependonthe merger, it will execute an agreement for the proposed divestures in size ofthe increase in and resulting level ofconcentration eachdivestituremarketwithapurchaserthattheBoarddeterminesto inabankingmarket.27Ineachofthese markets, theBoard becompetitivelysuitable.Regionsalsohascommittedtodivesttotal depositsineachdivestituremarketofatleasttheamountspecifiedin has identified factors that indicate the proposal would not the commitmentanddiscussed inthis orderand tocompletedivesti haveasignificantlyadverseimpactoncompetition,despite tures within 180days ofconsummation ofthe proposed merger. In the post-consummation increase in the HHI and market addition,Regionshascommittedthat,ifitisunsuccessfulincomplet share. ingtheproposeddivestiturewithinthistimeperiod,itwilltransferthe unsoldbranchestoanindependenttrusteethatwillbeinstructedtosell suchbranchestoanalternatepurchaserorpurchasers,withoutregard to price. Both the trustee and any alternate purchaser must be acceptabletotheBoard.SeeBankAmericaCorp.,78FederalReserve 24.These markets, and theeffects ofthe proposal on the concen Bulletin338(1992);UnitedNewMexicoFinancialCorp.,77Federal tration of banking resources in these markets, are described in ReserveBulletin484(1991). AppendixB. 22.RegionsproposestoselltheonlyAmSouthbranchintheParis, 25.Theninemarketsare: DallasCounty,Alabama;Clarksdaleand Tennessee,bankingmarkettoacommercialbankingorganizationthat Greenwood, both of Mississippi; and Bedford County, Cannon currentlyoperatesinthatbankingmarket.Regionsmaydivestnotless County,DeKalbCounty,Fayetteville,Paris, and RheaCounty, all of than $46.9 million in deposit liabilities to an in-market depository Tennessee. institutionwithnomorethan8percentofmarketdeposits. 26.Thethreemarketsare: HuntsvilleArea,Alabama;Cumberland 23. These markets,and the effectsofthe proposal on the concen County,Tennessee;andGreenville,Mississippi. tration of banking resources in these markets, are described in 27. See NationsBank Corporation, 84 Federal Reserve Bulletin AppendixA. 129 (1998).

Legal Developments: Fourth Quarter, 2006 CI9 Among the factors reviewed, the Board has considered marketremainsattractiveforentry.From2001 to2004,the the competitive influence of community credit unions in market's annualized income growth exceeded the average these banking markets. In 11 ofthe markets, certain credit annualized income growth for metropolitan counties in unions offer a wide range of consumer products, operate Alabama. street-levelbranches, andhavemembershipopentoalmost Decatur Area. In the Decatur Area banking market,31 all the residents in the applicable market. The Board has Regions is the largest depository organization in the mar concludedthat the activities ofsuch creditunions in those ket, controlling deposits ofapproximately $332.3 million, II markets exert competitive influence that mitigates, in whichrepresentapproximately24percentofmarketdepos part, the potentialcompetitiveeffectsofthe proposal.28 its.AmSouthisthefourthlargestdepositoryorganizationin themarket,controllingdepositsofapproximately$183mil 1. Banking Markets inAlabama lion, which represent 13 percent of market deposits. To reduce the potential for adverse effects on competition in Anniston Area. In the Anniston Area banking market,29 theDecaturAreabankingmarket,Regionshasproposedto Regions is the fourth largest depository organization, con divestone ofAmSouth's branches with at least $45.3 mil trolling deposits of approximately $199.5 million, which lion in deposits to an out-of-market depository organiza represent approximately 13 percent of market deposits. tion. Onconsummationofthe mergerandafteraccounting AmSouth is the second largest depository organization in for the proposed divestiture, Regions would remain the the market, controlling deposits of approximately largest depository organization in the market, controlling $267.1 million, which represent approximately 18 percent deposits of approximately $470 million, which represent of market deposits. On consummation of the proposal, 33percentofmarketdeposits.TheHHIwouldincreasenot Regions wouldbecomethe largestdepository organization more than401 points and would notexceed 1853. in the market, controlling deposits of approximately Severalfactors indicatethat the proposalisnot likelyto $466.7 million, which represent approximately 31 percent have a significantly adverse effect on competition in the ofmarketdeposits. TheHHI would increase 478 pointsto DecaturArea market. After consummation of the merger 1960. and taking into account the proposed divestiture, II other Several factors indicate that the increase in concentra commercial banking competitors would remain in the tion in theAnnistonArea bankingmarket, as measured by market, some with a significant presence in the market. the HHI, overstatesthe potentialanticompetitiveeffects of Four bank competitors in the market each would control the proposal in the market. After consummation of the more than 10percentofmarketdeposits. proposal,nineothercommercialbankingcompetitorswould Furthermore, the Board has evaluated the competitive remain in the market, some with a significant presence in influence of one active community credit union in this the market. The second and third largestbank competitors market. This credit union controls approximately in the market would control approximately 21 and 17 per $102.9 million in deposits in the market, which, on a cent,respectively, ofmarketdeposits. 50percent weighted basis, represent approximately 4 per In addition, the Board has evaluated the competitive centofmarketdeposits.Accountingfortherevisedweight influence of five active community credit unions in this ings of these deposits, Regions would control approxi market. These credit unions control approximately mately 32 percent ofmarket deposits, and the HHI would $137.6 million in deposits in the market, which, on a increase373 pointsto 1737.32 50 percent weighted basis, represent approximately 4 per In addition, the record ofrecent entry into the Decatur centofmarketdeposits.Accountingfortherevisedweight Areabankingmarketevidencesthe market'sattractiveness ings of these deposits, Regions would control approxi forentry.TheBoardnotesthatthreedepositoryinstitutions mately 30 percentofmarket deposits, and the HHI would have enteredthe marketde novo since2001. increase437 pointsto 1795.30 Etowah County. In the Etowah County banking mar Furthermore,therecordofrecententryintotheAnniston ket,33Regionsisthefifth largestdepository organizationin Areabanking marketevidencesthe market'sattractiveness the market, controlling deposits of approximately for entry. Three depository institutions have entered the $110.6 million, which represent II percent of market marketde novo since 2001. Otherfactors indicate that the deposits.AmSouthis the secondlargestdepository organi zationinthe market, controllingdepositsofapproximately $191.8 million, which represent 18 percent of market 28. The Board previously has considered the competitiveness of certainactivecreditunionsasamitigatingfactor.See. e.g.• Wachovia, Cl83 (2006); F.N.B. Corporation, 90 Federal Reserve Bulletin 481 31. The Decatur Area banking market in Alabama is defined as (2004); GatewayBank& TrustCo.,90FederalReserveBulletin547 MorganCounty and the portion ofthe city ofDecaturin Limestone (2004). County. 29. The AnnistonArea banking market in Alabama is defined as 32. With the deposits ofthis credit union weightedat 50 percent, CalhounCountyandthecityofHeflininCleburneCounty. Regions would be the largestdepository organization in the market, 30.Withthedepositsofthesecreditunionsweightedat50percent, with approximately 23 percent of market deposits, and AmSouth Regions would be the fourth largest depository organization in the wouldbethefourthlargestdepositoryorganizationinthemarket,with market, with approximately I3 percent of market deposits, and approximately 13percentofmarketdeposits. AmSouth would be the second largest depository institution in the 33. The Etowah County banking market is defined as Etowah market,controllingapproximately 17percentofmarketdeposits. County.Alabama.

C20 Federal Reserve BulletinD March 2007 deposits. Onconsummationoftheproposal,Regionswould torswouldremaininthemarket.TheBoardnotesthatthere become the largest depository organization in the market, are other competitors with a significant presence in the controlling deposits of approximately $302.4 million, market. The second largest bank competitor in the market whichrepresentapproximately29percentofmarketdepos would control approximately 19 percent ofmarket depos its.TheHHI wouldincrease 385 points to 1997. its, and two other bank competitors in the market each Several factors indicate that the increase in concentra wouldcontrol more than 10percentofmarketdeposits. tionintheEtowahCounty bankingmarket,asmeasuredby In addition, the Board has evaluated the competitive the HHI, overstates the potential anticompetitiveeffectsof influence of two active community credit unions in this the proposal in the market. After consummation of the market. These credit unions control approximately proposal, eight other commercial banking competitors $48.4 million in deposits in the market, which, on a would remain in the market, some with a significant 50 percent weighted basis, representapproximately 2 per presenceinthemarket.Thesecondlargestbankcompetitor centofmarketdeposits.Accountingfortherevisedweight in the marketwouldcontrol24 percentofmarketdeposits, ings of these deposits, Regions would control approxi and two otherbankcompetitors in the market each would mately 30 percentofmarketdeposits, and the HHI would controlmore than 10percentofmarketdeposits. increase 396pointsto 1792.36 In addition, the Board has evaluated the competitive Furthermore, the record of recent entry into the Gulf influence of three active community credit unions in this ShoresAreabankingmarketevidencesthemarket's attrac market.Thesecreditunionscontrolapproximately$145mil tiveness for entry. The Board notes that two depository lion in deposits in the market, which, on a 50 percent institutions have entered the market de novo since 2001. weightedbasis, represent approximately 7percentofmar Other factors indicate that the Gulf Shores Area banking ketdeposits.Accountingfortherevisedweightingsofthese marketremainsattractiveforentry.From2002to2004,the deposits, Regions wouldcontrol approximately 27 percent market's annualized deposit growth was more than four ofmarketdeposits,andtheHHI wouldincrease337points timesthe averageannualizeddepositgrowthfornonmetro to 1764.34 politan counties in Alabama. From 2001 to 2004, the Moreover, the record of recent entry into the Etowah market'sannualizedpopulationgrowthandincomegrowth County banking market evidences the market's attractive exceeded the average annualized population and income nessforentry.TheBoardnotes thatonedepository institu growthfor nonmetropolitancountiesinAlabama. tion has entered the market de novo since 2001. Other Mobile Area. In the Mobile Area banking market,3? factors indicatethatthemarketremainsattractiveforentry. Regions is the largest depository organization in the mar From2001to2004,themarket'sannualizedincomegrowth ket, controlling deposits of approximately $2.5 billion, exceededtheaverageannualizedincomegrowthformetro whichrepresentapproximately36percentofmarketdepos politancountiesinAlabama. its. AmSouth is the secondlargestdepository organization Gulf Shores Area. In the Gulf Shores Area banking inthemarket,controllingdepositsofapproximately$1.4bil market,35 Regions is the largestdepository organizationin lion, which represent approximately 20 percent ofmarket the market, controlling deposits of approximately deposits. To reduce the potential for adverse effects on $309.7 million, which represent approximately 21 percent competition in the Mobile Area banking market, Regions ofmarketdeposits.AmSouth is the fifth largestdepository has proposed to divest 22 ofAmSouth's branches, with at organizationinthemarket,controllingdepositsofapproxi least$887.6millionindeposits,toanout-of-marketdeposi mately $147.9 million, which represent approximately tory organization. On consummation of the merger and 10 percent of market deposits. On consummation of the after accounting for the proposed divestiture, Regions merger, Regions would remainthe largestdepository orga would remain the largest depository organization in the nization in the market, controlling approximately market, controlling deposits of approximately $3 billion, $457.7 million in deposits, which represent 31 percent of which represent 44 percent of market deposits. The HHI market deposits. The HHI would increase 409 points to would increase not more than 343 points and would not 1849. exceed 2440. Several factors indicate that the increase in concentra One thriftinstitutionoperatingin the marketservesas a tion in the GulfShoresArea banking market, as measured significant source of commercial loans and provides a bytheHHI,overstatesthepotential anticompetitiveeffects broad range of consumer, mortgage, and other banking ofthe proposal in the market. After consummation ofthe products. Competition from this thrift institution closely proposal, 11 othercommercialbanking andthriftcompeti- approximatescompetitionfromacommercialbank.Accord- 36.WiththedepositsofthesecreditunionsweightedatSOpercent, 34.WiththedepositsofthesecreditunionsweightedatSOpercent, Regions would bethe largestdepository organization in the market, Regions would be the fifth largest depository organization in the with approximately 20 percent of market deposits, and AmSouth market, with approximately 10 percent of market deposits, and wouldbethe fifthlargestdepositoryorganizationinthemarket,with AmSouthwould bethesecondlargestdepositoryorganizationinthe approximately 10percentofmarketdeposits. market,withapproximately 17percentofmarketdeposits. 37. The Mobile Area banking market in Alabama is defined as 35.TheGulfShoresAreabankingmarketinAlabamaisdefinedas Mobile County, and the towns ofBay Minette, Daphne, Fairhope, the towns ofElberta, Foley,GulfShores, Lillian, MagnoliaSprings, Loxley, PointClear, Robertsdale, Silverhill, SpanishFort, and Sum andOrangeBeachinBaldwinCounty. merdaleinBaldwinCounty.

Legal Developments: Fourth Quarter, 2006 e21 ingly, the Boardhasconcludedthat deposits controlled by effects on competition in the Montgomery Area banking this institution should be weighted at 100 percent in market, Regions has proposed to divest six ofAmSouth's market-share calculations.38 Accounting for the revised branches, with at least $183.9 million in deposits, to an weightingofthesedeposits,Regionswouldcontrolapproxi out-of-market depository organization. On consummation mately 44 percentofmarketdeposits on consummation of ofthe mergerand afteraccountingfor the proposeddives the proposal, and the HHI would increase 342 points to titure, Regionswouldremainthelargestdepositoryorgani 2434. zationinthe market, controllingdepositsofapproximately Several factors indicate that the increase in concentra $2 billion, which represent approximately 38 percent of tionintheMobileAreabankingmarket,asmeasuredbythe market deposits. The HHI would increase not more than HHI and Regions' market share, overstates the potential 508points and wouldnotexceed 1886. competitive effects of the proposal in the market. After Several factors indicate that the increase in concentra consummationofthe proposal, 17othercommercialbank tionintheMontgomeryAreabankingmarket, asmeasured ingandthriftcompetitorswouldremaininthe market.The by the HHI and Regions' market share, overstates the Boardnotes thatthere areothercompetitors withasignifi potential anticompetitive effects of the proposal in the cant presence in the market. Two bank competitors each market. After consummation of the proposal, 19 other wouldcontrolapproximately 12percentofthe market. commercial banking competitors would remain in the In addition, the Board has evaluated the competitive market. influence of one active community credit union in this The Board also hasevaluated the competitive influence market.Thiscreditunioncontrolsapproximately$66.4mil of five active community credit unions in this market. lion in deposits in the market, which, on a 50 percent These credit unions control approximately $408.1 million weighted basis, representapproximately 1percent ofmar indeposits in the market, which,ona50percentweighted ketdeposits.Accountingfortherevisedweightingsofthese basis, represent approximately 7percent ofmarketdepos deposits, Regions would control approximately 44 percent its.Accountingfortherevisedweightingsofthesedeposits, ofmarketdeposits,andtheHHIwouldincrease339points Regions would control less than 35 percent of market to 2410.39 deposits, andtheHHIwouldincrease438 pointsto 1652.41 In addition, the record of recent entry into the Mobile Inaddition,therecordofrecententryintotheMontgom Areabanking marketevidencesthe market'sattractiveness eryAreabankingmarketevidencesthemarket'sattractive for entry. The Board notes that two depository institutions ness for entry. The Board notes that three depository haveenteredthe marketde novo since 200I. Otherfactors institutions have entered the market de novo since 2001. indicate that the market remains attractive for entry. From Otherfactorsindicatethatthemarketremainsattractivefor 2002 to 2005, the market'sannualizeddeposit growth was entry. From2002 to 2005, the market'sannualizeddeposit morethantwicethe averageannualizeddepositgrowthfor growth substantially exceeded the average annualized metropolitancountiesinAlabama. From2001 to 2004,the deposit growthfor metropolitancountiesinAlabama. market's annualized population growthexceededthe aver Tuscaloosa Area. In the TuscaloosaArea banking mar age annualized population growth for metropolitan coun ket,42 Regions is the largestdepository organization in the ties inAlabama. market, controlling deposits ofapproximately $766.5 mil Montgomery Area. In the Montgomery Area banking lion, which represent approximately 34 percent ofmarket market,40 Regions is the largestdepository organizationin deposits.AmSouthis the secondlargestdepository organi the market, controllingdepositsofapproximately $1.5 bil zationinthemarket,controllingdepositsofapproximately lion, which represent approximately 27 percent ofmarket $466 million, which represent approximately 20.8 percent deposits.AmSouthis the secondlargestdepository organi of market deposits. To reduce the potential for adverse zationinthe market,controllingdepositsofapproximately effects on competition in the Tuscaloosa Area banking $750.1 million, which represent approximately 14 percent market, Regions proposed to divest four of AmSouth's of market deposits. To reduce the potential for adverse branches, with at least $361.3 million in deposits, to an out-of-market depository organization. On consummation ofthe mergerand afteraccountingforthe proposeddives 38. The Board previously has indicated that it may consider the titure,Regionswouldremainthelargestdepositoryorgani competitivenessofathriftinstitutionatalevelgreaterthan50percent of its deposits when appropriate. See, e.g., Banknorth Group, Inc., zationinthe market,controllingdepositsofapproximately 75FederalReserveBulletin703(1989).ThethriftintheMobileArea $871 million, whichrepresentapproximately39percentof bankingmarkethasaratioofcommercialandindustrialloanstoassets market deposits. The HHI would increase not more than of approximately 10 percent, which is comparable to the national 168pointsand would notexceed2069. average for all commercial banks. See First Union Corporation, 84FederalReserveBulletin489(1998). 39. With the deposits ofthis credit union weighted at50 percent, Regions would bethe largestdepository organizationin the market, 41.Withthedepositsofthesecreditunionsweightedat50percent, with approximately 36 percent of market deposits, and AmSouth Regions wouldbe the largest depository organization in the market, would be the second largest depository organization in the market, with approximately 25 percent of market deposits, and AmSouth controllingapproximately20percentofmarketdeposits. would be the eighth largest depository organization in the market, 40.TheMontgomeryAreabankingmarketinAlabamaisdefinedas controllingapproximately 10percentofmarketdeposits. Autauga,Elmore,Lowndes,andMontgomerycounties,andthetowns 42.TheTuscaloosaAreabankingmarketinAlabamaisdefinedas ofTallasseeandEastTallasseeinTallapoosaCounty. TuscaloosaCounty,andthecityofMoundvilleinHaleCounty.

C22 Federal Reserve Bulletin0 March 2oo7 Onethriftinstitutionoperatingin the marketserves as a which represent 36 percent of market deposits. The HHI significant source of commercial loans and provides a wouldincrease 614 pointsto 1792. broad range of consumer, mortgage, and other banking Several factors indicate that the increase in Region's products. Competition from this thrift institution closely market share in the Panama City Area banking market approximatescompetitionfromacommercialbank.Accord wouldnot have asignificantadverseeffectoncompetition ingly, the Boardhas concluded that deposits controlledby in the market. On consummation ofthe proposal, 15 other this institution should be weighted at 100 percent in commercialbankingandthriftcompetitorswouldremainin market-share calculations.43 Accounting for the revised the market, somewith asignificantpresencein the market. weightingofthesedeposits, Regionswouldcontrol38per The second largest bank competitor in the market would centofmarket deposits onconsummationofthe proposal, control II percentofmarketdeposits, and two other bank andthe HHI wouldincrease 164points to 2020. competitors in the marketeach would control slightly less Severalfactorsindicatethattheproposalwouldnothave than 10percentofmarketdeposits. asignificantlyadverseeffectonconcentrationintheTusca Furthermore, the Board has evaluated the competitive loosa Area banking market. After consummation of the influence of four active community credit unions in this proposal, 14othercommercialbanking andthriftcompeti market. These credit unions control approximately tors wouldremaininthe market. $568.4 million in deposits in the market, which, on a In addition, the Board has evaluated the competitive 50percentweightedbasis,representapproximately II per influence of five active community credit unions in this centofmarketdeposits.Accountingfortherevisedweight market. These credit unions control approximately ings of these deposits, Regions would control approxi $216.5 million in deposits in the market, which, on a mately 32 percentofmarketdeposits, and the HHI would 50 percent weighted basis, represent approximately 9 per increase486pointsto 1475.46 centofmarketdeposits.Accountingfortherevisedweight Inaddition, therecord ofextensiverecententryinto the ings of these deposits, Regions would control less than PanamaCity Area banking market evidences the market's 35percentofmarketdeposits, andtheHHIwould increase attractivenessforentry.TheBoardnotesthatsixdepository 137pointsto 1714.44 institutions have entered the market de novo since 2001. In addition, the record of recent entry into the Tusca Other factors indicate that the Panama City Area banking loosaArea banking market evidences the market's attrac market remains attractive for entry. From 2002 through tiveness for entry. The Board notes that two depository 2005,themarket'sannualizeddepositgrowthsubstantially institutions have entered the market de novo since 2001. exceededtheaverageannualizeddepositgrowthformetro Otherfactorsindicatethatthemarketremainsattractivefor politancountiesinFlorida. Inaddition, the market's annu entry. Forexample, from 2000through 2005, the market's alized income growth from 2001 through 2004 exceeded annualized deposit growth exceeded the average annual the average annualized income growth for metropolitan izeddeposit growthfor metropolitancountiesinAlabama. countiesin Florida. 2. Banking Market in Florida 3. Banking Market in Louisiana Panama City Area. In the Panama City Area banking Shrevepon-Bossier City. In the Shreveport-Bossier City market,45 Regions is the largestdepository organizationin banking market,47 Regions is the fourth largestdepository the market, controlling deposits of approximately organizationinthe market,controllingdepositsofapproxi $500.1 million, which represent 22 percent of market mately $491.5 million, which represent 11 percent of deposits.AmSouthis the secondlargestdepository organi market deposits. AmSouth is the third largest depository zationinthe market, controllingdepositsofapproximately organizationinthe market,controllingdepositsofapproxi $327.4 million, which represent 14 percent of market mately $768 million, whichrepresent 17percentofmarket deposits. On consummation ofthe merger, Regions would deposits.Onconsummationoftheproposal,Regionswould remain the largest depository organization in the market, become the largest depository organization in the market, controlling deposits of approximately $827.5 million, controlling deposits of approximately $1.3 billion, which represent 28 percent of market deposits. The HHI would increase 379pointsto 1952. Inaddition,onethriftinstitutionoperatinginthe market 43. This thrift institution has aratio ofcommercial and industrial serves as a significant source of commercial loans and loanstoassets ofapproximately 16percent,which iscomparableto provides a broad range ofconsumer, mortgage, and other the national average for all commercial banks. See First Union Corporation, 84FederalReserveBulletin489(1998). 44.Withthedepositsofthesecreditunionsweightedat50percent, Regions would be the largest depository organization in the market, 46.Withthedepositsofthesecreditunionsweightedat50percent, with approximately 31 percent of market deposits, and AmSouth Regions would be the largest depository organizationin the market, would be the second largest depository organization in the market, with approximately 19 percent of market deposits, and AmSouth controllingapproximately 17percentofmarketdeposits. would be the second largest depository organization in the market, 45.The PanamaCityAreabankingmarketinFloridaisdefined as controllingapproximately 13percentofmarketdeposits. BayCountyandthesouthernhalfofWashingtonCounty,includingthe 47. The Shreveport-Bossier City banking market in Louisiana is townsofVernonandWausau. definedasBossier,Caddo,DeSoto,andWebsterParishes.

Legal Developments: Fourth Quarter; 2006 C23 banking products. Competition from this thrift institution become the second largest depository organization in the closelyapproximatescompetitionfromacommercialbank. market, controllingdeposits ofapproximately $1.9 billion, Accordingly, the Board has concluded that deposits con which represent 26 percent of market deposits. The HHI trolledbythisinstitutionshouldbeweightedat 100percent wouldincrease 246 pointsto 2240. in market-share calculations.48 Accounting for the revised Anumberoffactors indicatethattheincreaseinconcen weightingofthesedeposits,Regionswouldcontrolapproxi trationintheJacksonAreabankingmarket,asmeasuredby mately 27 percentofmarketdeposits on consummation of theHHI, overstatesthe potentialanticompetitiveeffectsof the proposal, and the HHI would increase 353 points to the proposal in the market. After consummation of the 1914. proposal, 21 othercommercialbankingandthriftcompeti Several factors indicate that the increase in concentra torswouldremaininthemarket.TheBoardnotesthatthere tion in the Shreveport-Bossier City banking market, as are other competitors with a significant presence in the measuredbytheHill,overstatesthe potentialanticompeti market. The largest depository organization in the market tiveeffectsoftheproposalinthe market.Afterconsumma wouldcontrol37percentofmarketdeposits,andtwoother tion of the proposal, 21 other commercial banking and bankcompetitorsinthemarketeachwouldcontrolslightly thrift competitors would remain in the market. The Board more than5percentofmarketdeposits. notes that there are other competitors with a significant In addition, the Board has evaluated the competitive presence in the market. The second and third largest bank influence ofthree active community credit unions in this competitors in the market would control 25 percent and market. These credit unions control approximately 18 percent,respectively,ofmarketdeposits. $117.2 million in deposits in the market, which, on a In addition, the Board has evaluated the competitive 50percentweightedbasis, represent less than 1percentof influence of five active community credit unions in this marketdeposits. Accounting for the revised weightings of market. These credit unions control approximately thesedeposits,Regionswouldcontrolapproximately26per $505.9 million in deposits in the market, which, on a cent ofmarket deposits, and the HHI would increase 242 50 percent weighted basis, represent approximately 5 per pointsto 2205.5l centofmarketdeposits.Accountingfortherevisedweight Inaddition,therecordofsignificantrecententryintothe ings of these deposits, Regions would control approxi JacksonAreabankingmarketevidencesthemarket'sattrac mately 27 percentofmarketdeposits, and the HHI would tiveness for entry. The Board notes that five depository increase 334pointsto 1736.49 institutions have entered the market de novo since 2001. Furthermore, the record of recent entry into the Otherfactorsindicatethatthemarketremainsattractivefor Shreveport-Bossier City banking market evidences the entry.Forexample,themarket'sannualizeddepositgrowth market'sattractivenessforentry.TheBoardnotesthatthree from2002to2005exceededtheaverageannualizeddeposit depository institutions have entered the market de novo growth for metropolitan counties in Mississippi, and in since 2001. Otherfactors indicate that the market remains 2004 the market's per capita income exceeded the per attractive for entry. From 2001 to 2004, the market's capitaincomeformetropolitancountiesinMississippi. annualized income growth exceeded the average annual Lauderdale County. In the Lauderdale County banking izedincomegrowthformetropolitancountiesinLouisiana. market,52 Regions is the sixth largestdepository organiza tion in the market, controlling deposits of approximately 4. Banking Markets in Mississippi $76.3 million, whichrepresent approximately 8percentof market deposits. AmSouth is the fourth largest depository Jackson Area. In the Jackson Area banking market,50 organizationinthemarket,controllingdepositsofapproxi Regions is the fifth largest depository organization in the mately $120.3 million, which represent approximately market, controlling depositsof$440.5 million, which rep 13 percent of market deposits. On consummation of the resent approximately 6 percent of market deposits. Am merger, Regions would become the second largestdeposi South is the second largest depository organization in the tory organization in the market, controlling deposits of market, controlling deposits ofapproximately $1.5 billion, approximately $196.7 million, which represent approxi whichrepresentapproximately20percentofmarketdepos mately 21 percent of market deposits. The HHI would its. On consummation of the proposal, Regions would increase208 pointsto 1959. Several factors indicate that the increase in concentra tionintheLauderdaleCountybankingmarket,asmeasured 48. This thrift institution has aratio ofcommercial and industrial bytheHHI, overstatesthepotentialanticompetitiveeffects loanstoassetsofapproximately9percent,whichiscomparabletothe ofthe proposal in the market. After consummation ofthe nationalaverageforallcommercialbanks. See FirstUnion Corpora tion,84FederalReserveBulletin489(1998). 49.Withthedepositsofthesecreditunionsweightedat50percent, Regions would be the fourth largest depository organization in the 51.Withthedepositsofthesecreditunionsweightedat50percent, market, with approximately 10 percent of market deposits, and Regions would be the fifth largest depository organization in the AmSouth would be the third largest depository organization in the market, with approximately 6 percent of market deposits, and Am market,controllingapproximately 16percentofmarketdeposits. South would be the second largest depository organization in the 50. TheJacksonAreabanking marketin Mississippiisdefinedas market,controllingapproximately20percentofmarketdeposits. Hinds, Madison,andRankincounties;CopiahCounty,excludingthe 52.TheLauderdaleCountybankingmarketisdefinedasLauderdale townofWesson;andthetownofMendenhallinSimpsonCounty. County,Mississippi.

C24 Federal Reserve Bulletin0 March 2007 proposal, seven other commercial banking competitors competitors with a significantpresence in the market. The wouldremaininthemarket.TheBoardnotesthatthereare largestbankcompetitorinthemarketwouldcontrol30per othercompetitorswithasignificantpresencein the market. centofmarketdeposits, andtwootherbankcompetitorsin The largest depository organization in the market would the marketeachwouldcontrol9percentormoreofmarket control 30percentofmarketdeposits, and two otherbank deposits. competitors in the market each would control more than Inaddition,the marketappearstobeattractiveforentry. 10percentofmarketdeposits. From2002to2005,themarket'sannualizeddepositgrowth In addition, the Board has evaluated the competitive exceeded the average annualized deposit growth for non influence ofthree active community credit unions in this metropolitan counties in Mississippi. For example, the market. These credit unions control approximately market's annualized income growth from 1999 to 2004 $62.7 million in deposits in the market, which, on a exceeded the average annualized income growth for non 50percent weighted basis, represent approximately 3 per metropolitancountiesinMississippi. centofmarketdeposits.Accountingfortherevisedweight ings of these deposits, Regions would control approxi 5. Banking Market in Mississippi andLouisiana mately 20 percent ofmarket deposits, and the HHI would increase 195 pointsto 1838.53 McCombArea.IntheMcCombAreabankingmarket,55the Furthermore, the recordofrecententryinto the Lauder HHIwouldslightlyexceedtheDOJGuidelinesonconsum daleCounty bankingmarketevidencesthe market'sattrac mationofthe proposal. Regions is the fifth largestdeposi tiveness for entry. The Board notes that one depository tory organization in the market, controlling deposits of institution has entered the market de novo since 2001. approximately $30.2 million, which represent5 percentof Otherfactorsindicatethatthemarketremainsattractivefor marketdeposits. AmSouthis the second largestdepository entry. From 2002 to 2005, the market'sannualizeddeposit organizationinthe market,controllingdepositsofapproxi growthexceededtheaverageannualizeddepositgrowthfor mately $141.3 million, which represent approximately nonmetropolitan counties in Mississippi, and in 2004 the 22 percent of market deposits. On consummation of the market area's per capita income exceeded the per capita merger, Regions would become the second largestdeposi income for nonmetropolitan counties in Mississippi. Fur tory organization in the market, controlling deposits of thermore, from 1999 to 2004, the market's annualized $171.5 million, which represent approximately 27 percent populationgrowthexceeded the average annualized popu ofmarketdeposits. The HID would increase 201 points to lationgrowthfornonmetropolitancountiesinMississippi. 1934. Starkville.IntheStarkvillebankingmarket,54Regionsis Several factors indicate that the increase in concentra the fourth largest depository organization in the market, tion in the McCombAreabankingmarket, as measuredby controlling deposits of approximately $115.4 million, the HHI,overstatesthe potential anticompetitiveeffectsof whichrepresent 14percentofmarketdeposits.AmSouthis the proposal in the market. After consummation of the the second largest depository organization in the market, proposal,nineothercommercialbankingcompetitorswould controlling deposits ofapproximately $180 million, which remain in the market.TheBoardnotes thatthere areother represent 22 percent of market deposits. To reduce the competitors with asignificantpresence in the market. The potentialforadverseeffectsoncompetitionintheStarkville largestbankcompetitorinthemarketwouldcontrol27per banking market, Regions has proposed to divest three of centofmarketdeposits, andtwootherbankcompetitorsin AmSouth's branches, with at least$50millionindeposits, the market each would control 15 percent of market to an out-of-market depository organization. On consum deposits. In addition, the market appears to be moderately mationofthemergerandafteraccountingfortheproposed attractive for entry. For example, from 2001 to 2004, the divestiture, Regions would become the second largest market's annualized population growthexceededthe aver depository organizationin the market, controllingdeposits age annualized population growth for nonmetropolitan ofapproximately $245.4 million, which represent 30 per countiesinMississippi. centofmarketdeposits. TheHHIwouldincreasenotmore than 249pointsandwould notexceed2231. D. Views of OtherAgencies and Conclusion on Competitive Considerations Severalfactorsindicatethattheproposalwouldnothave significantly adverse competitive effects in the Starkville The DOJ has conducted a detailed review ofthe potential banking market. After consummation ofthe proposal, six competitive effects of the proposal and has advised the other commercial banking and thrift competitors would Board that, in light ofthe proposed divestitures, consum remain in the market. The Boardnotes that there are other mationoftheproposalwouldnotlikelyhaveasignificantly adverse effect on competition in any relevant banking market. Inaddition, the appropriate bankingagencieshave 53.Withthedepositsofthesecreditunionsweightedat50percent, Regions would be the sixth largest depository organization in the market, with approximately 8 percent ofmarket deposits, and Am South would be the fourth largest depository organization in the 55. The McComb Areabankingmarket isdefined as PikeCounty market,controllingapproximately 12percentofmarketdeposits. and theportionofAmiteCountyeastoftheWestForkoftheAmite 54. The Starkville banking market in Mississippi is defined as River, all in Mississippi, and the town ofKentwood in Tangipahoa Choctaw,Oktibbeha,andWebstercounties. Parish,Louisiana.

Legal Developments: Fourth Quarter, 2006 C25 been afforded an opportunity to comment and have not sufficient financial resources to effect the proposal. The objectedtotheproposal. proposedtransactionis structuredas ashareexchange.57 Based on these and all otherfacts ofrecord, the Board TheBoardalso hasconsideredthe managerialresources concludes that consummation of the proposal would not ofthe organizations involved and the proposed combined haveasignificantlyadverseeffectoncompetitionoronthe organization.58 The Board has reviewed the examination concentrationofresourcesinanyofthe67bankingmarkets recordsofRegions,AmSouth, and theirsubsidiary deposi where Regions and AmSouth compete directly or in any tory institutions, including assessments of their manage other relevant banking market. Accordingly, based on all ment,59risk-managementsystems, andoperations.Inaddi the facts of record and subject to completion of the tion, the Board has considered its supervisory experiences proposeddivestitures, the Boardhas determined thatcom and those ofthe otherrelevant banking supervisory agen petitive considerationsare consistentwithapproval. cieswiththeorganizationsandtheirrecordsofcompliance with applicable banking laws and with anti-money FINANCIAL, MANAGERIAL, AND SUPERVISORY launderinglaws.60Regions,AmSouth, andtheirsubsidiary CONSIDERATIONS depository institutions are considered to be well man aged.61 The Board also has considered Regions' plans for Section3oftheBReActandtheBankMergerActrequire the Board to consider the financial and managerial re sources and future prospectsofthe companies and deposi 57.Regionswilluseexistingresourcestofundthecashpurchaseof tory institutionsinvolvedin the proposal and certain other fractionalshares. 58. One commenter expressed generalized concerns about the supervisoryfactors. TheBoardhasconsideredthesefactors management and customer service at a branch of AmSouth Bank. in light of all the facts of record, including confidential Another commenter expressed concern about a press report that reportsofexamination,othersupervisoryinformationfrom Regions and the Internal Revenue Service ("IRS") are currently the primary federal and state supervisors ofthe organiza litigating the extent of the IRS's ability to access the tax accrual working papers of Regions' outside accounting firm. The federal tions involved inthe proposal, publiclyreported and other courts, and not the Board, have jurisdiction to adjudicate disputes financial information, information provided by Regions betweentheIRSandRegions. andAmSouth, andpubliccommentsonthe proposa1.56 59. Several commenters asserted that the boards ofdirectors and Inevaluatingfinancial resources inexpansionproposals management ofRegions, AmSouth, and their subsidiary banks lack by banking organizations, the Board reviews the financial ethnic diversity. One commenter suggested that both Regions and AmSouth shouldimplement supplierdiversity programs. The Board condition of the organizations involved on both a parent notes that the racial, ethnic, or gender composition of a banking onlyandconsolidatedbasis, as wellas the financial condi organization'smanagementandsuppliersarenotfactors theBoardis tion ofthe subsidiary depository institutions and the orga permitted to consider underthe BHCAct. See Western Bancshares, nizations' nonbanking operations. In this evaluation, the Inc. v. BoardofGovernors, 480F.2d749(10thCir. 1973);Deutsche BankAG,86FederalReserveBulletin509,513(1999). Boardconsiders avarietyofinformation, includingcapital 60.TwocommentersexpressedconcernaboutAmSouth'srecordof adequacy, asset quality, and earnings performance. In compliancewithanti-money-Iaunderinglawsinlightofpastenforce assessing financial factors, the Board consistently has ment actions taken against the organization. In October 2004, Am consideredcapitaladequacytobeespeciallyimportant.The SouthandAmSouthBankconsentedtoaceaseanddesistorderissued Board also evaluates the financial condition of the com by the Board and the Alabama Department ofBanking to address deficienciesinthebank'santi-money-Iaunderingprogram(the"C&D bined organization at consummation, including its capital Order"). SimultaneouswiththeC&DOrder,AmSouthandAmSouth position, asset quality, and earnings prospects, and the Bank: (I) consented to an orderissued by the Board, and the bank impactofthe proposedfunding ofthetransaction. consentedtoanorderissuedbytheU.S.DepartmentoftheTreasury's TheBoardhas carefullyconsideredthe financial factors Financial Crimes Enforcement Network, that assessed concurrent $10millioncivilmoneypenalties(the"CMPOrders");and(2)entered of the proposal. Regions, AmSouth, and their subsidiary into a deferred-prosecution agreement (the "Agreement") with the depository institutions are well capitalized and would U.S.AttorneyfortheSouthernDistrictofMississippithatincludeda remain so on consummation ofthe proposal. Based on its $40millionpenaltytobepaidtotheU.S.DepartmentoftheTreasury. reviewoftherecord, theBoardalsofinds thatRegions has AmSouth andAmSouth Bankhave fully compliedwith the require ments ofthe C&D Order,the CMPOrders, and theAgreement. The C&D Order was terminated as of April 2006, and the criminal 56. Two commenters expressed concern about Regions' and Am complaint filed againstAmSouth andAmSouth Bank as part ofthe South's relationships with unaffiliated retail check cashers, pawn AgreementwasdismissedinOctober2005. shops, and other nontraditional providers of financial services. In 61. One commenter expressed concern about investigations by approvingRegions'applicationtoacquireUnionPlantersCorporation, regulatory agencies ofMorgan Keegan & Company, Inc. ("Morgan Memphis,Tennessee,theBoardconsideredthisconcernandreviewed Keegan"),Memphis,Tennessee,asubsidiaryofRegionsthatengages Regions' relationships with nontraditional providersoffinancial ser in securities brokerage and investment bankingactivities. The com vices. Regions FiTUlncial Corporation, 90 Federal Reserve Bulletin menteralsoexpressedconcernaboutaninvestigationbytheSecurities 389 (2004) ("Union PlantersOrder"). Regionsrepresentedthatthere andExchangeCommission("SEC")ofAmSouth'smutualfundunitin have been no material changes in the way Regions conducts such connectionwithitsinvestigationofanunaffiliatedthirdpartyprovider relationships since it acquired Union Planters. With regard to Am ofadministrative support toAmSouth funds. The Board is aware of South,RegionsrepresentedthatAmSouthplaysnoroleinthelending public settlements entered into by Morgan Keegan and the SEC on practices or credit review processes ofsuch firms. As noted in the February 8andMay31, 2006,respectively, relatingtolatetrades in UnionPlantersOrder,theactivitiesoftheconsumerfinancebusinesses mutual funds and to inadequate disclosure to investors of certain identifiedbythe commentersarepermissible,andthe businessesare auction-ratesecuritiespractices.TheBoardalsoisawarethatMorgan licensedbythestateswheretheyoperate. Keegan has publicly disclosedthat itmay be under investigation by

C26 Federal Reserve BulletinD March 2007 implementing the proposal, including the proposed man A. CRA Performance Evaluations agementafterconsummation. Basedonallthefactsofrecord,theBoardhasconcluded As provided in the CRA, the Board has reviewed the thatconsiderationsrelating to the financial and managerial proposal in light of the evaluations by the appropriate resourcesandfutureprospectsoftheorganizationsinvolved federal supervisorsofthe CRAperformancerecordsofthe intheproposalareconsistentwithapproval,asaretheother relevant insured depository institutions. An institution's supervisoryfactorstheBoardmustconsiderundertheBHC most recent CRAperformance evaluation is a particularly Act. importantconsiderationintheapplicationsprocessbecause it represents a detailed, on-site evaluation of the institu tion's overall record ofperformance underthe CRAby its CONVENIENCE AND NEEDS CONSIDERATIONS appropriatefederal supervisor.65 Regions Bank received a "satisfactory" rating from the Inactingonproposalsundersection 3oftheBHCActand Federal Reserve Bank ofAtlanta ("Reserve Bank") at its the Bank Merger Act, the Board also must consider the most recent CRA performance evaluation, as of Octo effectsoftheproposalontheconvenienceandneedsofthe ber 20, 2003. AmSouth Bank received an "outstanding" communitiestobeservedandtakeintoaccounttherecords rating at its most recent CRA performance evaluation by of the relevant insured depository institutions under the theReserveBank,asofJuly 12,2004.66Regionsexpectsto Community Reinvestment Act ("CRA").62 The CRA re continue the existing CRAprogramsofRegions Bankand quiresthefederal financial supervisoryagenciestoencour AmSouth Bank, butthe combinedinstitution'scommunity age insured depository institutions to help meet the credit development program would be modeled on AmSouth's needs of the local communities in which they operate, program. consistentwiththeirsafeandsoundoperation,andrequires eRA Performance ofRegions Bank. In addition to the theappropriatefederal financial supervisoryagencytotake overall"satisfactory"rating that Regions Bankreceivedat into account an institution's record of meeting the credit its most recent CRA performance evaluation,67 the bank needsofitsentirecommunity,includinglow-andmoderate received separate overall "outstanding" or "satisfactory" income("LMI")neighborhoods, inevaluatingbankexpan ratings68in all butoneofthe MSAsand statesreviewed.69 sionary proposals.63 In response to the Board's request for public comment on this proposal, several commenters expressed concern 65.See InteragencyQuestionsandAnswersRegardingCommunity about Regions' andAmSouth's records oflending to LMI Reinvestment,66FederalRegister36,620at36,640(2001). orminorityindividualsorinLMIcommunitiesandtosmall 66. One comrnenter requested that the Board postpone consider ationoftheproposaluntilaftercompletionofanewCRAperformance businesses. Some commenters who opposed the proposal evaluationforAmSouthBank.TheBoardmusttake intoaccountthe criticizedthe adequacyandenforceability ofa lending and actualrecordsoftherelevantinsureddepositoryinstitutionsunderthe investment plan announced in July by Regions and Am CRA as of the time of the proposal in acting on proposals under Southinconnectionwith the proposal. Inaddition, several section3oftheBHCActandtheBankMergerAct.Neithertheseacts commenters questioned the sufficiency of assistance that northeCRArequiretheinitiationofnewperformanceevaluationsin connection with such proposals. Moreover, the BHCAct, the Bank RegionsandAmSouthprovidedtoindividualsandcommu MergerAct, and RegulationYrequirethe Board toact on proposals nities affected by Hurricanes Katrina and Rita. Some submittedunderthoseprovisionswithincertaintimeperiods. commentersalsoexpressedconcernthattheproposalwould 67.TheevaluationperiodwasJuly1,2001,throughJune30,2003, result in possible branchclosings. Asignificant numberof andthereviewincludeddatafromRegionsMortgage,Inc.,Montgom ery, Alabama. and EquiFirst Corporation ("EquiFirst"), Charlotte, commenters also expressed support for the services of North Carolina, which were both wholly owned subsidiaries of Regions andAmSouthandforthe merger. RegionsBankduringtheevaluationperiod. The Board has considered carefully all the facts of 68. Full-scope evaluations were conducted in Regions Bank's record, including evaluations of the CRA performance assessmentareas in theAugusta-Aiken (GA-SC), Chattanooga (TN recordsofRegionsBankandAmSouthBank,datareported GA), Columbus (GA-AL), Memphis (TN-AR-MS), Texarkana (TX AR) multistate metropolitan statistical areas ("MSAs"). Full-scope undertheHomeMortgageDisclosureAct("HMDA")64by evaluations were also conducted in other select MSAs in Alabama, the subsidiaries of Regions and AmSouth that engage in Arkansas, Rorida, Georgia, Louisiana, North Carolina, South Caro home mortgage lending, other information provided by lina,Tennessee,andTexas.Limited-scopeevaluationswereconducted Regions, confidential supervisory information, and public inotherrelevantMSAsinthosestates. 69. Several comrnenters expressed concern about the less-than commentsreceivedontheproposal. satisfactoryratingsthebankreceivedforitsCRAperformanceinsome ofitsassessmentareas.Thebankreceivedanoverallratingof"needs to improve" in the Chattanooga multistate metropolitan area, and variousstateandfederalregulators.TheBoardhasconsultedwiththe received"lowsatisfactory"ratingsunderthelendingtestforLouisiana SECaboutthesemattersandnotesthatAmSouthsolditsmutualfund andtheAugustaandTexarkanamultistatemetropolitanareas. Ineach servicesunit,asofSeptember2005.Aspartofitsongoingsupervision oftheseassessmentareas, examinersnotedthatthere are arelatively ofRegions andAmSouth, the Board monitors the status ofpublicly high proportion offamilies below the poverty level and that these disclosed investigationsandconsultsas needed withrelevantregula families may not qualify for residential real estate loans because of toryauthorities. their lower capacity for debt repayment. Examiners indicated that 62.12U.S.C.§2901etseq. theseconditionsmayhavehinderedthebank'seffortstolendtoLMI 63. 12U.S.c.§2903. individualsintheseassessmentareas.Thebankreceivedhigherratings 64. 12U.S.c.§2801etseq. underthe lendingand othertests in otherareas, and examiners con-

Legal Developments: Fourth Quarter, 2006 C27 Examinersreportedthatthebank's lending levelsreflected assessmentareasandthatservicesofferedgenerallydidnot excellent responsiveness to community credit needs and vary in any way that inconvenienced any portion of the thatthebankhadanexcellentlevelofqualifiedcommunity bank's assessmentareas. Inaddition, examinersconcluded developmentinvestments and grants. that the bank's community development services were Examinersrated Regions Bank'sperformanceunderthe responsivetoaffordablehousingneedsinthebank'sassess lending test as "outstanding," "high satisfactory," or "low mentareas, and that the bank exhibited a reasonable level satisfactory" in all MSAs and states reviewed, based on a of community development services to assist small busi review ofthe bank's housing-related loans reported under ness owners. HMDA, smallloanstobusinesses,7oandqualifiedcommu In 2005, Regions originated housing-related loans re nity development loans. Examiners stated that the bank's ported under HMDAinits assessment areas totaling more distribution of loans to geographies and borrowers of than $6.7 billion. Of this amount, 10.2 percent by dollar different income levels was good.71 They noted that volume was loanedtoborrowersinLMIcensustracts,and Regions Bank offered affordable housing loan programs, 18.6percenttoLMIborrowers.Inaddition, Regionsrepre and made more than 357 loans totaling $10.6 million sented that, in 2005, Regions Bank made approximately during the evaluation period using flexible lending prod $316 million in qualified community development loans ucts. and approximately $232 million in qualified investments Examiners generally characterizedRegions Bank's dis and grantsinitsassessmentareas. tributionofsmallloanstobusinessesineachofthe MSAs eRA Performance ofAmSouth Bank. In addition to the orstatesreviewed as goodoradequate.They reportedthat overall"outstanding"ratingthatAmSouthBankreceivedat thebankmade72,657 smallloanstobusinessesduringthe its most recent CRA performance evaluation,72 the bank evaluationperiod,totaling $7.6billion, andthat 18percent received separate overall "outstanding" or "satisfactory" ofthose loansbydollarvolume weretobusinesseslocated ratings in all the MSAs and states reviewed.73 Examiners in LMI census tracts. Examiners also concluded that reported that the bank's levels of lending demonstrated Regions Bank's distribution of loans to businesses of excellentresponsiveness to community creditneeds. They different sizes was good. In addition, examiners reported also concluded that the bank had an excellent level of that the bank's community development lending total of qualifiedcommunitydevelopmentinvestments and grants. $294.7 million during the review period was a relatively ExaminersratedAmSouth Bank "outstanding" or"high highlevelofcommunity developmentlending. satisfactory"underthe lending test inall MSAs and states ExaminersratedRegions Bank'sperformanceunderthe reviewed, basedon areview ofthe bank's housing-related investment test as "outstanding" or "high satisfactory" in loans reported under HMDA, small loans to businesses, mostofthe MSAs andstatesreviewed. They reportedthat andqualifiedcommunitydevelopmentloans.Theyreported thebankoftenexercisedleadershipby makinginvestments thatthebank'soveralldistributionoflending withingeog and grants not routinely provided by private investors. raphies of different income levels was adequate, and its During the evaluation period, the bank's qualified invest distributionofloanstoborrowersofdifferentincomelevels ments totaled more than $161 million, and it contributed was good. In addition, examiners reported that AmSouth morethan $1.9 milliontocharities withcommunity devel Bank made use of flexible lending practices to serve opmentpurposes. community credit needs and made more than 2,300loans, ExaminersratedRegionsBank'sperformanceunderthe totalingapproximately$188million, undertheseprograms service test as "high satisfactory" or "low satisfactory" in during the evaluation period. Examiners also reported that most of the MSAs and states reviewed. They concluded AmSouth Bank made $1.7 billion ofcommunity develop that the bank's distribution of branch offices and ATMs ment loansduring the evaluation period, a level which the generally was accessible to all portions of the bank's examinerscharacterizedasrelatively high. ExaminersgenerallycharacterizedAmSouthBank'sdis tributionofsmallloanstobusinessesamonggeographiesof cludedthatthebank'srecordofCRAperformanceduringthereview differing income levels and to businesses in LMI areas as period, when viewedas whole, meritedarating of"satisfactory." goodintheMSAsandstatesreviewed.74Theyreportedthat 70. "Smallloanstobusinesses"areloanswithoriginalamountsof $1 million orless that areeithersecuredby nonfarm, nonresidential propertiesorclassifiedascommercialandindustrialloans. 71. Several commenters specifically criticized Regions Bank's 72. The evaluation period was January 1, 2002, through Decem levelsoflendingtosmallbusinessesinLMIareasintheBirmingham, ber31,2003. Alabama, and Jackson, Tennessee MSAs. In the most recent CRA 73. Full-scope evaluations were conducted in AmSouth Bank's performanceevaluation for Regions Bank,examiners statedthat the assessment areas in the Chattanooga (TN-GA), Johnson City bank had an adequate distribution ofsmall business loans to busi Kingsport-Bristol(TN-VA),andMemphis(TN-AR-MS)MSAs.Full nessesinLMIareasintheBirminghamassessmentarea. Inaddition, scopeevaluationswere conducted in otherselectMSAs inAlabama, Regions made 1,589 small loans to businesses in the Birmingham Florida, Louisiana, Mississippi, and Tennessee, and limited-scope MSAin 2005, and more than 25 percent ofthose loans by number evaluationswereconductedinotherrelevantMSAsinthosestates.In weretobusinesseslocatedinLMIcensustracts. Regionsenteredthe addition,afull-scope evaluationwas conductedin thebank'sassess Jackson MSA in July 2004, on consummation ofits acquisition of mentareasinGeorgia. UnionPlantersCorporation.In2005,Regionsmade97smallloansto 74. One commenter criticized the levels of participation of both businesses in the Jackson MSA, and more than 15 percent ofthose AmSouthBankand RegionsBankin SmallBusinessAdministration loansbynumberweretobusinessesinLMIcensustracts. ("SBA")loanprograms.RegionsrepresentedthatRegionsBankisan

C28 Federal Reserve BulletinD March 2007 thebankmade morethan84,000smallloanstobusinesses, hasrepresentedthatithasclosedon$26.6millionofthose totaling approximately $7.4 billion, during the evaluation loans, as ofJuly 31, 2006.76 period. Examiners also concludedthat the bank's distribu Regions also indicated that it expects to have made tion of loans to businesses ofdifferent sizes was good or approximately $70 million in community development excellentintheMSAsand statesreviewed. loansin partsofMississippiin the GO Zone by the endof Under the investment test, examiners rated AmSouth 2006. For example, Regions stated that it is providing Bank "outstanding" for all the MSAs and states reviewed. construction and permanent financing to a low-income Theystatedthebankwasofteninaleadershippositionwith housingtaxcreditprojectinNewOrleansthatwillresultin regardtoinvestmentsandgrants notroutinely providedby the construction of 29 housing units. AmSouth indicated private investors. During the evaluation period, the bank's thatithasprovided$3.5 millionoffinancing inthepartsof qualifiedcommunitydevelopmentinvestmentstotaledmore Mississippi affected by Hurricane Katrina to rebuild a than$234million,andthebankcontributedapproximately senior citizens complex and to build 71 new affordable $7.4milliontoorganizationswithcommunitydevelopment homes, andthatithascommittedmore than$25 million to purposes. purchase and rehabilitate a 307-unit senior citizens apart ExaminersratedAmSouth Bank"outstanding" or"high mentcomplexin New Orleans. satisfactory" under the service test for all the MSAs and Regions also represented that it and AmSouth continue states reviewed.75 They concluded that the bank's ATMs to workwithaffectedresidentialmortgage loancustomers, andbranchlocationswerereadily accessibletoallportions and that assistance provided to these borrowers has in of the bank's assessment areas and that services offered cludedmodifying mortgages, providing forbearance relief, generallydid notvary inany way thatinconveniencedany and suspending credit bureau reporting. Regions repre portion of the bank's assessment areas. Examiners com sented that Regions Mortgage has modified more than mended the bank for being a leaderin providing commu 2,800 of the approximately 54,000 residential mortgage nity development services, and noted that the services loans it serviced in FEMA-declared disaster areas at the provided are responsive to affordable housing needs and time of Katrina's landfall, and has itself absorbed the assist small business owners in the bank's assessment $800,000 cost of these modifications. AmSouth indicated areas. that only ten ofthe nearly 3,300 mortgage loans it held in the affected areas at the time of landfall are currently in B. Assistance to Communities Affected by foreclosure, sixofwhichweredelinquentbeforeHurricane Katrina. In addition, Regions has stated that it is involved Hurricane Katrina withstateprogramsinLouisianaandMississippitoprovide Several commenters asserted that Regions and AmSouth grants to homeownersinaffectedareas. shoulddemonstrategreatersupportforrecoveryandrecon structioneffortsinareasaffectedbyHurricaneKatrina, and C. Branch Closings should detail plansfor financing the rebuilding efforts and working with borrowers with mortgage loans at risk of Two commenters expressed concern about the proposal's defaultdue tothe hurricane. possibleeffectonbranchclosings.Regionshasrepresented Regions represented that it and AmSouth originated that it and AmSouth have identified specific branches in morethan23,000HMDA-reportablemortgageloans,total overlapping markets as candidates for closure, relocation, ing approximately $3.8 billion, in2005 in portionsoftheir orconsolidation, buttheyhavenotmade final decisionson assessmentareasaffectedbyHurricaneKatrina. Thebanks closures. Regions has statedthat, on consummation ofthe alsooriginatedapproximately $2.3billioninsmallloansto proposal, it expects that the combined institution's branch businesses in 2005 in those areas. Moreover, Regions is closing policy would likely closely resemble AmSouth's involved in programs created under the Gulf Opportunity currentbranchclosing policy. Zone Act ("GO Zone") to support housing and small The Board has considered carefully Regions' and Am businesslendinginareasaffectedbyHurricaneKatrinaand South's branch closing policies and the banks' records of opening and closing branches. AmSouth's branch closing policy requires the bankto make every effortto minimize thecustomerimpactwithinthelocal marketandtoprovide SBA Preferred Lender and currently offers several SBA loan pro a reasonable alternative for customers to acquire similar grams,includingSBAExpressloans. Thebankalsooffersotherloan programs targetedto small businesses, includingthe Right Business Line of Credit, which provides revolving lines of credit of up to $250,000tosmallbusinesses.RegionsalsorepresentedthatAmSouth 76. One commentercriticized the level ofRegion Bank's invest Bank also offers other loan programs targeted to small businesses, mentsin nonprofitorganizationsinvolvedin microenterpriselending such as the Flexline product, under which small businesses may and providingaffordablehousingintheGulfCoastregion.Asnoted, borrow up to $100,000 on an unsecured basis and can apply on a RegionsBankrepresentedthatithasmadeanumberofinvestmentsto one-pageapplication. construct or rehabilitate affordable housing in the region. The eRA 75. Several commenters criticized the levels of service of both doesnotrequirebankstoprovideanyparticulartypeofqualifiedCRA AmSouthBankandRegionsBanktoLMIindividuals. investmentsinitseffortstomeetthecreditneedsoftheircommunities.

Legal Developments: Fourth Quarter, 2006 C29 services.Thepolicyrequiresthat, beforeafinal decision is the2005HMDAdatareportedbyRegionsBank,EquiFirst, madetocloseabranch,managementconsultwithmembers andAmSouthBank.81 ofthecommunityinanefforttominimizetheimpactofthe Although the HMDAdata might reflect certain dispari closing. In the most recent CRA performance examina ties in the rates ofloan applications, originations, denials, tions, examiners found that the banks' records ofopening or pricing among members of different racial or ethnic orclosing brancheshad notadversely affected the accessi groups in certain local areas, they provide an insufficient bility ofdelivery systems, particularlyto LMIgeographies basis by themselves on which to conclude whether or not andtoLMIindividuals. Regions or AmSouth Bank are excluding or imposing TheBoardalso has consideredthatfederal banking law highercosts on any racial orethnic group on a prohibited providesa specific mechanismfor addressing branchclos basis. The Board recognizes that HMDAdata alone, even ings.?7 Federal law requires an insured depository institu with the recent addition of pricing information, provide tion to provide notice to the public and to the appropriate onlylimitedinformationaboutthecoveredloans.82HMDA federal supervisory agency before closing a branch. In data, therefore, have limitations that make them an inad addition, the Board notes that the Reserve Bank will equate basis, absentotherinformation, for concluding that continue to review the branch closing record of Regions aninstitutionhasengagedinillegallendingdiscrimination. Bankinthe courseofconductingCRAperformanceevalu TheBoardis neverthelessconcernedwhenHMDAdata ations. foraninstitutionindicatedisparitiesinlendingandbelieves thatalllendinginstitutionsareobligatedtoensurethattheir lendingpractices are basedoncriteriathatensure notonly D. HMDA and Fair Lending Record safe and sound lending but also equal access to credit by creditworthy applicants regardless oftheir race or ethnic TheBoardhascarefullyconsideredthefairlendingrecords ity.83Because ofthe limitationsofHMDAdata, the Board andHMDAdataofRegionsandAmSouthBankinlightof has consideredthese datacarefully and taken into account public comments received on the proposal. Commenters other information, including examination reports that pro alleged,basedon2004and2005HMDAdata,thatRegions vide on-site evaluations of compliance by Regions and made higher-costloans78in various states more frequently AmSouthBankwithfair lending laws. to African-American borrowers than to nonminority bor Inthefairlendingreviewconductedinconjunctionwith rowers, and made a disproportionate shareofits subprime the most recent CRAperformance evaluation ofAmSouth loans incertainMSAs toAfricanAmericans.79 Comment Bank, examiners found no substantive violations ofappli ers also alleged that Regions denied the home mortgage cablefairlendinglaws.Moreover, therecordindicatesthat loan applications of African-American borrowers more both Regions and AmSouth have taken steps to ensure frequently than those ofnonminority applicantsin various compliance with fair lending and other consumer protec states and MSAs, and that the amount of Regions' and tionlaws.RegionsmonitorsRegionsBank'sandEquiFirst's AmSouth's mortgage lending toAfricanAmericans in the compliance with fair lending laws through internal audits Birmingham MSA lagged behind the performance of the that include comparative file analyses, and through self aggregate oflenders.8oThe Board focused its analysis on assessments thatinclude pricing,underwriting, andregres sion analysis of HMDA data.84 In addition, Regions 77. Section 42 of the Federal Deposit Insurance Act (12 U.S.C. §183Ir-I),as implementedbytheJointPolicyStatementRegarding 81.TheBoardreviewedtheHMDAdataforRegionsandAmSouth BranchClosings(64FederalRegister34,844(1999)),requiresthata Bank in various markets of concern to the commenters, in the bank provide the public with at least 30 days' notice and the combinedCRAassessmentareasforeachbank,andonanationwide appropriate federal supervisory agency and customers ofthe branch basis. withat least90days' notice beforethe date ofthe proposed branch 82.Thedata,forexample,donotaccountforthepossibilitythatan closing. The bank also is required to provide reasons and other institution'soutreacheffortsmayattractalargerproportionofmargin supportingdatafortheclosure,consistentwiththeinstitution'swritten ally qualified applicants than other institutions attract and do not policyforbranchclosings. provideabasisforanindependentassessmentofwhetheranapplicant 78. Beginning January I, 2004, the HMDA data required to be who was denied creditwas, in fact, creditworthy. In addition, credit reportedbylenderswereexpandedtoincludepricinginformationfor history problems, excessive debt levels relative to income, and high loansonwhichtheannualpercentagerateexceedstheyieldforU.S. loanamountsrelativetothevalueoftherealestatecollateral(reasons Treasury securities of comparable maturity 3 or more percentage mostfrequently citedforacreditdenialorhighercreditcost)arenot points for first-lien mortgages and 5 or more percentage points for availablefromHMDAdata. second-lienmortgages(12CFR203.4). 83. One commenter complained that AmSouth provided HMDA 79. As the Board previously has noted, subprime lending is a data of AmSouth Bank on paper rather than electronically in the pennissible activity that provides needed credit to consumers who format requested by the commenter. The Board notes that neither have difficultymeetingconventionalunderwritingcriteria.SeeRoyal HMDAnortheCRArequire financial institutionstoprovideHMDA BankofCanada, 88 FederalReserveBulletin385,388n. 18(2002). data in an electronic format on written request. See 12 CFR 203.5. The Boardcontinuestoexpectallbankholdingcompaniesandtheir Moreover,HMDAdatamaybeobtainedelectronicallyviatheHMDA affiliates to conduct their subprime lending operations without any websitemaintainedbytheFederalFinancialInstitutionsExamination abusivelendingpracticesandincompliancewithallapplicablelaws. Council. 80. The lending data of the aggregate of lenders represent the 84. In the fair lending review conducted in conjunction with cumulative lending for all financial institutions that have reported Regions Bank's 2003 CRAperformanceevaluation, examiners cited HMDAdatainagivenmarket. failures to comply with the Board's Regulation B (Equal Credit

C30 Federal Reserve Bulletin0 March 2007 employsasecond-reviewprocessunderwhichapplications goalsbemadeenforceablebytheBoard,orthattheplanbe that have been preliminarily denied are reviewed by a embodied in an agreement with one or more community secondcreditofficer.Regionsalsorequiresallnewemploy groupS.88 ees to complete fair lending training during the first six The Board views the enforceability of pledges, initia monthsoftheirtenure andtotakeannualrefreshercourses. tives, and agreements with third parties as matters outside AmSouth employs similarcompliance techniques, such as the scope of the CRA.89 As the Board previously has self-assessments, a second-review process, and annual fair explained, an applicant must demonstrate a satisfactory lending training. AmSouth also employs an independent record ofperformance under the CRAwithout reliance on consultantto conductinternal auditsthatincludecompara plans or commitments for future action.90 Moreover, the tive file reviews. Regions represented that it is reviewing Boardhas consistently found that neitherthe CRAnorthe thecomplianceprogramsofbothorganizationsandthatthe federal banking agencies'CRAregulations require deposi combinedorganizationwilladoptthebestpracticesofboth toryinstitutionstomakepledgesorenterintocommitments Regions andAmSouth. oragreements withany organization. The Boardalso has consideredthe HMDAdatain light In this case, as in past cases, the Board instead has of other information, including the CRA performance focused on the demonstrated CRA performance record of records of Regions Bank and AmSouth Bank discussed the applicant and the programs that the applicant has in above.85 Based on all the facts of record, the Board placetoservethecreditneedsofitsCRAassessmentareas. concludesthatRegions' andAmSouth'sestablishedefforts and record demonstrate that they are active in helping to F. Conclusion on Convenience and Needs Factor meetthe creditneedsoftheirentirecommunities.86 The Boardhas consideredcarefully all the facts ofrecord, includingreportsofexaminationoftheCRArecordsofthe E. Community Development Plan institutions involved, information provided by Regions, commentsreceivedontheproposal,andconfidentialsuper In connection with the proposed transaction, Regions and visoryinformation.91Regionsrepresentedthattheproposal AmSouth announced a plan to invest at least $1DO billion would provide customers of both organizations with in oversevenyearsacrossthe Southeast,Midwest, andTexas creasedcreditavailability andexpandedaccess toproducts to support community development, small business lend andservices.Basedonareviewoftheentirerecordandfor ing, and mortgage lending for low-income communities the reasons discussed above, the Boardhas concludedthat and borrowers. Several commenters expressed concerns considerationsrelatingtotheconvenienceandneedsfactor abouttheplan, arguingthatitlackedsufficientdetailordid and the CRA performance records ofthe relevant deposi not represent increases over the organizations' current tory institutionsare consistentwithapproval. lendinglevels.87Commentersalsorequestedthattheplan's ESTABLISHMENT OF BRANCHES OpportunityAct) inanonmortgage lending program. The Boardhas As previously noted, Regions Bankhas also appliedunder consideredthatthe failure was discoveredby the bankandthebank section 9ofthe FRAto establish branches at the locations took immediate corrective action. The Board also notes that the ofAmSouth Bank's main office and branches. The Board compliance failure was limitedto one productline and the bank no longeroffersthatproductline. has assessed the factors it is required to consider when 85.OnecommenterspeculatedabouttheBoard'sanalysisof2004 reviewing an application under section 9 ofthe FRA and HMDAdataforRegionsandAmSouthBank.TheBoardusesHMDA dataasascreentoidentifyinstitutionswithapplicationdenialratesor pricingpatternsthatappearto differsignificantlybasedonborrower 88.OnecommenterexpressedconcernthatRegions'acquisitionof ethnicity or sex. Examiners typically review loan files and other Union Planters Corporation in 2004 did not include a community informationfrominstitutionsidentifiedbythescreen,andanarrayof development plan that was the subject of an agreement between supervisory actions can be taken if no credible nondiscriminatory Regionsandoneormorecommunitygroups. explanation can be found for the disparities. See Robert B. Avery, 89. See. e.g.• Bank ofAmerica Corporation, 90 Federal Reserve etal.,"NewInformationReportedunderHMDAandItsApplicationin Bulletin217,233(2004);CitigroupInc., 88FederalReserveBulletin FairLendingEnforcement,"91 FederalReserveBulletin344(2005). 485,488n.18(2002). Suchmattersarehandledintheregularcourseoftheexaminationand 90. See Wachovia Corporation, 91 Federal Reserve Bulletin 77 supervisionprocess. (2005); l.P. Morgan Chase & Co., 90 Federal ReserveBulletin 352 86. One commenter noted press reports about litigation against (2004); Bank ofAmerica Corporation, 90 Federal Reserve Bulletin Regions by several immigrant chicken farmers who alleged that 217 (2004); NationsBank Corporation, 84 Federal Reserve Bulletin RegionsBankmadeloanstothemknowingthattheycouldnotafford 858(1998). repayment.Becausethesemattersareunresolved,theydonotprovide 91. One commenterexpressed concern about possiblejob losses afactualbasisforBoardconsideration.Thecourts,andnottheBoard, resulting fromthis proposal.Theeffectofaproposedacquisitionon have jurisdiction to adjudicate the legal claims of these plaintiffs employment in a community is not among the limited factors the againstRegions.Boardactionontheproposalwouldnotinterferewith Board is authorized to considerunderthe BHCAct, and the conve the ability ofthe courts to resolve any litigation pertainingto these nience and needs factor has been interpreted consistently by the matters. federalbankingagencies,thecourts,andtheCongresstorelatetothe 87. One commenter specifically alleged that the small business effectofaproposalontheavailabilityandqualityofbankingservices componentofthepledgedoesnotrepresentanyincreaseoverthetwo in the community. See. e.g., Wells Fargo & Company, 82 Federal organizations'currentsmallbusinesslendinglevels. ReserveBulletin445,457(1996).

Legal Developments: Fourth Quarter, 2006 C31 the Board's Regulation R and finds those factors to be sideredallthefacts ofrecordinlightofthefactors thatitis consistentwithapproval.92 requiredto considerunderthe BRCAct, the BankMerger Act, and the FRA.95 The Board's approval is specifically FOREIGNACTNITIES conditioned on compliance by Regions and Regions Bank withtheconditionsimposedinthisorder,thecommitments As noted above, Regions also proposes to acquire Cahaba madetotheBoardinconnectiOilwiththe applications,and International,Inc., the agreementcorporationsubsidiaryof receiptofallotherregulatoryapprovals.Forpurposesofthis AmSouth Bank. The Board has concluded that all the action, the conditions and commitments are deemed to be factors required to be considered under section 25 of the conditions imposed in writing by the Board in connection FederalReserveActandsection211.5 ofRegulation Kare withits findings and decision herein and, as such, may be consistentwithapprova1.93 enforcedinproceedingsunderapplicablelaw. The proposedbankingacquisitions may notbeconsum CONCLUSION matedbefore the 15thcalendarday afterthe effectivedate ofthis order, or laterthan three months after the effective Basedontheforegoingandallfactsofrecord,theBoardhas date ofthis order, unless such periodis extendedfor good determinedthatthe applicationsshouldbe, andherebyare, causebytheBoardortheFederalReserveBankofAtlanta, approved.94In reaching itsconclusion, the Boardhascon- acting pursuanttodelegatedauthority. By order of the Board of Governors, effective Octo 92.12U.S.C.§322;12CFR208.6(b). ber20, 2006. 93.12CFR211.5. 94. Several commenters requested that the Board hold a public Voting forthis action: ChairmanBernanke,Vice ChairmanKohn, meetingorhearingontheproposal.Section3oftheBRCActdoesnot andGovernorsBies,Warsh,Kroszner,andMishkin. requiretheBoardtoholdapublichearingonanapplicationunlessthe appropriatesupervisoryauthorityforthebanktobeacquiredmakesa JENNIFER J. JOHNSON timelywrittenrecommendationofdenialoftheapplication.TheBoard Secretary ofthe Board hasnotreceivedsucharecommendationfromtheappropriatesuper visoryauthority.TheBankMergerActandtheFRAdonotrequirethe Boardtoholdapublicmeetingorhearing.Underitsrules,theBoard warrantedinthiscase.Accordingly, therequests forapublichearing may, in its discretion, hold a public meeting or hearing on an ormeetingontheproposalaredenied. application toacquireabankifameetingorhearing isnecessary or 95. Several commenters also requested that the Board extend the appropriatetoprovideanopportunityfortestimonyorotherpresenta commentperiodordelayactionontheproposal.Aspreviouslynoted, tions (12 CFR 262.3(i)(2), 262.25(d)). The Board has considered theBoardhasaccumulatedasignificantrecordinthiscase,including carefullythecommenters'requestsinlightofallthefactsofrecord.In reports ofexamination, confidential supervisory information, public the Board's view, the commenters had ample opportunity to submit reportsandinformation,andpubliccomments.Asnoted,thecomment commentson the proposal and, in fact, submittedwritten comments ershavehadampleopportunitytosubmittheirviewsand,infact,have that the Board has considered carefully in acting on the proposal. provided multiple writtensubmissionsthattheBoardhas considered Moreover, the commenters' requests fail to demonstrate why their carefullyinactingontheproposal.Basedonareviewofallthefactsof written comments do not present their views adequately or why a record,theBoardhasconcludedthattherecordinthiscaseissufficient meetingorhearingotherwisewouldbenecessaryorappropriate.For to warrant action at this time and that neither an extension of the these reasons, and based on all the facts of record, the Board has comment period nor further delay in considering the proposal is determined that a public hearing or meeting is not required or necessary.

C32 Federal Reserve Bulletin0 March 2007 Appendix A REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DO] GUIDEliNES WITHOUT DNESTITURES Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits number of shares HHI HHI (dollars) competitors (percent) ALABAMA BANKING MARKETS Auburn and Opelika-Lee County, excluding thatportion ofthe county that is within 12 roadmiles ofPhenix City, Alabama orColumbus, Georgia Regions Pre-Consummation ............... 8 63.9 mil. 4.7 1,695 72 10 AmSouth ....................................... 4 104.5 mil. 7.7 1,695 72 10 Regions Post-Consummation.............. 3 168.4 mil. 12.4 1,695 72 10 Birmingham-Bibb, Blount, Chilton, Jefferson, St. Clair, Shelby, andWalker Counties Regions Pre-Consummation ............... 4 2.5 bil. 12.8 1,600 517 40 AmSouth ....................................... 1 3.9 bil. 20.3 1,600 517 40 Regions Post-Consummation.............. 1 6.3 bil. 33.0 1,600 517 40 Cullman-Cullman County Regions Pre-Consummation ............... 5 123.9 mil. 11.6 1,207 169 9 AmSouth ....................................... 7 78.0 mil. 7.3 1,207 169 9 Regions Post-Consummation.............. 1 201.9 mil. 18.9 1,207 169 9 DeKalb-DeKalb County Regions Pre-Consummation ............... 8 32.2 mil. 5.2 1,394 222 10 AmSouth ....................................... 1 134.3 mil. 21.6 1,394 222 10 Regions Post-Consummation.............. 1 166.5 mil. 26.7 1,394 222 10 Dothan-Houston andHenry Counties; Midland City andNewton in Dale County; andHartford and Slocomb in Geneva County Regions Pre-Consummation ............... 2 347.1 mil. 17.7 1,462 269 15 AmSouth ....................................... 3 149.1 mil. 7.6 1,462 269 15 Regions Post-Consummation .............. 1 496.2 mil. 25.3 1,462 269 15 Florence-Colbert andLauderdale Counties Regions Pre-Consummation ............... 5 139.9 mil. 7.1 1,554 93 10 AmSouth ....................................... 8 129.3 mil. 6.6 1,554 93 10 Regions Post-Consummation .............. 3 269.2 mil. 13.6 1,554 93 10 Marshall-Marshall County Regions Pre-Consummation ............... 4 151.7 mil. 11.6 1,506 382 12 AmSouth ....................................... 1 214.7 mil. 16.4 1,506 382 12 Regions Post-Consummation .............. 1 366.4 mil. 28.0 1,506 382 12 FLORIDA BANKING MARKETS Beverly Hills-Citrus County, excluding the city ofCitrus Springs Regions Pre-Consummation ............... 5 175.3 mil. 8.7 1,478 125 11 AmSouth ....................................... 7 144.0 mil. 7.2 1,478 125 11 Regions Post-Consummation.............. 4 319.3 mil. 15.9 1,478 125 11

Legal Developments: Fourth Quarter, 2006 C33 Appendix A-Continued REGIONS AND AMSOUTHBANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES WITHOUT DIVESTITURES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) Brevard-Brevard County Regions Pre-Consummation ............... 14 89.2 mil. 1.4 1,559 7 19 AmSouth ....................................... 8 172.5 mil. 2.6 1,559 7 19 Regions Post-Consummation.............. 7 261.7 mil. 4.0 1,559 7 19 Daytona Beach-Flagler County; the towns ofAllandale, Daytona Beach, Daytona Beach Shores, Edgewater, Holly Hill, New Smyrna Beach, OrmondBeach, Ormond-by-the-Sea, Pierson, Port Orange, and South Daytona in Volusia County; andthe town ofAstorin Lake County ! Regions Pre-Consummation ............... 5 398.7 mil. 5.7 1,667 22 ! AmSouth ....................................... 19 n.a.! n.a.! 1,667 22 ! Regions Post-Consummation.............. 5 398.7 mil. 5.7 1,667 22 Fort Walton Beach-Okaloosa and Walton Counties, andthe city ofPonce de Leon in Holmes County Regions Pre-Consummation ............... 4 334.4 mil. 7.8 999 214 22 AmSouth ....................................... 1 595.9 mil. 13.8 999 214 22 Regions Post-Consummation.............. 1 930.4 mil. 21.6 999 214 22 Ocala-Marion County, andthe town ofCitrus Springs in Citrus County Regions Pre-Consummation ............... 13 62.2 mil. 1.4 1,463 39 20 AmSouth ....................................... 4 574.5 mil. 13.4 1,463 39 20 Regions Post-Consummation.............. 4 636.6 mil. 14.8 1,463 39 20 Orlando-Orange, Osceola, and Seminole Counties; the western halfof Volusia County; and Clermont and Groveland in Lake County Regions Pre-Consummation ............... 17 291.9 mil. 1.1 1,354 7 47 AmSouth ....................................... 6 926.5 mil. 3.4 1,354 7 47 Regions Post-Consummation.............. 5 1.2 hil. 4.5 1,354 7 47 Pensacola-Escambia andSanta Rosa Counties Regions Pre-Consummation ............... 6 405.9 mil. 7.8 1,359 292 18 AmSouth ....................................... 1 978.2 mil. 18.8 1,359 292 18 Regions Post-Consummation.............. 1 1.4 bil. 26.5 1,359 292 18

C34 Federal Reserve Bulletin0 March 2007 Appendix A-Continued REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DO] GUIDELINES WITHOUT DNESTITURES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) Sarasota-Manatee and Sarasota Counties, excluding thatportion of Sarasota County that is both east ofthe Myakka Riverandsouth ofInterstate 75 (currently the towns ofNorthport and Port Charlotte); thepeninsular portion ofCharlotte County westofthe Myakka River (currently the towns of Englewood, EnglewoodBeach, New Point Comfort, Grove City, Cape Haze, Rotonda, Rotonda West, andPlacida); andGasparilla Island (the town of Boca Grande) in Lee County Regions Pre-Consummation ............... 17 162.3 mil. 1.0 1,305 3 43 AmSouth ....................................... 11 261.2 mil. 1.6 1,305 3 43 Regions Post-Consummation.............. 8 423.5 mil. 2.7 1,305 3 43 Tallahassee-Leon County, andthe towns ofQuincy andHavana in the eastern halfofGadsden County Regions Pre-Consummation ............... 14 6.7 mil. .2 1,221 3 12 AmSouth ....................................... 5 360.1 mil. 9.1 1,221 3 12 Regions Post-Consummation .............. 5 366.8 mil. 9.2 1,221 3 12 Tampa Bay-Hernando, Hillsborough, Pinellas, andPasco Counties Regions Pre-Consummation ............... 15 325.0 mil. .8 1,540 13 64 AmSouth ....................................... 4 3.2 bil. 7.9 1,540 13 64 Regions Post-Consummation .............. 4 3.5 bil. 8.7 1,540 13 64 GEORGIA BANKING MARKETS Dalton-Murrayand Whitfield Counties Regions Pre-Consummation ............... 4 164.4 mil. 9.5 1,512 22 12 AmSouth ....................................... 12 19.4 mil. 1.1 1,512 22 12 Regions Post-Consummation .............. 3 183.8 mil. 10.7 1,512 22 12 Gordon-Gordon County Regions Pre-Consummation ............... 7 10.0 mil. 1.6 2,948 21 5 AmSouth ....................................... 5 44.6 mil. 6.9 2,948 21 5 Regions Post-Consummation .............. 5 54.6 mil. 8.5 2,948 21 5 Rome-Floyd andPolk Counties Regions Pre-Consummation ............... 3 192.4 mil. 12.4 1,411 119 11 AmSouth ....................................... 8 73.7 mil. 4.8 1,411 119 11 Regions Post-Consummation.............. 2 266.1 mil. 17.2 1,411 119 11

Legal Developments: Fourth Quarter, 2006 C35 Appendix A-Continued REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DO] GUIDELINES WITHOUT DIVESTITURES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) LOUISIANA BANKING MARKETS Baton Rouge-Ascension, East Baton Rouge, lberville, Livingston, and West Baton Rouge Parishes; the northern halfofAssumption Parish, including the towns ofNapoleonville, Pierre Part, andPlattenville; andthe town ofUnion in St. James Parish Regions Pre-Consummation ............... 3 1.0bil. 11.9 1,852 62 37 AmSouth ....................................... 6 228.1 mil. 2.6 1,852 62 37 Regions Post-Consummation.............. 3 1.3 bil. 14.5 1,852 62 37 Monroe-Caldwell, Ouachita, and Union Parishes Regions Pre-Consummation ............... 4 211.8 mil. 9.8 1,134 92 15 AmSouth ....................................... 9 102.8 mil. 4.7 1,134 92 15 Regions Post-Consummation .............. 2 314.6 mil. 14.5 1,134 92 15 New Orleans-Jefferson, Orleans, Plaquemines, Saint Bernard, Saint Charles, Saint John the Baptist, and Saint Tammany Parishes; andSaint James Parish excluding the town of Union Regions Pre-Consummation ............... 4 1.5 bil. 7.6 1,577 40 40 AmSouth ....................................... 5 516.6 mil. 2.7 1,577 40 40 Regions Post-Consummation.............. 4 2.0 bil. 10.3 1,577 40 40 MISSISSIPPI BANKING MARKETS Biloxi-Hancock County, Harrison County, andthe City ofOcean Springs in Jackson County Regions Pre-Consummation ............... 6 158.5 mil. 5.2 2,965 11 11 AmSouth ....................................... 9 31.5 mil. 1.0 2,965 11 11 Regions Post-Consummation.............. 4 190.0 mil. 6.2 2,965 11 11 Columbus-Lowndes County Regions Pre-Consummation ............... 7 21.8 mil. 3.2 2,245 110 6 AmSouth ....................................... 3 117.5 mil. 17.2 2,245 110 6 Regions Post-Consummation .............. 2 139.4 mil. 20.4 2,245 110 6 Hattiesburg-Lamar and Forrest Counties Regions Pre-Consummation ............... 2 245.6 mil. 15.1 1,780 218 13 AmSouth ....................................... 5 117.9 mil. 7.2 1,780 218 13 Regions Post-Consummation.............. 2 363.5 mil. 22.3 1,780 218 13 Jones-Jones County Regions Pre-Consummation ............... 8 39.4 mil. 4.5 1,738 77 7 AmSouth ....................................... 5 76.1 mil. 8.6 1,738 77 7 Regions Post-Consummation.............. 4 115.5 mil. 13.1 1,738 77 7

C36 Federal Reserve Bulletin0 March 2007 Appendix A-Continued REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES WITHOUT DIVESTITURES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) O;iford-Lafayette and Yalobusha Counties Regions Pre-Consummation ............... 2 120.2 mil. 15.3 1,547 2 9 AmSouth ....................................... 10 n.a.2 n.a.2 1,547 2 9 Regions Post-Consummation.............. 2 120.2 miL 15.3 1,547 2 9 Tupelo-Chickasaw, Itawamba, Lee, Pontotoc, Prentiss, and Union Counties in Mississippi; andtheportion of Monroe County, Mississippi, north of u.s. Highway 278 andState Route 41, including the cities ofAmory, Quincy, and GreenwoodSprings Regions Pre-Consummation ............... 4 212.0 miL 6.7 1,908 49 13 AmSouth ....................................... 8 116.4 miL 3.7 1,908 49 13 Regions Post-Consummation.............. 3 328.4 miL 10.4 1,908 49 13 TENNESSEE BANKING MARKETS Athens-McMinn, Meigs, andMonroe Counties plus the town ofDelano in Polk County Regions Pre-Consummation ............... 8 51.9 miL 4.3 1,479 81 13 AmSouth ....................................... 3 114.5 miL 9.5 1,479 81 13 Regions Post-Consummation.............. 3 166.4 miL 13.7 1,479 81 13 Cleveland-Bradley County plus the towns ofBenton andOcoee in Polk County Regions Pre-Consummation ............... 9 15.5 mil. 1.2 1,650 34 8 AmSouth ....................................... 3 193.1 mil. 14.4 1,650 34 8 Regions Post-Consummation.............. 3 208.6 mil. 15.6 1,650 34 8 Cookeville-Jackson, Overton, and Putnam Counties Regions Pre-Consummation ............... 5 145.1 mil. 9.7 1,315 215 12 AmSouth ....................................... 4 164.7 mil. ILl 1,315 215 12 Regions Post-Consummation.............. 1 309.8 mil. 20.8 1,315 215 12 Dickson-Dickson County Regions Pre-Consummation ............... 9 16.3 miL 3.3 1,710 102 7 AmSouth ....................................... 3 74.7 mil. 15.3 1,710 102 7 Regions Post-Consummation.............. 2 91.0 mil. 18.6 1,710 102 7 Jackson-includes all ofCrockettand Madison Counties; Chester County, excluding the city ofEnville; Henderson County, excluding the Sardis census countydivision; andthe Humboldt, Gibson, Medina, andMilan census countydivisions in southern Gibson County Regions Pre-Consummation ............... 2 445.6 mil. 18.4 1,663 411 18 AmSouth ....................................... 4 270.1 mil. 11.2 1,663 411 18 Regions Post-Consummation.............. 1 715.8 mil. 29.6 1,663 411 18

Legal Developments: Fourth Quarter, 2006 C37 Appendix A-Continued REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES WITHOUT DIVESTITURES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) Knoxville-Anderson, Knox, Loudon, Roane, and Union Counties; the portion ofBlount County northwestof Chilhowee Mountain; the towns of Chestnut Hill, Danridge, Dumplin, Friends Station, Hodges, New Market, and Strawberry Plains in Jefferson County; the towns ofHarriman and Oliver Springs in Morgan County; the towns ofSeymour andKodak in Sevier County; andthe towns ofBlaine, Buffalo Springs, Joppa, Lea Springs, andPowderSprings in Grainger County Regions Pre-Consummation ............... 6 462.4 mil. 4.9 1,441 167 35 AmSouth ....................................... 3 1.6 bil. 17.0 1,441 167 35 Regions Post-Consummation.............. 2 2.1 bil. 21.9 1,441 167 35 Maury-Maury County Regions Pre-Consummation ............... 5 46.8 mil. 4.4 2,496 132 9 AmSouth ....................................... 3 163.4 mil. 15.2 2,496 132 9 Regions Post-Consummation.............. 3 210.2 mil. 19.5 2,496 132 9 McMinnville-Warren County, andthe town ofAltamont in Grundy County Regions Pre-Consummation ............... 2 139.6 mil. 24.7 2,708 188 6 AmSouth ....................................... 6 21.5 mil. 3.8 2,708 188 6 Regions Post-Consummation.............. 2 161.1 mil. 28.5 2,708 188 6 Morristown-NewportArea-Cocke, Grainger, andHamblen Counties, excluding the towns ofBlaine, Buffalo Springs, Joppa, Lea Springs, and Powder Spring in Grainger County; the towns ofBaneberry, Jefferson City, Jefferson Estates, Leadvale, Talbot, and White Pine in Jefferson County Regions Pre-Consummation ............... 5 no. 1mil. 7.9 1,008 93 15 AmSouth ....................................... 8 83.2 mil. 5.9 1,008 93 15 Regions Post-Consummation.............. 2 193.3 mil. 13.8 1,008 93 15 Nashville-Cheatham, Davidson, Robertson, Rutheiford, Sumner, Williamson, and Wilson Counties Regions Pre-Consummation ............... 4 1.6 bil. 6.7 1,404 243 45 AmSouth ....................................... 2 4.3 bil. 18.2 1,404 243 45 Regions Post-Consummation.............. 1 5.8 bil. 24.9 1,404 243 45

C38 Federal Reserve Bulletin0 March 2007 Appendix A-Continued REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DO] GUIDELINES WITHOUT DIVESTITURES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) BANKING MARKET IN ARKANSAS, MISSISSIPPI, AND TENNESSEE Memphis Area-Fayette, Shelby, and Tipton Counties in Tennessee; the city ofGrandJunction in Tennessee; Crittenden County inArkansas; Benton, De Soto, Marshall, Tate, and Tunica Counties in Mississippi; the northern partofCoahoma County, Mississippi, including the cities ofFriars Point, Coahoma, Lula, and Jonestown; the portion ofPanola County, Mississippi, north ofState Route 315 east to Sardis Lake, including the city ofSardis; and the portion ofQuitman County, Mississippi, north ofState Route 315, including the cities ofBirdie and Sledge Regions Pre-Consummation ............... 2 2.9 bil. 10.6 3,351 52 57 AmSouth ....................................... 6 647.5 mil. 2.4 3,351 52 57 Regions Post-Consummation .............. 2 3.5 bil. 13.1 3,351 52 57 BANKING MARKET IN GEORGIA AND TENNESSEE Chattanooga Area-Hamilton and Marion Counties in Tennessee, excluding theportion ofthe town of Monteagle that lies in Marion County; Catoosa, Dade, andWalker Counties in Georgia Regions Pre-Consummation ............... 8 206.4 mil. 3.2 1,460 108 22 AmSouth ....................................... 3 1.1 bil. 17.0 1,460 108 22 Regions Post-Consummation .............. 3 1.3 biI. 20.1 1,460 108 22 BANKING MARKET IN TENNESSEE AND KENTUCKY Clarksville andHopkinsville Area- Christian, Todd, and Trigg Counties in Kentucky; Montgomery and Stewart Counties in Tennessee Regions Pre-Consummation ............... 16 39.2 mil. 1.7 823 33 15 AmSouth ....................................... 3 226.0 mil. 9.7 823 33 15 Regions Post-Consummation .............. 2 265.1 mil. 11.4 823 33 15 NOTE: Dataare as ofJune 30, 2005. Allamounts ofdeposits are 1. AmSouth recently entered the Daytona Beach market with a unweighted.Allrankings, marketdepositshares,andHHIsarebased denovobranch.Accordingly,June30,2005,figuresareunavailable. onthriftdepositsweightedat50percent. 2. AmSouth recently entered the Oxford market with a de novo branch.Accordingly,June30,2005,figuresareunavailable.

Legal Developments: Fourth Quarter, 2006 C39 Appendix B REGIONS AND AMSOUTHBANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES AFTER DIVESTITURES Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) ALABAMA BANKING MARKETS REQUIRING DIVESTITURE Dallas-Dallas County Pre-Divestiture Regions Pre-Consummation............ 2 141.8 mil. 28.7 3,656 717 2 AmSouth .................................... 4 61.8 mil. 12.5 3,656 717 2 Regions Post-Consummation .......... 1 203.5 mil. 41.2 3,656 717 2 Post-Divestiture Regions Post-Consummation .......... 2 141.8 mil. 29.9 2,983 44 3 Branches Divested to Out-of- Market Purchaser ...................... 4 55.6 miLl 11.3 2,983 44 3 ALABAMA BANKING MARKETS REQUIRING DIVESTITURE Huntsville Area-Madison County; Limestone County, excluding both the town ofArdmore and theportion ofthe city ofDecaturlocated in Limestone County Pre-Divestiture Regions Pre-Consummation ............ 1 1.1 bil. 23.5 2,141 777 15 AmSouth .................................... 2 789.0 mil. 16.6 2,141 777 15 Regions Post-Consummation .......... 1 1.9 bil. 40.0 2,141 777 15 Post-Divestiture Regions Post-Consummation .......... 1 1.6 bil. 34.6 1,765 402 16 Branches Divested to Out-of- Market Purchaser ...................... 7 258.4 mil.2 5.4 1,765 402 16 MISSISSIPPI BANKING MARKETS REQUIRING DIVESTITURE Clarksdale-Coahoma County, excluding the northern part ofthe county that includes the cities ofFriars Point, Coahoma, Lula, andJonestown Pre-Divestiture Regions Pre-Consummation ............ 4 66.0 mil. 15.7 3,283 604 3 AmSouth .................................... 2 81.2 mil. 19.3 3,283 604 3 Regions Post-Consummation .......... 2 147.2 mil. 34.9 3,283 604 3 Post-Divestiture Regions Post-Consummation .......... 4 66.0 mil. 17.6 2,672 -7 4 Branches Divested to Out-of- Market Purchaser ...................... 3 73.1 miLl 17.4 2,672 -7 4 Greenville-Washington County Pre-Divestiture Regions Pre-Consummation ............ 3 110.3 mil. 17.1 2,394 478 5 AmSouth .................................... 5 90.6 mil. 14.0 2,394 478 5 Regions Post-Consummation .......... 3 201.0 mil. 31.1 2,394 478 5

C40 Federal Reserve BulletinD March 2007 Appendix B-Continued REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES AFTER DIVESTITURES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) Greenville-Washington County- Continued Post-Divestiture Regions Post-Consummation .......... 3 133.5 mil. 21.7 1,986 71 6 Branches Divested to Out-of- Market Purchaser ...................... 5 60.8 mil.) 9.4 1,986 71 6 Greenwood-Carroll andLeflore Counties Pre-Divestiture Regions Pre-Consummation ............ 4 53.6 mil. 10.5 2,035 409 6 AmSouth .................................... 2 99.4 mil. 19.5 2,035 409 6 Regions Post-Consummation .......... 1 153.0 mil. 30.0 2,035 409 6 Post-Divestiture Regions Post-Consummation .......... 4 53.6 mil. 12.5 1,598 -28 7 Branches Divested to Out-of- MarketPurchaser ...................... 3 89.5 mil.l 17.5 1,598 -28 7 TENNESSEE BANKING MARKETS REQUIRING DIVESTITURE Bedford-Bedford County Pre-Divestiture Regions Pre-Consummation ............ 2 97.6 mil. 21.8 3,005 653 4 AmSouth .................................... 3 67.3 mil. 15.0 3,005 653 4 Regions Post-Consummation .......... 2 164.9 mil. 36.8 3,005 653 4 Post-Divestiture Regions Post-Consummation .......... 2 97.6 mil. 23.3 2,377 24 5 Branches Divested to Out-of- Market Purchaser ...................... 3 60.5 miL) 13.5 2,377 24 5 Cannon-Cannon County Pre-Divestiture Regions Pre-Consummation ............ 1 52.3 mil. 39.3 5,634 2,240 1 AmSouth .................................... 3 38.0 mil. 28.5 5,634 2,240 1 Regions Post-Consummation .......... 1 90.3 mil. 67.8 5,634 2,240 1 Post-Divestiture Regions Post-Consummation .......... 1 52.3 mil. 42.2 3,471 77 2 Branches Divested to Out-of- Market Purchaser ...................... 3 34.2 miL) 25.7 3,471 77 2 Cumberland-Cumberland County Pre-Divestiture Regions Pre-Consummation ............ 1 156.7 mil. 24.8 3,189 1,179 5 AmSouth .................................... 2 149.9 mil. 23.7 3,189 1,179 5 Regions Post-Consummation .......... 1 306.6 mil. 48.6 3,189 1,179 5 Post-Divestiture Regions Post-Consummation .......... 1 199.3 mil. 33.3 2,171 161 6 Branches Divested to Out-of- Market Purchaser ...................... 3 96.6 mil.) 15.3 2,171 161 6

Legal Developments: Fourth Quarter; 2006 C41 Appendix B-Continued REGIONS AND AMSOUTH BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES AFTER DIVESTITURES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) DeKalb-DeKalb County Pre-Divestiture Regions Pre-Consummation ............ 3 62.8 mil. 21.8 3,667 975 2 AmSouth .................................... 2 64.4 mil. 22.4 3,667 975 2 Regions Post-Consummation .......... 1 127.2 mil. 44.2 3,667 975 2 Post-Divestiture Regions Post-Consummation .......... 2 62.8 mil. 24.0 2,699 7 3 Branches Divested to Out-of- Market Purchaser ...................... 3 58.0 miL! 20.1 2,699 7 3 Fayetteville-Lincoln County, excluding theportion ofthe town ofPetersburg that lies in Lincoln County Pre-Divestiture Regions Pre-Consummation ............ 2 97.8 mil. 23.0 2,477 467 6 AmSouth.................................... 4 43.2 mil. 10.2 2,477 467 6 Regions Post-Consummation .......... 1 141.0 mil. 33.2 2,477 467 6 Post-Divestiture Regions Post-Consummation .......... 2 97.8 mil. 24.0 2,038 28 7 Branches Divested to Out-of- Market Purchaser ...................... 4 38.9 miL! 9.1 2,038 28 7 Paris-Henry County Pre-Divestiture Regions Pre-Consummation ............ 3 54.3 mil. 12.1 2,809 282 6 AmSouth .................................... 4 52.1 mil. 11.6 2,809 282 6 Regions Post-Consummation .......... 3 106.5 mil. 23.7 2,809 282 6 Post-Divestiture Regions Post-Consummation .......... 3 54.3 mil. 13.3 2,531 4 6 Branches Divested to In-Market Purchaser ................................ 4 46.9 miL! 10.5 2,531 4 6 Rhea-Rhea County Pre-Divestiture Regions Pre-Consummation ............ 4 39.4 mil. 13.6 2,840 533 3 AmSouth .................................... 3 56.6 mil. 19.6 2,840 533 3 Regions Post-Consummation .......... 1 96.0 mil. 33.2 2,840 533 3 Post-Divestiture Regions Post-Consummation .......... 4 39.4 mil. 14.9 2,288 6 4 Branches Divested to Out-of- Market Purchaser ...................... 5 32.3 mil.l,3 11.2 2,288 6 4 NOTE: Dataare as ofJune 30, 2005.All amounls ofdeposits are 1.Onebranch. unweighted.Allrankings,marketdepositshares,andHHlsarebased 2.Fivebranches. on thrift deposits weighted at 50 percent. Amounts ofdeposits for 3.OnSeptember29,2006,priortothemerger,AmSouthsoldone branches divested to purchasers take into account potential deposit branchwithdepositsof$20.7milliontoSouthEastBankandTrust,a runoffofupto 10percent. market competitor. Those deposits are therefore not reflected in the post-divestitureamount.

C42 Federal Reserve Bulletin0 March 2007 Sky Financial Group, Inc. BHC Act also prohibits the Board from approving a Bowling Green, Ohio proposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket, unless the anticompetitiveeffects Order Approving Acquisition of a Bank oftheproposalareclearlyoutweighedinthepublicinterest by the probable effect of the proposal in meeting the Holding Company convenience and needs of the community to be served.5 TheBoardhascarefullyconsideredthe competitiveeffects Sky Financial Group, Inc. ("Sky"), a financial holding ofthe proposalin lightofall the facts ofrecord. company within the meaning of the Bank Holding Com SkyandWellsRivercompetedirectlyintheYoungstown panyAct("BHCAct"), hasrequestedtheBoard'sapproval Warren, Ohio banking market.6 The Board has reviewed under section 3 of the BHC Act! to acquire Wells River carefully the competitive effects of the proposal in this Bancorp, Inc. ("Wells River") and its subsidiary bank, banking market in light of all the facts of record. In Perpetual Savings Bank ("Perpetual"), both ofWellsville, particular,theBoardhasconsideredthenumberofcompeti Ohio.2 tors that wouldremainin the market, therelative sharesof Notice of the proposal, affording interested persons an total deposits in depository institutions in the market opportunitytosubmitcomments,hasbeenpublishedinthe ("marketdeposits")controlledbySkyandWellsRiver,?the FederalRegister(71 FederalRegister47,226(2006)).The concentration level ofmarketdeposits and the increase in time for filing comments has expired, and the Board has this levelas measuredbytheHerfindahl-HirschmanIndex considered the application and all comments received in ("HHI") under the Department of Justice Merger Guide lightofthe factors setforth insection3ofthe BHCAct. lines ("DOl Guidelines"),8 and othercharacteristics ofthe Sky, with total consolidated assets of $15 billion, con market. trols Sky Bank,3 Salineville, Ohio, with branches in Ohio, In the Youngstown-Warren banking market, Sky is the Indiana,Michigan,Pennsylvania,andWestVirginia. Skyis largest depository organization, controlling deposits of theeighthlargestdepository organizationinOhio, control $2.5billion,whichrepresent35.5percentofmarketdepos ling deposits of$8.1 billion, which represent 4 percent of its.Perpetualisthe 17thlargestdepositoryinstitutioninthe total deposits of insured depository institutions in Ohio market, controllingdeposits of$57.4million, whichrepre ("statedeposits").4 sentlessthan I percentofmarketdeposits. Onconsumma Wells River, a smallbank holding company with bank tion, Skywouldremain the largestdepository organization ing assets of approximately $72.6 million, operates one inthemarket,controllingdepositsofapproximately$2.5bil insureddepositoryinstitution,Perpetual,inOhio.Perpetual lion, which represent 36.2percentofmarketdeposits. The is the 179th largest depository institution in the state, HHIwould increase44 pointsto 1809. controlling deposits of approximately $57.4 million. On The proposalwould be consistentwith DOl Guidelines consummation of this proposal, Sky would remain the in the Youngstown-Warren banking market. Although the eighth largestdepository organization in Ohio, controlling marketwouldbecomehighlyconcentratedas measuredby deposits of approximately $8.2 billion, which represent approximately 4percentofstatedeposits. 5. 12U.S.c.§1842(c)(I). COMPETITIVE CONSIDERATIONS 6.TheYoungstown-WarrenbankingmarketisdefinedasMahoning County, excluding Smith township; Trumbell County, excluding Brookfield and Hartford townships; and Columbiana County, all in Section 3 of the BHC Act prohibits the Board from Ohio;andtheGrantDistrictinHancockCounty,WestVirginia. approving a proposal that would result in a monopoly or 7. DepositandmarketdataareasofJune30,2006,reflectmerger would be in furtherance of an attempt to monopolize the activitythroughSeptember12,2006,andarebasedoncalculationsin business of banking in any relevant banking market. The whichthedepositsofthriftinstitutionsareincludedat50percent.The Boardpreviouslyhasindicatedthatthriftinstitutionshavebecome,or have the potentialto become, significantcompetitors ofcommercial 1. 12U.S.c. §1842. banks. See, e.g., Midwest Financial Group, 75 Federal Reserve 2. In other pending applications, Perpetual has applied to state Bulletin 386, 387 (1989); National City Corporation, 70 Federal authoritiestoconverttoastate-charteredcommercialbankandtothe Reserve Bulletin 743, 744 (1984). Thus, the Board regularly has Board to become a state member bank. Sky plans subsequently to includedthriftdepositsinthemarketsharecalculationona50percent mergePerpetualwithSkyBank,withPerpetualasthesurvivingentity, weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve andtooperateSkyBank'sofficesasbranchesofPerpetualpursuantto Bulletin52,55(1991). section18(c)oftheFederalDepositInsuranceActandsection9ofthe 8. Under the DOJ Guidelines, a market is considered unconcen Federal Reserve Act (12 U.S.c. §1828(c); 12 U.S.c. §321). Sky tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated intendstochangethenameofPerpetualtoSkyBankandtomoveits if the post-merger HHI is between 1000 and 1800, and highly headquarterstoSalineville. concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof 3. SkyalsocontrolsSkyTrust, NationalAssociation, PepperPike, Justice ("DOJ") has informed the Board that a bank merger or Ohio ("Sky Trust"), alimited-purpose bank that provides only trust acquisition generally will not bechallenged (in the absenceofother services. factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI 4. Asset and deposit data are as ofJune 30, 2006, and statewide is at least 1800 and the merger increases the HHI more than 200 deposit and ranking data are adjusted for subsequent acquisitions points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds through September 12, 2006. In this context, insured depository forscreeningbankmergersandacquisitionsforanticompetitiveeffects institutions include commercial banks, savings banks, and savings implicitly recognize the competitive effects of limited-purpose and associations. othernondepositoryfinancialentities.

Legal Developments: Fourth Quarter, 2006 C43 theHHI, theincreaseintheHHI wouldbesmall.Asnoted, TheBoardhasconsideredcarefullythe financial factors Sky currently controls 35.5 percent ofthe market, and on of the proposal. Sky, Sky Bank, and Perpetual are well consummation ofthe proposal, Sky's market share would capitalized and would remain so on consummation ofthe increase less than I percent. Furthermore, 16 insured proposal. Basedonitsreview oftherecord, theBoardalso depository institutions other than Sky would continue to finds thatSkyhassufficientfinancialresourcestoeffectthe operatein themarket,includingtwoinstitutions, eachwith proposal.The proposedtransactionis structuredas ashare more than 10 percent ofmarket deposits, and three other exchange and cash purchase. Sky will use existing re institutions, each with more than 5 percent of market sourcesto fund the cash portionofthe transaction. deposits.Thesefactors, therefore,indicatethattheproposal TheBoardalsohasconsideredthe managerial resources is not likely to have a significantly adverse competitive ofSky,Wells River, and theirsubsidiarybanks.TheBoard effectin theYoungstown-Warrenbankingmarket. has reviewed the examinationrecordsofthese institutions, The DOJ also has conducted a detailed review of the including assessments of their management, risk potential competitive effects of the proposal and has management systems, and operations. In addition, the advised the Board that consummation of the proposal Boardhasconsidereditssupervisoryexperiencesandthose would not likely have a significantly adverse effect on oftheotherrelevantbankingsupervisoryagencieswiththe competition in any relevant banking market. In addition, organizations and their records ofcompliance with appli the appropriate banking agencies have been afforded an cablebankingand anti-money-laundering laws. Sky,Wells opportunity to comment and have not objected to the River, and theirsubsidiary depository institutions are con proposal. sideredtobewellmanaged.TheBoardalsohasconsidered Basedonallthefactsofrecord,theBoardconcludesthat Sky's plans for implementing the proposal, including the consummation of the proposal would not have a signifi proposed managementafterconsummation. cantly adverse effect on competition or on the concentra Basedonallthefactsofrecord,theBoardhasconcluded tion ofresources in the Youngstown-Warren banking mar thatconsiderationsrelating to thefinancial and managerial ket, whereSkyandWellsRivercompetedirectly,orinany resourcesandfutureprospectsoftheorganizationsinvolved otherrelevantbanking market. Accordingly, theBoardhas intheproposalareconsistentwithapproval,asaretheother determined that competitive considerations are consistent supervisory factors underthe BHCAct. withapproval. CONVENIENCE AND NEEDS CONSIDERATIONS FINANCIAL, MANAGERIAL, AND SUPERVISORY Inactingonaproposalundersection3oftheBHCAct,the CONSIDERATIONS Boardalso mustconsidertheeffectsoftheproposalonthe convenienceandneedsofthecommunitiestobeservedand Section3oftheBHCActrequirestheBoardtoconsiderthe take into account the records of the relevant insured financial and managerial resources andfuture prospects of depository institutionsundertheCommunityReinvestment the companies and depository institutions involved in the Act("CRA").9SkyBankreceiveda"satisfactory"ratingat proposal and certain other supervisory factors. The Board itsmostrecentCRAperformanceevaluationbytheFederal has considered these factors in light of all the facts of Reserve Bank of Cleveland, as of October 14, 2004. record, includingconfidentialreportsofexamination,other Perpetual also received a "satisfactory" rating at its most supervisory information from the primary supervisors of recentCRAperformanceevaluationbytheFederalDeposit the organizations involved in the proposal, publicly re InsuranceCorporation,asofJuly 1,2005.Afterconsumma ported and other financial information, and information tion of the proposal, Sky plans to implement its CRA providedbythe applicant. policiesatPerpetual.The proposalwouldresultinefficien Inevaluatingfinancial factors inexpansionproposalsby cies that would allow Sky to better serve the customers of banking organizations, the Board reviews the financial Sky Bank and Perpetual and would expand the products condition of the organizations involved on both a parent andservicesavailabletoPerpetualcustomers.Basedonall onlyandconsolidatedbasis, as well as the financial condi thefactsofrecord, theBoardconcludesthatconsiderations tion of the subsidiary banks and significant nonbanking relating to the convenience and needs factor and the CRA operations.Inthisevaluation,theBoardconsidersavariety performancerecords ofthe relevantdepository institutions of information, including capital adequacy, asset quality, are consistentwith approval. and earnings performance. In assessing financial factors, the Board consistently has considered capital adequacy to CONCLUSION be especially important. The Board expects banking orga nizationscontemplatingexpansiontomaintainstrongcapi Based on the foregoing and all the facts of record, the tal levels substantially in excess of the minimum levels Board has determined that the application should be, and specifiedbytheBoard'sCapitalAdequacyGuidelines.The herebyis,approved. Inreachingthisconclusion,theBoard Board also evaluates the financial condition of the com hasconsideredall thefacts ofrecordin lightofthefactors bined organization at consummation, including its capital position, asset quality, and earnings prospects, and the impactofthe proposedfunding ofthetransaction. 9. 12U.S.c.§2901 etseq.; 12U.S.c.§1842(c)(2).

CM Federal Reserve Bulletin0 March 2007 that it is required to consider under the BHC Act. The consideredthe proposalandallcommentsreceivedinlight Board'sapprovalisspecificallyconditionedoncompliance ofthe factors setforth in section4oftheBHCAct. by Sky with the conditions imposed in this order and the National City, with total consolidated assets of commitments made to the Board in connection with the $141.5billion,isthe 13thlargestdepositoryorganizationin application. Forpurposesofthis action, the conditions and the United States, controlling deposits of approximately commitments are deemed to be conditions imposed in $83.2 billion, which represent approximately I percent of writing by the Board in connection with its findings and the total amount ofdeposits ofinsured depository institu decision herein and, as such, may beenforcedin proceed tions in the United States.3 National City operates one ings underapplicablelaw. insured depository institution, National City Bank, Cleve The proposed transaction may not be consummated land, Ohio, with branches in seven states.4 Harbor, with beforethe 15thcalendarday afterthe effectivedate ofthis total consolidated assets of approximately $3.2 billion, order, orlaterthan three months after the effectivedate of operates one insured depository institution, Harbor FSB, thisorder, unlesssuchperiodisextendedforgoodcauseby with branches only in Florida. Harbor is the IIth largest theBoardortheFederalReserveBankofCleveland,acting depository organization in Florida, controlling deposits of pursuantto delegatedauthority. approximately $2.2billion, whichrepresentapproximately ByorderoftheBoardofGovernors,effectiveOctober6, 2 percent of the total amount of deposits of insured 2006. depository institutionsinthe state. Onconsummationofthe proposal, NationalCity would Voting for this action: Chairman Bernanke,Vice Chairman Kohn, andGovernorsWarsh,Kroszner.andMishkin.Absentandnotvoting: remain the 13th largest insureddepository organization in GovernorBies. theUnitedStates,withtotalconsolidatedassetsofapproxi mately$145.4billion.NationalCitywouldcontroldeposits ROBERT DEY. FRIERSON ofapproximately $85billion,representing I percentofthe Deputy Secretary ofthe Board total amount deposits ofinsured depository institutions in the UnitedStates. ORDERS ISSUED UNDER SECTION 4 OF TheBoardpreviouslyhasdeterminedby regulationthat the operation of a savings association by a bank holding THE BANK HOLDING COMPANY ACT company is closely related to banking for purposes of section 4(c)(8) ofthe BHC Act.sThe Board requires that National City Corporation savings associations acquired by bank holding companies conformtheirdirectandindirectactivities to thosepermis Cleveland, Ohio sible for bank holding companies under section 4 of the BHCAct.6 NationalCityhascommittedtoconformall the Order Approving the Acquisition of a activities of Harbor FSB to those permissible under sec Savings Association and a Notice to Engage tion 4(c)(8)oftheBHCActand RegulationY. Inaddition, in Nonbanking Activities the Board has determined that appraising real estate and personal property is closely related to banking.? National National City Corporation ("National City"), a financial City has committed to conduct this activity in accordance holdingcompany within the meaningofthe BankHolding with theBoard'sregulationsand orders. Company Act ("BHC Act"), has requested the Board's Section4(j)(2)(A)oftheBHCActrequirestheBoardto approval under sections 4(c)(8) and 4(j) of the BHC Act determinethattheproposedacquisitionofHarborFSB and andsection225.24oftheBoard'sRegulationyl toacquire AppraisalAnalysis"canreasonablybeexpectedtoproduce Harbor Federal Savings Bank ("Harbor FSB"), a savings benefitstothepublicthatoutweighpossibleadverseeffects, association, by merging with its holding company, Harbor such as undue concentration of resources, decreased or Florida Bancshares, Inc. ("Harbor"), both of Fort Pierce, unfaircompetition, conflictsofinterests,orunsoundbank Florida. National City also has requested the Board's ingpractices."8Aspartofitsevaluationunderthesepublic approval under those provisions to acquire Appraisal interestfactors, the Boardreviews the financial and mana Analysis,Inc.("AppraisalAnalysis"),FortPierce,asubsid gerialresourcesofthecompaniesinvolved,theeffectofthe iary ofHarbor, and thereby provide appraisal services for proposal on competition in the relevant markets, and the real estate and personal property in accordance with sec tion 225.28(b)(6)oftheBoard'sRegulationy'2 Notice of the proposal, affording interested persons an 3.Asset,deposit, andrankingdataareas ofJune30, 2006. In this opportunitytosubmitcomments,hasbeenpublishedinthe context, insured depository institutions include commercial banks, FederalRegister(71 FederalRegister41,219(2006».The savingsbanks,andsavingsassociations. time for filing comments has expired, and the Board has 4. National City Bank operates in Illinois, Indiana, Kentucky, Michigan,Missouri,Ohio,andPennsylvania. 5. 12CFR225.28(b)(4)(ii). 6./d. 1.12U.S.c.§§1843(c)(8)andG); 12CFR225.24. 7.12CFR225.28(b)(2)(i). 2. 12CPR225.28(b)(6). 8. 12U.S.C.§1843G)(2)(A).

Legal Developments: Fourth Quarter, 2006 C45 public benefits of the proposal.9 In acting on a notice to gerial resourcesofNationalCity,Harbor, and theirsubsid acquire a savings association, the Board also reviews the iaries. The Board also has reviewed the effectthe transac records ofperformance ofthe relevant insured depository tion would haveon those resources in lightofall the facts institutions under the Community Reinvestment Act of record, including confidential reports of examination, ("CRA").l0 The Board has considered the proposal under other supervisory information from the primary federal these factors in light of all the facts of record, including supervisors ofthe organizations involved in the proposal, confidentialsupervisoryandexaminationinformation,pub publiclyreported andotherfinancial information,informa licly reported financial and other information, and public tion provided by National City, and public comments commentssubmittedonthe proposal.!! receivedonthe proposal. Inevaluating financial resources inexpansion proposals by banking organizations, the Board reviews the financial COMPETITIVE CONSIDERATIONS condition ofthe organizations involved on both a parent As part ofthe Board's consideration ofthe public interest onlyand consolidatedbasis, as well as the financial condi factors under section 4 of the BHC Act, the Board has tion of the subsidiary-insured depository institutions and consideredcarefullythecompetitiveeffectsoftheproposed significant nonbanking operations. In this evaluation, the acquisitionofHarborFSBinlightofallthefactsofrecord. Boardconsidersavarietyofinformation, includingcapital National City and Harbor do not compete directly in any adequacy, asset quality, and earnings performance. In relevant banking market. Based on all the facts ofrecord, assessing financial resources, the Board consistently has the Board has concluded that consummation of the pro consideredcapitaladequacytobeespeciallyimportant.The posalwouldnotresultinanysignificantlyadverseeffecton Board also evaluates the financial condition of the com competitioninany relevantbanking marketP bined organization at consummation, including its capital The Board has considered the effects of the proposed position, asset quality, and earnings prospects, and the transaction on competition for appraisal services. Harbor impactofthe proposedfunding ofthe transaction. andNationalCitydonotcompetedirectly inprovidingthe The Board has carefully considered the proposal under proposed appraisal services. Moreover, the markets for the financial factors. National City, Harbor, and their these nonbanking activities are local or regional in scope subsidiary depository institutions are well capitalized and and are unconcentrated. The record in this case indicates would remainso onconsummation ofthe proposal. Based that there are numerous providersofthese services. Based on its review of the record, the Board finds that National onallthefactsofrecord,theBoardconcludesthatconsum Cityhassufficientfinancialresourcestoeffecttheproposal. mation ofthe proposal would have a de minimiseffect on Theproposedtransactionisstructuredasashareexchange. competitionamong providersofappraisal services. TheBoardalso hasconsideredthemanagerial resources ofthe organizations involved and the proposed combined organization. The Board has reviewed the examination FINANCIAL AND MANAGERIAL RESOURCES records of National City, Harbor, and their subsidiary In reviewing the proposal undersection4ofthe BHCAct, depositoryinstitutions,includingassessmentsoftheirman the Boardhascarefullyconsideredthe financial and mana- agement, risk-management systems, and operations. In addition, the Board has considered its supervisory experi ences and those ofthe otherrelevant banking supervisory 9.See12CFR225.26;see, e.g.,BancOneCorporation,83Federal agencies with the organizations and their records ofcom ReserveBulletin602(1997). pliance with applicable banking law and withanti-money 10.12U.S.C. §2901etseq. launderinglaws.NationalCity,Harbor,andtheirsubsidiary II.Oneofthetwocommentersontheproposalexpressedconcern thatNationalCity'sacquisitionofAppraisalAnalysiscoulderodethe depository institutions are considered to be well managed. separation between appraisers and the loan-production and credit The Board also has considered National City's plans for decision-making processes. National Cityhas committedthat it will implementing the proposal, including the proposed man conduct all appraisal services in compliance with applicable federal agementafterconsummation.!3 regulationsandguidancerequiringfunctionalseparationofappraisals fromcredit-solicitationanddecision-makingprocesses. Basedonallthefactsofrecord,theBoardhasconcluded 12.Anothercommenterexpressedconcernabouttheexistingcon thatthefinancial andmanagerialresourcesoftheorganizacentrationlevelsofmarketdepositsinmarketswhereHarborFSBhas offices.BecauseNationalCityBankcurrentlydoesnothavebranches inanyofthesebankingmarkets,theproposalwouldnotincreasethe concentration levels ofdeposits in Harbor FSB's banking markets. 13.AcommenterexpressedconcernaboutNationalCity'srelation Furthermore,theBoardreviewedtheconcentrationlevelsintheIndian ships with unaffiliated pawn shops, cash-advance lenders, and other River County, Rorida banking market, one of the markets where nontraditionalprovidersoffinancialservices.Asageneralmatter,the Harbor FSB has branches, in its recent review of the proposed activities ofthe consumerfinance businesses identified by the com acquisitionofGolden WestFinancial Corporation,Oakland, Califor menterare permissible,and the businessesare licensed bythestates nia, byWachoviaCorporation, Charlotte, NorthCarolina.TheBoard where they operate. National City has stated that itdoes not pursue found noadversecompetitiveimpactinthemarketasaresultofthat suchnontraditionalprovidersasalineofbusiness. NationalCityalso transaction. See Wachovia Corporation, 92 Federal Reserve Bulletin hasrepresentedthatitdoesnotplayanyroleinthelendingpractices, CI83(2006). creditreview,orotherbusinesspracticesofthosefirms.

C46 Federal Reserve Bulletin0 March 2007 tions involvedinthe proposal are consistentwithapproval rating at its most recent CRA performance evaluation by undersection4ofthe BHCAct. theOfficeofThriftSupervision,asofSeptember30,2005. NationalCityhasindicatedthatitsCRAprogramwouldbe implemented at Harbor FSB on consummation of the eRA PERFORMANCE RECORDS proposal. As previously noted, the Board considers the records of In connection with previous applications by National performanceundertheCRAoftherelevantinsureddeposi City,theBoardhasreviewedtheCRAperformancerecords tory institutions when acting on a notice to acquire a of National City's subsidiary-insured depository institu savingsassociation.TheCRArequiresthefederal financial tions.19Asummaryofthe mostrecentCRAevaluationsof supervisoryagenciestoencourageinsureddepositoryinsti National City Bank was included in the Allegiant Order. tutions tohelpmeetthe creditneedsofthe localcommuni Based on its review of the record in this case, the Board ties in which they operate, consistent with their safe and hereby reaffirms and adopts the facts and findings detailed soundoperation,andrequirestheappropriatefederalfinan in the AllegiantOrder. TheBoard also has consulted with cial supervisory agency to take into account a relevant the OCC concerning the CRA performance of National depository institution's record ofmeeting the credit needs CityBanksinceitslastCRAevaluation. of its entire community, including low- and moderate As discussed in the Allegiant Order, the most recent income("LMI")neighborhoods, inevaluatingbankexpan CRA evaluation of National City Bank characterized the sionary proposals.14 bank'soverallrecordofhomemortgageandsmallbusiness The Board received a comment related to the CRA lending as excellent and commended its level ofcommu performance record of National City. The commenter nitydevelopmentlending.20Examinersnotedfavorably the alleged, based primarily ondata reported under the Home useofseveralflexible lendingproductsdesignedtoaddress Mortgage DisclosureAct ("HMDA"),15 that National City the affordable housing needs of LMI individuals and the extended a disproportionately high number of subprime bank's level ofqualified investments. In addition, examin mortgage loansin the Cincinnati area, particularly to LMI ersreportedthatNationalCityBank'scommunitydevelop borrowers, as comparedtoitslendingoutsideCincinnati.16 ment services were excellent and commended the geo As provided in the CRA, the Board has evaluated the graphic distributionofthe bank's branches. proposal in light of the evaluations by the appropriate In 2004 and 2005, National City originated housing federal supervisorsoftheCRAperformancerecordsofthe related loans reported under HMDA totaling more than relevant insured depository institutions. An institution's $11.6 billion. Of this amount, 13 percent was lent to most recent CRAperformance evaluation is a particularly borrowers in LMI census tracts and 26 percent to LMI importantconsiderationintheapplicationsprocessbecause borrowers. National City represented that, in 2004 and it represents a detailed, on-site evaluation of the institu 2005, its subsidiary banks also made approximately tion's overallrecord ofperformanceunder the CRAby its $977 million in qualified community development loans appropriatefederal supervisor.17 and approximately $235 million in qualified investments National City Bank received an "outstanding" rating at and grants in their assessment areas, including significant its mostrecentCRAperformance evaluation by the Office investmentsin the Cincinnati area. ofthe Comptrollerofthe Currency ("OCC"), as ofFebru In the most recent CRA performance evaluation of ary 22, 2000.18 Harbor FSB received an "outstanding" Harbor FSB, examiners reported that the savings associa tion'soveralllendingtoLMIborrowersexceededthatofall otherlenders inits assessment areas during the evaluation 14.12U.S.c.§2903. period (January 1,2003, to December 31,2(04). In addi- 15. 12U.S.c.§2801etseq. 16. As the Board has previously noted, subprime lending is a permissible activity that provides needed credit to consumers who TrustCompany,Maplewood,Missouri,intoNationalCityBank.Each havedifficultymeetingconventionalunderwritingcriteria.TheBoard of these banks received either an "outstanding" or a "satisfactory" continuestoexpectallbankholdingcompaniesandtheiraffiliatesto rating al its most recent CRAevaluation, as have the other insured conduct their lending operations without any abusive lending prac depository institutions that, sincethe most recent CRAperformance tices. See. e.g., RoyalBankofCanada, 88 Federal Reserve Bulletin evaluation of National City Bank, have been consolidated into 385,388(2002).TheBoardnotesthatonSeptember5,2006,National NationalCityBank. Citysignedanagreementtosellitsprincipalsubsidiarythatoriginates 19. National City Corporation, 92 Federal Reserve Bulletin C84 subprimemortgageloans,FirstFranklinFinancialCorporation("First (2006); National City Corporation, 90 FederalReserve Bulletin 519 Franklin"), SanJose, California,to MerrillLynch& Co., NewYork, (2004); National City Corporation, 90 Federal Reserve Bulletin 236 New York, and also announced its intention to sellto MerrillLynch (2004) ("AllegiantOrder"); andNational City Corporation, 90 Fed $5.6billionofloansoriginatedbyFirstFranklin. eralReserveBulletin382(2004)("ProvidentOrder"). 17.SeeInteragencyQuestionsandAnswersRegardingCommunity 20.SeeAllegiantandProvidentOrders.Inevaluatingtherecordsof Reinvestment,66FederalRegister36,620at36,640(2001). performanceundertheCRAofNationalCityBank,examinersconsid 18.OnJuly22,2006,NationalCityconsolidatedfiveothersubsid ered home mortgage loans by certain affiliates in the bank's assess iary banks into NationalCity Bank: National City BankofIndiana. mentareas.Theloansreviewedbyexaminersincludedloansreported Indianapolis, Indiana; National City Bank ofKentucky, Louisville, by National City Mortgage Corporation, Miamisburg, Ohio (then a Kentucky; NationalCityBankofPennsylvania, Pittsburgh, Pennsyl subsidiaryofNationalCityBankofIndiana);NationalCityMortgage vania;NationalCityBankofSouthernIndiana,NewAlbany,Indiana; Services, Kalamazoo, Michigan (then a subsidiary of National City and National City Bank ofthe Midwest, Bannockburn, Illinois. On Bank of the Midwest); and other bank and nonbank affiliates of August 19, 2006, National City also consolidated PioneerBank and NationalCityBank.

Legal Developments: Fourth Quarter, 2006 C47 tion, examiners characterized Harbor FSB's level ofcom sound lendingbutalsoequalaccesstocreditbycreditwor munity development lending in the combined assessment thy applicantsregardlessoftheirraceorethnicity.Because areaasstrong.ExaminersalsocommendedHarborFSBfor ofthelimitationsofHMDAdata,theBoardhasconsidered supporting a wide variety ofnonprofit civic organizations these data carefully and taken into account otherinforma inits assessmentareas and noted that the savings associa tion, including examination reports that provide on-site tion offered a high level of banking services, including evaluations of compliance by National City with fair severalproductsthat were beneficialtoLMIindividuals. lending laws. In the fair lending reviews that were con Based on a review of the entire record, and for the ducted in conjunction with the most recent CRA perfor reasons discussed above, the Board has concluded that mance evaluations of National City, examiners noted no considerationsrelating tothe CRAperformancerecords of substantive violations ofapplicable fair lending laws. The the relevant depository institutions are consistent with Boardhasalsoforwarded thecommenter'ssubmissionsto, approval. and consulted with, the acc about the fair-lending and consumer-protection compliance records of National City OTHER CONSIDERATIONS Bank, including the records of First Franklin, which is a subsidiary ofthe bank. Inlightofpubliccommentsontheproposal,theBoardalso The record also indicates that National City has taken hascarefullyconsideredthefairlendingrecordandHMDA steps to ensure compliance with fair lending and other datareported by subsidiaries ofNationalCity in its evalu consumer protection laws. National City represents that it ation ofthe public interest factors. Acommenter opposed has a comprehensive fair lending program consisting of the proposal and alleged, basedon 2005 HMDAdata, that lending policies, annual training and testing of lending NationalCitymadehigher-costloanstoAfricanAmericans personnel, fair lending analyses, and oversight and moni andHispanicsmorefrequentlythantononrninorities.21The toring. Inaddition,NationalCitystatesthatitperformsfair Board has analyzed 2004 and 2005 HMDAdata reported lendinganalysisusingregressionmodelingandbenchmark by subsidiaries of National City in its banks' primary ingandmonitorsadherencetocreditpoliciesusingmonthly assessment areas, including the Metropolitan Statistical reporting and quality control reviews. National City also Areas("MSA")ofCleveland,Cincinnati,andIndianapolis, represents that its fair lending policies include a second and statewide in the states where those banks operated review program for its residential lending and that its branches. corporateunderwritingdepartmentconductsathirdreview Although the HMDAdata might reflect certain dispari ofdeniedapplicationsfromminorityapplicantsorforloans ties in the rates ofloan applications, originations, denials, used to finance properties in LMl areas. National City or pricing among members of different racial or ethnic intends to implement its consumer compliance and fair groups in certain local areas, they provide an insufficient lendingprogramsatHarborFSBafterconsummationofthe basis by themselves on which to conclude whether or not proposal. National City is excluding orimposing highercreditcosts Inaddition, theBoardhasconsideredtheHMDAdatain on those groups on a prohibited basis. The Board recog nizesthatHMDAdataalone,evenwiththerecentaddition lightofotherinformation,includingtheCRAperformance of pricing information, provide only limited information records ofNational City Bank and Harbor FSB. Based on about the covered 10ans.22 HMDA data, therefore, have all the facts of record, the Board has concluded that limitations that make them an inadequate basis, absent considerations relating to the fair lending record and other information, for concluding that an institution has HMDA data of National City Bank and Harbor FSB are engagedinillegal lendingdiscrimination. consistentwithapprovalundersection4oftheBHCAct. TheBoardis nevertheless concernedwhenHMDAdata foraninstitutionindicatedisparitiesinlendingandbelieves that all banks are obligated to ensure that their lending PUBLIC BENEFITS practicesarebasedoncriteriathatensurenotonly safeand Aspartofitsevaluationofthepublicinterestfactorsunder section 4 of the BHC Act, the Board also has reviewed 21. Beginning January 1, 2004, the HMDA data required to be carefullythepublicbenefitsandpossibleadverseeffectsof reportedbylenderswereexpandedtoincludepricinginformationfor the proposal. The record indicates that consummation of loansonwhichtheannualpercentagerate(APR)exceedstheyieldfor U.S.Treasurysecuritiesofcomparablematurity3ormorepercentage the proposal would result in benefits to consumers and points for first-lien mortgages and 5 or more percentage points for businesses currently served by Harbor. National City has second-lienmortgages(12CPR203.4). represented that the proposed transaction would provide 22.Thedata,forexample,donotaccountforthepossibilitythatan Harbor's customers with expanded products and services, institution'soutreacheffortsmayattractalargerproportionofmargin ally qualified applicants than other institutions attract and do not including expanded commercial lending products, cash provideabasisforanindependentassessmentofwhetheranapplicant managementandinternationaltrade services, andfiduciary who was denied creditwas, in fact, creditworthy. In addition, credit and trust services. In addition, National City has repre history problems,excessive debt levels relative to income. and high sented that its acquisition of Appraisal Analysis would loanamountsrelativetothevalueoftherealestatecollateral(reasons increase competition for appraisal services in Florida by mostfrequentlycitedforacreditdenialorhighercreditcost)arenot availablefromHMDAdata. increasingthe availabilityofsuchservices.

C48 Federal Reserve Bulletin0 March 2007 The Board has determined that the conduct of the that it is required to consider under the BHC Act. The proposed nonbanking activities within the framework of Board'sapprovalisspecificallyconditionedoncompliance RegulationYandBoardprecedentis not likelytoresultin by National City and Harbor with the conditions imposed adverseeffects, suchas undue concentrationsofresources, in this order and the commitments made to the Board in decreased or unfair competition, conflicts of interests, or connection with the notice. The Board's approval also is unsoundbankingpractices.Basedonallthefactsofrecord, subject to all the conditions set forth in Regulation Y, the Board has concluded that consummation of the pro including those in sections 225.7 and 225.25(c),24 and to posalcanreasonablybeexpectedtoproducepublicbenefits the Board's authority to require such modification or that would outweigh any likely adverse effects. Accord termination ofthe activities ofthe bank holding company ingly, the Board has determined that the balance of the or any of its subsidiaries as the Board finds necessary to public benefits under section 4(j)(2) of the BHC Act is ensure compliance with, and to prevent evasion of, the consistentwithapproval. provisionsoftheBHCActandthe Board'sregulationsand orders issued thereunder. Forpurposesofthis action, these CONCLUSION conditions and commitments are deemed to be conditions imposed in writing by the Board in connection with its Based on the foregoing and all the facts of record, the findingsanddecisionshereinand,assuch,maybeenforced Board has determined that the proposal should be, and inproceedingsunderapplicable law. herebyis,approved.23Inreachingitsconclusion,theBoard The acquisition shall not be consummated later than hasconsideredallthefacts ofrecord inlightofthe factors three months after the effective date of this order, unless such periodisextendedfor goodcauseby the Boardorby 23.AcommenterrequestedthattheBoardholdapublichearingor the FederalReserve BankofCleveland, acting pursuantto meetingontheproposal.TheBoard'sregulationsprovideforahearing delegatedauthority. undersection4oftheBHCActiftherearedisputedissuesofmaterial By order of the Board of Governors, effective Octo fact that cannot be resolved in some other manner (12 CFR ber 13, 2006. 225.25(a)(2». Underits rules, the Board also may, in its discretion, hold a public meeting or hearing on an application ifa meeting or Voting for this action: ChairmanBernanke, Vice Chairman Kohn, hearing is necessary or appropriate to provide an opportunity for andGovernorsKrosznerandMishkin.Absentandnotvoting:Gover testimony orotherpresentations. See 12CFR262.3(i)(2),262.25(d). norsBiesandWarsh. The Boardhasconsideredcarefullythe commenter'srequestinlight ofall the facts ofrecord. In the Board's view, the commenter had ample opportunityto submitcommentson the proposaland, infact, ROBERT DEY. FRIERSON submittedwrittencommentsthattheBoardhasconsideredcarefullyin Deputy Secretary ofthe Board actingontheproposal.Therequestfailstoidentifydisputedissuesof factthatarematerialtotheBoard'sdecisionthatwouldbeclarifiedby apublicmeetingorhearing.Moreover,thecommenter'srequestfails to demonstrate why its written comments do not present its views adequatelyorwhyameetingorhearingotherwisewouldbenecessary requiredorwarrantedinthiscase.Accordingly,therequestforapublic orappropriate.Forthesereasons,andbasedonallthefactsofrecord, hearingormeetingontheproposalisdenied. the Board has determined that a public hearing or meeting is not 24. 12CFR225.7and225.25(c).

C49 June 2007 Legal Developments: First Quarter, 2007 ORDERS ISSUED UNDER BANK Bank, with branches in 11 states and the District of HOLDING COMPANY ACT Columbia. U.S. Trust also engages in a broad range of permissiblenonbankingactivities.Onconsummationofthe proposal,BankofAmericawouldremainthesecondlargest ORDERS ISSUED UNDER SECTION 3 OF depository organization in the United States, with total consolidatedassets ofapproximately $1.5 trillion. THE BANK HOLDING COMPANY ACT INTERSTATE AND DEPOSIT CAP ANALYSIS Bank ofAmerica Corporation Section 3(d) ofthe BHCAct allows the Board to approve Charlotte, North Carolina an application by a bank holding company to acquire control of a bank located in a state other than the bank Order Approving the Acquisition of a Bank holding company's home state if certain conditions are Holding Company met. ForpurposesoftheBHCAct, the homestateofBank of America is North Carolina,6 and U.S. Trust Bank is Bank of America Corporation ("Bank of America"), a located in California, Connecticut, the District ofColum financial holdingcompanywithinthe meaningofthe Bank bia, Florida, Massachusetts, Minnesota, New Jersey, Holding Company Act ("BHC Act"), has requested the New York, North Carolina, Oregon, Pennsylvania, and Board's approval under section 3 of the BHC Actl to Texas.? acquire U.S. Trust Corporation ("U.S. Trust") and its The Board may not approve an interstate acquisition subsidiary bank, United States Trust Company, National undersection 3(d) ifthe applicantcontrols, oronconsum Association ("U.S. Trust Bank"), both of New York, mation of the proposed transaction would control, more NewYork.2 than 10 percentofthe total amount ofdeposits ofinsured Notice ofthe proposal, affording interested persons an depository institutions in the United States ("nationwide opportunity to submit comments, has been published deposit cap").8As requiredby section 3(d), the Board has (72 Federal Register 132 (2007)). The time for filing carefullyconsideredwhetherBankofAmericacontrols,or comments has expired, and the Board has considered the on consummation ofthe proposed transaction would con proposal and all comments received in light ofthe factors trol, morethan 10percentofthetotalamountofdepositsof setforth intheBHCAct.3 insured depository institutions9 in the United States. In Bank of America, with total consolidated assets of approximately$1.5trillion,isthesecondlargestdepository 6. See 12U.S.c. §I842(d).Abankholdingcompany'shomestate organization in the United States.4 Bank ofAmericaoper is the statein which the total deposits ofall bankingsubsidiaries of ates six insured depository institutions5 that operate in 30 suchcompanywerethelargestonJuly I, 1966,orthedateonwhich states and the DistrictofColumbia, and itengages nation thecompanybecameabankholdingcompany,whicheverislater. wide in numerous nonbanking activities that are permis 7. Forpurposesofsection3(d)oftheBHCAct,theBoardconsiders a bank to be located in the states in which the bankis chartered or sibleundertheBHCAct. headquarteredoroperatesa branch. See 12U.S.c. §§1841(0)(4}-(7) U.S. Trust, with total banking assets of approximately and I842(d)(l)(A)and(d)(2)(B). $11.1 billion,controlsonedepositoryinstitution,U.S.Trust 8. Onecommenterexpressedgeneralconcernsabouttheproposal's consistencywiththenationwidedepositcap. 9. The BHe Act adopts the definition of "insured depository 1. 12U.S.c.§1842. institution" used in the Federal Deposit Insurance Act (12 U.S.C. 2. U.S.TrustisawhollyownedsubsidiaryofTheCharlesSchwab §1811 et seq.) ("FDI Act"). See 12U.S.C. §1841(n). The FDlAct Corporation("CharlesSchwab"),SanFrancisco,California.Bankof contains an identical nationwide deposit cap applicable to bank-to AmericaproposestoacquirealltheoutstandingcommonstockofU.S. bank mergers and, consequently, many of the terms used in the TrustfromCharlesSchwab.Inaddition,BankofAmericaproposesto nationwidedeposit capin the BHCActreferto terms ordefinitions acquirethenonbankingsubsidiariesofU.S.Trustinaccordance with contained in the FDI Act. The FDl Act's definition of "insured section4(k)oftheBHCAct, 12U.S.c. §1843(k). depositoryinstitution"includesallbanks(whetherornottheinstitu 3. Threecommentersexpressedconcernsonvariousaspectsofthe tion is a bank for purposes of the BHC Act), savings banks, and proposal. savingsassociationsthatareinsuredbytheFederalDepositInsurance 4. AssetdataareasofDecember31,2006. Corporation("FDIC")andinsuredU.S.branchesofforeignbanks,as 5. Inthis context, insureddepositoryinstitutionsincludecorruner each of those terms is defined in the FDI Act. See 12 U.S.c. cialbanks,savingsbanks,andsavingsassociations. §1813(c)(2).

C50 Federal Reserve BulletinD June 2007 analyzing this matter, the Board calculated the percentage Texas, and would not hold deposits in excess of any of total deposits of insured depository institutions in the applicable state depositcaps. United States and the total deposits that Bank ofAmerica All other requirements of section 3(d) ofthe BHC Act controls, and on consummation of the proposal would also would be met on consummation of the proposal.14 control, in the same manner as described in the Board's Based on all the facts ofrecord, the Board is permitted to 2004 order approving Bank of America's acquisition of approve the proposalundersection3(d)oftheBHCAct. FleetBoston Financial Corporation.!O These calculations are based on the definition of "deposit" in the FDIAct,11 COMPETITIVE CONSIDERATIONS the deposit data collected in reports filed by all insured Section 3 of the BHC Act prohibits the Board from depository institutions,!2and the methodsand adjustments approving a proposal that would result in a monopoly or usedby theFDICto computetotal insureddeposits. would be in furtherance of an attempt to monopolize the Basedonthelatestavailabledepositdatareportedbyall business of banking in any relevant banking market. The depository institutions, the total amount of deposits of BHCAct also prohibits the Board from approving a bank insured depository institutions in the United States is acquisition that would substantially lessen competition in approximately $6.757 trillion as of December 31, 2006. any relevant banking market, unless the anticompetitive Also based on the latest Call Report, Bank of America effectsoftheproposalare clearlyoutweighedinthepublic (including all its insured depository institution affiliates) interest by the probable effect ofthe proposal in meeting controlsdepositsofapproximately$612.0billion,andU.S. theconvenienceandneedsofthecommunitytobeserved.!5 Trustcontrolsdepositsofapproximately$9.4billion.Bank BankofAmericaandU.S.Trusthavesubsidiarydeposi of America, therefore, currently controls approximately tory institutions that compete directly in 16 banking mar 9.1 percentoftotalU.S.deposits. Onconsummationofthe kets throughouttheUnitedStates.TheBoardhasreviewed proposed transaction, Bank of America would control carefullythe competitiveeffectsofthe proposalineach of approximately 9.2 percent ofthe total amount ofdeposits these banking marketsinlightofall the facts ofrecord. In of insured depository institutions in the United States. particular,theBoardhasconsideredthenumberofcompeti Therefore, the Board finds that BankofAmerica does not torsthatwouldremaininthemarkets, therelativesharesof now control, and on consummation ofthe proposed trans total deposits in depository institutions in the markets actionwouldnotcontrol,anamountofdepositsthatwould ("market deposits") controlled by Bank ofAmerica and exceedthe nationwidedeposit cap. U.S.Trust,!6theconcentrationlevelofmarketdepositsand Section 3(d) also prohibits the Board from approving a the increase in this level as measured by the Herfindahl proposalif, onconsummation, the applicant wouldcontrol HirschmanIndex("HHI")undertheDepartmentofJustice 30percentormore ofthe totaldeposits ofinsureddeposi MergerGuidelines ("DOJ Guidelines"),!? and other char toryinstitutionsinanystateinwhichboththeapplicantand acteristicsofthe markets. the organizationto be acquired operate an insured deposi tory institution, or such higherorlower percentage that is 14. Bank of America is adequately capitalized and adequately established by state law ("state deposit cap").13 On con managed as defined by applicable law (12 U.S.c. §1842(d)(I)(A). summationoftheproposal,BankofAmericawouldcontrol U.S.TrustBankhasbeeninexistenceandoperatedfortheminimum less than 30 percent of the total amount of deposits of period of time required by applicable state law. See 12 U.S.C. insured depository institutions in California, Connecticut, §I842(d)(1)(B). The other requirements in section 3(d) ofthe BHC theDistrictofColumbia, Florida,Massachusetts, NewJer Actalsowouldbemetonconsummationoftheproposal. 15. 12U.S.C.§I842(c)(1). sey, NewYork, NorthCarolina, Oregon,Pennsylvania, and 16. DepositandmarketsharedataareasofJune30,2006,adjusted toreflectmergersandacquisitionsthroughFebruary20,2007,andare based on calculations in which the deposits ofthrift institutions are includedat50percent.TheBoardpreviouslyhasindicatedthatthrift 10. Bank ofAmerica Corporation, 90 Federal Reserve Bulletin institutionshavebecome,orhavethepotentialtobecome,significant 217, 219 (2004) ("BOA/Fleet Order"); see also Bank ofAmerica competitorsofcommercialbanks.See.e.g.,MidwestFinancialGroup, Corporation,92FederalReserveBulletinC5(2006)(orderapproving 75FederalReserveBulletin386,387(1989);NationalCityCorpora Bank of America's merger with MBNA Corporation, Wilmington, tion, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board Delaware("BOAIMBNAOrder"». regularlyhasincludedthriftdepositsinthemarketsharecalculationon II. Section3(d)oftheBHCActspecificallyadoptsthedefinitionof a50percentweightedbasis.See,e.g.,FirstHawaiian.Inc.,77Federal "deposit" in theFDIAct(12 U.S.C. §1842(d)(2)(E» (incorporating ReserveBulletin52,55(1991). thedefinitionof"deposit"at12U.S.c.§1813(1». 17. Underthe DOJ Guidelines, amarket is considered unconcen 12. Each insured bank in the United States must report data lratedifthepost-mergerHHIisunder1000.moderatelyconcentrated regarding its total deposits in accordance with the definition of if the post-merger HHI is between 1000 and 1800, and highly "deposit"in the FDIActonthe institution'sConsolidatedReportof concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof ConditionandIncome("CallReport").Eachinsuredsavingsassocia Justice ("001") has informed the Board that a bank merger or tionsimilarlymustreportits totaldeposits onthe institution'sThrift acquisition generally will notbechallenged (inthe absence ofother Financial Report. Deposit data for FDIC-insured U.S. branches of factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI foreignbanksandfederalbranchesofforeignbanksareobtainedfrom isat least 1800andthe mergerincreasesthe HHIby morethan 200 theReportofAssetsandLiabilitiesofU.S.BranchesandAgenciesof points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds ForeignBanks.ThesedataarereportedquarterlytotheFDICandare forscreeningbankmergersandacquisitionsforanticompetitiveeffects publiclyavailable. implicitly recognize the competitive effects of limited-purpose and 13. 12U.S.c.§1842(d)(2)(B)-(D). othernondepositoryfinancialentities.

Legal Developments: First Quarter. 2007 C51 A. Banking Markets within Established Guidelines C. Views ofOtherAgencies and Conclusion on Competitive Considerations Consummation of the proposal would be consistent with Board precedent and within the thresholds in the DOl The DOl has conducted a detailed review ofthe potential Guidelinesin 15ofthe 16banking markets.ls Onconsum competitive effects of the proposal and has advised the mation of the proposal, three of these markets would Board that consummation of the transaction would not remainunconcentrated,elevenmarketswouldremainmod likely have asignificantly adverseeffectoncompetitionin erately concentrated, and one market wouldremain highly any relevant banking market. In addition, the appropriate concentrated, as measured by the HHI. The change in the banking agencies have been afforded an opportunity to HHI measure of concentration in each of these markets commentandhave notobjectedtothe proposal. would be very small. Moreover, numerous competitors Basedonallthefactsofrecord,theBoardconcludesthat wouldremain ineachofthe 15bankingmarkets. consummation of the proposal would not have a signifi cantly adverse effect on competition or on the concentra B. Banking Market Warranting Special Scrutiny tion ofresources in any ofthe 16 banking markets where BankofAmericaandU.S. Trustcompetedirectlyorinany Bank ofAmerica and U.S. Trust compete directly in one otherrelevantbankingmarket. Accordingly, the Boardhas banking market, Hartford, Connecticut,19 that warrants a determined that competitive considerations are consistent detailed review because the post-consummation market withapproval. share of Bank of America in that market would exceed 35 percent. In the Hartford banking market, Bank of FINANCIAL, MANAGERIAL, AND SUPERVISORY Americais the largestdepository organization, controlling CONSIDERATIONS deposits of approximately $10.3 billion, which represent approximately 40.5 percentofmarketdeposits. U.S. Trust Section3oftheBHCActrequirestheBoardtoconsiderthe is the 25th largest depository organization in the market, financial and managerial resources and future prospects of controlling deposits of$50.6 million, which represent less the companies and depository institutions involved in the than 1percentofmarketdeposits. Onconsummationofthe proposal and certain other supervisory factors. The Board proposal, Bank of America would remain the largest has considered these factors in light of all the facts of depository organizationin the market, controllingdeposits record, including confidential reports of examination and of approximately $10.3 billion, which represent approxi other supervisory information received from the relevant mately40.7percentofmarketdeposits. BankofAmerica's federal and state supervisors ofthe organizations involved marketsharewouldincreasebylessthan Ipercent,andthe inthe proposal, publiclyreportedandotherfinancial infor HHI would increase by only 16 points to 2142, which is mation,includinginformationprovidedbyBankofAmerica. consistentwiththeDOlGuidelines. Inevaluatingfinancialfactors inexpansionproposalsby The Board has considered carefully whether other fac banking organizations, the Board reviews the financial tors eithermitigate the competitive effects ofthe proposal condition ofthe organizations involved on both a parent or indicate that the proposal would have a significantly only and consolidatedbasis, as well as the financial condi adverse effect on competition in the market. The number tion of the subsidiary banks and significant nonbanking and strength offactors necessary to mitigate the competi operations.Inthisevaluation,theBoardconsidersavariety tiveeffectsofaproposaldependonthesizeoftheincrease of information, including capital adequacy, asset quality, and the resulting level of concentration in a banking and earnings performance. In assessing financial factors, market.20 the Board consistently has considered capital adequacy to Severalfactorsindicatethattheproposalwouldnothave be especially important. The Board also evaluates the asignificantly adverse effect on concentration in the Hart financial condition of the combined organization at con fordbankingmarket.Althoughthemarketishighlyconcen summation,includingitscapitalposition,assetquality,and trated,as measuredbytheHHI,thechangeinmarketshare earningsprospects, andtheimpactoftheproposedfunding and market structure would be de minimis, and 32 other ofthe transaction. depository organizations would continue to operate in the The Board has considered carefully the proposal under market. In addition, the record ofentry into the Hartford the financial factors. Bank of America, all its subsidiary banking market evidences the market's attractiveness for banks, and U.S. Trust Bank currently are well capitalized entry.Eightdepositoryinstitutionshaveenteredthemarket and would remain so on consummation of the proposal. de novo since2001. Basedonitsreviewoftherecord,theBoardfindsthatBank ofAmerica has sufficient financial resources to effect the proposal. The proposed transaction is structured as a cash 18. Thesemarkets,andtheeffectsoftheproposalontheconcentra purchaseofshares, and BankofAmerica will use existing tion of banking resources in these markets, are described in the resourcesto fund the purchase. appendix. TheBoardalsohasconsideredthe managerialresources 19. The Hartford banking market is defined as the Hartford ofthe organizations involved and the proposed combined NewBritainRanallyMetropolitanArea. 20. SeeNationsBankCorporation,84FederalReserveBulletin129 organization. The Board has reviewed the examination (1998). records of Bank of America and U.S. Trust, and their

C52 Federal Reserve Bulletin0 June 2007 subsidiary banks, including assessments of their manage CONVENIENCE AND NEEDS CONSIDERATIONS ment, risk-managementsystems, andoperations.21 Inaddi tion, the Boardhas considered its supervisory experiences Inactingonaproposalundersection3oftheBHCAct,the and those ofthe otherrelevant bank supervisory agencies Boardis requiredtoconsiderthe effectsofthe proposalon withtheorganizationsandtheirrecordsofcompliancewith theconvenienceandneedsofthecommunitiestobeserved applicable banking law, including anti-money-Iaundering andto take intoaccounttherecords oftherelevantinsured laws.22The Board also has consideredBank ofAmerica's depositoryinstitutionsundertheCommunityReinvestment plans for implementing the proposal, including the pro Act ("CRA").24 The CRA requires the federal financial posedmanagementafterconsummation. supervisoryagenciestoencourageinsureddepository insti Basedonallthefactsofrecord,theBoardhasconcluded tutionsto helpmeetthecreditneedsofthe localcommuni thatconsiderationsrelating to the financial and managerial ties in which they operate, consistent with their safe and resourcesandfutureprospectsoftheorganizationsinvolved soundoperation,andrequirestheappropriatefederalfinan intheproposalareconsistentwithapproval,asaretheother cial supervisory agency to take into account a relevant supervisory factors underthe BHCAct,23 depository institution's record ofmeeting the credit needs of its entire community, including low- and moderate income("LMI")neighborhoods,inevaluatingbankexpan 21. The Board has considered that Bank of America recently sionaryproposals.25 enteredinto agreements with the Internal Revenue Service ("IRS") The Board has considered carefully all the facts of andtheDOJwithrespecttoongoingindustrywideinvestigationsbeing conducted by the DOJ, the IRS, and the Securities and Exchange record,includingreportsofexaminationoftheCRAperfor Commission ("SEC") related to certain practices in the municipal mancerecords ofthe subsidiarybanksofBankofAmerica bondindustry. BankofAmericahasvoluntarilyprovidedinformation andU.S.Trust,datareportedbyBankofAmericaunderthe and continues to work with the three agencies on this matter. The HomeMortgageDisclosureAct("HMDA"),26otherinfor BoardhasalsoconsideredthatthismonthBankofAmericasettledan mationprovidedbyBankofAmerica,confidentialsupervi SECenforcementactionagainstBankofAmerica'ssubsidiary,Bane ofAmericaSecuritiesLLC,relatedtoitsresearchreports. Consistent sory information, and public comments received on the withthe provisionsofsection 5oftheBHCAct,as amendedby the proposal. One commenter questioned Bank ofAmerica's Gramrn-Leach-BlileyAct,Pub.L.No.106-102,113Stat.1338(1999), record of serving the credit needs of residents of the theBoardhasreliedonexaminationandothersupervisoryinformation New York City area. The commenter also expressed con providedbytheSECandotherappropriatefunctionalregulatorsabout functionallyregulatedsubsidiaries.TheBoardalsohasconsultedwith cern that the acquisition of U.S. Trust Bank could nega theSECaboutitsreviewoftheeffortsofBankofAmericatocomply tively affectLMI residents ofNew YorkCityifU.S. Trust with federal securities laws. The Board also has considered the Bank's current CRA programs were altered.27 Two other willingnessandeffortsundertakenbyBankofAmerica'smanagement commenters alleged, based on HMDA data, that Bank of toensurecompliancewithall applicablestateand federal lawandto America engaged in disparate treatment ofminority indi improvecomplianceprogramsandpoliciesinlightoftheseinvestiga tions. vidualsinhome mortgagelending. 22. As part ofits consideration ofmanagerial factors, the Board reviewedconfidentialsupervisoryinformationonthe policies,proce A. eRA Performance Evaluations dures,andpracticesofBankofAmericaanditssubsidiarybanksfor complyingwiththeBankSecrecyActandconsultedwiththeOfficeof As provided in the CRA, the Board has evaluated the theComptrolleroftheCurrency("OCC").TheBoardalsoconsidered convenienceandneedsfactorinlightofthe evaluationsby theresultofinvestigationsbyotherauthoritiesconcerninganti-money laundering matters involving Bank of America, which related to the appropriate federal supervisors of the CRA perfor deficienciesin handling money transfers through Bank ofAmerica's mance records of the relevant insured depository institu NewYorkbranchandtocertaindeficienciesincustomerduediligence tions.Aninstitution'smostrecentCRAperformanceevalu andsuspiciousactivityreportingatasubsidiaryofBankofAmerica, ation is a particularly important consideration in the BancofAmericaInvestmentServices,Inc.Theseinvestigationshave recentlybeensettled,andBankofAmericahastakenappropriatesteps toreviseitsanti-money-launderingpolicies,systems,andcontrols. 23. One commenter reiterated concerns he had expressed previ durestohelpensurethatthesubprimeloansitpurchasesandsecuri ouslyaboutBankofAmerica'srelationswithunaffiliatedthirdparties tizes are in compliance with applicable state and federal consumer engagedinsubprimelending,includingOwnItMortgage("OwnIt"), protectionlaws. formerly OakmontMortgage Company, Woodland Hills, California. 24.12U.S.c.§2901 etseq.;12U.S.C. §I842(c)(2). Bank of America represented that its investment in OwnIt was a 25. 12U.S.C.§2903. passive,noncontroIlinginvestmentandthatOwnitrecentlyterminated 26. 12U.S.c. §2801etseq. itsoperations.BankofAmericaprovideswarehouselines-of-creditto 27. ThecommenteralsorequestedthatBankofAmericaimplement subprime lenders and other consumer finance companies, purchases anumberofCRA-relatedrecommendationssetforth inthecomment subprime mortgage loans from unaffiliated lenders, and securitizes letter.TheBoardhasconsistentlyfound thatneithertheCRAnorthe poolsofsubprimemortgageloans.Asageneralmatter,theactivitiesof federal bankingagencies' CRAregulationsrequiredepositoryinstitu the consumer finance businesses identified by the commenter are tionstomakepledgesorenterintocommitmentsoragreements with permissible,andthebusinessesare licensedbythestateswherethey anyorganization.SeeBONFleetOrderat232-33.Instead,theBoard operate.SeeBOA/FleetOrder217,at223n.29(2004). Moreover,the focuses ontheexistingCRAperformancerecordofan applicantand commenterprovidednoevidencethatBankofAmericahasoriginated, the programs that an applicant has in placeto servethe needsofits purchased,orsecuritized "predatory" loansorotherwiseengagedin CRAassessmentareasatthetimetheBoardreviewsaproposalunder abusive lending practices. Bank ofAmerica has policies and proce- theconvenienceandneedsfactor.

Legal Developments: First Quarter; 2007 C53 applicationsprocessbecauseitrepresentsadetailed,on-site ferent income levels was good, and they commended BA evaluation of the institution's overall record of perfor Bankfordeveloping mortgageloan programswithflexible mance under the CRA by its appropriate federal supervi underwriting standards, such as its Neighborhood Advan sor.28 tage programs, which assisted in meeting the credit needs BankofAmerica'sleadbank,BankofAmerica,National of BA Bank's assessment areas. Examiners also reported Association ("BA Bank"), Charlotte, North Carolina, that the bank's small business lending was excellent or received an "outstanding" rating at its most recent CRA good in the majority of its rating areas, and they com performance evaluation by the acc, as ofDecember 31, mended the distribution of small business loans among 2001 ("2001 Evaluation").29 The only other subsidiary businesses of different sizes in several of BA Bank's bank of Bank ofAmerica subject to the CRA, FIA Card assessment areas.34 In addition, examiners noted in the Services, N.A., Wilmington, Delaware,3o also received an 2001 Evaluation that BA Bank's level of community "outstanding" rating at its most recent CRA performance developmentlending wasexcellent. evaluation by the acc, as of April 4, 2005. U.S. Trust Since the 2001Evaluation, BABank has maintained a Bank was formed in 2006 by the conversion of United substantial level of home mortgage, small business, and StatesTrustCompanyofNewYork("USTC NewYork"), community development lending. The bank originated New York, New York, to a national bank charter and its more than 376,000 HMDA-reportable home mortgage subsequent merger with U.S. Trust Company, National loans totaling approximately $80 billion throughout its Association("USTCLosAngeles"),LosAngeles,Califor assessment areas in 2005.35 More than 75,000 of those nia. Both banks were subsidiaries of U.S. Trust and had loanstotaling more than$8billion wereoriginatedtoLMI "outstanding" CRAperformanceratingsbythe Board and individuals. In2006,BABankwasrecognized bythe U.S. the acc, respectively, before the merger.31 Bank of Small Business Administration ("SBA") for the ninth Americahasrepresentedthatitwouldworktocombinethe consecutiveyearastheleadingsmallbusinesslenderinthe communitydevelopmentandcommunityinvestmentactivi country, based on its origination ofapproximately 13,000 ties of BA Bank and U.S. Trust Bank to strengthen and SBA loans totaling more than $405 million. Bank of meet the banking needs ofthe communities in which they America represented thatBABank'scommunity develop operate. mentlendingduring 2005 and 2006 totaled approximately eRA Performance ofBA Bank. The 2001 Evaluation of $5.8billion.36 BA Bank was discussed in the BOA/Fleet Order.32 The In the 2001 Evaluation, examiners reported that BA BoardalsoconsideredBABank'sCRAperformanceinthe Bankconsistentlydemonstratedstronginvestment-testper BOA/MBNA Order. Basedonareviewofthe recordinthis formance, noting that its performance was excellent or case, the Board hereby reaffirms and adopts the facts and good in the majority of its assessment areas. During the findingsdetailedinthosetwoordersconcerningBABank's evaluation period, BA Bank funded more than 17,000 CRAperformance record. Bank ofAmerica also provided housing units for LMI families through its community the Board with additional information about its CRA developmentinvestmentsthroughoutitsassessmentareas.J7 performance sincethe Board lastreviewedsuchmattersin Examiners commended BA Bank for taking a leadership theBOA/MBNAOrder.33TheBoardalsoconsultedwiththe role in developing and participating in complex invest acc with respect to BA Bank's CRA performance since ments that involved multiple participants and both public the BOA/MBNA Order. andprivate funding. In the 2001 Evaluation, examiners commended BA Since the 2001 Evaluation, BABank has continued its Bank'soverall lending performance, which they described strong activities in community development investmentin as demonstrating excellent or good lending-test results in itsassessmentareas. BankofAmericarepresentedthatBA all itsrating areas. Examinersreportedthatthedistribution Bank's qualifying community development investments ofHMDA-reportable mortgage loans among areas ofdif- during 2005 and 2006 totaled approximately $3.6 billion and that BA Bank's subsidiary community development 28. SeeInteragencyQuestionsandAnswersRegardingCommunity Reinvestment,66FederalRegister36,620and36,639(2001). 29. Theevaluation periodforthe2001 Evaluation wasJanuary I, 34. Inthis context, "smallbusinessloans" are loanswithoriginal 2000,throughDecember31,2001. amountsof$1millionorlessthataresecuredbynonfarm,nonresiden 30. FIA Card Services was formerly known as MBNAAmerica tialpropertiesorarecommercialandindustrialloanstoborrowersin Bank,NationalAssociation,Wilmington.Delaware,andwasrenamed theUnitedStates. inJune2006. 35. BABankoriginatedmorethan5,400HMDA-reportable home 31. USTC New York received an overall "outstanding" CRA mortgage loans totaling approximately $1.6 billion in the New York performanceratingfromtheBoard,asofMarch IS,2004,andUSTC MSAin 2005, including785 loans totalingapproximately$188 mil Los Angeles received an overall "outstanding" CRA performance liontoLMIindividuals. rating from the OCC, as ofOctober IS, 2002.TheOCChas not yet 36. BankofAmericaadvisedthatinformationfor2006isbasedon evaluatedU.S.TrustBank'sCRAperformance. preliminary data, which have notbeen finalized and may be incom 32. BOAIFleetOrderat225-229. plete. 33. Bank ofAmerica has provided detailed information about its 37. BankofAmericaalso hasprovidedgrantstononprofitorgani communitydevelopmentactivitiesinNewYorkCityinresponsetoa zations,suchasACCIONandtheNewMexicoCommunityDevelop commenter'sconcernsaboutitsrecord ofservingthecreditneedsof ment Loan Fund, that originate microloans in amounts as small as thecity'sresidents. $500andpromoteSBAprograms.

C54 Federal Reserve Bulletin0 June 2007 corporation had helped develop more than 6,200 housing nority borrowers.42The Board has focused its analysis on units in LMI census tracts or for LMI individuals since the 2005HMDAdatareportedby BankofAmericaand its 2003.38 subsidiarybanks.43 ExaminerscommendedBABank's serviceperformance Although the HMDAdata might reflect certain dispari throughout its assessment areas in the 2001 Evaluation. ties in the rates of loan applications, originations, and They reported thatthe bank's retaildelivery systems were denialsamongmembersofdifferentracialorethnicgroups generallygoodandthatthebank'sdistributionofbranches in certain local areas, they provide an insufficientbasis by among geographies of different income levels was ad themselves on which to conclude whetheror not Bank of equate. Examiners also commended BABankfor its com America is excluding or imposing higher costs on any munitydevelopmentservices,whichtypicallyrespondedto group on a prohibited basis. The Board recognizes that the needs ofthe communities served by the bankthrough HMDAdataalone,evenwiththerecentadditionofpricing outitsassessmentareas.39 information, provide only limited information about the eRA Perfonnance of u.s. Trust Bank. As noted, U.S. covered 10ans.44 HMDA data, therefore, have limitations TrustBankreceived an overall "outstanding" rating in its that make them an inadequate basis, absentotherinforma March2004evaluation.40U.S.TrustBankprovidesinvest tion, for concluding that an institution has engaged in ment management, private banking, and fiduciary services illegallendingdiscrimination. tohigh-net-worthindividuals andinstitutions andisdesig TheBoardis neverthelessconcernedwhenHMDAdata nated as a wholesale bank for purposes of evaluating its foraninstitutionindicatedisparitiesinlendingandbelieves eRA performance. As such, it is evaluated under the thatalllendinginstitutionsareobligatedtoensurethattheir communitydevelopmenttest, and examinersmayconsider lending practices are basedon criteriathatensure not only the bank's community development investments, loans, safe and sound lending but also equal access to credit by and services nationwide rather than only in the bank's creditworthyapplicantsregardlessoftheirraceorethnicity. assessmentarea.41 Because ofthe limitations ofHMDAdata, the Board has Withrespecttocommunitydevelopmentlending,exam consideredthesedatacarefullyandtakenintoaccountother iners commendedU.S. TrustBank'sresponsiveness to the information, including examination reports that provide credit needs ofits assessment area. Examiners noted that on-siteevaluationsofcompliancewithfairlendinglawsby during the evaluation period, U.S. Trust Bank made more BankofAmerica and its subsidiaries. The Board also has than $44 million in qualified community development consultedwith the acc, the primary federal supervisorof investments, including a number of low-income housing BankofAmerica's subsidiary banks. tax credit investments, which helped meet the assessment The record, including confidential supervisory informa area'scriticalneedsforaffordable housing. tion, indicates that Bank of America has taken steps to ensure compliance with fair lending and other consumer B. HMDA and Fair Lending Record protection laws. Bank of America has corporate wide policiesandproceduresto helpensurecompliance withall TheBoardhascarefullyconsideredthefairlendingrecords fair lending andotherconsumerprotectionlaws and regu and HMDA data of Bank of America in light of public lations. Bank ofAmerica's compliance program includes comments received on the proposal. Two commenters fair lending policy and product guides, compliance file alleged,basedon2005and2006HMDAdata, thatBankof reviews,testingofHMDAdataintegrity,andotherquality America had denied the home mortgage loan applications assurance measures. In addition, Bank ofAmerica repre of African-American and Hispanic borrowers more fre sentedthatitprovidesannualfairlendingtrainingtoensure quently than those of nonminority applicants in various thatBankofAmerica'sassociatesunderstandtheirresponmetropolitan statistical areas ("MSAs") and nationwide. Thecommentersalso allegedthatBankofAmericaandits subsidiaries made higher-cost loans more frequently to 42. Beginning January 1, 2004, the HMDA data required to be African-American and Hispanic borrowers than to nonmi- reportedbylenderswereexpandedtoincludepricinginformationfor loansonwhichtheannualpercentagerate(APR)exceedstheyieldfor U.S.Treasurysecuritiesofcomparablematurity3percentagepointsor 38. Bank ofAmerica also has represented that, during 2005 and more for first-lien mortgages and 5 percentage points or more for 2006,BABank'squalifyingcommunitydevelopmentinvestmentsin second-lienmortgages(12CFR203.4). New York City totaled approximately $170 million and qualified 43. TheBoardreviewedHMDAdataforBABanknationwideand community development lending in New YorkCity totaled approxi in MSAs and states where the bank's primary assessment areas are mately$700million. located.The Board notesthat2006HMDAdataare preliminary and 39. One commenterasserted that BankofAmericashouldensure thatfinal datawillnotbeavailableforanalysisuntilfall2007. thatcertainbankingproductsandservicesaremadeavailabletoLMI 44. Thedata,forexample,donotaccountforthepossibilitythatan customersinNewYorkCity.AlthoughtheBoardhasrecognizedthat institution'soutreacheffortsmayattractalargerproportionofmargin bankscanhelptoservethebankingneedsofcommunitiesbymaking ally qualified applicants than other institutions attract and do not certain products or services available on certain terms or at certain provideabasisforanindependentassessmentofwhetheranapplicant rates, the CRAneitherrequires an institutionto proVideany specific who was denied creditwas, in fact, creditworthy. In addition, credit typesofproductsorservicesnorprescribestheircoststotheconsumer. history problems, excessive debt levels relative to income, and high 40. The evaluation period was from March 16, 2002, through loanamountsrelativetothevalueoftherealestatecollateral(reasons December31,2003. mostfrequently citedforacreditdenialorhighercreditcost)arenot 41. See 12CFR25.25. availablefromHMDAdata.

Legal Developments: First Quarter, 2007 C55 sibilities for complying with the fair lending policy and conclusion,theBoardhasconsideredallthefacts ofrecord how to employ fair lending "bestpractices" in all aspects in light ofthe factors that it is required to consider under ofthe lending process. BankofAmerica has statedthat its the BHC Act and other applicable statutes. The Board's fairlendingpolicieswillcontinuetoapply tocurrentBank approvalisspecificallyconditionedoncompliancebyBank ofAmerica operations and that it will review and make ofAmerica with the conditions in this order and all the appropriate modifications to the fair lending policies that commitments made to the Board in connection with the wouldapply toU.S.TrustBank'soperationsafterconsum proposal. For purposes of this transaction, these commit mationofthe proposal. mentsandconditionsaredeemedtobeconditionsimposed The Boardalso hasconsidered the HMDAdata in light in writingby the Boardinconnectionwith its findings and of other information, including the programs described decision and, as such, may be enforced in proceedings above and the overall performance records ofthe subsid underapplicablelaw. iary banks of Bank of America under the CRA. These The proposal may not be consummated before the 15th established efforts and record ofperformance demonstrate calendar day after the effective date ofthis order, or later thatthe institutions are activeinhelping to meetthe credit than three months after the effective date of this order needsoftheirentirecommunities. unlesssuchperiodisextendedforgoodcausebytheBoard or by the Federal Reserve Bank of Richmond, acting C. Conclusion on Convenience and Needs and pursuantto delegatedauthority. eRA Performance ByorderoftheBoardofGovernors,effectiveMarch27, 2007. The Board has considered carefully all of the facts of record, including reports of examination of the CRA Votingfor this action: Chairman Bemanke,Vice Chairman Kohn, records ofthe institutions involved, information provided andGovernorsBies,Warsh,Kroszner,andMishkin. by Bank ofAmerica, comments received on the proposal, ROBERT DEY. FRIERSON andconfidentialsupervisoryinformation. BankofAmerica Deputy Secretary ofthe Board represented that the proposal will result in greater conve nience for Bank of America and U.S. Trust customers throughexpandeddeliverychannelsandabroaderrangeof 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 ofthe written recommendation ofdenial ofthe application. The Board has notreceivedsucharecommendationfromtheappropriatesupervisory relevantinsureddepository institutions are consistent with authorities.Underitsrules,theBoardalsomay,initsdiscretion,holda approval ofthe proposal. 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 CONCLUSION 225.l6(e),262.3(i)(2),262.25(d».TheBoardhasconsideredcarefully the commenter's request in light of all the facts of record. In the Based on the foregoing, and in light of all the facts of Board's view, the commenter had ample opportunity to submit his record, the Board has determined that the application views and, in fact, submitted written comments that the Board has should be, and hereby is, approved.45 In reaching its considered carefully in acting on the proposal. The commenter's requestfailstodemonstratewhywrittencommentsdonotpresenthis views adequately or why a meeting or hearing otherwise would be 45. OnecommenterrequestedthattheBoardholdapublicmeeting necessaryorappropriate.Forthesereasons,andbasedonallthefacts orhearingontheproposal.Section3oftheBHCActdoesnotrequire ofrecord,theBoardhasdeterminedthatapublicmeetingorhearingis the Board to hold a public hearing on an application unless the notrequiredorwarrantedin thiscase.Accordingly. therequest for a appropriatesupervisoryauthorityforthebanktobeacquiredmakesa publicmeetingorhearingontheproposalisdenied.

C56 Federal Reserve Bulletin0 June 2007 Appendix BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) BOSTON BANKING MARKET IN MASSACHUSETTS AND NEW HAMPSHIRE Boston-the Boston Ranally Metropolitan Area (RMA) andthe town ofLyndeboro in Hillsborough County, New Hampshire Bank ofAmerica Pre-Consummation ...... 1 30.0bil. 23.17 1,231 16 161 U.S. Trust ......................................... 26 445.7 mil. .34 1,231 16 161 Bank ofAmerica Post-Consummation ..... 1 30.4 bil. 23.51 1,231 16 161 CHARLOTTE-RocK HILL BANKING MARKET IN NORTH CAROLINA AND SOUTH CAROLINA Charlotte-RockHill-the Charlotte RMA and the non-RMAportion ofCabarrus County, North Carolina BankofAmerica Pre-Consummation ...... 2 21.8 bil. 23.27 4,741 0 49 U.S. Trust ......................................... 38 8.7 mil. .01 4,741 0 49 Bank ofAmerica Post-Consummation ..... 2 21.8 bil. 23.28 4,741 0 49 DALLAS BANKING MARKET IN TEXAS Dallas-Dallas County; the southeastern quadrantofDenton County (including the cities ofDenton andLewisville); the southwestern quadrantofCollin County (including the cities ofMcKinney and Plano); Rockwall County; the communities ofForney and Terrell in Kaufman County; andthe cities ofMidlothian, Waxahachie, and Ferris in Ellis County BankofAmerica Pre-Consummation ...... 2 18.9 biL 24.50 1,726 3 114 U.S. Trust ._...................................... 75 52.5 mil. .07 1,726 3 114 Bank ofAmerica Post-Consummation ..... 2 18.9 biL 24.57 1,726 3 114 GREENSBORO-HIGH POINT BANKING MARKET IN NORTH CAROLINA Greensboro-High Point-the Greensboro RMA andthe non-RMAportions of Davidson (excluding the Winston-Salem RMA portion) andRandolph counties Bank ofAmerica Pre-Consummation ...... 3 1bil. 9.03 1,179 0 27 U.S. Trust ......................................... 27 3.6 miL .03 1,179 0 27 BankofAmerica Post-Consummation ..... 3 1biL 9.07 1,179 0 27

Legal Developments: First Quarter, 2007 C57 Appendix-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits number of shares HHI HHI (dollars) competitors (percent) HOUSTON BANKING MARKET IN TEXAS Houston-the Houston-SugarLand- Baytown Metropolitan StatisticalArea, consisting ofAustin, Brazoria, Chambers, Fort Bend, Galveston, Harris, Liberty, Montgomery, San Jacinto, andWaller counties Bank ofAmerica Pre-Consummation ...... 2 9.1 bit 11.17 1,406 1 84 U.S. Trust ......................................... 70 26.2 mil. .03 1,406 1 84 Bank ofAmerica Post-Consummation ..... 2 9.1 bil. 11.20 1,406 1 84 Los ANGELES BANKING MARKET IN CALIFORNIA LosAngeles-the LosAngeles RMA and the towns ofActon andRosamond Bank ofAmerica Pre-Consummation ...... 1 56.4 bil. 21.24 814 5 166 U.S. Trust ......................................... 58 268.5 mil. .10 814 5 166 Bank ofAmerica Post-Consummation ..... 1 56.6 bil. 21.34 814 5 166 MIAMI-FORT LAUDERDALE BANKING MARKET IN FLORIDA Miami-Fort Lauderdale-Browardand Dade counties Bank ofAmerica Pre-Consummation ...... 2 20.1 bit 20.12 990 0 99 U.S. Trust ......................................... 98 0.0 mil. .00 990 0 99 Bank ofAmerica Post-Consummation ..... 2 20.1 bit 20.12 990 0 99 NAPLES BANKING MARKET IN FLORIDA Naples-Collier County, excluding the town ofImmokalee Bank ofAmerica Pre-Consummation ...... 2 1.8 bil. 17.89 1,150 9 36 U.S. Trust ......................................... 29 24.7 mil. .25 1,150 9 36 BankofAmericaPost-Consummation ..... 2 1.8 bit 18.14 1,150 9 36 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, andWestchester counties in New York; Bergen, Essex, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, and Warren counties in New Jersey; Monroe andPike counties in Pennsylvania; and Fairfield County and portions ofLitchfieldandNew Haven counties in Connecticut Bank ofAmerica Pre-Consummation ...... 3 56.2 bit 6.57 1,246 9 285 U.S. Trust ......................................... 20 5.7 bit .67 1,246 9 285 Bank ofAmericaPost-Consummation ..... 3 62 bit 7.24 1,246 9 285

C58 Federal Reserve Bulletin0 June 2007 Appendix-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits number of shares HHI HHI (dollars) competitors (percent) PHILADELPHIA BANKING MARKET IN NEW JERSEY AND PENNSYLVANIA Philadelphia-Bucks, Chester, DeLaware, Montgomery, andPhiladeLphia counties in PennsyLvania; andBurlington, Camden, Cumberland, Gloucester, andSalem counties in New Jersey BankofAmerica Pre-Consummation ...... 5 6.4 bil. 6.09 1,003 0 123 U.S. Trust ......................................... 109 9.2 mil. .01 1,003 0 123 BankofAmerica Post-Consummation ..... 5 6.4 bil. 6.10 1,003 0 123 PORTLANDBANKING MARKET IN OREGON AND WASHINGTON Portland-the PortlandRMA; the towns of Banks, Molalla, MountAngel, North PLains, Saint Helens, Scappoose, Vernonia, andWoodburn, Oregon; and Yacolt, Washington Bank ofAmerica Pre-Consummation ...... 2 4.1 bil. 16.96 1,438 4 42 U.S. Trust ......................................... 32 22.3 mil. .09 1,438 4 42 Bank ofAmerica Post-Consummation ..... 2 4.1 bil. 17.05 1,438 4 42 RALEIGH BANKING MARKET IN NORTH CAROLINA Raleigh-the Raleigh RMA andthe non- RMA portions ofFrankLin, Harnett (excluding the Fayetteville RMAportion), Johnston, and Wake counties Bank ofAmerica Pre-Consummation ...... 6 1.1 bil. 7.01 1,538 1 31 U.S. Trust ......................................... 28 1.8 mil. .01 1,538 1 31 BankofAmerica Post-Consummation ..... 6 1.1 bil. 7.02 1,538 1 31 SAN FRANCISCO-OAKLAND-SAN JOSE BANKING MARKET IN CALIFORNIA San Francisco-OakLand-San Jose-the San Francisco-OakLand-San Jose RMA andthe towns ofByron, Hollister, San Juan Bautista, Pescadero, and PointReyes Station BankofAmerica Pre-Consummation ...... 1 56.2 bil. 27.03 1,349 1 101 U.S. Trust ......................................... 73 56.9 mil. .03 1,349 1 101 Bank ofAmerica Post-Consummation ..... 1 56.2 bil. 27.06 1,349 1 101

Legal Developments: First Quarter, 2007 C59 Appendix-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HBI HHI (dollars) competitors (percent) WASHINGTON BANKING MARKET IN THE DISTRICT OF COLUMBIA, MARYLAND, VIRGINIA, AND WEST VIRGINIA Washington-the Washington RMA, the non-RMAportions ofCalvert, Charles, Frederick, Prince George's, andSt. Mary's counties in Maryland; Fauquier andLoudoun counties in Virginia; Jefferson County in West Virginia; andthe independent cities ofAlexandria, Fairfax, Falls Church, andManassas in Virginia PNC Pre-Consummation ...................... 2 14.8 bil. 11.76 842 1 91 Mercantile ........................................ 80 16.9 mil. .01 842 1 91 PNC Post-Consummation ..................... 2 14.8 bil. 11.77 842 1 91 WEST PALM BEACH BANKING MARKET IN FLORIDA West Palm Beach-Palm Beach County eastofLoxahatchee andthe towns of Indiantown andHobe Sound in Martin County Bank ofAmerica Pre-Consummation ...... 2 5.9 bil. 18.39 1,520 13 62 U.S. Trust ......................................... 32 115.4 mil. .36 1,520 13 62 Bank ofAmerica Post-Consummation ..... 2 6 bil. 18.75 1,520 13 62 NOTE: Data are as ofJune 30, 2006. All amounts ofdeposits are un weighted. All rankings. market deposit shares, and HHls are based on thriftdepositsweightedat50percent. Community Bankshares, Inc. considered the application and all comments received in Greenwood Village, Colorado lightofthe factors setforth insection3ofthe BHCAct. Community, with total consolidated assets of approxi Order Approving the Acquisition of a Bank mately $1.4 billion, operates the following subsidiary insureddepository institutions in Californiaand Colorado: Holding Company Community Banks ofNorthern California, Tracy, Califor nia; and Community Banks of Colorado ("Community Community Bankshares, Inc. ("Community"), a bank Bank"), Greenwood Village, Colorado. Community is the holdingcompany within the meaningoftheBankHolding 17th largest depository organization in Colorado, control Company Act ("BHC Act"), has requested the Board's lingdepositsof$981.1 million,whichrepresent 1.3percent approval under section 3 of the BHC Actl to acquire oftotal deposits ofinsureddepository institutionsinColo CitizensFinancialCorporation("Citizens")anditssubsid rado ("statedeposits").2 iary bank, The Citizens State Bank of Cortez ("Citizens Citizens, with total banking assets of approximately StateBank"),both ofCortez, Colorado. $78 million, operates one insured depository institution Notice ofthe proposal, affording interested persons an with branches only in Colorado. Citizens is the 103rd opportunitytosubmitcomments,hasbeenpublishedinthe largest depository organization in Colorado, controlling FederalRegister(71 FederalRegister68,817 (2006)).The time for filing comments has expired, and the Board has 2. DataareasofJune30,2006.Inthiscontext,insureddepository institutions include commercial banks, savings banks, and savings I. 12usc.§1842. associations.

C60 Federal Reserve Bulletin0 June 2007 depositsofapproximately$65million,whichrepresentless tion, the Board has considered a number of factors to than 1percentofstatedeposits. identifytheeconomicallyintegratedareathatrepresentsthe On consummation of this proposal, Community would appropriate local geographic banking market encompass remain the 17th largest depository organization in Colo ing Cortez for purposes of analyzing the proposal's com rado, controlling deposits of approximately $1 billion, petitiveeffects.7 whichrepresent 1.4percentofstatedeposits. The Board reviewed the proximity of Cortez and Du rango and the commuting data between their respective counties. A mountain pass between Cortez and Durango COMPETITIVE CONSIDERATIONS reportedly makes commuting and other travel between Section 3 of the BHC Act prohibits the Board from thesecitiesdifficultattimesduring the wintermonths.The approving a proposal that would result in a monopoly or rate of commuting between Montezuma and La Plata would be in furtherance ofany attempt to monopolize the counties remains low at approximately 7 percent of resi business of banking in any relevant banking market. The dents despite some increase during the past decade. Other BHC Act also prohibits the Board from approving a indicators ofeconomic integration, such as entertainment, proposalthatwouldsubstantiallylessencompetitioninany restaurant, and shopping opportunities available in one relevant banking market, unless the anticompetitiveeffects market butnotin the other, are insufficientto suggest that oftheproposalareclearlyoutweighedinthepublicinterest the low commuting rate understates the economic integra by the probable effect of the proposal in meeting the tion ofthe counties. Both cities have large discount retail convenience and needs of the community to be served.3 storesand supermarkets. TheBoardhasconsideredcarefullythecompetitiveeffects BankingdataalsosupporttheReserveBank'sdefinition ofthe proposalinlightofallthe facts ofrecord. of the Cortez banking market as the relevant geographic market. Interviews by the Reserve Bank with bankers in A. Geographic Banking Market Cortez and Durango indicate that most, if not all, of the localbanksview thetwo citiesas separatemarkets. Banks Community and Citizens compete directly in the Cortez, in each city generally have few customers from the other Colorado banking market ("Cortez banking market"). city,donotsolicitoradvertiseforbusinessintheothercity, Community contends that the Cortez banking market, as anddonotmonitortheloanordepositratesofbanksinthe delineated by the Federal Reserve Bank of Kansas City othercity.8 ("Reserve Bank"),4 does not reflect the true nature of Based on the foregoing and a careful review ofall the banking competition in Cortez and that the relevant geo facts of record, including information provided by local graphic marketforanalysis shouldbeexpanded to include banks, the state ofColorado, and other publicly available La Plata County, where the city of Durango is located. information, the Board reaffirms that the relevant geo Communitybasesitscontentiononthecommutingpatterns graphic market within which to evaluate the competitive betweenMontezumaandLaPlatacounties.5 effects of this proposal is the Cortez banking market, as In defining a geographic market, the Board and the currentlydefinedbythe ReserveBank. courtshaveconsistentlyfound thattherelevantgeographic market for analyzing the competitive effects ofa proposal B. Competitive Effects in the Banking Market must reflect commercial and banking realities and should consist ofthe local area where customers can practicably TheBoardhasreviewedcarefullythecompetitiveeffectsof turn for alternatives.6 In reviewing Community's conten- theproposalintheCortezbankingmarketinlightofallthe facts ofrecord. In particular, the Boardhasconsideredthe number of competitors that would remain in the banking 3. 12U.S.c.§1842(c)(1). 4. The Cortez banking market is defined as Dolores and Monte zumacounties,Colorado. (1998); First Union Corporation, 83 Federal ReserveBulletin 1012, 5. Community argues that approximately 7 percent ofworkers in 1013-14(1997);ChemicalBankingCorporation,82FederalReserve Montezuma County, where Cortez is located, commute to La Plata Bulletin239, 241 (1996); and "yoming Bancorporation,68 Federal Countyforemployment,andthattheabsolutenumberofcommuters ReserveBulletin313,314(1982). traveling from Montezuma County to La Plata County exceeds the 7. Indelineatingtherelevantgeographicmarketinwhichtoassess absolutenumberofcommuterstravelingtoMontezumaCountyfrom the competitive effects ofa bank merger or acquisition, the Board Dolores County (the other county in the Cortez banking market). reviewspopulationdensity;workercommutingpatterns;theusageand Community also notes that the only banking institution in Dolores availability of banking products; advertising patterns of financial County is 35 road miles from Cortezand thatDurango, where most institutions;thepresenceofshopping,employment,andothernecessi LaPlataCountybankinginstitutionsarelocated,isonly45roadmiles ties; and other indicia ofeconomic integration and transmission of fromCortez. competitiveforcesamongbanks.See,e.g., FirstSecurityCorporation, 6. See UnitedStates v. PhillipsburgNationalBank, 399U.S. 350 86 Federal Reserve Bulletin 122 (2000); Pennbancorp, 69 Federal (1970); United States v. Philadelphia National Bank, 374 U.S. 321, ReserveBulletin548(1983). 357(1963);BrownShoe Co. v. UnitedStates, 370U.S.294,336-337 8. OneexceptionisabankinthetownofMancos,Colorado,that (1962).SeealsoFirstYorkBanCorp,88FederalReserveBulletin251 has attracted depositors from both cities. Mancos is in Montezuma (2002); First Union Corporation, 84 Federal Reserve Bulletin 489 CountybetweenCortezandDurango.

Legal Developments: First Quarter, 2007 C61 market, the relative shares of total deposits in depository posal. Moreover, the marketconcentration as measured by institutions in the market ("market deposits") controlled the HHI has decreased 624 poinls during the last decade, by Community and Citizens,9 the concentration level of from 2367 in 199612 to 1743 in 2006, evidencing signifi marketdeposits and the increase in this level as measured cantand effective competition by market participants dur by the Herfindahl-Hirschman Index ("HHI") under the ing thisperiod. Department of Justice Merger Guidelines ("DOJ Guide Inaddition,actionsbycompetitorstoenterthemarketin lines"),10and othercharacteristicsofthe market. 2007 demonstrate that the market is attractive for entry. In the Cortez banking market, the concentration levels Although no depository institutions have entered the mar onconsummationoftheproposalwouldexceedthethresh ketinrecentyears, twoinstitutionshavetakenstepswithin oldlevelsintheDOJGuidelines. Community's subsidiary, thepastyearthat willleadtoentryintothe marketin2007 CommunityBank, is the fifth largestdepository institution through de novo branches. One bank established a loan in the market, controlling deposits of approximately production office ("LPO") in Cortez in 2006 and has $51.8 million, which representapproximately 13.4percent purchasedabuildingaspartofitsplanstoconverttheLPO of market deposits. Citizens' subsidiary, Citizens State into a full-service branch in 2007. Another bank plans to Bank, is the third largest depository institution in the openadenovobranchinthe marketin the nearfuture and market, controlling deposits of approximately $65.1 mil has taken significant actions to implement that plan. The lion, whichrepresentapproximately 16.8percentofmarket Board previously has considered such prospective entry deposits. On consummation of the proposal, Community into a market by competitors as evidence of a market's Bankwouldbecomethelargestdepositoryinstitutioninthe attractivenessfor entry.13 market, controlling deposits ofapproximately $116.9 mil lion, which wouldrepresent30.2percentofmarketdepos C. Views of OtherAgencies and Conclusion on its.TheHHIwouldincrease449 pointsto 2192. Competitive Considerations The Board has considered carefully whether other fac tors eithermitigate the competitive effects ofthe proposal The DOJalso conducted adetailed review ofthe potential or indicate that the proposal would have a significantly competitive effects of the proposal and has advised the adverse effect on competition in the market. The number Boardthat consummationofthe proposalwould not likely and strength offactors necessary to mitigate the competi have a significantly adverse effect on competition in the tiveeffectsofaproposaldependonthesizeoftheincrease Cortez banking market. In addition, the appropriate bank in and the resulting level of concentration in a banking ingagencies were affordedanopportunityto commentand market.ll have notobjectedtothe proposal. Several factors indicate that the increase in concentra Basedonallthefactsofrecord,theBoardconcludesthat tionintheCortezbankingmarket,asmeasuredbyincreases consummation of the proposal would not have a signifi in the HHI and Community Bank's market share, over cantly adverse effect on competition or on the concentra states the potential competitive effects of the proposal. tion of resources in the Cortez banking market or in any After consummation, five insured depository institutions otherrelevantbanking market.Accordingly, the Board has would continue to operate in the market, which is an determined that competitive considerations are consistent averagenumberofcompetitorsforsparselypopulatedrural withapproval. banking marketslike the Cortezmarket.Therelative share of market deposits held by each depository institution FINANCIAL, MANAGERIAL, AND SUPERVISORY indicatesthereisactivecompetitioninthe market. Eachof CONSIDERATIONS the four remaining institutions that directly compete with Community Bank will have a market share of between Section3oftheBHCActrequirestheBoardtoconsiderthe 12 percent and 22 percent on consummation of the pro- financial and managerial resources andfuture prospectsof the companies and depository institutions involved in the proposal and certain other supervisory factors. The Board 9. DepositandmarketsharedataareasofJune30,2006,adjusted has considered ihese factors in light of all the facts of to reflect subsequentmergers and acquisitions through February 12, record, including confidential reports of examination and 2007.Nosavingsassociationsoperateinthemarket. othersupervisoryinformationfrom theprimaryfederal and 10. Underthe DOJGuidelines, amarket isconsidered unconcen tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated state supervisors of the organizations involved in the if the post-merger HHI is between 1000 and 1800, and highly proposal,publiclyreportedandotherfinancialinformation, concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof and information providedbyCommunity. Justice ("001") has informed the Board that a bank merger or Inevaluatingfinancial factorsinexpansionproposalsby acquisition generally will not be challenged (in the absence ofother factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI banking organizations, the Board reviews the financial is atleast 1800andthe mergerincreasesthe HHI by morethan 200 condition ofthe organizations involved both on a parentpoints.TheDOJhasstatedthatthehigher-than-normalHHIthresholds forscreeningbankmergersandacquisitionsforanticompetitiveeffects implicitly recognize the competitive effects of limited-purpose and 12. Aspen Bancslulres, Inc., 82 Federal Reserve Bulletin 665 othernondepositoryfinancialentities. (1996). II. See NarionsBank Corp., 84 Federal Reserve Bulletin 129 13. Southern National Corp., 83 Federal Reserve Bulletin 597 (1998). (1997).

C62 Federal Reserve Bulletin0 June 2007 only and on a consolidated basis, as well as the financial represented that the proposal will provide greater conve condition of the subsidiary depository institutions and nience to customers through a larger network ofbranches significant nonbanking operations. In this evaluation, the and automated teller machines and a broader range of Boardconsidersavarietyofinformation,includingcapital financial products and services over an expanded geo adequacy, asset quality, and earnings performance. In graphic area. Based on all the facts of record, the Board assessing financial factors, the Board consistently has concludes that considerations relating to the convenience consideredcapitaladequacytobeespeciallyimportant.The and needs of the community to be served and the CRA Board also evaluates the financial condition of the com performancerecords oftherelevantdepository institutions bined organization at consummation, including its capital are consistentwithapproval. position, asset quality, and earnings prospects, and the impactoftheproposedfunding ofthe transaction. CONCLUSION TheBoardhasconsideredcarefully thefinancial factors of the proposal. Community, all its subsidiary depository Based on the foregoing and all the facts of record, the institutions, and Citizens Bank currently are well capital Board has determined that the application should be, and ized and would remain so on consummation of the pro hereby is, approved. In reaching its conclusion, the Board posal. Based on its review of the record, the Board also hasconsideredall thefacts ofrecord inlightofthefactors finds that Community has sufficient financial resources to that it is required to consider under the BHC Act. The effect the proposal. The proposedtransaction is structured Board'sapprovalisspecificallyconditionedoncompliance asacashpurchase.Thepurchasewouldbefundedfromthe by Community with the conditions imposed in this order proceeds of an issuance of trust preferred securities and andthecommitmentsmadetotheBoardinconnectionwith debt. the application. Forpurposes ofthis action, the conditions TheBoardalsohasconsideredthemanagerialresources and commitments are deemedto be conditionsimposedin of Community, Citizens, and their subsidiary depository writing by the Board in connection with its findings and institutions. The Board has reviewed the examination decision herein and, as such, may be enforcedin proceed recordsoftheseinstitutions,includingassessmentsoftheir ingsunderapplicable law. management,risk-managementsystems, andoperations.In The proposed transaction may not be consummated addition, the Board has considered its supervisory experi beforethe 15thcalendarday afterthe effectivedate ofthis ences and those ofthe otherrelevant banking supervisory order, orlaterthan three months afterthe effective date of agencies with the organizations and their records ofcom thisorder,unlesssuchperiodisextendedforgoodcauseby pliance with applicable banking laws, including anti the Board or the Reserve Bank, acting pursuant to del money-laundering laws. The Board also has considered egatedauthority. Community'splansforimplementingtheproposal,includ By orderofthe BoardofGovernors, effectiveMarch 1, ing theproposedmanagementafterconsummation. 2007. Basedonallthefactsofrecord,theBoardhasconcluded thatconsiderationsrelating tothe financial andmanagerial Votingforthis action: ChairmanBernanke,ViceChairman Kohn, resourcesandfutureprospectsoftheorganizationsinvolved and Governors Bies, Warsh, and Kroszner. Absent and not voting: intheproposalareconsistentwithapproval,asaretheother GovernorMishkin. supervisoryfactors underthe BHCAct. ROBERT DEY. FRIERSON Deputy Secretary ofthe Board CONVENIENCE AND NEEDS CONSIDERATIONS Inactingonaproposalundersection3oftheBHCAct, the The Industrial Bank ofTaiwan Co., Ltd. Boardalso mustconsidertheeffectsoftheproposalonthe Taipei, Taiwan convenienceandneedsofthecommunitiestobeservedand take into account the records of the relevant insured depositoryinstitutionsundertheCommunityReinvestment IBT Holdings Corp. Act("CRA").!4CommunityBanksofNorthernCalifornia Cerritos, California andCommunityBankboth received "satisfactory"ratings at their most recent CRAperformance evaluations by the Order Approving the Formation of a Bank Federal Reserve Bank of San Francisco and the Reserve Holding Company Bank, as of November 17, 2003, and June 6, 2005, respectively.Citizens StateBankreceiveda "satisfactory" The Industrial Bank ofTaiwan Co., Ltd. ("IBT") and its rating at its most recent CRA performance evaluation by wholly owned subsidiary, IBT Holdings Corp., have re theReserveBank, asofSeptember5,2006.Afterconsum quested the Board's approval under section 3 ofthe Bank mationoftheproposal,Community plansto implementits Holding Company Act ("BHC Act")! to become bank CRA policies at Citizens State Bank. Community has 14. 12U.S.c.§2901etseq.; 12U.S.c. §1842(c)(2). 1. 12U.S.c. §1842.

Legal Developments: First Quarter, 2007 C63 holdingcompanies and to acquire EverTrustBank("Ever has considered these factors in light of all the facts of Trust"), CityofIndustry, California. record, including confidential reports of examination and Notice of the proposal, affording interested persons an other supervisory information received from the federal opportunitytosubmitcomments,hasbeenpublishedinthe and state supervisors of EverTrust, publicly reported and FederalRegister(71 FederalRegister46,230(2006)).The other financial information, information provided by IBT, time for filing comments has expired, and the Board has andpubliccommentsreceivedonthe proposal. The Board consideredthe proposaland allcommentsreceivedinlight hasalsoconsultedwiththeFinancialSupervisoryCommis ofthe factors setforth in section 3ofthe BRCAct. sion ("FSC"), the primary home-country supervisor of IBT, with total consolidated assets of approximately IBT.5 $4 billion, is the 37th largest bank in Taiwan.2 IBT Inevaluatingthefinancialfactors inproposalsinvolving currently has no banking operations in the United States. the formation of new bank holding companies, the Board EverTrust, with total consolidated assets ofapproximately reviews the financial condition of the applicant and the $308 million, is the l22nd largestdepository institutionin targetdepository institutions.TheBoardalsoevaluatesthe California, controlling deposits of approximately financial position ofthe pro forma organization, including $293.6 million, which represent less than 1percent ofthe its capital position, asset quality, and earnings prospects, total amount ofdeposits ofinsured depository institutions andthe impactofthe proposedfunding ofthe transaction. inthe state.3 TheBoardhascarefullyconsideredthe financial factors ofthe proposal. Taiwan's risk-based capital standards are consistent with those established by the Basel Capital COMPETITIVE CONSIDERATIONS Accord (the "Accord"). On consummation, the capital Section 3 of the BRC Act prohibits the Board from ratiosofIBTwouldcontinuetoexceedtheminimumlevels approving a proposal that would result in a monopoly or thatwouldberequiredundertheAccordandareconsidered would be in furtherance of an attempt to monopolize the equivalentto the capitallevelsthat wouldberequiredofa business of banking in any relevant banking market. The U.S. banking organization. Furthermore, EverTrustis well BRCAct also prohibits the Board from approving a bank capitalized and would remain so on consummation ofthe acquisition that would substantially lessen competition in proposal. Based on its review of these factors, the Board any relevant banking market, unless the anticompetitive findsthatIBThassufficientfinancialresourcestoeffectthe effectsoftheproposalareclearlyoutweighedinthepublic proposal. The proposed transaction is structured as a cash interest by the probable effect ofthe proposal in meeting purchase. theconvenienceandneedsofthecommunitytobeserved.4 TheBoardalsohasconsideredthemanagerialresources As noted, IBT does not control a U.S. depository ofthe organizations involved and the proposed combined institution, and the proposal would not result in an expan organization.TheBoardhasreviewedsupervisoryinforma sion of EverTrust. Based on all the facts of record, the tionprovidedbytheFSCandinformationprovidedbyIBT, Boardconcludesthatconsummationofthe proposalwould including information about compliance with anti-money nothaveasignificantlyadverseeffectoncompetitionoron laundering laws.6 In addition, the Board has reviewed the the concentration of resources in any relevant banking examinationrecordsofEverTrust,includingassessmentsof market. Accordingly, based on all the facts ofrecord, the itsmanagement, risk-managementsystems,andoperations. Board has determined that competitive considerations are TheBoardhasalsoconsideredthesupervisory experiences consistentwithapproval. ofrelevant federal and state banking supervisory agencies with EverTrust and the bank's record ofcompliance with applicable banking law and anti-money-Iaundering laws. FINANCIAL, MANAGERIAL, AND SUPERVISORY CONSIDERATIONS Section3oftheBRCActrequirestheBoardtoconsiderthe 5. TheFSChasconfirmedthatIBTisingoodstandingandhasnot objectedtotheproposal. financial and managerial resources and future prospects of 6. Acommenterexpressedconcernaboutalleged money launder the companies and depository institutions involved in the ingandgovernmentalcorruptioninTaiwanandthepossibleimpactof proposal and certain other supervisory factors. The Board these allegations could have on banking in the Asian-American community.TheBoardhastakenintoconsiderationTaiwan'slawsand regnlations,aswellasIBT'sandEverTrust'spoliciesandprocedures, 2. TaiwaneseassetandrankingdataareasofSeptember30,2006, onanti-money-laundering.Taiwanhasenactedlawsandregulationsto andarebasedontheexchangeratethenineffect.IBTisorganizedand determoneylaunderingthatareconsistentwithFinancialActionTask charteredasanindustrialbankinTaiwan.Taiwaneseindustrialbanks Force recommendations. Money laundering is a criminal offense in mayconductvariousbankingandfinancialactivities,suchaslending, Taiwan, and financial institutions are required to establish internal securities trading, underwriting, and trust activities. With respect to policies, procedures,andsystemsforthedetectionandpreventionof deposit-taking and foreign-exchange activities, however, they may money laundering throughout their worldwide operations. IBT, a onlyservecertaintypesofcustomers. privatesectorbank,haspoliciesandproceduresthataremonitoredby 3. Domesticassetandranking dataareasofSeptember30, 2006. its audit division and by governmental entities responsible for anti Deposit data are as of June 30, 2006. In this context, depository money-launderingcompliance.IBThasconfirmedthatitwillmaintain institutions include commercial banks, savings banks, and savings EverTrust'scompliancepoliciesandprocedures,whichareconsidered associations. satisfactorybyits regulators, and that it willconformthemto IBT's 4. 12V.S.c. §I842(c)(l). policiesandproceduresifthosepoliciesarethemorestringent.

eM Federal Reserve Bulletin0 June 2007 Moreover, theBoardhasconsideredlBT'splansforimple with the Board to obtain any waivers or exemptions that menting the proposal,including the proposedmanagement may be necessary to enable it to make such information afterconsummation. available to the Board. In light of the commitments pro Basedonallthefactsofrecord,theBoardhasconcluded vided by IBT and other facts of record, the Board has that the financial and managerial resources and future concluded that IBT has provided adequate assurances of prospectsofthe organizations involvedinthe proposal are accesstoanynecessaryinformationtheBoardmayrequest. consistentwithapproval. Forthese reasons, and based on all the facts ofrecord, the Section 3 ofthe BHCAct also provides that the Board Board has concluded that the supervisory factors it is may not approve an application involving a foreign bank required to considerunder section 3(c)(3) ofthe BHCAct unlessthe bankissubjecttocomprehensive supervisionor are consistentwithapproval. regulation on a consolidated basis by its home-country supervisor.?Asnoted, the FSC is the primarysupervisorof CONVENIENCE AND NEEDS CONSIDERATIONS commercialandindustrialbanks inTaiwan, includingIBT. The Board has previously determined, in connection with Inactingonaproposalundersection3ofthe BHCAct, the applications involving other banks in Taiwan, that those Boardalso mustconsidertheeffectsofthe proposalonthe banks were subject to home-country supervision on a convenienceandneedsofthecommunitiestobeservedand consolidatedbasis.8Inthis case,the Boardhasdetermined take into account the records of the relevant insured thatIBTissupervisedbytheFSConsubstantiallythesame depositoryinstitutionsundertheCommunityReinvestment termsandconditionsasthoseotherbanks.Basedonallthe Act("CRA").lOEverTrustreceiveda "satisfactory"rating facts ofrecord,theBoardhasconcludedthatIBTissubject at its most recent CRA performance evaluation by the to comprehensive supervision and regulationon aconsoli FederalDepositInsuranceCorporation, as ofNovember I, datedbasisbyitshome-country supervisor. 2003.IBThasrepresentedthatitdoesnotplantomakeany TheBHCActalso requires the Board to determine that reductionsinproductsorservicesofferedbyEverTrustand an applicant has provided adequate assurances that it will mayexpandthem.IBT's financial resources willserveas a make available to the Board such information on its source of strength for EverTrust and enhance the bank's operations and activities and those ofits affiliates that the ability to meet the banking needs of the communities it Boarddeemsappropriatetodetermineandenforcecompli serves. Based on all the facts of record, the Board con ance with the BHC Act.9 The Board has reviewed the cludes that considerations relating to the convenience and restrictionsondisclosuresinjurisdictionswhereIBTwould needs factor and the CRA performance records of the have material operations and has communicated with the relevant depository institutions are consistent with ap relevantgovernmentauthoritiesconcerningaccesstoinfor proval. mation. IBT has committed that it will make available to the Board such information on its operations and the CONCLUSION operations of any of its affiliates that the Board deems necessary to determine and enforce compliance with the Based on the foregoing and all facts ofrecord, the Board BHC Act, the International Banking Act, and other appli has determined that the application should be, and hereby cable federal law. IBT also has committed to cooperate is, approved. In reaching its conclusion, the Board has consideredallthefacts ofrecordinlightofthefactors that it is required to considerunderthe BHCAct. The Board's approval is specificallyconditionedoncompliancebyIBT 7. See 12U.S.c.§1842(c)(3)(B).AsprovidedinRegulationY,the Board determines whethera foreign bank is subjectto consolidated withtheconditionsimposedinthisorder,thecommitments home-country supervision under the standards set forth in Regula made to the Board inconnectionwith the application, and tionK.See12CFR225.l3(a)(4).RegulationKprovidesthataforeign receiptofall otherregulatory approvals.l1 Forpurposes of bank will be considered subject to comprehensive supervision or this action, theconditionsandcommitmentsaredeemedto regulation on a consolidated basis if the Board determines that the bankissupervisedorregulatedinsuchamannerthatitshome-country be conditions imposed in writing by the Board in connec supervisorreceivessufficientinformationontheworldwideoperations tion withitsfindings anddecisionhereinand, assuch,may ofthe bank, includingits relationships to any affiliate, to assess the beenforcedin proceedingsunderapplicablelaw. bank's overall financial condition and its compliance with laws and regulations.See 12CFR211.24(c)(1). 8. SeeInternationalCommercialBankofChinaCo.. Ltd.,92Fed 10. 12U.S.c. §2901etseq.; 12U.S.c.§1842(c)(2). eralReserveBulletinC199(2006);TaiwanCooperativeBank,92Fed 11. IBTalsohascommittedthatitssubsidiarieswillconformtheir eral Reserve Bulletin C201 (2006); SinoPac Holdings, 88 Federal existing direct and indirect nonbanking activities and investments, ReserveBulletin307(2002);ChinatrustFinancialHoldingCompany. includingbydivestitureifnecessary,totherequirements oftheBHC Ltd., 88 Federal Reserve Bulletin 303 (2002); E. Sun Commercial ActwithintwoyearsofitsacquisitionofEverTrust.Thisconformance Bank Limited, 86 Federal Reserve Bulletin 238 (2000); Chinatrust periodmay, inthediscretionoftheBoard,beextendedbyuptothree Commercial Bank, Ltd., 84 Federal Reserve Bulletin 1121 (1998); one-yearextensions,takingintoconsiderationthe factors setforth in LandBankofTaiwan,83FederalReserveBulletin336(1997);Taiwan section4(a)(2)oftheBHCAct(12U.S.c.§1843(a)(2».IBTalsohas Business Bank, 81 Federal Reserve Bulletin 746 (1995); Farmers committed to ensure that, after consummating its acquisition of BankofChina,81 FederalReserveBulletin620(1995).Thesupervi EverTrust, neitherIBTnoritssubsidiaries,directlyorindirectly,will sion ofindustrialbanksandcommercialbanksinTaiwanissubstan engagein new activitiesornewlinesofbusinessormakeadditional tiallythesame. investments in or acquire entities that are inconsistent with the 9. See 12U.S.C.§1842(c)(3)(A). requirementsoftheBHCAct.

Legal Developments: First Quarter, 2007 C65 The proposed transaction may not be consummated tory institutions that operate in nine states and the District beforethe 15thcalendarday afterthe effectivedate ofthis ofColumbia,4andengagesinnumerousnonbankingactivi order, orlaterthan three months after the effectivedate of ties that are permissible under the BHC Act. PNC is the thisorder,unlesssuchperiodisextendedforgoodcauseby 22ndlargestdepository organizationinMaryland, control the Board or the Federal Reserve Bank of San Francisco, lingdepositsofapproximately $313.8 million. acting pursuantto delegatedauthority. Mercantile's subsidiary banks operate in Delaware, By orderofthe BoardofGovernors, effectiveMarch 9, Maryland, Pennsylvania, Virginia, and the District of 2007. Columbia. In Maryland, Mercantile is the second largest depository organization, controlling deposits of approxi Voting forthis action: Chairman Bernanke, ViceChairman Kohn, mately $11.1 billion. andGovernorsBies,Warsh,Kroszner,andMishkin. Onconsummationofthe proposal, PNC would become the 18thlargestdepository institutionin the United States, ROBERT DEY. FRIERSON with total consolidated assets of approximately $116 bil Deputy Secretary ofthe Board lion.PNCwouldcontroldepositsofapproximately$75bil lion, which represent approximately 1.15 percent of the The PNC Financial Services Group, Inc. total amount ofdeposits ofinsured depository institutions Pittsburgh, Pennsylvania in the UnitedStates. InMaryland, PNCwouldbecomethe secondlargestdepositoryorganization,controllingdeposits Order Approving the Merger of Bank of approximately $11.4 billion, which represent approxi mately 12.3 percentofstatedeposits. Holding Companies The PNC Financial Services Group, Inc. ("PNC"), a INTERSTATEANALYSIS financial holdingcompanywithinthemeaningoftheBank Section 3(d) ofthe BHCAct allows the Board to approve Holding Company Act ("BHC Act"), has requested the an application by a bank holding company to acquire Board'sapprovalundersection3oftheBHCAct! tomerge controlofabanklocatedinastateotherthanthehomestate with Mercantile Bankshares Corporation ("Mercantile"), of such bank holding company if certain conditions are Baltimore, Maryland, and acquire Mercantile's 11 subsid met. Forpurposesofthe BHCAct, thehome stateofPNC iary banks.2 is Pennsylvania,S and Mercantile is located in Delaware, Notice ofthe proposal, affording interested persons an the District of Columbia, Maryland, Pennsylvania, and opportunitytosubmitcomments,hasbeenpublishedinthe Virginia.6 FederalRegister(71 FederalRegister69,132(2006».The Based on a review of all the facts ofrecord, including time for filing comments has expired, and the Board has relevant state and DistrictofColumbia statutes, the Board considered the application and all comments received in finds that the conditions for an interstate acquisition enu lightofthefactors setforth insection 3oftheBHCAct. merated in section 3(d) of the BHC Act are met in this PNC, with total consolidated assets of approximately case.? In light of all the facts of record, the Board is $98 billion, is the 21st largest depository organization in permittedtoapprovethe proposalundersection3(d)ofthe the United States, controlling deposits of approximately BHCAct. $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 deposi- 4. PNC'slargestsubsidiarybank,asmeasuredbytotaldeposits,is PNC Bank, National Association ("PNC Lead Bank"), Pittsburgh, Pennsylvania, which operates in Florida, Indiana, Kentucky, Mary 1. 12 U.S.c. §1842. PNC proposes to acquire the nonbanking land, New Jersey, Ohio, Pennsylvania, Virginia, and the District of subsidiariesofMercantileinaccordancewithsection4(k)oftheBHC Columbia.PNCsothersubsidiarybank,PNCBank,Delaware("PNC Act, 12U.S.C.§l843(k). Delaware Bank"),Wilmington, Delaware, hasbranchesin Delaware 2. Mercantile'slargestsubsidiarybank,asmeasuredbybothassets andPennsylvania. and deposits. isMercantile-SafeDepositandTrustCompany("Mer 5. Abank holdingcompany's homestateisthestateinwhichthe cantileLeadBank"),Baltimore,Maryland.Mercantile'sothersubsid totaldepositsofallsubsidiarybanksofthecompanywerethelargest iary banks in Maryland are: Annapolis Bank and Trust Company, on July I, 1966, orthe date on which the company became a bank Annapolis; Citizens National Bank, Laurel; Farmers & Mechanics holdingcompany,whicheverislater(12U.S.C.§I841(0)(4)(C». Bank,Frederick;MercantileCountyBank,Elkton;MercantileEastern 6. Forpurposesofsection 3(d), the Boardconsidersabanktobe Shore Bank, Chestertown; Mercantile Southern Maryland Bank, locatedinthestatesinwhichthebankischarteredorheadquarteredor Leonardtown; and Westminster Union Bank, Westminster. Mercan operatesabranch(12U.S.C.§§1841(0)(4)--(7)and1842(d)(I)(A)and tile's subsidiary banks in Virginia are Marshall National Bank and (d)(2)(B». TrustCompany,Marshall, and the National BankofFredericksburg, 7. 12U.S.c.§§1842(d)(l)(A)--(B)and I842(d)(2)(A)-(B).PNCis Fredericksburg. ItssubsidiarybankinDelawareis MercantilePenin adequatelycapitalizedand adequately managed,as definedbyappli sulaBank,Selbyville. cablelaw.AllofMercantile'ssubsidiarybankshavebeeninexistence 3. NationwideassetdataareasofSeptember30,2006.Nationwide andoperated forthe minimumperiodoftimerequired byapplicable depositand rankingdataareas ofJune 30,2006,and reflect merger state and District ofColumbia laws. On consummation of the pro activitythroughNovember 14, 2006. Inthis context,insureddeposi posal,PNCwouldcontrollessthan 10percentofthetotalamountof toryinstitutionsincludecommercialbanks,savingsbanks,andsavings depositsofinsureddepositoryinstitutionsintheUnitedStatesandless associations. than 30percentofthetotalamountofdeposits ofinsureddepository

C66 Federal Reserve Bulletin0 June 2007 COMPETITIVE CONSIDERATIONS Guidelines in three of the four banking markets.II On consummationoftheproposal,theWashington marketand Section 3 of the BHC Act prohibits the Board from the York market would remain moderately concentrated, approving a proposal that would result in a monopoly or and the Wilmington market would remain highly concen would be in furtherance of an attempt to monopolize the trated, as measured by the HHI. The changes in the HHI business ofbanking in any relevant banking market. The measure of concentration in each of these markets are BHC Act also prohibits the Board from approving a bank small. Moreover, numerous competitors would remain in acquisition that would substantially lessen competition in each ofthe threebanking markets. any relevant banking market, unless the anticompetitive effectsofthe proposalare clearlyoutweighedin thepublic B. Banking Market Warranting Special Scrutiny interest by the probable effect of the proposal in meeting theconvenienceandneedsofthecommunitytobeserved.8 PNC and Mercantile compete directly in one banking PNC and Mercantile have subsidiarydepository institu market that warrants a detailed review, Sussex County, tionsthatcompetedirectlyinfourbankingmarkets: Sussex Delaware,12becausethe post-consummation concentration County, Delaware; York, Pennsylvania; Wilmington in level would exceed the thresholds ofthe DOJ Guidelines. Delaware and Maryland; and Washington in Maryland, In the Sussex County banking market, PNC is the fourth Virginia, WestVirginia, and the DistrictofColumbia. The largest depository organization, controlling deposits of Boardhasreviewedcarefullythecompetitiveeffectsofthe approximately $257.3 million, which represent approxi proposalineachofthesebankingmarketsinlightofallthe mately 9.8 percent of market deposits. Mercantile is the facts ofrecord. In particular, the Boardhasconsideredthe second largest depository organization in the market, con number ofcompetitors that would remain in the markets, trollingdepositsof$426.3million,whichrepresentapproxi the relative shares of total deposits in depository institu mately 16.2percentofmarketdeposits. Onconsummation tions in the markets ("market deposits") controlled by of the proposal, PNC would become the second largest PNC and Mercantile,9 the concentration level of market depository organization in the market, controllingdeposits deposits and the increase in this level as measured by the ofapproximately$683.6million, whichrepresentapproxi Herfindahl-Hirschman Index ("HHI") under the Depart mately 26.0 percent of market deposits. The HHI would mentofJustice MergerGuidelines ("DOJ Guidelines"),10 increase 317 pointsto 2010.13 andothercharacteristicsofthe markets. The Board has considered carefully whether other fac tors either mitigate the competitive effects ofthe proposal or indicate that the proposal would have a significantly A. Banking Markets within Established Guidelines adverse effect on competition in the market. The number Consummation of the proposal would be consistent with and strength offactors necessary to mitigate the competi Board precedent and within the thresholds in the DOJ tiveeffectsofaproposaldependonthesizeoftheincrease and the resulting level of concentration in a banking market.14 institutions in Delaware, Maryland, Pennsylvania, Virginia, and the District ofColumbia. All other requirements ofsection 3(d) ofthe Several factors indicate that the increase in concentra BHCActwouldbemetonconsummationoftheproposal. tion, as measured by the HHI, overstates the potential 8. 12U.S.c.§1842(c)(1). 9. DepositandmarketsharedataareasofJune30,2006,adjusted toreflectmergersandacquisitionsthroughJanuary 19,2007,andare II. These markets, andtheeffectsoftheproposalon the concen based on calculations in which the deposits ofthrift institutions are tration of banking resources in these markets, are described in includedat50percent.TheBoardpreviouslyhasindicatedthatthrift AppendixA. institutionshavebecome,orhavethepotentialtobecome,significant 12. The Sussex County banking market is defined as Sussex competitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup, County,Delaware,excludingthecityofMilford. 75FederalReserveBulletin386,387(1989);NationalCityCorpora 13. These market concentration and market share calculations tion, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board includetheweightingofdepositscontrolledbythreethriftinstitutions regularlyhasincludedthriftdepositsinthemarketsharecalculationon inthemarketat100percent.TheBoardpreviouslyhasindicatedthatit a50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77Federal may consider the competitiveness of a thrift institution at a level ReserveBulletin52,55(1991). greaterthan50percentofitsdepositswhenappropriateifcompetition 10. Underthe DOJ Guidelines, a market is considered unconcen fromtheinstitutioncloselyapproximatescompetitionfromacommer tratedifthepost-mergerHHI isunder1000,moderatelyconcentrated cial bank. See, e.g., Banknorth Group, Inc., 75 Federal Reserve if the post-merger HHI is between 1000 and 1800, and highly Bulletin 703 (1989). The thrift institutions in the Sussex County concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof bankingmarketserveassignificantsourcesofcommercialloansand Justice ("DOJ") has informed the Board that a bank merger or provide a broad range of consumer, mortgage, and other banking acquisition generally will notbechallenged (intheabsenceofother products. These thrift institutions have ratios of commercial and factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI industrialloanstoassetsofapproximately14.9percent,7percent,and is at least 1800 and the merger increases the HHI more than 200 5.5 percent, which are comparable to the national average for all points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds commercial banks. Competition from these thrift institutions, there forscreeningbankmergersandacquisitionsforanticompetitiveeffects fore, closely approximates competition from commercialbanks. See implicitly recognize the competitive effects of limited-purpose and FirstUnionCorporation,84FederalReserveBulletin489(1998). othernondepositoryfinancialentities. 14. SeeNationsBankCorporation,84FederalReserveBulletin129 (1998).

Legal Developments: First Quarter, 2007 C67 anticompetitiveeffectoftheproposalintheSussexCounty FINANCIAL, MANAGERIAL, AND SUPERVISORY market. After consummation of the proposal, 16 other CONSIDERATIONS depository organizations would continue to operate in the market. Section3oftheBHCActrequirestheBoardtoconsiderthe In addition, the Board has concluded that the activities financial and managerial resources andfuture prospects of oftwo community credit unions in the market exert suffi the companies and depository institutions involved in the cientcompetitiveinfluencetomitigate,inpart,thepotential proposal and certain other supervisory factors. The Board adverse competitive effects of the proposal. Both credit has considered these factors in light of all the facts of unions offer a wide range of consumer products, operate record, including confidential reports of examination and street-levelbranches, andhavemembershipopentoalmost other supervisory information received from the federal all the residents in the market.15 These active community and state supervisors ofthe organizations involved in the credit unions control approximately $185.3 million of proposal, publiclyreportedandotherfinancial information, deposits in the market, which represent approximately information provided by PNC, and public comments re 3.4 percent of market deposits on a 50 percent weighted ceivedonthe proposa1.l7 basis. Ifthese credit unions were factored into the market Inevaluatingfinancialfactorsinexpansionproposalsby calculations on a 50 percent weighted basis, PNC would banking organizations, the Board reviews the financial control approximately 25.2 percent ofmarket deposits on condition ofthe organizations involved on both a parent consummationoftheproposal,andtheHHIwouldincrease only andconsolidatedbasis, as well asthe financial condi 296pointsto 1885.16 tion of the subsidiary banks and significant nonbanking Moreover, the record of entry into the Sussex County operations.Inthisevaluation,theBoardconsidersavariety banking market evidences its attractiveness for entry. The of information, including capital adequacy, asset quality, Boardnotes thatthree depository institutions haveentered and earnings performance. In assessing financial factors, the marketde novo since 2003. Otherfactors indicatethat the Board consistently has considered capital adequacy to themarketremainsattractiveforentry.From 1999to2004, be especially important. The Board also evaluates the the market's annualized population growth substantially financial condition of the combined organization at con exceeded the annualized population growth for Delaware summation,includingitscapitalposition,assetquality,and as a whole, and the market's annualized income growth earnings prospects,andtheimpactofthe proposedfunding alsoexceededthe annualizedincome growth for the entire ofthe transaction. state. The Board has considered carefully the proposal under the financial factors. PNC, all its subsidiarybanks, and all C. Views ofOtherAgencies and Conclusion on Mercantile'ssubsidiarybankscurrentlyarewellcapitalized Competitive Considerations and would remain so on consummation of the proposal. The DOJ has conducted a detailed review ofthe potential Basedonitsreviewoftherecord,theBoardfindsthatPNC hassufficientfinancialresourcestoeffecttheproposal.The competitive effects of the proposal and has advised the proposed transaction is structured as a partial share ex Board that consummation of the transaction would not change and partial cash purchase of shares. PNC will use likely have asignificantlyadverseeffecton competitionin existing resources and the proceeds of a trust preferred any relevant banking market. In addition, the appropriate banking agencies have been afforded an opportunity to securities issuance and long-term debt to fund the cash purchaseoftheshares. commentandhave notobjectedto the proposal. The Board also has considered the managerial re Basedonallthefactsofrecord,theBoardconcludesthat sources of the organizations involved and the proposed consummation of the proposal would not have a signifi cantly adverse effect on competition or on the concentra combined organization. The Board has reviewed the ex tionofresourcesinany ofthefourbankingmarkets where amination records of PNC, Mercantile, and their subsid iary banks, including assessments of their management, PNC and Mercantile compete directly or in any other relevantbankingmarket.Accordingly, theBoardhasdeter risk-managementsystems, and operations. In addition, the mined that competitive considerations are consistent with Board has considered its supervisory experiences and those of the other relevant banking supervisory agencies approval. with the organizations and their records of compliance with applicable banking law, including anti-money- 15. The Board previously has considered the competitiveness of similarlyactivecreditunionsasamitigatingfactor. See, e.g., Wacho via Corporatien, 92 Federal Reserve Bulletin CI83 (2006); F.N.B. Corporation,90FederalReserveBulletin481 (2004);GatewayBank 17. Onecommenterexpressedconcernaboutpressreportsregard & TrustCo.,90FederalReserveBulletin547(2004). ing the theft of a laptop computer containing data about some of 16. Beforeconsummation ofthe proposal, with deposits ofthese MercantileLeadBank'scustomers.Inresponsetothesecuritybreach, creditunionsweightedat50percent,PNCwouldbethefourthlargest MercantileLead Banknotifiedpotentiallyaffected customers, moni depositoryorganizationinthemarket,withapproximately9.5percent toredcustomeraccountsforsuspiciousactivities,andofferedcustom of market deposits, and Mercantile would be the second largest erscredit-monitoringservicesat bankexpense. Mercantileand PNC depository organization in the market, controlling approximately have policiesand procedures in placetoaddress dataprotectionand 15.7percentofmarketdeposits. databreaches,aswellastosafeguardcustomerinformation.

C68 Federal Reserve Bulletin0 June 2007 laundering laws.18 The Board also has considered PNC's detailed, on-site evaluation of the institution's overall plans for implementing the proposal, including the pro record of performance under the CRA by its appropriate posed management after consummation. federal supervisor.22 Basedonallthefactsofrecord,theBoardhasconcluded PNC LeadBankreceivedan "outstanding" rating at its thatconsiderationsrelating to the financial andmanagerial most recentCRAperformance evaluationby the Office of resourcesandfutureprospectsoftheorganizationsinvolved the Comptrollerofthe Currency ("OCC"), as ofApril 15, intheproposalareconsistentwithapproval,asaretheother 2002.PNCDelawareBankalsoreceivedan "outstanding" supervisoryfactors underthe BHCAct. rating at its most recent CRA evaluation by the Federal Deposit Insurance Corporation ("FDIC"), as of Janu ary 21, 2003. Mercantile Lead Bank received a "satisfac CONVENIENCE AND NEEDS CONSIDERATIONS tory"rating atitsmostrecentCRAperformanceevaluation by the FDIC, as of April 19, 2004. Each ofMercantile's Inactingonaproposalundersection3oftheBHCAct, the other subsidiary banks received a "satisfactory" rating at Boardalso mustconsidertheeffectsoftheproposalonthe its most recent CRA performance evaluation.23 PNC has convenienceandneedsofthecommunitiestobeservedand represented that it plans to implement its current CRA take into account the records of the relevant insured programatMercantile's subsidiary banks. depositoryinstitutionsundertheCommunityReinvestment Act ("CRA").19 The CRA requires the federal financial B. HMDA and Fair Lending Record supervisoryagenciestoencourageinsureddepositoryinsti tutionstohelpmeetthecreditneedsofthe localcommuni TheBoardhascarefullyconsideredthefairlendingrecords ties in which they operate, consistent with their safe and and HMDAdataofPNC and Mercantileinlightofpublic soundoperation,andrequirestheappropriatefederal finan commentsreceivedonthe proposal.Acommenteralleged, cial supervisory agency to take into account a relevant based on 2005 HMDA data, that PNC denied the home depository institution's record ofmeeting the creditneeds mortgageloanapplicationsofAfrican-Americanborrowers of its entire community, including low- and moderate more frequently than those of nonminority applicants in income neighborhoods, in evaluating bank expansionary variousmetropolitanstatisticalareas("MSAs").Thecom proposals.20 menteralso allegedthatMercantiledeniedthe home mort The Board has considered carefully all the facts of gage loan applications ofAfrican-American and Hispanic record,includingreportsofexaminationoftheCRAperfor borrowersmorefrequentlythanthoseofnonminorityappli mancerecordsofthesubsidiarybanksofPNCandMercan cants in various states and made inadequate numbers of tile,datareportedbyPNCandMercantileundertheHome loans toAfricanAmericans and Hispanics. The Board has Mortgage DisclosureAct ("HMDA"),21 otherinformation focused its analysis on the 2005 HMDAdata reported by provided by PNC, confidential supervisory information, PNC Lead Bank and by each of Mercantile's subsidiary and public comments received on the proposal. A com banks.24 menteralleged, based primarily on2005 HMDAdata, that Although the HMDAdata might reflectcertain dispari PNC and Mercantile engaged in discriminatory treatment ties in the rates of loan applications, originations, and of minority individuals in the home mortgage lending denialsamongmembersofdifferentracialorethnicgroups operationsoftheirsubsidiarydepository institutions. incertainlocal areas, they provide an insufficient basis by themselves on which to conclude whether or not PNC or A. CRA Performance Evaluations Mercantile are excluding or imposing highercosts on any group on a prohibited basis. The Board recognizes that As provided in the CRA, the Board has evaluated the HMDAdataalone,evenwiththerecentadditionofpricing convenienceandneedsfactorinlightoftheevaluationsby information, provide only limited information about the the appropriate federal supervisors of the CRA perfor covered loans.25 HMDA data, therefore, have limitations mance records of the insured depository institutions of PNC and Mercantile. An institution's most recent CRA performance evaluationis a particularly important consid 22. SeeInteragencyQuestionsandAnswersRegardingCommunity Reinvestment,66FederalRegister36,620at36,640(2001). eration in the applications process because it represents a 23. AppendixBliststhe mostrecentCRAperformanceratings of thesebanks. 24. The Board reviewed the HMDAdata for PNC Lead Bankin theWashington-Arlington-Alexandria,DC-VA-MD-WVMSA;inthe 18. AcommenterreiterateditspastcriticismofPNC'sacquisition Pittsburgh, Pennsylvania,MSA; andinitsCRAassessmentareas. In ofRiggsNationalCorporation("Riggs"),Washington,D.C.,in2005, addition, the Board reviewed the HMDA data reported by each of without providing any new information. The commenterpreviously Mercantile's subsidiary banks in its respective CRA assessment submittedextensivecommentsonPNC'sapplicationtoacquireRiggs, areas. andtheBoardconsideredthosecommentsinactingonthatproposal. 25. Thedata,forexample,donotaccountforthepossibilitythatan See The PNC Financial Services Group, Inc., 91 Federal Reserve institution'soutreacheffortsmayattractalargerproportionofmargin Bulletin424(2005). ally qualified applicants than other institutions attract and do not 19. 12U.S.c.§2901etseq.; 12U.S.C.§1842(c)(2). provideabasisforanindependentassessmentofwhetheranapplicant 20. 12U.S.c.§2903. who was denied creditwas, in fact, creditworthy. Inaddition, credit 21. 12U.S.c.§2801etseq. history problems, excessivedebt levels relative to income, and high

Legal Developments: First Quarter; 2007 C69 that make them an inadequate basis, absentotherinforma customers through a larger branch network and a broader tion, for concluding that an institution has engaged in variety ofproducts and services. Basedonareview ofthe illegallendingdiscrimination. entire record, and for the reasons discussed above, the TheBoardis neverthelessconcernedwhen HMDAdata Board concludes that considerations relating to the conve foraninstitutionindicatedisparitiesinlendingandbelieves nience andneedsfactor and the CRAperformancerecords thatalllendinginstitutionsareobligatedtoensurethattheir oftherelevantinsureddepositoryinstitutionsareconsistent lending practicesare basedoncriteriathatensure not only withapproval. safe and sound lending but also equal access to credit by creditworthyapplicantsregardlessoftheirraceorethnicity. Because ofthe limitations ofHMDA data, the Board has CONCLUSION consideredthesedatacarefullyandtakenintoaccountother Based on the foregoing and all the facts of record, the information, including examination reports that provide Board has determined that the application should be, and on-siteevaluationsofcompliancewithfairlendinglawsby herebyis,approved.26Inreachingitsconclusion,theBoard PNC,Mercantile,andtheirslolbsidiaries.TheBoardalsohas acc hasconsideredallthefacts ofrecordinlightofthe factors consultedwith the andFDIC, respectively, about the that it is required to consider under the BHC Act. The fair-lending compliance records of PNC Lead Bank and Board'sapprovalisspecificallyconditionedoncompliance MercantileLeadBank. by PNC with the conditions imposedin this orderand the The record, including confidential supervisory informa commitments made to the Board in connection with the tion, indicatesthatPNCandMercantilehavetakenstepsto application. For purposes ofthis action, the commitments ensure compliance with fair lending and other consumer protection laws. PNC and Mercantile each has a fair and conditions are deemed to be conditions imposed in writing by the Board in connection with its findings and lendingcomplianceprogramthatincludesasecondreview decision and, as such, may be enforced in proceedings process, and periodic self-assessments utilizing compara underapplicable law. tive file reviews to identify any discriminatory practices The proposed transaction may not be consummated withrespectto the companies' home mortgage lending. In beforethe 15thcalendarday afterthe effectivedateofthis addition, PNC and Mercantile each has a process for order, orlaterthan three months after the effectivedate of resolving fair lending complaints, and eachconducts peri thisorderunless suchperiodisextendedforgoodcauseby odic internal audits of its fair lending program. Both theBoardortheFederalReserveBankofCleveland,acting companiesalsorequireemployeestocompletefair-lending pursuantto delegatedauthority. training sessions. PNC has represented that Mercantile's By order of the Board of Governors, effective Febru current fair-lending compliance program initially would ary 15,2007. remain in place at Mercantile's subsidiary banks after consummationoftheproposal, butitwouldbereplacedby Voting forthis action: ChairmanBernanke,Vice ChairmanKohn, PNC'sfair-lendingcomplianceprogramlaterin2007 after andGovernorsBies,Warsh,Kroszner,andMishkin. Mercantile's subsidiary banks are merged into PNC's subsidiary banks. ROBERT DEY. FRIERSON TheBoard also hasconsideredthe HMDAdata in light Deputy Secretary ofthe Board of other information, including the programs described above and the overall performance records ofthe subsid iary banks ofPNC and Mercantile under the eRA. These 26. AcommenterrequestedthattheBoardholdapublicmeetingor establishedeffortsandrecordsdemonstratethattheinstitu hearingontheproposal.Section3oftheBHCActdoesnotrequirethe tions areactiveinhelping to meetthe creditneeds oftheir Boardtoholdapublichearingonanapplicationunlesstheappropriate entirecommunities. supervisory authority for any ofthe banks to be acquired makes a timelywrittenrecommendationofdenialoftheapplication.TheBoard hasnotreceivedsucharecommendationfromanyappropriatesuper C. Conclusion on Convenience and Needs and visoryauthority.Underitsrules,theBoardmay,initsdiscretion,hold CRA Performance a publicmeetingorhearingonanapplication to acquire abankifa meetingorhearingisnecessaryorappropriatetoprovideanopportu TheBoardhasconsideredcarefully all the facts ofrecord, nityfortestimonyorotherpresentations(12CFR225.l6(e),262.3(i)(2), includingreportsofexaminationoftheCRArecordsofthe 262.25(d». The Board has considered carefully the commenter's request in light ofall the facts ofrecord. In the Board's view, the institutions involved, information provided by PNC, com commenter had ample opportunity to submit comments on the pro ments received on the proposal, and confidential supervi posal and, in fact, submitted written comments that the Board has sory information. PNC represented that the proposal will considered carefully in acting on the proposal. The request fails to result in greater convenience for PNC and Mercantile demonstratewhywrittencommentsdonotpresentitsviewsadequately or why a meeting or hearing otherwise would be necessary or appropriate.Forthesereasons,andbasedonallthefactsofrecord,the loanamountsrelativetothevalueoftherealestatecollateral(reasons Boardhasdeterminedthatapublichearingormeetingisnotrequired mostfrequentlycited foracreditdenialorhighercreditcost)arenot orwarrantedinthiscase.Accordingly,therequestforapublichearing availablefromHMDAdata. ormeetingisdenied.

C70 Federal Reserve Bulletin0 June 2007 Appendix A PNC AND MERCANTILE BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DO] GUIDEliNES Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) WILMINGTON BANKING MARKET IN DELAWARE AND MARYLAND Wilmington-includes New Castle County, Delaware, andCecil County, Maryland PNC Pre-Consummation ...................... 2 1,790,381 13.3 2,616 68 21 Mercantile ........................................ 7 344,617 2.6 2,616 68 21 PNC Post-Consummation ..................... 2 2,134,998 15.8 2,616 68 21 WASHINGTON BANKING MARKET IN THE DISTRICT OF COLUMBIA, MARYLAND, VIRGINIA, AND WEST VIRGINIA Washington-includes the Ranally Metro Area (RMA) ofWashington, DC-MD-VA- WV,' the non-RMAportions ofCalvert, Charles, Frederick, and St. Mary's counties in Marylandand Fauquierand Loudon counties in Virginia; Jefferson County, West Virginia; andthe Virginia independent cities ofAlexandria, Fairfax, Falls Church, andManassas PNC Pre-Consummation ...................... 8 2,943,750 2.8 1,026 25 83 Mercantile ........................................ 7 4,616,421 4.5 1,026 25 83 PNC Post-Consummation ..................... 6 7,560,171 7.3 1,026 25 83 YORK BANKING MARKET IN PENNSYLVANIA York-includes Adams and York counties PNC Pre-Consummation ...................... 10 279,184 4.5 1,036 1 15 Mercantile ........................................ 17 6,973 0.1 1,036 1 15 PNC Post-Consummation ..................... 10 286,157 4.6 1,036 1 15 NOTE: Data are as ofJune 30, 2006, and adjusted to reflect mergers and acquisitions through January 19, 2007. All deposit amounts are in thousands ofdollars. All rankings, marketdeposit shares, and HHIs are basedonthriftdepositsweightedat50percent.

Legal Developments: First Quarter, 2007 C71 Appendix B CRA PERFORMANCE EVALUATIONS OF MERCANTILE BANKSHARES CORPORATION'S OTHER BANKS Bank CRARating Date Supervisor 1. Citizens National Bank, Laurel, Maryland ....................... Satisfactory February 2005 OCC 2. National Bank ofFredericksburg, Fredericksburg, Virginia .............. Satisfactory September 2002 OCC 3. Marshall National Bank and Trust Company, Marshall, Virginia ...................... Satisfactory April 2005 OCC 4. Mercantile Peninsula Bank, Selbyville, Delaware ................... Satisfactory June 2005 FDIC 5. Mercantile Southern Maryland Bank, Leonardtown, Maryland .............. Satisfactory January 2005 FDIC 6. Westminster Union Bank, Westminster, Maryland ................ Satisfactory March 2004 FDIC 7. Mercantile County Bank, Elkton, Maryland ....................... Satisfactory May 2005 FDIC 8. MercantileEastern Shore Bank, Chestertown, Maryland ............... Satisfactory October 2004 FDIC 9. Farmers & Mechanics Bank, Frederick, Maryland ................... Satisfactory November 2005 FRB 10. Annapolis Bank and Trust Company, Annapolis, Maryland .................. Satisfactory April 2005 FRB ORDERS ISSUED UNDER Noticeoftheapplication,affordinginterestedpersonsan INTERNATIONAL BANKING ACT opportunity to comment, has been published in a newspa per of general circulation in Mineola (Newsday, Inc., May 19, 2006).The time for filing commentshasexpired, Banco Santander Totta, S.A. and allcommentshavebeenconsidered. Bank, with total consolidated assets of approximately Lisbon, Portugal $44.6billion,3is the third largest privately owned banking organization in Portugal. Bank provides a broad range of Order Approving Establishment of a banking,financial,andotherservicestocorporateandretail Representative Office clientsprimarily in Portugal. OutsidePortugal, Bankoper ates a subsidiary bank in Angola; branches in the United BancoSantanderTotta, S.A. ("Bank")(formerlyknownas Kingdom, Luxembourg, Puerto Rico, and Madeira; and BancoTotta&Arrores,S.A.("Arrores"»,Lisbon,Portugal, representative offices in Germany, Canada, Switzerland, a foreign bank within the meaning of the International Venezuela, France, and SouthAfrica. In the United States, Banking Act ("rnA"), has applied under section lO(a) of Bankhasonenonbanksubsidiary,Totta&Arrores,Newark, the rnAI to retain a representative office in Mineola, New Jersey, that engages in money-remittance services in New York.2 The Foreign Bank Supervision Enhancement Connecticut,New Jersey, NewYork, andMassachusetts. Act of 1991, which amended the rnA, provides that a Bank is a subsidiary of Banco Santander Central His foreign bank must obtain the approval of the Board to pano, S.A. ("Santander"), Madrid, Spain.4 Through its establisha representativeofficein the UnitedStates. offices and subsidiaries, Santander offers banking, finan cial, and other services worldwide. In the United States, Santander indirectly controls two U.S. insured depository 1. 12U.S.C.§3107(a). institutions5andownsseveralU.S.subsidiariesthatengage 2. AcoresoperatedtherepresentativeofficeinMineola.TheAcores bankingorganizationwasreorganizedeffectiveDecember16,2004.In connectionwiththereorganization,anewholdingcompany,Santander TottaSGPS, S.A., wascreated,andACores mergedwithACores' two 3. AssetdataareasofSeptember3D,2006. subsidiarybanks,CompanhiaGeraldeCreditoPredialPortugues,S.A. 4. Santander indirectly controls approximately 99.6 percent of ("Credito")andBancoSantanderPortugal,SA,withCrectitoasthe Bank'svotingshares. survivor. Credito then changed its name to Banco Santander Totta, 5. Santander controls Banco Santander Puerto Rico, San Juan, SA PuertoRico. a state-chartered bankwithofficesonlyin PuertoRico;

en Federal Reserve BulletinD June 2007 in nonbanking activities. Santander and its foreign bank BankofSpain.9 Basedonall the facts ofrecord, including subsidiariesoperateanumberofdirectofficesintheUnited the above information, it has been determined that Bank States. andSantanderaresubjecttocomprehensivesupervisionon Bank assumed the existing operations of A<;ores in aconsolidatedbasis bytheirhome-country supervisors. connection withacorporatereorganization. Nochangesin The Board also has taken into account the additional the activitiesofBank'srepresentativeofficehaveoccurred standards set forth in section 7 of the IBA and Regula asaresultofthereorganization.Thatofficeactsasaliaison tionK.IDTheBankofPortugaland the BankofSpainhave betweenBankanditsexistingandpotentialcustomers.The noobjectiontoBank'sretentionoftherepresentativeoffice. office'sactivitiesinclude soliciting new business,conduct Withrespecttothefinancial andmanagerialresourcesof ing research, marketing various services, and receiving Bank, taking into consideration its record ofoperations in applications for extensions of credit and executing loan its home country, its overall financial resources, and its documents onbehalfofBank. standing with its home-country supervisor, financial and Under the IBA and Regulation K, in acting on an managerial factors are consistent with approval ofBank's application by aforeign bank to establish arepresentative retentionoftherepresentativeoffice.Bankappearstohave office, the Board must consider whether (l) the foreign the experience and capacity to support the representative bank has furnished the information the Board needs to office and has established controls and procedures for the assess the applicationadequately; (2) theforeign bankand representativeofficetoensurecompliancewithU.S. law,as any foreign bankparentengage directly in the business of well as controls and procedures for its worldwide opera banking outside of the United States; and (3) the foreign tions generally. bankandanyforeignbankparentaresubjecttocomprehen PortugalisamemberoftheFinancialActionTaskForce sive supervision on a consolidated basis by their home and subscribes to its recommendations on measures to country supervisors.6 The Board also considers additional combatmoneylaundering.Inaccordancewiththeserecom standardsassetforth in the IBAandRegulation K.7 mendations,Portugalhasenactedlawsandcreatedlegisla As notedabove, BankandSantanderengagedirectly in tive and regulatory standards to deter money laundering. the business of banking outside the United States. Bank Money laundering is a criminal offense in Portugal, and also has providedtheBoardwithinformationnecessary to financial institutionsare required to establishinternal poli assess the applicationthroughsubmissionsthataddress the cies, procedures,andsystemsforthedetectionand preven relevantissues. tion of money laundering throughout their worldwide Withrespecttosupervisionbyhome-countryauthorities, operations. Bank has policies and procedures to comply the Board previously has determined, in connection with with these laws and regulations that are monitored by applications involving other banks in Portugal, that those governmental entities responsible for anti-money banks were subject to home-country supervision on a launderingcompliance, consolidated basis.8 Bank is supervised by the Bank of With respect to access to information about Bank's Portugalonsubstantiallythe sameterms andconditions as operations, the Board has reviewed the restrictions on thoseotherbanks.WithrespecttoBank'sparent,theBoard disclosure inrelevantjurisdictionsin whichBankoperates previously has determined that Santander is subject to and has communicated with relevant government authori comprehensive supervision on a consolidated basis by the ties regarding access to information. Bank and Santander have committed to make available to the Board such andSovereignBank,Wyomissing,Pennsylvania,asavingsassociation information on the operations of Bank and any of its with offices in Connecticut, Delaware, Maryland, Massachusetts, affiliates that the Boarddeems necessary to determine and New Hampshire, New Jersey, New York, Pennsylvania, and Rhode enforcecompliancewiththeIBA, theBankHoldingCom Island. pany Act, and other applicable federal law. To the extent 6. 12 U.S.C. §3107(a)(2); 12CFR211.24(d)(2). Inassessing this thattheprovisionofsuchinformationtotheBoardmaybe standard,theBoardconsiders,amongotherindiciaofcomprehensive, consolidatedsupervision,theextenttowhichthehome-countrysuper prohibited by law orotherwise, Bank and Santander have visors(i)ensurethatthebankhasadequateproceduresformonitoring committed to cooperate with the Board to obtain any andcontrollingitsactivitiesworldwide;(ii)obtaininformationonthe necessary consentsorwaivers that mightbe required from conditionofthebankanditssubsidiariesandofficesthroughregular examinationreports,auditreports, orotherwise;(iii)obtaininforma tion on the dealings with and relationship between the bankand its 9. Seee.g.,BancoSantander,SA,85FederalReserveBulletin441 affiliates, both foreign and domestic; (iv) receive from the bank (1999). financial reports that are consolidated on a worldwide basis or 10. See 12U.S.C. §3105(d)(3)-(4);12CFR211.24(c)(2)-(3).The comparableinformationthat permits analysis ofthe bank's financial additionalstandardssetforthinsection7ofthelBAandRegulationK conditiononaworldwideconsolidatedbasis;and(v)evaluatepruden include the following: whether the bank's home-country supervisor tialstandards,suchascapitaladequacyandrisk assetexposure,ona has consented to the establishment of the office; the financial and worldwidebasis.Nosinglefactorisessential,andotherelementsmay managerialresourcesofthebank;whetherthebankhasproceduresto informtheBoard'sdetermination. combatmoneylaundering,whetherthereisalegalregimeinplacein 7. 12U.S.c.§3105(d)(3)-(4);12CFR211.24(c)(2)-(3). thehornecountrytoaddressmoneylaundering,andwhetherthehorne 8. See,e.g..CaixaEconomicaMontepioGeral,86FederalReserve country is participating in multilateral efforts to combat money Bulletin 700 (2000); Banco Comercial Portugues, SA, 86 Federal laundering; whetherthe appropriatesupervisorsin the horne country Reserve Bulletin 613 (2000); Banco Espfrito Santo, SA, et aI., may share information on the bank's operations with the Board; 86 Federal Reserve Bulletin 418 (2000); Caixa Geral de Depositos whetherthe bank and its U.S. affiliatesare in compliance with U.S. SA,85 FederalReserveBulletin774(1999). law;theneedsofthecommunity;andthebank'srecordofoperation.

Legal Developments: First Quarter, 2007 C73 third parties for disclosure ofsuch information. In lightof per of general circulation in Houston (The Houston thesecommitmentsandotherfactsofrecord,andsubjectto Chronicle, November 20, 2006). The time for filing com the conditiondescribed below, it has beendetermined that ments has expired, and all comments received have been Bankand Santanderhave providedadequate assurancesof considered. access to any necessary information that the Board may Bank,withtotalassetsof$338billion,isthethirdlargest request. commercial bank in Canada.2 It provides a variety of Onthe basisofall the facts ofrecord, andsubjecttothe banking services to retail andcorporatecustomersthrough commitments made by Bankand Santander, as wellas the more than 950 branches in Canada. Italso provides stock termsandconditionssetforthinthisorder,Bank'sapplica brokerage, insurance brokerage, fund management, and tiontoretaintherepresentativeofficeinMineola,NewYork, financial advisory servicesthrough subsidiaries. is hereby approved by the Director of the Division of IntheUnitedStates,BankoperatesbranchesinPortland, BankingSupervisionandRegulation, withtheconcurrence Oregon,andNewYork,NewYork;andagenciesinAtlanta, ofthe GeneralCounsel, pursuantto authoritydelegatedby Georgia,andSanFrancisco,California.3Bankalsoengages the Board.II Should any restrictions on access to informa in financing, investment advisory, securities, fiduciary and tionontheoperationsoractivitiesofBankanditsaffiliates custody,andmoneytransmissionactivitiesthroughsubsid subsequently interfere with the Board's ability to obtain iaries. informationto determineandenforcecomplianceby Bank The proposed branch would replace Bank's existing or its affiliates with applicable federal statutes, the Board representative office in Houston. It would engage in a may require terminationofanyofBank'sdirectorindirect wholesalebankingbusiness,offeringcorporateinvestment, activitiesinthe UnitedStates.Approvalofthis application lending, and cash management services to existing and alsoisspecificallyconditionedoncompliancebyBankand prospective customers. Bankis a qualifying foreign bank Santanderwith the commitments made in connectionwith ingorganizationunderRegulation K.4 thisapplicationand withtheconditionsin thisorder.12The Under the IBA and Regulation K, in acting on an commitments and conditions referred to above are condi application by a foreign bank to establish a branch, the tions imposed in writing by the Board in connection with Boardmustconsiderwhethertheforeign bank(1)engages this decision and may be enforced in proceedings under directly in the business of banking outside of the United 12U.S.C. §1818againstBankanditsaffiliates. States; (2) has furnished to the Board the information it By order, approved pursuant to authority delegated by needs to assess the application adequately; and (3) is the Board,effectiveMarch 16,2007. subject to comprehensive supervision on a consolidated basisbyitshome-countrysupervisor.5TheBoardalsomay ROBERT DEY. FRIERSON consider additional standards set forth in the IBA and Deputy Secretary ofthe Board Regulation K.6 Asnotedabove,Bankengagesdirectlyinthebusinessof banking outside the United States. Bankalso has provided The Bank ofNova Scotia Toronto, Canada 2. AssetdataareasofOctober31,2006. 3. In connection with this proposal, Bank has filed notice under Order Approving Establishment of a Branch section211.22(b)(1)ofRegulationK(12CFR211.22(b)(1» tochange itshomestatefromNewYorktoTexas.Bank'sbranchinPortlandwas The Bank of Nova Scotia ("Bank"), Toronto, Canada, a established before the enactmentofthe IBAin 1978. See 12U.S.c. foreignbankwithinthemeaningoftheInternationalBank §3103(b).Bank'sNewYorkofficeiscurrentlylicensedasanagency by the state of New York. Because the office accepts large ing Act ("IBA"), has applied under section 7(d) of the denominationdepositsfromU.S.residents,itistreatedasabranchfor IBA I to establishabranchinHouston,Texas.TheForeign purposes ofthe IBA. As a consequence ofBank's change ofhome Bank Supervision Enhancement Act of 1991, which state.Bank'sbranchinNewYorkmustlimititsdeposittakingtothat amendedtheIBA,providesthataforeignbankmustobtain permittedtoanagencyundertheIBAandRegulationK. 4. 12CFR211.23(b). the approval of the Board to establish a branch in the 5. 12 U.S.c. §3105(d)(2); 12CFR 211.24(c)(l). In assessingthis United States. standard,theBoardconsiders,amongotherfactors,theextenttowhich Noticeoftheapplication,affordinginterestedpersonsan the home-country supervisors (i) ensure that the bank has adequate opportunity to comment, has been published in a newspa- proceduresformonitoringandcontrollingitsactivitiesworldwide;(ii) obtain information on the condition ofthe bankand its subsidiaries and offices through regular examination reports, audit reports, or otherwise; (iii)obtaininformationon the dealings withandrelation 11. See 12CFR265.7(d)(12). shipbetweenthebankanditsaffiliates,bothforeignanddomestic;(iv) 12. TheBoard'sauthoritytoapprovetheretentionoftherepresen receive from the bank financial reports that are consolidated on a tativeofficeparallelsthecontinuingauthorityofthestateofNewYork worldwide basis or comparable informationthat permits analysis of to license offices of a foreign bank. The Board's approval of this thebank'sfinancialconditiononaworldwideconsolidatedbasis;and application does not supplant the authority of the New York State (v) evaluate prudential standards, such as capital adequacy and risk BankingDepartmenttolicensetherepresentativeofficeinaccordance assetexposure,onaworldwidebasis.Theseareindiciaofcomprehen withanytermsorconditionsthatitmayimpose. sive,consolidatedsupervision.Nosinglefactorisessential,andother elementsmayinformtheBoard'sdetermination. 1. 12U.S.C.§3105(d). 6. 12U.S.C.§3105(d)(3H4);12CFR211.24(c)(2H3).

C74 Federal Reserve Bulletin0 June 2007 theBoardwithinfonnationnecessarytoassesstheapplica regulations, and its compliance with applicable laws and tionthroughsubmissionsthat address the relevant issues. regulations is monitored by the bank's auditors and the Withrespecttosupervisionbyhome-countryauthorities, OSH. the Board previously has detennined, in connection with With respect to access to information about Bank's applications involving other banks in Canada, that those operations, the restrictions on disclosure in relevantjuris banks were subject to home-country supervision on a dictions in which Bank operates have been reviewed and consolidated basis by their home-country supervisor, the relevant government authorities have been communicated Office of the Superintendent of Financial Institutions with regarding access to infonnation. Bankhas committed ("OSH").? Bank is supervised by the OSH on substan to make available to the Board such information on the tially the same tenns and conditions as those otherbanks. operations ofBank and any ofits affiliates that the Board Basedonallthefactsofrecord, ithasbeendetenninedthat deemsnecessarytodetermineandenforcecompliancewith Bankissubjecttocomprehensivesupervisiononaconsoli the IBA, the Bank Holding Company Act, and other datedbasis byits home-country supervisor. applicable federal law. To the extent that the provision of Theadditionalstandardssetforthinsection7oftheIBA suchinformationtotheBoardmay beprohibitedby lawor andRegulation Khave also been taken into account.8 The otherwise, Bank has committed to cooperate with the OSHhasnoobjectiontotheestablishmentoftheproposed Board to obtain any necessary consents or waivers that branch. mightberequiredfrom third parties fordisclosureofsuch Canada'srisk-basedcapitalstandardsareconsistentwith infonnation. In addition, subject to certain conditions, the thoseestablishedbytheBaselCapitalAccord("Accord"). OSH may share information on Bank's operations with Bank's capital is in excess of the minimum levels that other supervisors, including the Board. In light of these wouldberequiredbytheAccordandisconsideredequiva commitments and other facts of record, and subject to the lent to capital that would be required of a U.S. banking condition described below, it has been determined that organization. Managerial and other financial resources of Bank has provided adequate assurances of access to any Bank also are considered consistent with approval, and necessaryinformationthatthe Boardmay request. Bank appears to have the experience and capacity to Based on the foregoing and all the facts of record, supporttheproposedbranch.Bankhasestablishedcontrols Bank's application to establish a branch is hereby ap and procedures for the proposed branch to ensure compli proved.9 Should any restrictions on access to infonnation ance with U.S. lawand foritsoperationsingeneral. on the operations or activities of Bank and its affiliates Canadais amemberofthe FinancialActionTaskForce subsequently interfere with the Board's ability to obtain and subscribes to its recommendations on measures to informationto determineandenforcecompliancebyBank combatmoney launderingandterroristfinancing. Inaccor or its affiliates with applicable federal statutes, the Board dance with those recommendations, Canada has enacted mayrequireterminationofanyofBank'sdirectorindirect laws and adopted regulations to deter money laundering activitiesin theUnited States.Approval ofthis application and terrorist financing. Money laundering is a criminal also is specifically conditioned on compliance by Bank offenseinCanada, andfinancial institutionsarerequiredto with the conditions imposed in this orderand the commit establishinternal policies, procedures, and systemsfor the ments made to the Board in connection with this applica detectionandpreventionofmoney laundering andterrorist tion.lOForpurposesofthis action, these commitments and financing throughouttheirworldwideoperations.Bankhas conditions are deemed to be conditions imposed by the policies and procedures to comply with these laws and Board in writing in connection with its findings and decision and, as such, may be enforced in proceedings underapplicable law. By order, approved pursuant to authority delegated by 7. See Toronto-DominionBank,92FederalReserveBulletinClOO (2006); BankofMontreal, 92 Federal Reserve BulletinC14(2006). theBoard, effectiveMarch 13,2007. See also Toronto-Dominion Bank, 82 Federal Reserve Bulletin 1052 (1996);BankofMontreal,80FederalReserveBulletin925(1994). ROBERT DEV. FRIERSON 8. See12U.S.C.§3105(d)(3)-(4);12CFR2l1.24(c)(2)-(3).These Deputy Secretary ofthe Board standardsinclude(i)whetherthebank'shome-countrysupervisorhas consented to the establishment of the office; (ii) the financial and managerial resources ofthe bank; (iii) whetherthe bank has proce 9. Approved by the DirectoroftheDivisionofBanking Supervi durestocombatmoneylaundering,whetherthereisalegalregimein sion and Regulation, with the concurrence ofthe General Counsel, placeinthehomecountrytoaddressmoneylaundering,andwhether pursuanttoauthoritydelegatedbytheBoard. the home country is participating in multilateral efforts to combat 10. The Board's authority to approve the establishment of the money laundering; (iv) whether the appropriate supervisors in the proposedbranchparallelsthecontinuingauthorityofthestateofTexas homecountrymayshareinformationonthebank'soperationswiththe to license offices ofa foreign bank. The Board's approval of this Board;(v) whetherthebankand its U.S. affiliatesare incompliance application does not supplantthe authority ofthe state ofTexas to withU.S. law; (vi)theneedsofthecommunity; and (vii)thebank's license theproposedofficeofBankinaccordance withany termsor recordofoperation. conditionsthatitmayimpose.

Legal Developments: First Quarter, 2007 C75 FINAL ENFORCEMENT DECISIONS NOW, THEREFORE, prior to the taking of any testi ISSUED BY THE BOARD monyoradjudicationof, orfinding on,any issueoffact or law implied or set forth herein, and without this Order constituting an admission by Morgan of any allegation IN THE MATTER OF made orimplied by the Board ofGovernors inconnection with this proceeding, and solely for the purpose ofsettle ment of this proceeding without protracted hearings or Seresa T. Morgan testimony: A Former Institution-Affiliated Party of 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: Civitas BankGroup, Inc. I. Morgan, withoutthepriorwrittenapprovaloftheBoard Franklin, Tennessee of Governors and, where necessary pursuant to sec tion 8(e)(7)(B) of the FDI Act (12 U.S.C. Docket No. 06-020-E-I §1818(e)(7)(B», another federal financial institution regulatory agency, is hereby and henceforth prohibited from: Order of Prohibition Issued Upon Consent Pursuant to (a) participating in any manner in the conduct of the Section 8(e) of the Federal Deposit Insurance Act, as affairs of any institution or agency specified in AmendedWHEREAS, pursuantto sections 8(e) and (i)(3) section 8(e)(7)(A) of the FDI Act (12 U.S.c. of the Federal Deposit Insurance Act, as amended (the §1818(e)(7)(A)), including, butnot limitedto, any insured depository institution or any holding com "FDIAct")(12U.S.c. §§1818(e)and(i)(3»,theBoardof panyofaninsureddepository institution; Governors ofthe Federal Reserve System (the "Board of (b) soliciting, procuring, transferring, attempting to Governors") issues this consent Order ofProhibition (the transfer, voting or attempting to vote any proxy, "Order") against SeresaT. Morgan ("Morgan"), aformer consent,orauthorizationwithrespecttoany voting institution-affiliated party, as defined in sections 3(u) and rights in any institution described in sec 8(b)(3) of the FDI Act (12 U.S.C. §§1813(u) and tion 8(e)(7)(A) of the FDI Act (12 U.S.C. 1818(b)(3»,ofCivitasBankGroup,Inc., Franklin,Tennes §1818(e)(7)(A»; (c) violatinganyvotingagreementpreviouslyapproved see, previously known as Cumberland Bancorp, Inc., a by any federal bankingagency; and registeredbankholding company ("Civitas"); (d) voting for a director, or serving or acting as an WHEREAS, on January 5, 2007, the Board of Gover institution-affiliatedparty, suchas anofficer, direc norsissuedaNoticeofIntenttoProhibitIssuedPursuantto tor, or employee in any institution described in Section 8(e) of the Federal Deposit Insurance Act, as section 8(e)(7)(A) of the FDI Act (12 U.S.C. amended (the "Notice") against Morgan alleging that §1818(e)(7)(A». 2. All communications regarding this Order shall be when Morgan was employed by Civitas, she allegedly addressedto: participated in violations of law, unsafe or unsound prac (a) Mr. John H. Atkinson tices, andbreachesoffiduciary dutyinconnectionwith the AssistantVice President embezzlement ofover $197,000 from Civitas, and falsifi DepartmentofBanking Supervision cation of its books and records; that she was thereafter andRegulation terminated from her position as an employee of Civitas; FederalReserve BankofAtlanta and that she hadexecuteda promissory note requiring her 1000Peachtree Street, N.E. Atlanta, GA30309-4470 to makerepayment toCivitas; (b) Ms. SeresaT. Morgan WHEREAS, on January 12, 2007, Morgan filed an 304HighlandHeights answerto the Notice; and Goodlettsville,TN37072 WHEREAS, thisOrderresolvestheproceedinginitiated Withacopy to: by issuanceofthe Notice; and (c) Larry D. Woods, Esq. WHEREAS, by affixing her signature hereunder, Mor P.O. Box24727 Nashville,TN37202 gan has consented to the issuance of this Order by the 3. Any violation of this Order shall separately subject Board ofGovernors and has agreed to comply with each Morgan to appropriate civil or criminal penalties, or and every provision ofthis Order, andhas waivedany and both,undersections8(i)and(j)oftheFDIAct(12U.S.C. all rights she might otherwise have pursuant to 12 U.S.c. §§1818(i)and(j». §1818 or 12 CFR Part 263, orotherwise: (a) to a hearing 4. The provisions of this Order shall not bar, estop, or for the purpose of taking evidence with respect to any otherwisepreventthe BoardofGovernors, orany other federal or state agency ordepartment, from taking any matter implied or set forth in this Order; (b) to obtain otheractionaffecting Morgan. judicial review ofthis Order or any provision hereof; and 5. Each provisionofthis Ordershallremainfully effective (c) to challenge or contest in any manner the basis, and enforceableuntil expressly stayed, modified, termi issuance,terms, validity,effectiveness,orenforceabilityof nated, or suspended in writing by the Board of Gover this Orderorany provisionhereof. nors.

C76 Federal Reserve Bulletin0 June 2007 By orderofthe BoardofGovernors effective this 22nd day ofFebruary, 2007. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM JENNIFER J. JOHNSON Secretary ofthe Board (signed) Seresa T. Morgan

cn October 2007 Legal Developments: Second Quarter, 2007 ORDERS ISSUED UNDER BANK Onconsummationofthisproposal,andafteraccounting HOLDING COMPANY ACT for the proposed divestiture, 1st Source would remain the fifth largestdepository organizationinIndiana, controlling deposits of approximately $3.2 billion, which represent ORDERS ISSUED UNDER SECTION 3 OF 3.6 percentofstatedeposits. THE BANK HOLDING COMPANY ACT COMPETITIVE CONSIDERATIONS 1st Source Corporation Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or South Bend, Indiana would be in furtherance ofany attempt to monopolize the business of banking in any relevant banking market. The Order Approving the Acquisition of a Bank BHC Act also prohibits the Board from approving a Holding Company proposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket, unless the anticompetitiveeffects 1st Source Corporation ("1st Source"), a bank holding oftheproposalareclearlyoutweighedinthepublicinterest company within the meaning ofthe Bank Holding Com by the probable effect of the proposal in meeting the panyAct("BHCAct"),hasrequestedtheBoard'sapproval convenienceandneedsofthe communityto beserved.4 undersection3oftheBHCAct! toacquireFINABancorp, 1stSource and FINAcompete directly in three banking Inc.("FINA")anditssubsidiarybank,FirstNationalBank, markets: Gary-Hammond, Indiana; La Porte, Indiana Valparaiso("FirstNational"),bothofValparaiso,Indiana.2 Michigan; and Starke, Indiana. Notice of the proposal, affording interested persons an TheBoardhasreviewedcarefullythecompetitiveeffects opportunitytosubmitcomment..,hasbeenpublishedinthe ofthe proposalineachofthethreebankingmarketswhere FederalRegister(72FederalRegister13,108(2007»).The 1st Source and FINA compete directly, in light of all the time for filing comments has expired, and the Board has facts ofrecord. In particular, the Boardhas consideredthe considered the application and all comments received in number of competitors that would remain in the banking lightofthefactors setforth insection3ofthe BHCAct. markets, the relative shares oftotal deposits in depository 1st Source, with total consolidated assets of approxi institutions in the markets ("market deposits") controlled mately $3.8 billion, operates one insured depository insti by 1stSourceandFINA,5theconcentrationlevelofmarket tution subsidiary, 1st Source Bank, with branches in Indi deposits and the increase in that level as measured by the anaandMichigan. 1stSourceisthefifth largestdepository Herfindahl-Hirschman Index ("HHI") under the Depart organizationinIndiana,controllingdepositsof$2.7billion, ment of Justice Merger Guidelines ("DOJ Guidelines"),6 which represent 3 percent of total deposits of insured depository institutionsinIndiana("statedeposits").3 4. 12U.S.c.§l842(c)(I). ANA, with total consolidated assets of approximately 5. DepositandmarketsharedataareasofJune30,2006,adjusted $611 million, operates one insured depository institution, to reflect subsequent mergers and acquisitions through February 23, FirstNational,withbranchesonlyinIndiana.FirstNational 2007, and are based on calculations in which the deposits of thrift is the 34th largest depository organization in Indiana, institutions are included at 50 percent. The Board previously has indicatedthatthriftinstitutionshavebecome,orhavethepotentialto controllingdepositsofapproximately $526.7 million. become, significant competitors of commercial banks. See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); National City Corporation, 70FederalReserveBulletin 743 (1984). 1. 12U.S.C. §1842. Thus, the Boardregularly hasincluded thriftdeposits in the market 2. 1st Source proposes to merge FINA with and into Hickory share calculation on a 50 percent weighted basis. See, e.g., First Acquisition, Inc. ("Hickory"'), a wholly owned subsidiary of 1st Hawaiian, Inc.,77FederalReserveBulletin52(1991). Source organized solely to effectthe proposed acquisition. Immedi 6. Under the DOJ Guidelines, a market is considered unconcen ately following the merger ofFINAwith and into Hickory, Hickory tratedifthepost-mergerHHIis under1000,moderatelyconcentrated wouldmergewithandinto 1stSource. if the post-merger HHI is between 1000 and 1800, and highly 3. AssetdataareasofMarch31,2007,andstatewidedepositand concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof ranking data are as of June 30, 2006, and reflect merger activity Justice ("OOJ") has informed the Board that a bank merger or through May9, 2007. In this context,insureddepository institutions acquisition generally will not bechallenged(in the absence ofother includecommercialbanks,savingsbanks,andsavingsassociations. factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI

C78 Federal Reserve Bulletin0 October 2007 other characteristics of the markets, and commitments post-consummationincreaseinthe HHI and market share. made by 1stSource to divest one or more branches in the Onconsummationofthe proposal and the proposeddives Starkebankingmarket. tituretoacompetitivelysuitableinsureddepositoryinstitu tion, at least five other insured depository institutions A. Banking Market with Divestiture would continue to operate in the market. In addition, the concentrationofdepositsinthemarkethasdecreasedsince 1st Source and FlNA compete directly in one banking 2000. market, the Starke market, that warrants adetailed review of competitive effects.7 In this market, the concentration B. Banking Markets without Divestiture level on consummation of the proposal, after accounting for the proposed divestiture, would exceed the threshold Consummationofthe proposal withoutdivestitures would levelsintheDOJ Guidelines. be consistent with Board precedent and within the thresh 1st Source Bank is the largest depository institution in olds in the DOl Guidelines in the Gary-Hammond and theStarkebankingmarket, controllingdepositsofapproxi La Porte banking markets.1O On consummation of the mately$70million, whichrepresentapproximately 31 per proposal, the Gary-Hammond banking market would re cent ofmarket deposits. First National is the fifth largest main moderately concentrated and the La Porte banking depository institutioninthemarket,controllingdepositsof market would remain highlyconcentrated, as measuredby approximately $13 million, whichrepresentapproximately the HHI. The change inthe HHImeasureofconcentration 6 percentofmarketdeposits. On consummation and with in each of these markets would be small, however, and outthe proposeddivestiture, the HIDinthis marketwould numerous competitors would remain in eachbankingmar increase369points,from 2236to 2605,andtheproforma ket. marketshareofthe combinedentity wouldbe 37percent. Toreducethepotentialadverseeffectsoncompetitionin C. Views ofOtherAgencies and Conclusion on the Starke banking market, 1st Source has committed to Competitive Considerations divestat leastonebranchwithno less than$6.4millionin deposits to an out-of-market insured depository organiza The DOl also has conducted a detailed review of the tion.8 Onconsummationofthe proposedmerger, and after potential competitive effects of the proposal and has accountingforthedivestiture, 1stSourcewouldremainthe advised the Board that consummation of the proposal largest depository institution in the market, controlling would not likely have a significantly adverse effect on deposits of approximately $77 million, which represent competition in any relevant banking market. In addition, 34.7 percent ofmarket deposits. The HHI would increase the appropriate banking agencies have been afforded an nomore than237 pointsto 2473. opportunity to comment and have not objected to the The Board carefully has considered whether other fac competitiveeffectsofthe proposal. tors eithermitigate the competitive effects ofthe proposal Basedonallthefactsofrecord,theBoardconcludesthat or indicate that the proposal would have a significantly consummation of the proposal would not have a signifi cantly adverse effect on competition or on the concentra adverseeffectoncompetitioninthemarket.9Inthismarket, tion of resources in the three banking markets where 1st the record indicates that the proposal would not have a significantly adverse impact on competition, despite the SourceandFlNAcompetedirectlyorinanyotherrelevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with ap is at least 1800 and the merger increases the HHI more than 200 proval. points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds forscreeningbankmergersandacquisitionsforanticompetitiveeffects implicitly recognize the competitive effects of limited-purpose and FINANCIAL, MANAGERIAL, AND SUPERVISORY othernondepositoryfinancialentities. CONSIDERATIONS 7. TheStarkebankingmarketisdefinedasStarkeCounty,Indiana. 8. 1st Source has committed that, before consummation of the proposed merger, it will execute an agreement for the proposed Section3oftheBHCActrequirestheBoardtoconsiderthe divestiture in the Starke banking market with a purchaser that the financial and managerial resources and future prospects of Board determines to be competitively suitable. 1st Source also has the companies and depository institutions involved in the committedtocompletethedivestiture within 180daysafterconsum proposal and certain other supervisory factors. The Board mationoftheproposedmerger.Inaddition, IstSourcehascommitted that,ifitisunsuccessfulincompletingtheproposeddivestiturewithin has considered these factors in light of all the facts of suchtimeperiod,itwilltransfertheunsoldbranchtoanindependent record,includingconfidentialreportsofexamination,other trustee who will be instructed to sell the branch to an alternate supervisory informationfrom the primaryfederal andstate purchaserorpurchasersinaccordancewiththetermsofthisorderand supervisors ofthe organizations involved in the proposal, withoutregardtoprice.Thetrnstagreement,trustee,andanyalternate publicly reported and other financial information, and purchasermustbedeemedacceptablebytheBoard.SeeBankAmerica Corporation, 78 Federal Reserve Bulletin 338 (1992); United informationprovidedby 1stSource. NewMexicoFinancialCorporation,77FederalReserveBulletin484 (1991). 9. The number and strength offactors necessary to mitigate the 10. These banking markets and theeffectsofthe proposal on the competitiveeffectsofaproposaldependonthesizeoftheincreasein concentration of banking resources in them are described in the andresultinglevelofconcentrationinabankingmarket. appendix.

Legal Developments: Second Quarter, 2007 C79 Inevaluatingfinancialfactors inexpansionproposalsby depositoryinstitutionsundertheCommunityReinvestment banking organizations, the Board reviews the financial Act("CRA").l1 1stSourceBankreceiveda "satisfactory" condition of the organizations involved both on a parent rating at its most recent CRA perfonnance evaluation by only and on a consolidated basis, as well as the financial theFederalReserveBankofChicago, as ofMay 23, 2005. condition of the subsidiary depository institutions and First National received a "satisfactory" rating at its most significant nonbanking operations. In this evaluation, the recent CRA perfonnance evaluation by the Office of the Board considers avariety ofinfonnation, includingcapital ComptrolIeroftheCurrency,asofDecember5,2003.After adequacy, asset quality, and earnings perfonnance. In consummation ofthe proposal, 1st Source plans to imple assessing financial factors, the Board consistently has ment its CRA policies at First National. 1st Source has consideredcapitaladequacytobeespeciallyimportant.The representedthatthe proposalwouldprovidegreaterconve Board also evaluates the financial condition of the com nience to customers through a larger network ofbranches binedorganizations atconsummation, including its capital and ATMs and a broader range of financial products and position, asset quality, and earnings prospects, and the services over an expanded geographic area. Based on all impactoftheproposedfunding ofthe transaction. thefactsofrecord,theBoardconcludesthatconsiderations TheBoardhasconsideredcarefullythe financial factors relating to the convenience and needs ofthe communities of the proposal. 1st Source and its subsidiary depository to be served and the CRA perfonnance records of the institution,andFirstNational,currentlyarewellcapitalized relevant depository institutions are consistent with ap and would remain so on consummation of the proposal. proval. Basedonitsreviewoftherecord, theBoardalso finds that 1st Source has sufficient financial resources to effect the CONCLUSION proposal.The proposedtransactionis structuredas ashare exchange and cash payment. The cash portion would be Based on the foregoing and alI the facts of record, the funded from the proceeds ofan issuance oftrust preferred Board has detennined that the application should be, and securitiesand adividendfrom 1stSourceBank. herebyis,approved. Inreaching itsdecision, theBoardhas TheBoardalsohasconsideredthemanagerialresources consideredallthe facts ofrecordinlightofthefactors that of1stSource,FINA,andtheirsubsidiarybanks.TheBoard itis required to considerunderthe BHCAct.The Board's hasreviewedthe examinationrecords ofthese institutions, approval is specificalIy conditioned on compliance by 1st including assessments of their management, risk Source with the conditions imposed in this order and the management systems, and operations. In addition, the commitments made to the Board in connection with the Boardhasconsidereditssupervisoryexperiencesandthose application, including the divestiture commitment dis oftheotherrelevantbankingsupervisoryagencieswiththe cussed above. For purposes ofthis action, the conditions organizations and their records ofcompliance with appli and commitments are deemed to be conditionsimposedin cable banking laws and with anti-money-laundering laws. writing by the Board in connection with its findings and 1st Source, FINA, and their subsidiary depository institu decision herein and, as such, may be enforced in proceed tions are considered well managed. The Board also has ingsunderapplicablelaw. considered 1st Source's plans for implementing the pro The proposed transaction may not be consummated posal, including the proposed management after consum beforethe 15thcalendarday afterthe effectivedateofthis mation, and has consulted the other relevant supervisory order, orlaterthan three months afterthe effective date of agenciesconcerningthese plans. thisorder,unlesssuchperiodisextendedforgoodcauseby Basedonallthefactsofrecord, theBoardhasconcluded the Boardorthe Federal Reserve BankofChicago, acting thatconsiderationsrelating to the financial and managerial pursuantto delegatedauthority. resourcesandfutureprospectsoftheorganizationsinvolved By orderofthe Board ofGovernors, effective May 15, intheproposalareconsistentwithapproval,asaretheother 2007. supervisory factors undertheBHCAct. Votingforthis action: Chairman Bernanke,Vice Chairman Kohn, andGovernorsWarsh,Kroszner,andMishkin. CONVENIENCE AND NEEDS CONSIDERATIONS Inactingonaproposalundersection3oftheBHCAct, the ROBERT DEY. FRIERSON Deputy Secretary ofthe Board Boardalsomustconsidertheeffectsofthe proposalonthe convenienceandneedsofthecommunitiestobeservedand take into account the records of the relevant insured 11. 12U.S.C.§2901etseq.; 12U.S.C.§1842(c)(2).

C80 Federal Reserve Bulletin0 October 2007 Appendix BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES WITHOUT DIVESTITURES Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) INDIANA AND INDIANA- MICHIGAN BANKING MARKETS Gary-Hammond-Lake County; Porter County, excluding Pine township; andNew Durham, Clinton, Cass, Dewey, andPrairie townships in La Porte County, Indiana 1st Source Pre-Consummation ....... 17 54.8 mil. .7 1,108 8 27 FINA ....................................... 7 499.2 mil. 6.1 1,108 8 27 1st Source Post-Consummation ...... 6 554 mil. 6.8 1,108 8 27 La Porte-La Porte County, excluding New Durham, Clinton, Cass, Dewey, andPrairie townships; Olive andWarren townships in St. Joseph County; and Pine township in Porter County, all in Indiana; andNew Buffalo, Three Oaks, Galien, andWeesaw townships in Berrien County, Michigan 1st SourcePre-Consummation ....... 3 142.8 mil. 10.0 2,063 20 13 FINA ....................................... 12 14.1 mil. 1.0 2,063 20 13 1stSource Post-Consummation ...... 3 156.9 mil. 11.0 2,063 20 13 NOTE: All rankings, market deposit shares, and HHls are based on thriftdepositsweightedatSOpercent. The Bank ofNew York Mellon Corporation Pennsylvania,andtherebyacquiringTheBankofNewYork New York, New York ("BONY Lead Bank"), New York, New York, Mellon Bank,N.A. ("MellonLeadBank"),Pittsburgh,Pennsylva Order Approving the Formation of a Bank nia, andthe othersubsidiarybanksofBONYandMellon.2 BNYMellon is a newly organized corporation formed to Holding Company and the Merger of Bank facilitate BONY'sacquisitionofMellon. BNYMellonalso Holding Companies has filed with the Board an election to become a financial holding company pursuant to sections 4(k) and (1) ofthe The Bank of New York Mellon Corporation ("BNYMel BHCActandsection225.82ofRegulationY.3BNYMellon Ion")hasrequestedtheBoard'sapprovalundersection3of the BankHoldingCompanyAct("BHCAct")! tobecome a bank holding company by merging with The Bank of 2. BONY Lead Bank and Mellon Lead Bank are the largest NewYorkCompany,Inc.("BONY"),NewYork,NewYork, subsidiary banks oftheirparent holding companies, as measured by bothassets and deposits. BONYoperatesoneothersubsidiarybank, andMellonFinancialCorporation ("Mellon"), Pittsburgh, The Bank of New York (Delaware), Newark, Delaware. Mellon's other subsidiary banks are: Mellon United National Bank, Miami, Florida;Mellon 1stBusinessBank, NationalAssociation, LosAnge 1. 12 U.S.C. §1842. In addition, BONY and Mellon each has les,California;andMellonTrustofNewEngland,NationalAssocia requested the Board's approval to hold and exercise options to tion,Boston,Massachusetts. purchase up to 19.9 percent of each other's common stock on the 3. See 12 U.S.C. §1843(k)and (I); 12 CFR 225.82. BNYMellon occurrenceofcertainevents.Bothoptions wouldexpireonconsum hascertifiedthatthesubsidiarydepositoryinstitutionsofBONYand mationofthemergerofMellonandBONYintoBNYMellon. Mellon are well capitalizedand well managed, and BNYMellonhas

Legal Developments: Second Quarter, 2007 C81 also proposes to acquire BNY International Financing controlofabanklocatedinastateotherthanthehomestate Corporation, New York, New York, and Mellon Overseas of such bank holding company if certain conditions are Investment Corporation, Greenville, Delaware, both Edge met. For purposes of the BHC Act, the home state of Actcorporationsorganizedundersection25 ofthe Federal BONY is New York.? Mellon is located in California, ReserveAct.4 Delaware, Florida, Maryland, Massachusetts, New Jersey, Notice of the proposal, affording interested persons an andPennsylvania.s opportunitytosubmitcomments,hasbeenpublishedinthe Based on a review ofall the facts ofrecord, including FederalRegister(72 FederalRegister12,800, 13,108,and relevant state statutes, the Board finds that the conditions 16,788 (2007)). The time for filing comments has expired, for an interstate acquisition enumerated in section 3(d) of and the Board has considered the application and all theBHCActaremetinthiscase.9Inlightofallthefactsof comments received in light of the factors set forth in record, the Board is permitted to approve the proposal section3ofthe BHCAct. undersection3(d)ofthe BHCAct. BONY, with total consolidated assets ofapproximately $99.9billion,is the 18thlargestdepository organizationin COMPETITIVE CONSIDERATIONS the United States, controlling deposits of approximately $30.1 billion.5 BONY's subsidiary banks operate main Section 3 of the BHC Act prohibits the Board from officesorbranches in Connecticut, Delaware, New Jersey, approving a proposal that would result in a monopoly or andNewYork, andBONYengagesin numerous nonbank would be in furtherance of an attempt to monopolize the ingactivities thatarepermissibleunderthe BHCAct. business of banking in any relevant banking market. The Mellon, with total consolidated assets ofapproximately BHCAct also prohibits the Board from approving abank $40.5billion,isthe33rdlargestdepository organizationin acquisition that would substantially lessen competition in the United States, controlling deposits of approximately any relevant banking market, unless the anticompetitive $22.1 billion. Mellon's subsidiary banks operate main effectsoftheproposalareclearlyoutweighedinthepublic officesorbranchesinsevenstates,6andMellonengagesin interest by the probable effect ofthe proposal in meeting numerous nonbanking activities thatare permissibleunder theconvenienceandneedsofthecommunitytobeserved.to theBHCAct. BONY and Mellon have subsidiary depository institu On consummation of the proposal, BNYMellon would tions that compete directly in four banking markets: Los become the 12th largest depository organization in the Angeles,California; Miami-FortLauderdaleArea, Florida; United States, with total consolidated assets of approxi Wilmington, in Delaware and Maryland; and Boston in mately$154billion.BNYMellonwouldcontroldepositsof Massachusetts and New Hampshire. The Board has re approximately $52.2 billion, which represent less than viewedcarefully the competitiveeffectsofthe proposalin 1 percent of the total amount of deposits of insured each of these banking markets in light of all the facts of depository institutionsinthe UnitedStates. record. In particular, the Boardhas consideredthe number of competitors that would remain in the markets, the relativesharesoftotaldepositsindepository institutionsin INTERSTATE ANALYSIS the markets ("marketdeposits") controlledby BONYand Mellon,1I the concentration levels ofmarket deposits and Section 3(d) ofthe BHCActallows the Board to approve an application by a bank holding company to acquire 7. Abankholdingcompany's homestateisthestateinwhichthe totaldepositsofallsubsidiarybanksofthecompanywerethelargest providedalltheinformationrequiredunderRegulationY.Basedonall on July I, 1966, orthe date on which the company became a bank the facts of record, the Board has determined that the election to holdingcompany,whicheverislater(12U.S.c. §1841(0)(4)(C)). becomeafinancialholdingcompanywillbecomeeffectiveonconsum 8. Forpurposes ofsection 3(d),the Boardconsidersabank to be mation of the proposal, if on that date all subsidiary depository locatedinthestatesinwhichthebankischarteredorheadquarteredor institutions ofBONY and Mellon remain well capitalized and well operatesabranch(12U.S.C.§§1841(0)(4)-(7)and1842(d)(I)(A)and managed, and if each subsidiary insured depository institution of (d)(2)(B)). BONYandMellonhasreceivedaratingofatleast"satisfactory"atits 9. 12 U.S.C. §§1842(d)(I)(A)-(B) and 1842(d)(2)(A)-(B). mostrecentperformanceevaluation underthe Community Reinvest BNYMellon is adequately capitalized and adequately managed, as mentAct("CRA")(12U.S.c.§2901etseq).BNYMellonproposesto definedbyapplicablelaw.AllofMellon'ssubsidiarybankshavebeen acquire the nonbanking subsidiaries ofBONYand Mellon inaccor inexistenceandoperatedfortheminimumperiodoftimerequiredby dancewithsection4(k)oftheBHCAct, 12U.S.c.§I843(k). applicablestatelaws.Onconsummationoftheproposal,BNYMellon 4. 12U.S.c.§601 etseq.Asthisacquisitionisbeingmadeaspart wouldcontrollessthan 10percentofthetotal amountofdeposits of ofa proposal requiring approval under section 3 of the BHC Act, insureddepositoryinstitutionsintheUnitedStates.Theproposalalso separate approval under the Federal Reserve Act is not required would comply with relevant state deposit caps, each of which is (12CFR211.5(e)(iii)). 30percent.SeeFla.Stat. §658.2953(7)(b);Md.CodeAnn.,Fin.Inst. 5. Nationwide asset data are as ofMarch 31, 2007. Nationwide §5-1013; Mass. Gen. Laws ch. 167, §39; and N.J. Stat. Ann. depositandrankingdataareasofMarch31,2007,andreflectmerger §17.9A-148(E). The otherrequirements ofsection 3(d) ofthe BHC activity throughthatdate. In this context, insureddepository institu Actwouldbemetonconsummationoftheproposal. tions includecommercialbanks,savingsbanks, andsavingsassocia 10. 12U.S.c.§1842(c)(I). tions. 11. DepositandmarketsharedataareasofJune30,2006,adjusted 6. Mellon'ssubsidiarybanksoperatemainofficesandbranchesin toreflectmergers and acquisitions through March31,2007,and are California,Delaware,Florida,Maryland,Massachusetts,NewJersey, based on calculations in which the deposits ofthrift institutions are andPennsylvania. includedat50percent.TheBoardpreviouslyhasindicatedthatthrift

C82 Federal Reserve Bulletin0 October 2007 theincreaseinthoselevelsas measuredbytheHerfindahl of the competlttve effects of the merger in this case. HirschmanIndex("HHI")undertheDepartmentofJustice SignificantbusinesslinesofthesubsidiarybanksofBONY Merger Guidelines ("DOJ Guidelines"),12 and otherchar and Mellon include custody services; clearing, corporate acteristicsofthe markets. trust, and depository receipts services; securities lending; In delineating the relevant product market in which to transferagentservices;fund administrationandaccounting assess the competitive effects of a bank acquisition or services; and foreign exchange (collectively "securities merger, the SupremeCourthas determined that "commer services")}6 Accordingly, in analyzing the competitive cial banking" is the appropriate line ofcommercebecause effects,the Boardhastakentheadditionalstepofconsider the cluster of banking products and services provided by ing measuresofsecuritiesservicesthatmorecloselyreflect commercial banks is unique relative to other types of the effectofthe proposaloncompetition. financial institutions. 13 Tomeasurethe "clusterofproducts Securities servicesare providedonanational basis, and andservices,"theCourthasusedbankdepositstomeasure most customers for these services are large corporations, theconcentrationandmarketsharesintherelevantbanking institutions, and otherfinancially sophisticatedentities.An markets. appropriate measure of these services is domestic assets Based on deposit data, consummation of the proposal under custody. BONY is the third largest provider of would be consistent with Board precedent and within the securities services, with a market share of approximately thresholds in the DOJ Guidelines in each of the four 18.2 percent, and Mellon is the fifth largest provider of banking markets.14 On consummationofthe proposal, the these services, with a market share of approximately Los Angeles and Miami-Fort Lauderdale area markets 6.7 percent.J7 Together, BONY and Mellon would be the would remain unconcentrated, and the Boston market largest provider ofthese services, with a market share of wouldremainmoderatelyconcentrated,asmeasuredbythe 24.9percent.Thismeasureofthecompetitiveeffectsofthe HHI. Although the Wilmington market would remain proposal indicates that the overlapping market, as mea highlyconcentrated,theincreaseinconcentrationwouldbe sured by the HHI, wouldremain moderately concentrated, minimal. Numerous depository institution competitors with the HHI increasing 246 points from 1542 to 1788. wouldremainineachofthe fourmarkets. Afterconsummation,21 otherparticipantswouldremainin Although the subsidiary banks ofBONY accept depos the market. its,neitherBONYnorMellonengagesinretailbankingtoa The DOJ has conducted a detailed review ofthe poten significant degree to support their banking operations,15 tialcompetitiveeffectsofthe proposalandhas advisedthe whichmakestheamountofdepositsaless-reliablemeasure Board that consummation of the transaction would not likely have asignificantly adverseeffectoncompetitionin any relevant banking market. In addition, the appropriate institutionshavebecome,orhavethepotentialtobecome,significant banking agencies have been afforded an opportunity to competitorsofcommercialbanks.See.e.g.,MidwestFinancialGroup, commentandhave notobjectedtothe proposal. 75 FederalReserveBulletin386,387(1989);NationalCityCorpora Basedonallthefactsofrecord,theBoardconcludesthat tion, 70 FederalReserve Bulletin 743, 744 (1984). Thus, the Board regularlyhasincludedthriftdepositsinthemarketsharecalculationon consummation of the proposal would not have a signifi a50percentweightedbasis.See,e.g., FirstHawaiian, Inc.,77Federal cantly adverse effect on competition or on the concentra ReserveBulletin52,55(1991). tion ofresourcesinany ofthefourbankingmarkets where 12. Underthe DOJGuidelines, a market is considered unconcen BONY and Mellon compete directly or in any other tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated if the post-merger HHI is between 1000 and 1800, and highly relevantbankingmarket.Accordingly, theBoardhasdeter concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof mined that competitive considerations are consistent with Justice ("DOJ") has informed the Board that a bank merger or approval. acquisitiongenerallywillnotbechallenged(inthe absence ofother factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI is at least 1800 and the merger increases the HHI more than 200 FINANCIAL, MANAGERIAL, AND SUPERVISORY points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds CONSIDERATIONS forscreeningbankmergersandacquisitionsforanticompetitiveeffects implicitly recognize the competitive effects of limited-purpose and Section3oftheBHCActrequirestheBoardtoconsiderthe othernondepositoryfinancialentities. financial and managerialresources andfuture prospects of 13. SeeUnitedStatesv.PhillipsburgNationalBank,399U.S.350, 359 (1970); United States v. Philadelphia National Bank, 374 U.S. the companies and depository institutions involved in the 321,356(1963). proposal and certain other supervisory factors. The Board 14. These banking markets, and the effectofthe proposal on the has considered these factors in light of all the facts of concentration ofbanking resources in the markets based on deposit data,aredescribedintheappendix. 15. In October 2006, BONY Lead Bank sold its retail banking 16. BONYandMellonalsoprovidethefollowingtypesofservices business, including 338 branches, and its regional middle market through their subsidiary banks: asset management, private wealth business, to JPMorgan Chase & Co., New York, New York. In managementandprivatebanking,andcashandtreasurymanagement. December200I,MellonLeadBanksolditsconsumer,smaIlbusiness, 17. These marketsharesare calculatedas ifStateStreetCorpora and regional banking businesses, including most ofits branches, to tion ("State Street") has consummated its proposed acquisition of Citizens Financial Group, Inc., Providence, Rhode Island. BONY Investors Financial Services Corp. ("IFS"), bothofBoston, Massa Lead Bankand Mellon Lead Bankeachcurrently maintainsa smaIl chusetts. State Street has filed an application with the Board for network of branches to serve private banking and private wealth approval to acquire IFS andthat applicationis pending. State Street managementclients. andIFSarealsosignificantprovidersofsecuritiesservices.

Legal Developments: Second Quarter, 2007 C83 record, including confidential reports of examination and Ion will take all necessary steps to ensure that sufficient other supervisory information received from the federal resources, training, and managerial efforts are dedicatedto and state supervisors of the organizations involved in the maintaining afully effective compliance risk-management proposal, publiclyreportedandotherfinancialinformation, system to ensure compliance withAMLstatutes and regu information provided by BONY, and public comments lationsthroughoutitsorganization. receivedonthe proposal. Basedonallthefactsofrecord,theBoardhasconcluded Inevaluatingfinancial factors inexpansionproposalsby thatconsiderationsrelating to the financial and managerial banking organizations, the Board reviews the financial resourcesandfutureprospectsoftheorganizationsinvolved condition of the organizations involved on both a parent intheproposalareconsistentwithapproval,asaretheother onlyand consolidatedbasis, as well asthe financial condi supervisory factors undertheBHCAct. 19 tion of the subsidiary banks and significant nonbanking operations.Inthisevaluation,theBoardconsidersavariety CONVENIENCE AND NEEDS CONSIDERATIONS of information, including capital adequacy, asset quality, and earnings performance. In assessing financial factors, Inactingonaproposalundersection3oftheBHCAct,the the Board consistently has considered capital adequacy to Boardisrequiredtoconsiderthe effectsofthe proposalon be especially important. The Board also evaluates the theconvenienceandneedsofthecommunitiestobeserved financial condition of the combined organization at con and take into account the records of the relevant insured summation,includingitscapitalposition,assetquality, and depositoryinstitutionsundertheCommunityReinvestment earningsprospects,andtheimpactoftheproposedfunding Act ("CRA").20 The CRA requires the federal financial ofthe transaction. supervisoryagenciestoencourageinsureddepositoryinsti The Board has considered carefully the proposal under tutionstohelpmeetthecreditneeds ofthe localcommuni the financial factors. BONY, Mellon, and their subsidiary ties in which they operate, consistent with their safe and banks currently are well capitalized, and BNYMellon and soundoperation,andrequirestheappropriatefederal finan each bankthat it would control would be well capitalized cial supervisory agency to take into account a relevant on consummation ofthe proposal. Based on its review of depository institution's record of meeting the creditneeds the record, the Board finds that BNYMellon has sufficient of its entire community, including low- and moderate financial resources to effect the proposal. The proposed income("LMI")neighborhoods,inevaluatingbankexpan transactionisstructuredas ashareexchange. sionary proposals.21 TheBoardalsohasconsideredthe managerialresources The Board has considered carefully all the facts of ofthe organizations involved and the proposed combined record,includingreportsofexaminationoftheCRAperfor organization. In addition, the Board has considered mance records of the subsidiary banks of BONY and BNYMellon'splansforimplementingtheproposal,includ Mellon,datareportedbyBONYundertheHomeMortgage ing the proposed management after consummation. In considering the managerial resources, the Board has re viewed theexaminationrecordsofBONYand Mellon and In May 2007, a suit was filed against BONYLead Bank by the theirsubsidiarybanks,includingassessmentsoftheirman Russian Federal Customs Service in a Russian court for damages agement, risk-managementsystems, andoperations. More allegedly resulting from moneytransfersthatBONYLead Bankhad madetoandfromRussiafrom 1996to 1999.Thesetransactionswere over, theBoardhasconsidered its supervisory experiences alsoconsideredinconnectionwiththeexecutionofthe2000Written and those ofthe otherrelevant banking supervisory agen Agreementandwereinvestigated bythe U.S. DepartmentofJustice, cieswiththeorganizationsandtheirrecordsofcompliance whichenteredinto a Non-Prosecution Agreement with BONYLead with applicable banking law, including anti-money Bankon November8,2005.The Boardwillcontinuetomonitorthe suitbytheRussianauthoritiesandnotesthatneitherBoardactionon laundering ("AML") laws. Banking organizations operat thisproposalnoranysupervisoryactionbytheBoardundertheBHC ing in the United States are required to implement and Actwould interferewiththeabilityofaforeign courttoresolveany operate effective AML programs. Accordingly, the Board litigationpertainingtothismatter. hasconsideredtheexistingAMLprogramsatBONY'sand 19. Acomrnenterexpressed concernabout BONY'srelationships Mellon's subsidiary banks, including recentenhancements withunaffiliatedthirdpartiesengagedinsubprimelending.BONYhas at BONYLeadBank.18The Board expects that BNYMel- 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 18. BONYLeadBankenteredintowrittenagreementsinFebruary subprime mortgages. Inaddition, BONYnoted thatitacts as aswap 2000 ("2000 Written Agreement") and April 2006 ("2006 Written counterparty in connection with some subprime loan securitization Agreement"), with the Federal Reserve Bank ofNew York and the transactionsandthatitsproprietarytreasuryportfolio,andsomefunds New York State Banking Department to address deficiencies in the forwhich BONYacts as investmentmanager, includesecuritiesthat bank's compliance with federal and stateAML statutes and regula may be partiallybacked by subprime assets. BONYhas represented tions. The written agreements included requirements that the bank thatitdoesnotplayanyroleinthelendingpracticesorcreditreview developandimplementplanstostrengthenindependenttestingofits processesofitscustomerswhoengageinsubprirnelending.TheBoard AML program, enhance training of its personnel in suspicious expectsallbankingorganizationstoconducttheiroperationsinasafe transaction identification and reporting, and improve its enhanced and sound manner with adequate systems to manage operational, due-diligenceprogram.TheBoardhasreviewedcarefullytheprogress compliance,andreputationalrisk. made by the bank in implementing the 2006 Written Agreement's 20. 12U.S.C. §2901 etseq.;12U.S.c. §1842(c)(2). requirementsandmorebroadlyinenhancingitsAMLcompliance. 21. 12U.S.c. §2903.

C84 Federal Reserve Bulletin 0 October 2007 Disclosure Act ("HMDA"),22 other information provided BONY Lead Bank and Mellon Lead Bank have been by BONY and Mellon, confidential supervisory informa designated as wholesale banks for purposes ofevaluating tion, and public comments received on the proposal. Two their CRA performances.28 Insured depository institutions commenters expressed concerns about BONY's record of designatedaswholesaleinstitutionsareevaluatedunderthe serving the creditand investmentneeds ofLMIcommuni communitydevelopmenttest, and examinersmayconsider ties in its assessment areas.23 One commenter alleged, the institution's community development investments, based on HMDA data, that BONY engaged in disparate loans, and services nationwide rather than only in the treatment ofminority individuals in home mortgage lend institution'sassessmentareas.29BONYLeadBankreceived ing. its wholesale bank designation after the 2005 Evaluation, while Mellon Lead Bank was evaluated as a wholesale A. eRA Performance Evaluations bankinits2005 evaluation. eRA Performance of BONY Lead Bank. As noted, As provided in the CRA, the Board has evaluated the BONYLeadBankreceivedanoverall "satisfactory"rating convenienceandneedsfactorinlightoftheevaluationsby inthe2005Evaluation.30Underthelendingtest,examiners the appropriate federal supervisors of the CRA perfor concludedthatthebankdemonstratedadequateresponsive mance records of the insured depository institutions of ness tothe retailcreditneedsofits tworating areas, given BONY and Mellon. An institution's most recent CRA the bank's capacity to meet the areas' credit needs and performance evaluationis a particularly important consid overallmarketconditions.3)Theydescribedthedistribution eration in the applications process because it represents a of HMDA-reportable loans among borrowers ofdifferent detailed, on-site evaluation of the institution's overall income levels as good and reported that the bank's geo record of performance under the CRA by its appropriate graphic distribution of loans to small businesses was federal supervisor.24 adequate.32 BONYLeadBankreceiveda "satisfactory"ratingatits Inthe interimbetweenthe 2005Evaluationandthesale most recent CRA performance evaluation by the Federal ofitsretailbankingbusinessinOctober2006,BONYLead Reserve Bank of New York, as ofMay 16, 2005 ("2005 Bankremainedanactivemortgagelenderinitsassessment Evaluation").25 BONY's othersubsidiary bank, TheBank areas.In2005,BONYLeadBankmademorethan$1.7bil ofNew York (Delaware), received a "satisfactory" rating lionofHMDA-reportableloansinitsassessmentareas.The at its most recent CRA performance evaluation by the bank's percentages of home purchase loans and refinance Federal Deposit Insurance Corporation ("FDIC"), as of loans originatedin LMIgeographies in the Bronx, Brook November21, 2005. MellonLeadBankreceivedan "out lyn, and Manhattan all exceeded the percentages for the standing" rating at its most recent CRA performance aggregateoflenders in2005.33 evaluationbytheOfficeoftheComptrolleroftheCurrency In the 2005 Evaluation, examiners commended BONY ("OCC"), as of May 15, 2005. Each of Mellon's other Lead Bank's community lending performance.34 During subsidiary banks received an "outstanding" or "satisfac tory" rating at its most recent CRA performance evalua tion.26 The existing eRA programs ofBONY's and Mel the bank was a state-chartered nonmember bank doing business as lon'ssubsidiarybankswillcontinueafterconsummationof Mellon 1stBusinessBank.MellonUnitedNationalBankreceivedan the proposal.27 "outstanding"ratingatitsmostrecentCRAevaluationbytheOCC,as ofDecember31,2003;andBostonSafeDepositandTrustCompany, the predecessorofMellonTrustofNew England, NationalAssocia tion,receivedan"outstanding"ratingatitslastCRAevaluationbythe 22. 12U.S.C.§280l etseq. FederalReserveBankofBoston,asofSeptember30,2002. 23. TheconunentersalsorequestedthatBONYimplementanum 27. BNYMellon has indicated that in the longer term, the CRA ber of CRA-related recommendations set forth in their comment programofthemergedorganizationwillcombinethebestelementsof letters.TheBoardhasconsistentlyfoundthatneithertheCRAnorthe theCRAprogramsofBONYandMellon. federalbankingagencies' CRAregulationsrequiredepositoryinstitu 28. See 12CFR228.25; 12CFR25.25. tionstomakepledgesorenterintocommitmentsoragreements with 29. Two commenters questioned how, as a designated wholesale any organization. See Bank ofAmerica Corporation, 93 Federal bank,BONYLeadBankwillservethecreditneedsofthecommuni ReserveBulletinC52,n. 27(2007). Instead,theBoardfocuses onthe ties inwhichitoperates. existing CRAperformance record ofan applicantand the programs 30. Full-scopeevaluationswereconductedinBONYLeadBank's that an applicant has in place to serve the credit needs ofits CRA assessmentareas in the New York multistate metropolitan area(CT assessmentareas atthetimetheBoardreviews aproposal underthe NJ-NY) ("New York metropolitan assessment area") and in the convenienceandneedsfactor. nonmetropolitan portionsofNewYorkState. 24. SeeInteragencyQuestionsandAnswersRegardingCommunity 31. Examiners noted thathousingpricesin thebank'sassessment Reinvestment,66FederalRegister36,620at36,640(2001). areasweredisproportionatelyhighincomparisonwithincomelevels, 25. Two commenters expressed concern over the "low satisfac whichmadehomeownershipverydifficultforLMIborrowers,particu tory"ratingsBONYLeadBankreceivedunderthelendingandservice larlyforlow-incomeborrowers. tests for itsassessmentareain the NewYork metropolitanarea. The 32. In this context, small businesses are businesses with gross bankreceived an "outstanding" rating underthe investmenttest for annualrevenuesof$1 millionorless. the assessmentarea, andexaminersconcludedthatthebank'srecord 33. Thelendingdataoftheaggregate lendersrepresentthecumu of CRA performance during the review period, when viewed as a lativelendingforallfinancialinstitutionsthatreportedHMDAdatain whole,meritedaratingof"satisfactory." amarket. 26. Mellon 1st Business Bank, National Association received a 34. One commenterasserted that BONY should provide commu "satisfactory" rating from the FDIC, as ofFebruary 11,2003, when nitydevelopmentloanswithprincipalamountsoflessthan$5million.

Legal Developments: Second Quarter, 2007 C85 the evaluationperiod, the bankmade community develop eRA Performance of Mellon Lead Bank. As noted, ment loans totaling $724 million, which supported afford Mellon Lead Bank received an overall "outstanding" ablehousingconstruction,economicrevitalizationprojects, rating in its May 2005 evaluation. Mellon Lead Bank andcommunitydevelopmentgroups,includingthose serv provides investment management, private banking, and ing persons with disabilities. Examiners reported that fiduciary servicestohigh-net-worthindividualsandinstitu 64 percent of the community development lending by tionsandisdesignatedasawholesalebankforpurposesof dollar volume helped develop affordable housing, which evaluatingitseRAperformance. examiners described as a significant need in the bank's Withrespecttocommunitydevelopmentlending,exam assessmentareas. iners commended Mellon Lead Bank's responsiveness to BONYLead Bank has continued its community devel the credit needs ofits assessment areas. Examiners noted opment lending since the 2005 Evaluation. BONY repre thatduring theevaluationperiod,MellonLeadBankmade sented that the bank extended more than 80 community more than $200 million in qualified community develop development loans totaling $612 million in its assessment ment investments. They indicated that the majority of areas in 2005 and 2006. MellonLeadBank'scommunity developmentinvestments In the 2005 Evaluation, BONYLead Bank received an were mortgage-backed securities and collateralized mort "outstanding"ratingundertheinvestmenttest.Thebank's gage obligations secured by properties in its combined new qualifying community development investments dur assessmentareas. ing the evaluation period totaled $176 million and were primarily in the form of affordable housing initiatives. B. HMDA and Fair Lending Record BONY Lead Bank also donated $3 million during the evaluationperiodtocommunitydevelopmentorganizations TheBoardhascarefullyconsideredthefairlendingrecords engaged in affordable housing development, social ser and HMDA data of BONY in light of public comment vices, and neighborhood revitalization efforts in its received on the proposal. A commenter alleged, based on NewYorkmetropolitan assessmentarea.35 2006 HMDA data, that BONY made higher-cost loans BONY Lead Bank represented that it made almost morefrequently toAfricanAmericanandHispanicborrow $174 million in qualified community development invest ers thantononminorityborrowersYSincesellingitsretail ments during 2005 and 2006. These included investments banking businessin October2006, BONYno longerorigi totaling more than $170 million in projects to create nates retail mortgage loans except in limited instances affordable housing through the low-income housing tax whenrequestedtodosobyits privatebankingclients.The credit program. In addition, the bank made more than Board has focused its analysis on the 2005 HMDA data $3 millionin community development grants during 2005 reportedbyBONYandits subsidiary banks.38 and 2006 to a range of groups involved in affordable Although the HMDAdata might reflectcertain dispari housing and communityandeconomicdevelopmentin the ties in the rates of loan applications, originations, and bank's assessmentareas. denialsamong membersofdifferentracialorethnicgroups In the 2005 evaluation, BONY Lead Bank received a incertain local areas, they provide an insufficient basis by "low satisfactory" rating for the service test. Examiners themselveson which toconcludewhetherornot BONYis noted that the bank's retail delivery systems were reason excluding or imposing higher costs on any group on a ably accessible to geographies and individuals ofdifferent prohibited basis. The Board recognizes that HMDA data income levels and reported that the bank provided an alone,evenwiththerecentadditionofpricinginformation, adequate level of community development services.36 provideonlylimitedinfonnationaboutthecoveredloans.39 Examiners reported that bank employees conducted semi HMDAdata, therefore, havelimitationsthatmake them an nars on first-time home buying, provided financial educa tion to LMI individuals, and served on the boards of community organizations that address the credit needs of 37. Beginning January 1, 2004, the HMDA data required to be LMI areasandindividuals. reportedbylenderswereexpandedtoincludepricinginformationfor loansonwhichtheannualpercentagerate(APR)exceedstheyieldfor U.S.Treasurysecuritiesofcomparablematurity3percentagepointsor more for first-lien mortgages and 5 percentage points or more for Although the Board has recognized that banks can help serve the second-lienmortgages(12CFR203.4). bankingneedsofcommunitiesbymakingcertainproductsorservices 38. The Board reviewed the 2005 HMDAdata for BONY Lead available, the CRA does not require an institution to provide any Bank for 2005 in its assessment area~. The Board notes that 2006 specifictypeofproducttoconsumers. HMDAdataarepreliminaryandthatfinaldatawillnotbeavailablefor 35. A commenter criticized the level of BONY Lead Bank's analysisuntilfall 2007. charitable contributions. The CRAdoes not require an institution to 39. Thedata,forexample,.donotaccountforthepossibilitythatan make any specific investment in, or contribution to, community institution'soutreacheffortsmayattractalargerproportionofmargin groups. ally qualified applicants than other institutions attract and do not 36. As noted, BONYLead Bank soldits retail bankingbusiness, provideabasisforanindependentassessmentofwhetheranapplicant including most of its branches, in October 2006 and has been who was denied creditwas, in fact, creditworthy. In addition, credit designatedawholesale bank for purposes ofthe CRA.Accordingly, history problems, excessive debt levels relative to income, and high anyfutureCRAevaluationsofthebankwillnotincludeareviewofits loanamountsrelativetothevalueoftherealestatecollateral(reasons delivery ofretail banking services but will consider the extent and mostfrequently citedforacreditdenial orhighercreditcost)arenot levelofinnovationofthebank'scommunitydevelopmentservices. availablefromHMDAdata.

C86 Federal Reserve Bulletin0 October 2007 inadequate basis, absentotherinformation, for concluding that the proposalwould provide customers ofbothorgani that an institution has engaged inillegal lending discrimi zations with increased credit availability and expanded nation. access to products and services. Based on a review ofthe TheBoard is nevertheless concerned whenHMDAdata entire record and for the reasons discussed above, the foraninstitutionindicatedisparitiesinlendingandbelieves Board has concluded that considerations relating to the thatalllendinginstitutionsareobligatedtoensurethattheir convenience and needs factor and the eRA performance lending practices are basedon criteriathatensure notonly recordsoftherelevantdepositoryinstitutionsareconsistent safe and sound lending but also equal access to credit by withapproval. creditworthyapplicantsregardlessoftheirraceorethnicity. Because ofthe limitations ofHMDAdata, the Board has CONCLUSION consideredthesedatacarefullyandtakenintoaccountother information, including examination reports that provide Based on the foregoing and all the facts of record, the on-siteevaluationsofcompliancewithfairlendinglawsby Board has determined that the application should be, and BONY and its subsidiaries. The Board also has consulted herebyis,approved.42Inreachingitsconclusion,theBoard with the Federal Reserve Bank of New York about the hasconsidered allthefacts ofrecordinlightofthe factors fair-lending compliancerecord ofBONYLeadBank. that it is required to consider under the BHC Act. The The record, including confidential supervisory informa Board'sapprovalisspecificallyconditionedoncompliance tion,indicatesthatBONYhastakenstepstoensurecompli by BNYMellon with the conditions imposed in this order ancewithfair lendingandotherconsumerprotectionlaws. andthecommitmentsmadetotheBoardinconnectionwith BONYhasafair-lendingcomplianceprogramthatincludes the application. For purposes of this action, the commit a second-review process; and periodic self-assessments mentsandconditionsaredeemedtobeconditionsimposed involvingstatisticalandregressionanalysestoidentifyany in writingby theBoardinconnectionwithits findings and indicator of disparate treatment or disparate impact. In decision and, as such, may be enforced in proceedings addition, BONY has a process for resolving fair lending underapplicable law. complaintsandrequiresemployeestocompletefair-lending The proposed transaction may not be consummated trainingsessions.BNYMellonhasrepresentedthatBONY's beforethe 15thcalendarday afterthe effectivedate ofthis current fair-lending compliance program will remain in order, orlaterthan three months afterthe effective date of placeafterconsummationofthe proposal.40 thisorderunlesssuch periodisextendedforgoodcause by The Board also has consideredthe HMDAdatain light theBoardortheFederalReserveBankofNewYork,acting of other information, including the programs described pursuanttodelegatedauthority. above and the overall performance records ofthe subsid By orderofthe Board ofGovernors, effectiveJune 14, iary banks of BONY under the CRA. These established 2007. efforts and records of performance demonstrate that the Voting for this action: Chairman Bernanke and Governors Warsh, institutionsareactiveinhelpingtomeetthecreditneedsof Kroszner,andMishkin.Absentandnotvoting:ViceChairmanKohn. theirentirecommunities. ROBERT DEY. FRIERSON C. Conclusion on Convenience and Needs and Deputy Secretary ofthe Board CRA Performance 42. OnecomrnenterrequestedthattheBoardholdapublicmeeting The Boardhasconsideredcarefully all the facts ofrecord, orhearingontheproposal.Section3oftheBHCActdoesnotrequire includingreportsofexaminationoftheCRArecordsofthe the Board to hold a public hearing on an application unless the institutions involved, information provided by BNYMel appropriatesupervisoryauthorityforthebanktobeacquiredmakesa lon, comments received on the proposal, and confidential written recommendationofdenial ofthe application.The Boardhas supervisory information.41 BNYMellon has represented notreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrnles,theBoardalsomay,initsdiscretion,holda public meeting or hearing on an application to acquire a bank if 40. BNYMellon has represented that in the longer term, the fair necessary or appropriate to clarify factual issues related to the lendingcomplianceprogramofthe mergedorganizationwouldcom application and to provide an opportunity for testimony (12 CPR bine the best elements of the fair-lending compliance programs of 225.l6(e),262.3(i)(2),262.25(d».TheBoardhasconsideredcarefully BONYandMellon. the commenter's request in light of all the facts of record. In the 41. One commenterexpressed concern about possiblejob losses Board's view, the commenter had ample opportunity to submit its resultingfrom this proposal. Theeffectofaproposedacquisition on views and, in fact, submitted written comments that the Board has employment in a community is not among the limited factors the considered carefully in acting on the proposal. The commenter's Board is authorized to considerunderthe BHCAct, and the conve requestfails todemonstratewhywrittencommentsdonotpresentits nience and needs factor has been interpreted consistently by the views adequately or why a meeting or hearing otherwise would be federal bankingagencies,thecourts,andtheCongresstorelatetothe necessaryorappropriate.Forthesereasons,andbasedonallthefacts effectofaproposalontheavailabilityandqualityofbankingservices ofrecord,theBoardhasdeterminedthatapublicmeetingorhearingis in the community. See, e.g., Wells Fargo & Company, 82 Federal notrequiredorwarrantedinthis case.Accordingly, therequestfora ReserveBulletin445,457(1996). publicmeetingorhearingontheproposalisdenied.

Legal Developments: Second Quarter, 2007 C87 Appendix BONYAND MELLON BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) WILMINGTON BANKING MARKET IN DELAWARE AND MARYLAND Wilmington-includes New Castle County, Delaware, and Cecil County, Maryland BONY Pre-Consummation............ 23 80,836 .08 1,949 0 36 Mellon ..................................... 25 35,649 .03 1,949 0 36 BNYMellon Post-Consummation ... 21 116,485 .11 1,949 0 36 Los ANGELES BANKING MARKET IN CALIFORNIA Los Angeles-includes the Los AngelesRanally Metro Area andthe towns ofActon in LosAngeles County andRosamondin Kern County BONYPre-Consummation............ 159 721 .00 799 0 174 Mellon ..................................... 20 2,602,448 .98 799 0 174 BNYMellon Post-Consummation ... 20 2,603,169 .98 799 0 174 BOSTON BANKING MARKET IN MASSACHUSETTS AND NEW HAMPSHIRE Boston-includes the Boston MA- NH Ranally Metro Area andthe towns ofAthol, Hubbardston, Orange, Petersham, Phillipston, Royalston, andWarwick in Massachusetts; and the towns of Antrim, Bennington, Deering, Dublin, Fitzwilliam, Francestown, Greenfield, Hancock, Jaffrey, Lyndeborough, Peterborough, Rindge, Sharon, andTemple in New Hampshire BONYPre-Consummation ............ 163 10 .00 1,123 0 167 Mellon ..................................... 4 8,353,381 6.45 1,123 0 167 BNYMellon Post-Consummation ... 4 8,353,391 6.45 1,123 0 167 MIAMI-FoRT LAUDERDALEAREA BANKING MARKET IN FLORIDA Miami-FortLauderdale-includes BrowardandDade counties BONYPre-Consummation............ 99 4 .00 984 0 103 Mellon ..................................... 14 1,371,208 1.37 984 0 103 BNYMellon Post-Consummation ... 14 1,371,212 1.37 984 0 103 NOTE: Dataare asofJune 3D,2006,andare adjustedtoreflectmerg ersand acquisitionsthrough March31,2007.All depositamounts arein thousands ofdollars. All rankings. market deposit shares. and HHis are basedonthriftdepositsweightedat50percent.

C88 Federal Reserve Bulletin0 October 2007 C-B-G, Inc. 3(c) of the BRC Act requires the Board to review each West Liberty, Iowa applicationin lightofcertainfactors specifiedin the BRC Act.Thesefactorsrequireconsiderationoftheeffectsofthe Order Approving the Acquisition of Shares proposal on competition, the financial and managerial resources and future prospects of the companies and of a Bank Holding Company depositoryinstitutionsconcerned,andtheconvenienceand needsofthe communitiestobe served.5 C-B-G, Inc. ("C-B-G"), a bank holding company within Inconsideringthesefactors, theBoardis mindfulofthe the meaning of the Bank Holding Company Act ("BHC potential adverse effects that contested acquisitions might Act"), has requested the Board's approval undersection 3 have on the financial and managerial resources of the of the BHC Act! to acquire additional shares, up to company to be acquired and the acquiring organization. 35 percent of the voting shares of Washington Bancorp The Board has long held that, if the statutory criteria are ("Washington") andthereby acquire an additionalinterest met, withholding approval based on other factors, such as inWashington'ssubsidiarybank,FederationBank,bothof whether the proposal is acceptable to the management of Washington, Iowa. At the time it filed this application, theorganizationtobeacquired,wouldbeoutsidethelimits C-B-Gowned24 percentofWashington's votingshares.2 oftheBoard'sdiscretionundertheBRCAct.6Asexplained Notice ofthe proposal, affording interested persons an below, the Board has carefully considered the statutory opportunitytosubmitcomments,hasbeenpublishedinthe criteria in lightofall the comments received and informa Federal Register(72 Federal Register8,161 (2007)).The tion submitted by C-B-G. The Board also has carefully time for filing comments has expired, and the Board has consideredallotheravailableinformation, includinginfor considered the application and all comments received in mationaccumulatedintheapplicationprocess,supervisory lightofthefactors setforth in section3ofthe BRCAct. information ofthe Board and other agencies, and relevant C-B-G,withbankingassetsofapproximately$193.1mil examination reports. In considering the statutory factors, lion, is the 69th largest depository organization in Iowa, particularly the effect ofthe proposal on the financial and controllingdepositsof$164.9million,whichrepresentless managerial resources of C-B-G, the Board has reviewed than 1 percent of total deposits of insured depository financial information, including the terms and cost ofthe institutions in Iowa ("state deposits").3 Washington, with proposal and the resources that C-B-G proposes to devote totalbankingassetsofapproximately$105.5million,isthe tothe transaction. 174th largest depository organization in Iowa, controlling $70.2 million in deposits. On consummation of the pro posal, C-B-G would become the 48th largest depository FINANCIAL, MANAGERIAL, AND SUPERVISORY organizationinIowa,controllingapproximately$235.1mil CONSIDERATIONS lion in deposits, which represents less than 1 percent of Section3oftheBRCActrequirestheBoardtoconsiderthe statedeposits. financial and managerial resources andfuture prospects of TheBoardreceivedcommentsobjectingtothe proposal the companies and depository institutions involved in the from the managementofWashingtonandfrom someofits proposal and certain other supervisory factors. The Board directorsandshareholders.TheBoardpreviouslyhasstated has considered these factors in light of all the facts of that, in evaluating acquisition proposals, it must apply the record, including confidential reports ofexamination and criteriaintheBRCActinthesamemannertoallproposals, othersupervisoryinformationfromtheprimaryfederaland regardlessofwhethertheyaresupportedoropposedbythe state supervisors of the organizations involved in the management of the institutions to be acquired.4 Section proposal,publiclyreportedandotherfinancial information, andinformationprovidedby C-B-G. 1. 12U.S.C.§1842. Several commenters expressed concerns about the 2. InApril 2005,the Board approved anapplicationbyC-B-Gto amountofleveragethatC-B-G hasreported onits balance acquire up to 24.35 percent of Washington's voting shares as a noncontrollinginvestment. C-B-G, Inc., 91 FederalReserveBulletin sheet, and the size of C-B-G's proposed investment in 421 (2005)("2005Order"). 3. Asset data are as of March 31, 2007. Statewide deposit and rankingdataareasofJune30,2006,andreflectmergerandacquisition 5. Inaddition,theBoardisrequiredbysection3(c)oftheBHCAct activity as ofApril 27, 2007. Deposit data reflect the total deposits to disapprove a proposal if the Board does not receive adequate reportedbyeachorganization'sinsureddepositoryinstitutionintheir assurancesthatitcanobtaininformationontheactivitiesoroperations Consolidated Reports ofCondition and Income or Thrift Financial of the company and its affiliates. See 12 U.S.c. §1842(c). One Reports. In this context,insureddepository institutionsincludecom cornmenter asserted that the proposed transaction would have a mercialbanks,savingsbanks,andsavingsassociations. negative impact on the local ownership and control ofWashington. 4. See, e.g., Juniata Valley Financial Corp., 92 Federal Reserve Such concerns are outside the statutory factors that the Board is Bulletin C171 (2006) ("Juniata,,); Central Pacific Financial Corp., authorizedtoconsiderwhenreviewinganapplicationundertheBHC 90FederalReserveBulletin93,94(2004)("CentralPacific");North Act. See Western Bancshares, Inc. v. BoardofGovernors, 480 F.2d Fork Bancorporation, Inc., 86 Federal Reserve Bulletin 767, 768 749(lOthCir. 1973). (2000) ("North Fork"); The Bank of New York Company. Inc., 6. See Juniata; Central Pacific; FleetBoston Financial Corpora 74FederalReserveBulletin257,259(l988)("BONY,,). tion,86FederalReserveBulletin751,752(2000);NorthFork;BONY.

Legal Developments: Second Quarter, 2007 C89 Washingtonin relation to C-B-G's total assets. Comment pects of the organizations involved in the proposal are ersalsocontendedthattheproposalcouldimperilC-B-G's consistent with approval, as are the other supervisory future financial condition.7 factors underthe BHCAct.9 Inevaluatingfinancialfactors inexpansionproposalsby banking organizations, the Board reviews the financial COMPETITIVE AND CONVENIENCE AND NEEDS condition of the organizations involved both on a parent CONSIDERATIONS only and on a consolidated basis, as well as the financial condition of the subsidiary depository institutions and of Section 3 of the BHC Act prohibits the Board from their significantnonbanking operations. In this evaluation, approving a proposal that would result in a monopoly or the Board considers a variety of information, including would be in furtherance ofany attempt to monopolize the capital adequacy, asset quality, and earnings performance. business ofbanking in any relevant banking market. Sec In assessing financial factors, the Board consistently has tion 3also prohibits the Board from approving a proposal consideredcapitaladequacytobeespeciallyimportant.The thatwouldsubstantially lessencompetitioninany relevant Board also evaluates the financial condition of the com banking market, unless the Board finds that the anticom bined organization at consummation, including its capital petitiveeffectsoftheproposalclearlyareoutweighedinthe position, asset quality, and earnings prospects, and the public interest by the probable effect of the proposal in impactoftheproposedfunding ofthe transaction. meetingtheconvenienceandneedsofthecommunitytobe TheBoardhasconsideredcarefullythefinancial factors served.lO C-B-G and Washington do not compete directly oftheproposal.BothC-B-G'sandWashington'ssubsidiary in any relevant banking market. Based on all the facts of depository institutions currently are well capitalized and record, theBoardhasconcludedthatconsummationofthe wouldremainsoonconsummation. Basedonitsreviewof proposal would have no significantly adverse effect on the record, the Board also finds that C-B-G has sufficient competitionorontheconcentrationofbankingresourcesin financial resources to effect the proposal. The proposed any relevant banking market and that competitive factors transaction is structured as a cash purchase ofshares, and areconsistentwithapproval. C-B-Gwoulduseexistingresources tofund thepurchase. In addition, considerations relating to the convenience TheBoardalsohasconsideredthemanagerialresources and needs ofthe communities to be served, including the of C-B-G, Washington, and their subsidiary depository records of performance of the institutions involved under institutions. The Board has reviewed the examination the Community ReinvestmentAct ("CRA"),ll are consis recordsoftheseinstitutions,includingassessmentsoftheir tent with approval of the application. Community Bank, management,risk-managementsystems, andoperations.In C-B-G's sole subsidiary bank, received a "satisfactory" addition, the Board has considered its supervisory experi rating and Federation Bank received an "outstanding" encesandthoseoftheotherrelevantbankingagencies with rating at their most recent evaluations for CRA perfor the organizations and their records of compliance with mance by the FDIC.12 C-B-G has represented that the applicable banking laws, including anti-money-laundering proposal will not result in any changes in the services or laws. productsoffered byFederationBank.13 Some commenters contended that the voting-rights restrictionsonshareholderswhoownmorethan 10percent CONCLUSION ofWashington's sharescould preventC-B-Gfrom serving as asourceoffinancial and managerialstrengthto Federa Based on the foregoing and all the facts of record, the tion Bank, as required under the Board's Regulation y'8 Board has determined that the application should be, and C-B-Ghasacknowledgedthat, ifitdoes acquirecontrolof herebyis,approved.14Inreachingitsconclusion,theBoard 25 percent or more of Washington's shares, it will be required, ifnecessary, to serveas asourceoffinancial and 9. Several commentersexpressed concernthatthe proposal could managerial strength to Federation Bank. The Board has subjectFederation Bankto liability underthe cross-guarantee provi carefully considered the capacity of C-B-G to serve as a sionoftheFederalDepositInsuranceAct, 12U.S.c.§1815(e)("FDI sourceoffinancialandmanagerialstrengthtoitssubsidiary Act"), in the event that a subsidiary bank ofC-B-G were to fail or require assistance from the Federal Deposit Insurance Corporation banks, including Federation Bank, on approval and con ("FDIC").TheBoardnotesthattheapplicationofthisprovisionofthe summationofthe proposal. FDIActisamatterthatwouldbedecidedbytheFDIC. Based on all the facts ofrecord, including public com 10. 12U.S.c.§1842(c)(l). ments,theBoardhasconcludedthatconsiderationsrelating 11. 12U.S.C.§2901etseq. 12. ThemostrecentCRAperformanceevaluationsofCommunity to the financial and managerial resources and future pros- BankandFederationBankwereasofMay2004andDecember2004, respectively.WiltonSavingsBank,asubsidiarybankofC-B-Gwhich was merged into Community Bank in January 2006, received a 7. The commenters asserted that C-B-G would have onlylimited "satisfactory"ratingatitslastCRAevaluation,asofNovember2003. influenceoverWashington'soperationsduetoaprovisioninWashing 13. One commenter contended that the proposal would have a ton's articles of incorporation that restricts the voting rights of deleteriouseffectontheservicesFederationBankprovidestoitslocal shareholderswho own morethan 10percentofWashington's voting community. shares.TheBoardhasanalyzedtheeffectoftheproposalonC-B-G's 14. Inconnectionwith the application that the Boardapproved in generalfinancialconditionmorebroadly. 2005, C-B-G made commitmentsto ensure that it would not control 8. See 12CFR225.4(a)(l). WashingtonorFederationBankforpurposesofthe BHCAct. These

C90 Federal Reserve Bulletin0 October 2007 hasconsideredallthe facts ofrecord inlightofthefactors considered the application and all comments received in that it is required to consider under the BHC Act. The lightofthefactors setforth in section3oftheBHCAct. Board'sapprovalisspecificallyconditionedoncompliance First Busey, with total consolidated assets of approxi byC-B-Gwiththeconditionsimposedinthisorderandthe mately$2.5billion,controlstwosubsidiaryinsureddeposi commitments made to the Board in connection with the tory institutions that operate in Illinois, Indiana, and application. Forpurposesofthis action, theconditions and Florida: Busey Bank, also in Urbana, and Busey Bank, commitments are deemed to be conditions imposed in NationalAssociation,PortCharlotte,Florida.FirstBuseyis writing by the Board in connection with its findings and the33rdlargestdepositoryorganizationinIllinois,control decision herein and, as such, may be enforced in proceed ling deposits of $1.5 billion, which represent less than ingsunderapplicablelaw. Ipercentoftotaldepositsofinsureddepositoryinstitutions The proposed transaction may not be consummated inIllinois("statedeposits").2 beforethe 15thcalendarday afterthe effectivedate ofthis Main Street, with total consolidated assets of approxi order, orlaterthan three months afterthe effectivedate of mately$1.5billion,controlsoneinsureddepositoryinstitu thisorder,unlesssuchperiodisextendedforgoodcauseby tion that operates only in Illinois. Main Street is the 36th the Boardorthe FederalReserve BankofChicago, acting largest depository organization in Illinois, controlling pursuanttodelegatedauthority. depositsofapproximately $1.2billion. By orderofthe Board ofGovernors, effective May 24, Onconsummationofthisproposal,andafteraccounting 2007. forthe proposeddivestiture, FirstBuseywouldbecomethe 24thlargestdepository organization in Illinois, controlling Votingforthis action: ChairmanBernanke,Vice Chairman Kohn, depositsofapproximately$2.7billion,whichrepresentless andGovernorsWarsh,Kroszner,andMishkin. than 1percentofstatedeposits. JENNIFER J. JOHNSON Secretary ofthe Board COMPETITIVE CONSIDERATIONS Section 3 of the BHC Act prohibits the Board from First Busey Corporation approving a proposal that would result in a monopoly or Urbana, Illinois would be in furtherance ofany attempt to monopolize the business of banking in any relevant banking market. The Order Approving the Merger of Bank BHC Act also prohibits the Board from approving a proposalthatwouldsubstantiallylessencompetitioninany Holding Companies relevantbankingmarket, unlessthe anticompetitiveeffects oftheproposalareclearlyoutweighedinthepublicinterest First Busey Corporation ("First Busey"), a bank holding by the probable effect of the proposal in meeting the company within the meaning of the Bank Holding Com convenienceandneedsofthe community tobe served.3 panyAct("BHCAct"),hasrequestedtheBoard'sapproval FirstBusey and Main Streethave subsidiary depository undersection3oftheBHCAct1tomergewithMainStreet institutions that compete directly in three markets in Illi Trust, Inc. ("Main Street") andthereby acquire its subsid nois: Bloomington-Normal, Champaign-Urbana, and Peo iary bank, Main StreetBank &Trust, both ofChampaign, ria.4 The Board has reviewed carefully the competitive Illinois. effects ofthe proposalineachofthese bankingmarketsin Notice ofthe proposal, affording interested persons an light ofall the facts ofrecord. In particular, the Boardhas opportunitytosubmitcomments,hasbeenpublishedinthe consideredthenumberofcompetitorsthatwouldremainin FederalRegister(71 FederalRegister76,339(2006».The thebanking markets, therelative sharesoftotaldepositsin time for filing comments has expired, and the Board has depository institutions in the markets ("market deposits") controlledbyFirstBusey andMain Street,5 the concentra tion level ofmarketdeposits and the increase in that level commitments arelistedinthe appendix to the 2005 Orderand were modified by the Board's letter dated October 25, 2006. One com 2. AssetdataareasofMarch31.2007,andstatewidedepositand menterurged that the Board continue to require C-B-G to abide by ranking data are as of June 30, 2006, and reflect merger activity thosecommitmentsifthe Boardapproves C-B-G'scurrentproposal. throughMay21,2007.Inthiscontext,insureddepositoryinstitutions C-B-G proposes to own up to 35 percent of the voting shares of includecommercialbanks,savingsbanks,andsavingsassociations. Washington and, thus, would be deemed to control Washington for 3. 12U.S.c. §I842(c)(I). purposesoftheBHCActwithoutregardtothepreviouscommitments 4. Thesebankingmarketsaredescribedbelowandintheappendix. considered.See12U.S.c.§1841(a)(2)(A).Accordingly,theBoardhas 5. DepositandmarketsharedataareasofJune30,2006,adjusted determinedinthiscasenottoimposetherestrictionscontainedinthe toreflectsubsequentmergersandacquisitionsthroughMay21.2007, commitments,andnottorequirecompliancewiththecommitmentson andarebasedoncalculationsinwhichthedepositsofthriftinstitutions consummationoftheproposal.Forthereasonsdiscussedinthisorder, are included at 50 percent. The Board previously has indicatedthat the Board has concluded that C-B-G meets the statutory factors thrift institutions have become, or have the potential to become, requiredtoown morethan25 percentofWashingtonandtoexercise significant competitors of commercial banks. See. e.g., Midwest therightsattendanttothatlevelofownership. Financial Group, 75 Federal Reserve Bulletin 386 (1989); National City Corporation, 70FederalReserveBulletin743(1984).Thus,the 1. 12U.S.C.§1842. Board regularly has included thrift deposits in the market share

Legal Developments: Second Quarter, 2007 C91 as measured by the Herfindahl-Hirschman Index ("HHI") would remain the largest depository institution in the underthe DepartmentofJusticeMergerGuidelines ("DOJ market, controlling deposits ofapproximately $1.6billion, Guidelines"),6 other characteristics of the markets, and which wouldrepresentnotmore than36percentofmarket commitments made by FirstBusey to divest five branches deposits.TheHHIwouldnotincreasemorethan506points of Main Street Bank & Trust in the Champaign-Urbana to 1561.9 bankingmarket. The application raises special concerns because First Busey, the largest institution in the banking market, pro A. Banking Market Warranting Special Scrutiny posestomergewiththemarket'ssecondlargestcompetitor. Nootherinstitutioncontrolsmorethan6percentofmarket First Busey and Main Street compete directly in one deposits. TheBoardhas previouslyrecognized that merger banking market, Champaign-Urbana,7 that warrants a de proposals involving the largest depository institutions in tailed review of the competitive effects of the proposal. markets structured like the Champaign-Urbana market First Busey's market share on consummation of the pro warrant close review due to the size of those institutions posal,includingproposeddivestiture,wouldexceed35per relative to other market competitors. The Board, there IO centin this market. fore, has considered whether other factors either mitigate Busey Bank is the largest depository institution in the the competitive effects ofthe proposal orindicate that the Champaign-Urbana banking market, controlling deposits proposal would have a significantly adverse effect on of approximately $1.1 billion, which represent approxi competitionin the market.ll mately 27 percentofmarketdeposits. Main StreetBank& Anumberoffactorsindicatethattheincreaseinconcen Trust is the second largest depository institution in the tration in the Champaign-Urbanabanking market, as mea market, controlling deposits ofapproximately $538.5 mil sured by the market share of the combined organization, lion, which represent approximately 13 percent ofmarket overstates the potentialcompetitive effects ofthe proposal deposits.Toreducethe potentialadverseeffectsoncompe inthemarket.Afterconsummation,andtakingintoaccount tition in the Champaign-Urbana banking market, First the proposed divestiture, at least 39 other insured deposi BuseyhascommittedtodivestfivebranchesofMainStreet tory institutions wouldcontinue to compete in the market. Bank & Trust that have at least $110.2 million in total Inaddition,theproposeddivestitureto abankingorganiza deposits to another insured depository organization in the tion operating in the Champaign-Urbana banking market market.8 On consummation of the proposed merger, and would strengthen the competitive position ofan in-market after accounting for the proposed divestiture, First Busey participant. TheBoardnotes thattwo community creditunions also exert a competitive influence in the Champaign-Urbana calculationona50percentweightedbasis.See. e.g.. FirstHawaiian. banking market.12 Both institutions offer a wide range of Inc.,77 FederalReserveBulletin52(1991). consumerproducts, operatestreet-levelbranches, and have 6. Under the DOJ Guidelines, a market is considered unconcen tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated if the post-merger HHI is between 1000 and 1800, and highly concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof BankAmerica Corporation, 78 FederalReserve Bulletin 338 (1992); Justice ("DOJ") has informed the Board that a bank merger or United New Mexico Financial Corporation, 77 Federal Reserve acquisition generally will not bechallenged (in the absenceofother Bulletin484(1991). factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI 9. Thecalculationsofmarketshareand concentrationinclude the is at least 1800 and the merger increases the HHI more than 200 weightingat 100percentofdeposits controlled bytwothrift institu points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds tions in the market. The Board previously has indicated that it may forscreeningbankmergersandacquisitionsforanticompetitiveeffects considerthe competitiveness ofa thrift institution at a level greater implicitly recognize the competitive effects of limited-purpose and than 50 percent of its deposits if competition from the institution othernondepositoryfinancialentities. closelyapproximatescompetitionfromacommercialbank. See, e.g., 7. The Champaign-Urbana banking market is defined as Cham BankNorthGroup, Inc. 75 FederalReserveBulletin703 (1989).The paign County; Ford County, excluding Brenton. Mona, Pella, and thriftinstitutionsin the Champaign-Urbanabanking marketserveas Rogers townships; Artesia and Loda townships in Iroquois County; significantsourcesofcommercialloansandprovideabroadrangeof Butler, Middlefork, Pilot, Oakwood,and VancetownshipsinVermil consumer, mortgage,andotherbankingproducts.Thesethriftinstitu ionCounty;Garret,Tuscola,Camargo,Murdock,andNewmantown tions have ratios of commercial and industrial loans to assets of shipsinDouglasCounty;PiattCounty,excludingWillowBranchand approximately6 percentand8percent,whichare comparableto the CerroGordotownships;SantaAnnatownshipinDeWittCounty;and national average for all commercial banks. Competition from these BellflowertownshipinMcLeanCounty,allinIllinois. thrift institutions, therefore, closely approximates competition from 8. First Busey has committed that, before consummation of the commercialbanks. See FirstUnion Corporation, 84FederalReserve proposed merger, it will execute an agreement for the proposed Bulletin489(1998). divestitureintheChampaign-Urbanabankingmarketwithapurchaser 10. SeeFirstarCorporation,87FederalReserveBulletin236,238 that the Board determines to be competitively suitable. First Busey (2001). also has committedtocompletethe divestiture within 180days after II. The number and strength offactors necessary to mitigate the consummation ofthe proposed merger. In addition, First Busey has competitiveeffectsofaproposaldependonthesizeoftheincreasein committed that, if it is unsuccessful in completing the proposed andresultinglevelofconcentrationinabankingmarket.SeeNations divestiture within such time period, it will transfer any unsold BankCorp.,84FederalReserveBulletin129(1998). branchesto anindependenttrusteewhowillbeinstructed to sell the 12. The Board previously has considered the competitiveness of branches to an alternate purchaserorpurchasers in accordance with certainactive credit unions as a mitigatingfactor. See, e.g.• Regions thetermsofthisorderandwithoutregardtoprice.Boththetrusteeand Financial Corporation. 93 Federal Reserve Bulletin CI6 (2007); anyalternatepurchasermustbedeemedacceptablebytheBoard.See Wachovia Corporation, 92 Federal Reserve Bulletin CI83 (2006);

C92 Federal Reserve BulletinD October 2007 membershipsopentoalmostalltheresidentsinthemarket. Basedonallthefactsofrecord,theBoardconcludesthat Inthislight,theBoardconcludesthattheiractivitiesinthis consummation of the proposal would not have a signifi banking market exert sufficient competitive influence that cantly adverse effect on competition or on the concentra mitigate, in part, the potential competitive effects of the tion ofresources in the three banking markets where First proposal. 13 Busey and Main Street compete directly or in any other Moreover,therecordofrecententryintotheChampaign relevantbankingmarket.Accordingly,theBoardhasdeter Urbana banking market evidences its attractiveness for mined that competitive considerations are consistent with entry. Since2002, five depository institutionshaveentered approval. the market de novo, and nine depository institutions have entered the market by acquisition. Otherfactors also indi cate that the market remains attractive for entry. For FINANCIAL, MANAGERIAL, AND SUPERVISORY example, from 2002to2005, the market'saverageannual CONSIDERATIONS ized income growth exceeded the average annualized incomegrowth for all metropolitanareasinIllinois. Section3oftheBHCActrequirestheBoardtoconsiderthe Based on all the facts of record and for the reasons financial and managerial resources and future prospects of discussed above, the Board believes thatcompetitive con the companies and depository institutions involved in the siderations in the Champaign-Urbana banking market are proposal and certain other supervisory factors. The Board consistentwith approval in this case. The Boardcontinues has considered these factors in light of all the facts of to have concerns, however, about the structure of this record, includingconfidentialreportsofexamination,other banking market and believes that future mergers in the supervisoryinformationfrom theprimaryfederal and state market involving First Busey or its successors in would supervisors of the organizations involved in the proposal, warrantspecialconsideration.TheBoardintendsto scruti publicly reported and other financial information, and nize carefully any future acquisition proposal that would information providedbyFirstBusey. increase First Busey's market share in the Champaign Inevaluatingfinancialfactorsinexpansionproposalsby Urbanabankingmarket. banking organizations, the Board reviews the financial condition ofthe organizations involved both on a parent only and on a consolidated basis, as well as the financial B. Banking Markets within Established Guidelines condition of the subsidiary depository institutions and Consummation of the proposal in the remaining banking significant nonbanking operations. In this evaluation, the markets, Bloomington-Normal and Peoria, would be con Boardconsidersavarietyofinformation, includingcapital sistent with Board precedent and within the thresholds in adequacy, asset quality, and earnings performance. In the DO} Guidelines withoutdivestitures.14On consumma assessing financial factors, the Board consistently has tion of the proposal, the Bloomington-Normal banking consideredcapitaladequacytobeespeciallyimportant.The market would remain highly concentrated, and the Peoria Board also evaluates the financial condition of the com banking markets wouldremain unconcentrated. Numerous bined organization at consummation, including its capital competitorswouldremainin both bankingmarkets. position, asset quality, and earnings prospects, and the impactofthe proposedfunding ofthe transaction. C. Agency Views and Conclusion on Competitive TheBoardhasconsideredcarefullythe financial factors Considerations ofthe proposal. FirstBusey,MainStreet, andtheirsubsid iary depository institutions currently are well capitalized The DO} also has conducted a detailed review of the and would remain so on consummation of the proposal. potential competitive effects of the proposal and has Basedonitsreviewoftherecord, the Boardalsofinds that advised the Board that consummation of the proposal, First Busey has sufficient financial resources to effect the taking into account the proposed divestiture, would not proposal. The proposed transaction is structured primarily likely haveasignificantly adverseeffecton competitionin as ashareexchange. any relevant banking market. In addition, the appropriate TheBoardalsohasconsideredthe managerialresources banking agencies have been afforded an opportunity to ofFirstBusey,MainStreet,andtheirsubsidiarydepository commentandhavenot objectedtothe proposal. institutions. The Board has reviewed the examination recordsofthese institutions,includingassessmentsoftheir management,risk-managementsystems, andoperations.In F.N.B. Corporation,90FederalReserveBulletin481(2004);Gateway addition, the Board has considered its supervisory experi Bank& TrustCo.,90FederalReserveBulletin547(2004). ences and those ofthe otherrelevant banking supervisory 13. The two community credit unions control approximately agencies with the organizations and their records ofcom $138.8 million in deposits in the market, which represent approxi mately 2 percentofmarketdeposits ona50percentweightedbasis. pliancewithapplicablebankinglawsandwithanti-money Accountingfortherevisedweightingsofthese deposits, FirstBusey launderinglaws. FirstBusey, MainStreetandtheirsubsid would control approximately 36 percentofmarket deposits on con iary depository institutions are considered well managed. summationoftheproposal,andtheHHIwouldnotincreasemorethan The Board also has considered First Busey's plans for 490pointsto 1514. implementing the proposal, including the proposed man 14. The effects of the proposal on the concentration ofbanking resourcesinthesemarketsaredescribedintheappendix. agementafterconsummation.

Legal Developments: Second Quarter, 2007 C93 Basedonallthefactsofrecord,theBoardhasconcluded beservedandtheCRAperformancerecordsoftherelevant thatconsiderations relating to the financial and managerial depository institutions areconsistent withapproval. resourcesandfutureprospectsoftheorganizationsinvolved intheproposalareconsistentwithapproval,asaretheother CONCLUSION supervisoryfactors undertheBRCAct. Based on the foregoing and all the facts of record, the CONVENIENCE AND NEEDS CONSIDERATIONS Board has determined that the application should be, and hereby is, approved. In reaching its conclusion, the Board Inactingonaproposalundersection3oftheBRCAct, the hasconsideredall thefacts ofrecord inlightofthe factors Boardalso mustconsiderthe effectsofthe proposalonthe that it is required to consider under the BRC Act. The convenienceandneedsofthecommunitiestobeservedand Board'sapprovalisspecificallyconditionedoncompliance take into account the records of the relevant insured by First Busey with the conditions imposed in this order depositoryinstitutionsundertheCommunityReinvestment andthecommitmentsmadetotheBoardinconnectionwith Act ("CRA").I5 Busey Bank received an "outstanding" the application, including the divestiture commitment dis rating at its most recent CRA performance evaluation by cussed above. For purposes of this action, the conditions theFederalInsuranceDepositCorporation("FDIC"),asof andcommitments are deemed to beconditionsimposedin December 1, 2005.16MainStreetBank&Trustreceiveda writing by the Board in connection with its findings and "satisfactory" rating at its most recent CRA performance decision herein and, as such, may be enforced in proceed evaluation by the FDIC, as of December 1, 2006. After ings underapplicablelaw. consummationofthe proposal, First Busey plans to main The proposed transaction may not be consummated tain Main Street Bank & Trust's CRA policies until Main beforethe 15thcalendarday aftertheeffectivedate ofthis Street Bank & Trust is merged into Busey Bank. First order, orlaterthan three months afterthe effective date of Busey has represented that consummation ofthe proposal thisorder,unlesssuchperiodisextendedforgoodcauseby would allow it to provide a broader range of financial the Boardorthe FederalReserve BankofChicago, acting products and services over a larger area. Based on all the pursuanttodelegatedauthority. facts of record, the Board concludes that considerations By orderofthe Board ofGovernors, effective June 14, relating to the convenience and needsofthe community to 2007. Voting forthis action: ChairmanBernanke and Governors Warsh, 15. 12U.S.c. §2901 etseq.;12U.S.C.§1842(c)(2). Kroszner,andMishkin.Absentandnotvoting:ViceChairmanKohn. 16. BuseyBank,NationalAssociationwasrated "satisfactory"by the OfficeoftheComptrollerofthe Currency,as ofAugust 2,2004, whenitwasdoingbusinessasTatponCoastNationalBankandbefore ROBERT DEY. FRIERSON itsacquisitionbyFirstBusey. Deputy Secretary ofthe Board

C94 Federal Reserve Bulletin0 October 2007 Appendix FIRST BUSEYAND MAIN STREET BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DO} GUIDELINES WITHOUT DIVESTITURES Market Amount Remaining deposit Resulting Increase in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) ILLINOIS BANKING MARKETS Bloomington-Normal-McLean County; andEl Paso, Kansas, Panola, andMinonk townships in Woodford County First Busey Pre-Consummation ...... 4 242.6 mil. 10.1 1,238 134 27 Main Street ............................... 5 158.5 mil. 6.7 1,238 134 27 FirstBusey Post-Consummation .... 2 401.1 mil. 16.8 1,238 134 27 Peoria-Peoria and Tazewell Counties, and Woodford County, excluding El Paso, Kansas, Panola, andMinonk townships First Busey Pre-Consummation ...... 12 123.0mil. 2.6 859 1 33 Main Street ............................... 32 10.7 mil. .2 859 1 33 FirstBusey Post-Consummation .... 12 133.7 mil. 2.8 859 1 33 NOTE: Data are as of June 30, 2006, and reflect merger activity through May 21, 2007. Deposit amounts are unweighted. All rankings, marketdepositshares, andHHlsarebasedonthriftdepositsweightedat 50percent. Huntington Bancshares Incorporated requestedtheBoard'sapprovalundersection3oftheBHC Columbus, Ohio Act to become a bank holding company and merge with Sky. Notice of the proposal, affording interested persons an Penguin Acquisition, LLC opportunity to submit comments, has been published (72 Federal Register 6242 (2007)). The time for filing Baltimore, Maryland comments has expired, and the Board has considered the proposal and all comments received in light ofthe factors Order Approving the Merger of Bank setforth intheBHCAct.3 Holding Companies and the Formation of a Huntington, with total consolidated assets of approxi Bank Holding Company mately $35.3 billion, is the 46thlargestdepository organi zation in the United States.4 Huntington controls one Huntington Bancshares Incorporated ("Huntington"), a depository institution, The Huntington National Bank financial holdingcompanywithinthe meaningoftheBank ("HNB"),5 also in Columbus, that operates in six states6 Holding Company Act ("BHC Act"), has requested the and engages in numerous nonbanking activities that are Board's approval under section 3 of the BHC Act! to permissible under the BHC Act. Huntington is the fourth acquire Sky Financial Group, Inc. ("Sky"), Bowling largestdepository organizationinOhio, controllingdepos Green,anditssubsidiarybank, SkyBank, Salineville,both itsofapproximately $16.3billion. ofOhio.2 In addition, Huntington's wholly owned subsid iary, PenguinAcquisition, LLC, Baltimore, Maryland, has 3. Threecommentersexpressedconcernsaboutvarious aspectsof theproposal. 4. AssetandrankingdataareasofDecember31,2006. 1. 12U.S.C.§1842. 5. In thiscontext,insureddepository institutionsincludecommer 2. In addition, Huntington proposes to acquire the nonbanking cialbanks,savingsbanks,andsavingsassociations. subsidiariesofSkyinaccordance withsection4(k)ofthe BHCAct, 6. Huntington operates branches in Ohio, Rorida, Indiana, Ken 12U.S.c.§1843(k). tucky,Michigan,andWestVirginia.

Legal Developments: Second Quarter, 2007 C95 Sky, with total consolidated assets of approximately COMPETITIVE CONSIDERATIONS $18 billion, controls Sky Bank, which operates in Ohio, Indiana, Michigan, Pennsylvania, and West Virginia.? Sky Section 3 of the BHC Act prohibits the Board from also engages in a broad range of permissible nonbanking approving a proposal that would result in a monopoly or activities. In Ohio, Sky is the seventh largest depository would be in furtherance of an attempt to monopolize the organization,controllingdepositsofapproximately$8.6bil business of banking in any relevant banking market. The lion. BHCAct also prohibits the Board from approving abank On consummation of the proposal, Huntington would acquisition that would substantially lessen competition in any relevant banking market, unless the anticompetitive becomethe34thlargestdepositoryinstitutionintheUnited effectsofthe proposalare clearlyoutweighedinthe public States, with total consolidated assets of approximately interest by the probable effect of the proposal in meeting $53billion. Huntington wouldcontroldeposits ofapproxi mately $38.3billion,whichrepresentlessthan 1percentof theconvenienceandneedsofthecommunitytobeserved.II Huntington and Sky have subsidiary depository institu the total amount ofdeposits ofinsured depository institu tions that compete directly in the following 12 banking tions in the United States. In Ohio, Huntington would markets: Cleveland, Columbus, Dayton, Akron, Toledo, become the third largest depository organization, control Canton, Lima, Dover-New Philadelphia, Fremont, and ling deposits ofapproximately $24.9 billion, which repre Logan banking markets in Ohio; the Indianapolis banking sent approximately 11.9 percent of the total amount of market in Indiana; and the Cincinnati multistate banking deposits of insured depository institutions in the state market in Ohio, Indiana, and Kentucky. The Board has ("statedeposits"). reviewed carefully the competitive effects ofthe proposal ineachofthese bankingmarketsinlightofall the facts of record. In particular, the Boardhasconsideredthe number INTERSTATEANALYSIS of competitors that would remain in the markets, the relative shares of total deposits in depository institutions Section 3(d) ofthe BHCActallows the Boardto approve controlledbyHuntingtonandSkyinthe markets("market an application by a bank holding company to acquire deposits"),12theconcentrationlevelofmarketdepositsand control of a bank located in a state other than the bank theincreasesinthoselevelsasmeasuredbytheHerfindahl holding company's home state if certain conditions are HirschmanIndex("HHI")undertheDepartmentofJustice met. For purposes of the BHC Act, the home state of Merger Guidelines ("DOJ Guidelines"),13 and otherchar Huntington is Ohio,S and Sky is located in Ohio, Indiana, acteristicsofthe markets. Michigan,Pennsylvania, andWestVirginia.9 Consummationoftheproposalwouldbeconsistentwith Based on a review of all the facts of record, including Board precedent and within the thresholds in the DOJ relevant state statutes, the Board finds that the conditions Guidelinesin all 12 banking markets.14On consummation for an interstate acquisition enumerated in section 3(d) of of the proposal, 11 markets would remain moderately the BHCActare met in this case.1OIn lightofall the facts concentratedandonemarketwouldremainhighlyconcenof record, the Board is permitted to approve the proposal undersection3(d)ofthe BHCAct. 11. 12U.S.C.§I842(c)(I). 12. DepositandmarketsharedataareasofJune30,2006,adjusted toreflectmergersandacquisitionsthroughFebruary7,2007.andare 7. SkyalsocontrolsSkyTrust, NationalAssociation, PepperPike, based on calculations in which the deposits ofthrift institutions are Ohio ("Sky Trust"), a limited-purpose depository institution that includedat50percent.TheBoardpreviouslyhasindicatedthatthrift providesonlytrustservices. institutionshavebecome,orhavethepotentialtobecome,significant 8. See 12U.S.c. §1842(d).Abankholdingcompany'shomestate competitorsofcommercialbanks.See.e.g.,MidwestFinancialGroup, is the state in which the total deposits ofall bankingsubsidiaries of 75FederalReserveBulletin386,387(1989);NationalCityCorpora suchcompanywerethelargestonJuly I, 1966,orthedateonwhich tion, 70 Federal Reserve Bulletin 743, 744 (1984). Thus. the Board thecompanybecameabankholdingcompany,whicheverislater. regularlyhasincludedthriftdepositsinthemarketsharecalculationon 9. Forpurposesofsection3(d)oftheBHCAct,theBoardconsiders a50percentweightedbasis.See.e.g..FirstHawaiian. Inc.,77Federal a bank to be located in the states in which the bank is chartered or ReserveBulletin52,55(1991). headquarteredoroperatesabranch. See 12U.S.c. §§1841(0)(4)--{7) 13. Underthe DOJGuidelines, a market isconsidered unconcen and 1842(d)(I)(A)and 1842(d)(2)(B). tratedifthepost-mergerHHIisunder 1000,moderatelyconcentrated 10. 12U.S.c. §§I842(d)(I)(A)--{B) and 1842(d)(2)(A)--{B). Hun if the post-merger HHI is between 1000 and 1800, and highly tington isadequatelycapitalizedandadequatelymanaged,asdefined concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof byapplicablelaw.SkyBankhasbeeninexistenceandoperatedforthe Justice ("DOJ") has informed the Board that a bank merger or minimum periods of time required by all applicable state laws, acquisition generally will notbe challenged (in the absence ofother including Indiana state law (five years). See Bums Ind. Code Ann. factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI §28-2-l7-20. On consummation ofthe proposal, Huntington would is at least 1800 and the merger increases the HHI more than 200 controllessthan10percentofthetotalamountofdepositsofinsured points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds depository institutions in the United States. Huntington also would forscreeningbankmergersandacquisitionsforanticompetitiveeffects complywiththestatedepositcapsinallrelevantstates,includingOhio implicitly recognize the competitive effects of limited-purpose and andWestVirginiawhere it willcontrolless than 25 percentofstate othernondepositoryfinancialentities. deposits in each state. See 0.R.c. §ll5.05 and West VirginiaCode 14. Those banking marketsand the effects ofthe proposal onthe §3IA-2-12a.All otherrequirements ofsection 3(d)ofthe BHCAct concentration of banking resources therein are described in the wouldbemetonconsummationoftheproposal. appendix.

C96 Federal Reserve BulletinD October 2007 trated, as measuredby the HHI.Thechange inthe HHI in TheBoardalsohasconsideredthe managerial resources the highlyconcentratedmarket would besmall. Moreover, ofthe organizations involved and the proposed combined numerous competitors would remain in each of the 12 organization. The Board has reviewed the examination banking markets. recordsofHuntington, Sky,andtheirsubsidiarydepository The DOl hasconducted a detailed review ofthe poten institutions, including assessments of their management, tialcompetitiveeffectsofthe proposal andhasadvisedthe risk-managementsystems, and operations. In addition, the Board that consummation of the transaction would not Boardhasconsidereditssupervisoryexperiencesandthose likely havea significantly adverseeffectoncompetitionin of the other relevant bank supervisory agencies with the any relevant banking market. In addition, the appropriate organizations and their records ofcompliance with appli banking agencies have been afforded an opportunity to cable banking law, including anti-money-Iaundering laws. commentand havenotobjectedtothe proposal. Huntington, Sky, and their subsidiary depository institu Basedonallthefactsofrecord,theBoardconcludesthat tions are considered to be well managed. The Board also consummation of the proposal would not have a signifi has considered Huntington's plans for implementing the cantly adverse effect on competition or on the concentra proposal, including the proposed management after con tion ofresources in any ofthe 12 banking markets where summation. Huntington and Sky compete directly or in any other Basedonallthefactsofrecord,theBoardhasconcluded relevantbankingmarket.Accordingly, theBoardhasdeter thatconsiderationsrelatingtothe financial and managerial mined that competitive considerations are consistent with resourcesandfutureprospectsoftheorganizationsinvolved approval. intheproposalareconsistentwithapproval,asaretheother supervisoryfactors underthe BHCAct. FINANCIAL, MANAGERIAL, AND SUPERVISORY CONSIDERATIONS CONVENIENCE AND NEEDS CONSIDERATIONS Inactingonaproposalundersection3oftheBHCAct,the Section3oftheBHCActrequirestheBoardtoconsiderthe financial and managerial resources and future prospectsof Boardis requiredtoconsidertheeffectsofthe proposalon theconvenienceandneedsofthecommunitiestobeserved the companies and depository institutions involved in the proposal and certain other supervisory factors. The Board andtotakeintoaccounttherecords oftherelevantinsured depositoryinstitutionsundertheCommunityReinvestment has considered these factors in light of all the facts of Act("CRA").16 record, including confidential reports of examination and The CRA requires the federal financial supervisory other supervisory information received from the relevant agencies to encourage insured depository institutions to federal andstatesupervisors ofthe organizations involved help meet the credit needs of the local communities in in the proposal, and publicly reported and other financial information, including information provided by Hunting which they operate, consistent with their safe and sound ton. operation, and requires the appropriate federal financial supervisory agency to take into accountarelevantdeposi Inevaluatingfinancialfactorsinexpansionproposalsby banking organizations, the Board reviews the financial tory institution's record ofmeeting the credit needs ofits condition ofthe organizations involved on both a parent entire community, including low- and moderate-income only andconsolidatedbasis, as wellas the financial condi ("LMI") neighborhoods, in evaluating bankexpansionary tion ofthe subsidiary depository institutions and the orga proposals.I? The Board has considered carefully all the facts of nizations' nonbanking operations. In this evaluation, the record, including evaluations of the CRA performance Boardconsidersavarietyofinformation,includingcapital recordsofthesubsidiarydepositoryinstitutionsofHunting adequacy, asset quality, and earnings performance. In tonandSky,datareportedbyHuntingtonandSkyunderthe assessing financial factors, the Board consistently has HomeMortgageDisclosureAct("HMDA"),18otherinfor consideredcapitaladequacytobeespeciallyimportant.The mation provided by Huntington, confidential supervisory Board also evaluates the financial condition of the com information, and public comments received on the pro bined organization at consummation, including its capital posal. One commenter alleged that Huntington and Sky position, asset quality, and earnings prospects, and the made an insufficient number of mortgage loans in LMI impactofthe proposedfunding ofthe transaction. censustracts,thereby diminishingresidents' accesstobank The Board has considered carefully the proposal under creditandencouragingpredatorymortgagelendinginthose the financial factors. Huntington, Sky, and theirsubsidiary areas.AllthreecommentersallegedthatneitherHuntington depository institutions are currently well capitalized and norSkyhadadequatelyservedLMIcommunitiesduetoan wouldremain soonconsummationofthe proposal. Based insufficient number of branches and services in those onitsreviewoftherecord,theBoardfinds thatHuntington communities. They also asserted that this alleged insuffi hassufficientfinancial resourcestoeffecttheproposal.The ciencyofbrancheshadcontributedtothegrowthofpayday proposed transaction is structured as a combination share exchangeandcashpurchase.15 16. 12U.S.c.§2901 etseq.; 12U.S.C.§1842(c)(2). 17. 12U.S.C.§2903. 15. Huntingtonwilluseexistingresourcestofundthepurchase. 18. 12U.S.c.§2801etseq.

Legal Developments: Second Quarter, 2007 C97 lending in LMI areas. Two commenters also expressed intheClevelandandColumbusassessmentareas,including concern that the proposal would lead to closings of the loans totaling $12.26 million to developers of affordable combinedorganization'sbranchesinLMIareas. housing. In addition, examiners noted that HNB's use of flexible loan programs contributedpositivelytothe bank's A. eRA Performance Evaluations lending performance, including its participation in afford able housing programs and its Community Access Mort As provided in the CRA, the Board has reviewed the gage product for borrowers in LMI tracts, under which proposal in light of the evaluations by the appropriate borrowers with have higher debt-to-income ratios could federal supervisorsoftheCRAperformancerecords ofthe qualifyfor loans. relevant insured depository institutions. An institution's Since the 2003 Evaluation, HNB represented that it has most recent CRA performance evaluation is a particularly introduced additional mortgage products to assist LMI importantconsiderationintheapplicationsprocessbecause borrowers, including a mortgage product offering up to it represents a detailed, on-site evaluation of the institu 100 percent financing with no mortgage insurance on tion's overallrecord ofperformanceunderthe CRAby its owner-occupied properties in LMI census tracts and on appropriatefederal supervisor.19 properties purchased byLMIborrowersincensustractsof HNB received a "satisfactory" rating at its most recent any income level. Another new product, the "Welcome CRA performance evaluation by the Office ofthe Comp Home" program, offers a fixed-rate mortgage with no troller of the Currency ("OCC"), as of March 31, 2003 down-payment requirement and reduced mortgage insur ("2003 Evaluation").2o Sky Bank received a "satisfac ance for those with slightly impaired credit and limited tory" CRA performance rating by the Federal Reserve funds forclosingcosts.HNB hasmade loanstotaling more BankofCleveland, as ofMarch 13,2006 ("2006 Evalua than$176million throughthe "WelcomeHome" program. tion").21 Huntingtonhasrepresentedthatitwouldcontinue A variation of this product is used in Cleveland's "Help itsCRAprogramin the combinedinstitution. EliminateLoans that arePredatory" program, an initiative eRA Performance of HNB. In the 2003 Evaluation, by Fannie Mae and local banking institutions, including HNB received a "high satisfactory" rating on each ofthe HNBandSkyBank,tocreateafundtorefinancemortgages lending, investment, and service tests for its CRA perfor for borrowers who have mortgages with problematic fea mance overall and in Ohio.22 Examiners reported that the tures, suchas severe prepaymentpolicies.23 bank's overall distribution ofloans to borrowers ofdiffer In the 2003 Evaluation, examinerscharacterizedHNB's ent income levels was good and that its geographic distri performance under the investment test as good in the butionofloanswasadequate. Inaddition,examinersnoted Cleveland and Columbus assessment areas. Examiners that HNB provided a relatively high level of community concluded that the investments were responsive to identi developmentservicesandreportedthatitsservice-delivery fied needs in those areas for affordable housing, financial systems were accessible to geographies and individuals of assistance for small business, and revitalization of LMI differentincome levelsinitsassessmentareas. areas. Huntington madeinvestmentstotaling $73.5 million Inthebank'sClevelandandColumbusassessmentareas, from 2004through 2006. examiners concluded that the geographic distribution of Examiners rated HNB's performance under the service HNB'shomepurchaseloansandhomerefinanceloanswas test in the Cleveland and Columbus assessment areas as adequate. Examiners characterized the bank's geographic good in the 2003 Evaluation. Although examiners noted distributionofits home improvementloans as excellentin that the percentages of branches in LMI geographies in the Cleveland assessment area and good in the Columbus those assessment areas were generally lower than the assessment area. Examiners also rated HNB's distribution percentages of the population in those LMI geographies, ofloans by borrowerincome level for home purchase and they reportedthatthe operationalhoursandservicesofthe home refinance as good in its Cleveland and Columbus bank's brancheswereaccessibletoresidents inLMIareas, assessment areas and as excellent for home improvement with many branches offering services on Saturdays and loansinitsClevelandassessmentarea. Moreover, examin making branch personnel available for appointments out ers commended HNB for providing community develop side standard service hours. Examiners also noted that mentloans that were very responsive to communityneeds telephone banking services were offered in English and Spanish. Additionally, examiners commended HNB for providingahigh levelofcommunitydevelopmentservices 19. SeeInteragencyQuestionsandAnswersRegardingCommunity to numerous organizations serving the Cleveland and Reinvestment,66FederalRegister36,620and36,639(2001). Columbus assessment areas, with bank representatives 20. Theevaluationperiodforthe 2003Evaluation was January 1, serving in leadership roles in such organizations. Some of 1999, through December 31, 2002, for the lending test and July 1, 1999, through December 31, 2002, for the service and investment these services included establishing and supervising stu tests. dentbankingprogramsinelementaryschoolswithstudents 21. SkyTrust, aspecial-purpose bank, is not subjectto the CRA from primarily LMI areas, participation on a committee (12CPR228.11(3». 22. HNB's statewide rating for Ohio was based primarily on full-scopeevaluationsconducted in HNB'sClevelandand Columbus assessment areas, the bank's major markets in Ohio. Limited-scope 23. HNBparticipatesinsimilarinitiativesinMontgomeryCounty, evaluationswereconductedinHNB's13otherOhioassessmentareas. whereDaytonislocated,andToledo.

e98 Federal Reserve Bulletin0 October 2007 formedbytheCityofClevelandtoaddressabusive lending B. Branch Closings practicesthattargetedLMIborrowers,andprovidingtrain ing for nonprofit organizations offering services to LMI Two commenters expressed concern about the proposal's individuals and families. HNB represents that since the possible effect on branch closings. Huntington has repre 2003 Evaluation, ithasprovidedmore than4,000commu sentedthatmanagementisconsideringinternalrecommen nitydevelopmentservices,includingfinancial literacyedu dations onbranchclosings, relocations, and consolidations cation for children and adults in both the Cleveland and inoverlappingmarketsafterconsummationoftheproposal Columbusmetropolitanareas. butthatnofinaldecisionshavebeenmade. Huntingtonalso eRA Performance of Sky Bank. As noted, Sky Bank represented that it would follow HNB's branch closing receivedanoverall"satisfactory"ratinginthe2006Evalu policy withrespect to any ofthose actions that are related ation.24 Examiners reported that taken as a whole, Sky tothe proposal. Bank's distributionoflendingreflectedagoodpenetration TheBoardhasconsideredcarefullyHNB'sbranchclos among customers ofdifferent income levels. Furthermore, ing policy and its record ofopening and closing branches. examiners noted that Sky Bank was a leader in making HNB's branch closing policy requires the bank to ensure community development loans and qualified investments that its products and services meet the needs and conve and that it provided a relatively high level ofcommunity nience of the communities in which it does business, developmentservices.ExaminersfoundSkyBank'sservice including LMI communities. In making a decision on delivery systemstobereasonablyaccessibletoallportions whether to close abranch, bankmanagement must review of, and to individuals of different income levels in, its andassessany factors andpotential changesthat, ifimple assessmentareas. mented, mightreasonablyimprovetheviabilityofanoffice In its statewide assessment area in Ohio, Sky Bank and reduce the need to close that office. If a potential received a "high satisfactory"rating onthe lending test.25 branch closing is in an LMI community, the policy also Overall geographic income distribution ofloans was con requires thatHNB'sCRAexperts assess the impactonthe sidered adequate by examiners, while lending distribution community and contact neighborhood representatives and byborrowerincomewasconsideredgood.Althoughexam interestedcommunitygroups todiscuss andevaluate ways iners reported weaker performance in Sky Bank's to minimize adverseeffectsofthe proposedclosing onthe Cleveland-Akron metropolitan statistical area ("MSA") community and local customers. If the bank decides to assessmentarea,theynotedthatSkyBank'spresenceinthe close a branch, its management must make every reason Cleveland-Akron market was relatively new and that it able effort to facilitate the availability of its services and faced significant competition from well-established finan products to customersofthe closedoffice. TheBoard also cial institutions in that market. In addition, examiners hasconsideredthatfederal banking law providesaspecific stated that they considered Sky Bank's operations in that mechanismfor addressing branchclosingsthatrequires an market to be consistent with the overall operations ofthe insured depository institution to provide notice to the institution. Examiners reported that the bank had a high public and to the appropriate federal supervisory agency levelofcommunitydevelopmentlendingintheCleveland beforeclosing abranch.26 acc Akron MSAassessmentarea. In the 2003 Examination, examiners concluded Examiners rated Sky's overall service performance in that HNB'srecord ofopening and closing branches had a the Cleveland-Akron MSA assessment area as adequate. favorable or neutral impact on LMI census tracts in its ExaminersnotedthatretailofficelocationsinLMIgeogra full-scope Ohioassessmentareas.TheBoardhasconsulted phies in this assessment area were limited, but also noted withtheOCConthebank'srecordofbranchopeningsand that Sky Bankprovided arelatively high levelofcommu closingssincethe2003Evaluation.TheOCCwillcontinue nity developmentservicesin thatarea. toreviewthebranchopeningandclosingrecordofHNBin thecourseofconductingCRAperformanceevaluations. C. HMDA and Fair Lending Record 24. Theevaluationperiodforthe2006EvaluationwasJanuary I, 2003, through December 31, 2004, for home mortgage and home TheBoardhascarefullyconsideredthefairlendingrecords improvement loans under the lending test and October 1, 2003, to and HMDAdata ofHuntington and Sky in light ofpublic March 31, 2006, forcommunitydevelopmentloansand investments underthe lendingand investmenttests and communitydevelopment servicesundertheservicetest. 25. Thisratingwasbasedonthebank'slendingperformanceinits 26. Section 42 of the Federal Deposit Insurance Act (12 U.S.c. Ohioassessmentareaswherefull-scopeexaminationswereperformed §1831r-l),as implemented bythe Joint Policy StatementRegarding in the following areas: the Cleveland-Akron MSA, the Canton BranchClosings(64FederalRegister34,844(1999»,requiresthata MassillonMSA,andtheNorthwesternOhiononmetropolitanassess bank provide the public with at least 30 days' notice and the mentareas. Examinersalsoreviewed the bank'sassessmentareas in appropriate federal supervisory agency and customers ofthe branch Ohio where limited-scope examinations were performed to ensure withatleast90 days' notice before the date ofthe proposed branch consistencywiththeoveralllendingactivity. Sky'sassessmentareas closing. The bank also is required to provide reasons and other wherelimited-scopeexaminationswereperformedincludeditsassess supportingdatafortheclosing,consistentwiththeinstitution'swritten mentareasintheColumbusandToledoMSAs. policyforbranchclosings.

Legal Developments: Second Quarter, 2007 C99 comments received on the proposal. Two commenters ton sellsthe majorityofthe mortgages thatitoriginateson alleged, based on 2004 and 2005 HMDA data, that Hun the secondary market, and its standard procedure is to tingtonhaddeniedthe home mortgageloanapplicationsof submit applications through automated underwriting sys African-Americanborrowersmorefrequently thanthoseof tems thatonly examine objectivedata concerning the loan nonminorityapplicantsintheColumbusmetropolitanarea. applicant.Inaddition,Huntingtonrepresentedthatitscom The Board has focused its analysis on the 2005 and pliance staff members frequently receive training on best preliminary 2006HMDAdatareported by HNB.27 compliance practices from industry and government ex Although the HMDAdata might reflect certain dispari perts. Huntington has stated that its fair lending policies ties in the rates of loan applications, originations, and will apply to the combined institution afterconsummation denialsamongmembersofdifferentracialorethnicgroups ofthe proposal. incertainlocal areas, they provide an insufficientbasis by The Board also has considered the HMDAdatainlight themselveson which to conclude whetheror notHunting of other information, including the programs described tonisexcludingorimposinghighercostsonanygroupona above and the overall performance record ofHNB under prohibited basis. The Board recognizes that HMDA data the CRA. These established efforts and record of perfor alone,even withtherecentadditionofpricinginformation, mance demonstrate that the institution is active in helping provideonlylimitedinformationaboutthecoveredloans.28 to meetthe creditneedsofitsentire communities. HMDAdata, therefore, have limitationsthatmaketheman inadequate basis, absentotherinformation, for concluding D. Conclusion on Convenience and Needs and that an institution has engaged in illegal lending discrimi CRA Performance nation. The Board has considered carefully all of the facts of TheBoardis neverthelessconcernedwhen HMDAdata record, including reports of examination of the CRA foraninstitutionindicatedisparitiesinlendingandbelieves records ofthe institutions involved, information provided thatalllendinginstitutionsareobligatedtoensurethattheir lending practicesare basedoncriteriathatensure notonly by Huntington, comments received on the proposal, and safe and sound lending but also equal access to credit by confidentialsupervisoryinformation.Huntingtonstatesthat creditworthyapplicantsregardlessoftheirraceorethnicity. theproposalwillresultingreaterconvenienceforHunting Because ofthe limitations ofHMDAdata, the Board has tonandSkycustomersthroughexpandeddeliverychannels consideredthesedatacarefullyandtakenintoaccountother and a broaderrange ofproducts and services. Based on a information, including examination reports that provide review ofthe entire record, and for the reasons discussed above, the Boardconcludes that considerations relating to on-siteevaluationsofcompliancewithfairlendinglawsby Huntington and its subsidiaries. The Board also has con the convenience and needs factor and the CRA perfor sulted with the OCC, the primary federal supervisor of mancerecordoftherelevantinsureddepositoryinstitutions are consistentwith approval ofthe proposal. HNB. The record, including confidential supervisory informa tion, indicates that Huntington has taken steps to ensure CONCLUSION compliance with fair lending and other consumer protec tion laws. Huntington has corporatewide policies and pro Based on the foregoing, and in light of all the facts of cedurestohelpensurecompliancewithallfairlendingand record, the Board has determined that the applications other consumer protection laws and regulations. Ongoing should be, and herebyare, approved.29 monitoring by corporate compliance management is de signed to ensure compliance with policies and procedures. Huntington's compliance program also includes quarterly 29. Three commenters requested that the Board hold a public assessments of fair-lending compliance for each line of meetingorhearingontheproposal.Section3oftheBHCACldoesnot business, routine reviews of loans, and regular testing to requiretheBoardtoholdapublichearingonanapplicationunlessthe note areas of weakness and recommend action plans for appropriatesupervisoryauthorityforthebanktobeacquiredmakesa improvement. With respect to mortgage lending, Hunting- written recommendation ofdenial ofthe application. The Boardhas nolreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holda 27. TheBoardreviewedHMDAdataforHuntingtoninOhioandin public meeting or hearing on an application to acquire a bank if theCleveland,Columbus,andToledoMSAswherethebank'sprimary necessary or appropriate to clarify factual issues related to the assessmentareasarelocated.TheBoardnotesthat2006HMDAdata application and to provide an opportunity for testimony (12 CFR are preliminaryand that final datawill not be available for analysis 225.16(e),262.3(i)(2),262.25(d)).TheBoardhasconsideredcarefully until fall 2007. the commenters' requests in light ofall the facts of record. In the 28. Thedata,forexample,donotaccountforthepossibilitythatan Board's view, thecommentershadampleopportunitytosubmittheir institution'soutreacheffortsmayattractalargerproportionofmargin views and, in fact, submitted written comments that the Board has ally qualified applicants than other institutions attract and do not considered carefully in acting on the proposal. The commenters' provideabasisforanindependentassessmentofwhetheranapplicant requestsfailtodemonstratewhywrittencommentsdonotpresenttheir who was denied creditwas, infact, creditworthy. In addition, credit views adequately or why a meeting or hearing otherwise would be history problems,excessive debtlevels relative to income, and high necessaryorappropriate.Forthesereasons,andbasedonallthefacts loanamountsrelativetothevalueoftherealestatecollateral(reasons ofrecord,theBoardhasdeterminedthatapublicmeetingorhearingis mostfrequentlycitedforacreditdenialorhighercreditcost)arenOl notrequired orwarranled inthis case.Accordingly, therequestfora availablefromHMDAdata. publicmeelingorhearingontheproposalisdenied.

CI00 Federal Reserve Bulletin0 October 2007 Inreaching its conclusion, the Boardhas considered all than three months after the effective date of this order thefactsofrecordinlightofthefactorsthatitisrequiredto unlesssuchperiodisextendedforgoodcausebytheBoard considerunder the BHCActand otherapplicable statutes. or by the Federal Reserve Bank of Cleveland, acting The Board's approval is specifically conditioned on com pursuantto delegatedauthority. pliancebyHuntingtonwiththeconditionsinthisorderand By order of the Board of Governors, effective June 4, allthe commitments made tothe Boardinconnectionwith 2007. the proposal. For purposes of these transactions, those commitments and conditions are deemed to be conditions Votingfor this action: Chairman Bernanke, ViceChairman Kohn, andGovernorsWarsh,Kroszner,andMishkin. imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedingsunderapplicablelaw. The proposal may notbe consummatedbefore the 15th ROBERT DEY. FRIERSON calendar day after the effective date ofthis order, or later Deputy Secretary ofthe Board Appendix BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits number of shares HHI HHI (dollars) competitors (percent) OHIO BANKING MARKETS Cleveland-Cuyahoga, Geauga, Lake, andLorain counties; Medina County, excluding the city ofWadsworth, the townships ofGuilford, Sharon, and Wadsworth, andthe village ofSeville; the cities ofAurora and Streetsboro, the townships ofFreedom, Hiram, Mantua, Nelson, Shalersville, and Windham, andthe villages adjoining these townships in Portage County; the cities ofHudson, Macedonia, and Twinsburg, the townships ofBoston, Northfield Center, Richfield, Sagamore Hills, and Twinsburg, andthe villages adjoining these townships in Summit County; andthe city ofVermilion in Erie County Huntington Pre-Consummation .......... 6 2.41 bil. 4.0 1,781 15 41 Sky ............................................. 11 1.15 bil. 1.9 1,781 15 41 Huntington Post-Consummation ......... 4 3.56 bil. 5.9 1,781 15 41 Columbus-Franklin, Delaware, Fairfield, Hocking, Licking, Madison, Morrow, Pickaway, and Union counties; and Perry County, excluding Harrison township Huntington Pre-Consummation .......... 1 8.30 bil. 28.0 1,662 60 59 Sky ............................................. 12 323.mil. 1.1 1,662 60 59 Huntington Post-Consummation ......... 1 8.63 bil. 29.1 1,662 60 59 Dayton-Montgomery, Greene, Miami, and Preble counties Huntington Pre-Consummation .......... 6 456 mil. 4.9 1,553 14 30 Sky ............................................. 11 129 mil. 1.4 1,553 14 30 Huntington Post-Consummation ......... 6 585 mil. 6.3 1,553 14 30

Legal Developments: Second Quarter; 2007 ClOl Appendix-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits numberof shares HHI HHI (dollars) competitors (percent) Akron-Summit County, excluding the cities ofHudson, Macedonia, and Twinsburg, the townships ofBoston, Northfield Center; Richfield, Sagamore Hills, and Twinsburg, and the villages adjoining those townships; Portage County, excluding the cities ofAurora and Streetsboro, the townships of Freedom, Hiram, Mantua, Nelson, Shalersville, andWindham, andthe villages adjoining those townships; the city ofWadsworth, the townships of Guilford, Sharon, and Wadsworth, and the village ofSeville in Medina County; the townships ofLake and Lawrence andthe villages ofCanal, Fulton, andHartville in Stark County; the city ofRittman, the townships of Chippewa andMilton, andthe villages adjoining those townships in Wayne County Huntington Pre-Consummation .......... 7 396 mil. 4.6 1,379 23 22 Sky ............................................. 10 212 mil. 2.5 1,379 23 22 Huntington Post-Consummation ......... 6 608 mil. 7.1 1,379 23 22 Toledo-Lucas, Fulton, and Ottawa counties and Wood County, excluding the city ofFostoria Huntington Pre-Consummation .......... 4 969 mil. 10.9 1,666 319 20 Sky ............................................. 3 1.29 bil. 14.5 1,666 319 20 Huntington Post-Consummation ......... 1 2.26 bil. 25.5 1,666 319 20 Canton-Stark Count); excluding the townships ofLake andLawrence; Carroll County; andthe township of Smith andthe village ofSebring in Mahoning County Huntington Pre-Consummation .......... 2 796 mil. 15.1 1,700 307 16 Sky ............................................. 6 535 mil. 10.2 1,700 307 16 Huntington Post-Consummation ......... 1 1.33 bil. 25.3 1,700 307 16 Lima-Allen andPutnam counties; the townships ofClay, Duchouquet, Goshen, Logan, Moulton, Pusheta, Salem, Union, andWayne inAuglaize County; the township ofLiberty in Hardin County; andthe township of Washington in Van Wert County Huntington Pre-Consummation .......... 2 317 mil. 12.7 1,390 276 16 Sky ............................................. 5 273 mil. 10.9 1,390 276 16 Huntington Post-Consummation ......... 1 591 mil. 23.6 1,390 276 16

C102 Federal Reserve Bulletin0 October 2007 Appendix-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES-Continued Market Amount Remaining deposit Resulting Change in Bank Rank ofdeposits number of shares HHI HHI (dollars) competitors (percent) Dover-New Philadelphia-Tuscarawas and Harrison counties and the townships ofSalt Creek, Paint, Berlin, Walnut Creek, and Clark in Holmes County Huntington Pre-Consummation .......... I 363 mil. 25.7 1,377 191 18 Sky ............................................. 9 53 mil. 3.7 1,377 191 18 Huntington Post-Consummation ......... 1 415 mil. 29.4 1,377 191 18 Fremont-Sandusky County Huntington Pre-Consummation .......... 7 39 mil. 6.0 1,977 78 10 Sky ............................................. 6 43 mil. 6.5 1,977 78 10 Huntington Post-Consummation ......... 2 82 mil. 12.5 1,977 78 10 Logan-Logan County Huntington Pre-Consummation .......... 3 65 mil. 1l.5 1,725 375 II Sky ............................................. 2 92 mil. 16.2 1,725 375 II Huntington Post-Consummation ......... 1 157 mil. 27.8 1,725 375 II BANKING MARKET IN INDIANA Indianapolis-Indianapolis MSA, consisting ofBoone, Hamilton, Hancock, Hendricks, Johnson, Marion, Morgan, andShelby counties; and Green township in Madison County, all in Indiana Huntington Pre-Consummation .......... 9 617 mil. 2.6 1,283 44 49 Sky ............................................. 4 2.01 bil. 8.5 1,283 44 49 Huntington Post-Consummation ......... 3 2.62 bil. 11.1 1,283 44 49 CINCINNATI BANKING MARKET IN OHIO, INDIANA, AND KENTUCKY Cincinnati-Hamilton, Brown, Butler, Clermont, and Warren counties in Ohio; Boone, Bracken, Campbell, Gallatin, Grant, Kenton, andPendleton counties in Kentucky; and Dearborn County in Indiana Huntington Pre-Consummation .......... 5 1.53 bil. 3.9 1,799 1 77 Sky ............................................. 66 14 mil. 0.0 1,799 1 77 Huntington Post-Consummation ......... 5 1.55 bit. 4.0 1,799 1 77 NOTE: Dataare as ofJune 30, 2006. All amounts ofdeposits are un weighted. All rankings, market deposit shares, and HHIs are based on thrift depositsweightedat50percent.

LegalDevelopments: Second Quarter; 2007 C103 ORDERS ISSUED UNDER FEDERAL sory information, publicly reported and other financial information, and information provided by Bank and the RESERVE ACT commenter. Bank is well capitalized and would remain so on consummation of the proposal. The Board also has First State Bank reviewedBank'sbusinessplanandfinancialprojectionsfor the branch, includingthe projections for deposits, income, Conway, Arkansas andcosts.Aftercarefullyconsideringallthefactsofrecord, the Board has concluded that the financial history and Order Approving Establishment of a Branch condition, capital adequacy, and future earnings prospects ofBankareconsistentwithapproval ofthe proposal. First State Bank ("Bank"), a state member bank, has In considering Bank's managerial resources, the Board requested the Board's approval under section 9 of the has reviewed the bank's examination record, including FederalReserveAct("Act")! toestablishabranchat6039 assessmentsofits management, risk-managementsystems, HeberSpringRoadWest, Quitman,Arkansas. andoperations.TheBoardalsohasconsideredits supervi Notice ofthe proposal, affording interested persons an sory experiences with Bank and the bank's record of opportunity to submit comments, has been published in compliance with applicable banking law,8 including anti accordancewiththeBoard'sRulesofProcedure.2Thetime money-laundering laws. Bank is considered to be well forfilingcommentshasexpired,andtheBoardhasconsid managed. Based onthis review and all the facts ofrecord, ered the notice and all comments received in light ofthe the Board has concluded that the character of Bank's factors specifiedin theAct. managementisconsistentwithapprovalofthe proposal. Bankis the 19thlargestdepository institutioninArkan The Board also has considered the convenience and sas, controlling approximately $390.5 million in deposits, needs ofthe community to be served, taking into account whichrepresents less than I percentofthe totalamountof the comment received, and the bank's performance under deposits of insured depository institutions in the state.3 the CRA. Bank received a "satisfactory" rating by the Bank's main office and ten branches are in Faulkner and Federal Deposit Insurance Corporation at its most recent White counties,Arkansas, and the proposed branch would CRA performance evaluation, as of February 17, 2004.9 bein neighboringCleburneCounty. TheBoardgenerallyconsiderstheentryofanewcompeti Section9(3)oftheAct4 requires astatememberbankto tor in acommunity to be a positive factor when assessing obtain Board approval before establishing a branch. The theeffectofaproposalontheconvenienceandneedsofthe Boardisrequiredbysection9(4)oftheActtoconsiderthe communitybecausenewentry provides additional alterna financial condition ofthe applying bank, the general char tives to consumers and businesses. Bank has represented acterofits management, and whetheritscorporate powers that the proposed branch would provide residents of the areconsistentwiththe purposesoftheAct, whenactingon Quitman area with another convenient source of banking a branch application.5 Regulation H, which implements services and offer extended service hours.1O For these section 9(4),6 enumerates the factors that the Board must reasons and based on a review of the entire record, the consider, including (I) the financial history and condition Boardconcludesthat the convenience and needs consider of the applying bank and the general character of its ations and Bank's record of performance under the CRA management; (2)the adequacyofthebank'scapitalandits are consistentwithapprovalofthe proposal. futureearningsprospects;(3)theconvenienceandneedsof the community to be served by the branch; and (4) in the case ofbranches with deposit-taking capability, the bank's 8. ThecommenteralsoexpressedconcernaboutBank'sconstruc performance under the Community Reinvestment Act tion of the proposed branch facility without obtaining regulatory ("CRA").? approval to establish a branch. Bank established a loan production The Board has carefully considered the application in officeinApril2007attheproposedbranchsiteinQuitman,whichdId notrequiretheBoard'spriorapproval.TheBankhasconfirmedtothe lightofthesefactors and publiccommentreceived from a BoardthattheQuitmanloanproduction officeis notengagedinany competing bank in Quitman. The commenterasserted that activitiesthatwouldcausetheofficetobeabranchwithinthemeaning the community's demographic and economic characteris of the Act or the Board's implementing regulations. See 12 CFR tics would notsupportanotherprofitable branch. 208.2(c). 9. An institution's most recent CRA performance evaluation is a Inconsideringthe financial historyandcondition,future particularly important consideration in the applications process be earnings prospects, and capital adequacy of Bank, the cause it represents a detailed, on-site evaluation ofthe institution's Board has reviewed reports ofexamination, othersupervi- overall record of performance under the CRA by its appropriate federalsupervisor.SeeInteragencyQuestionsandAnswersRegarding Community Reinvestment, 66 Federal Register 36,620 at 36,640 1. 12U.S.C.§321 etseq. (2001). 2. 12CFR262.3(b). 10. In reviewing this proposal, the Board has considered the 3. Statewiderankinganddepositdataare asofJune 30,2006,and comments inlightofBank'splansand projections forthe proposed reflectmergersasofJune I,2007. branch, as wellas its financial and managerial resources. The Board 4. 12U.S.C.§321 and 12CPR208.6(b). also hasreviewed thedeposit and demographic data for therelevant 5. 12U.S.C.§322. banking market, which includes all of Cleburne County. The data 6. 12CFR208.6(b). indicate modest increases in population from 2000 to 2006 and 7.12U.S.c.§2901etseq. consistentmoderategrowthindepositsduringthesametimeperiod.

C104 Federal Reserve Bulletin0 October 2007 Based on the foregoing and aU the facts ofrecord, the Noticeoftheapplication,affordinginterestedpersonsan Board has detennined that the application should be, and opportunitytocomment,hasbeenpublishedinnewspapers hereby is, approved. The Board's approval is specificaUy ofgeneral circulation in Greenwich, Connecticut (Green conditioned on Bank's compliance with all commitments wich Time), andStamford,Connecticut(TheAdvocate), on made to the Board in connection with the proposal. The November 3, 2006. The time for filing comments has commitments and conditions relied on by the Board are expired, and allcommentsreceived have beenconsidered. deemed to be conditions imposedin writing inconnection Bank, with total assets of $1.6 trillion, is the second withitsfindingsanddecisionand,assuch,maybeenforced largestcommercialbankin the United Kingdom.2 Bankis inproceedingsunderapplicable law. whoUy owned by The Royal Bank ofScotland Group pIc Approval of this application is also subject to the ("RBSGroup"),Edinburgh,Scotland.RBSGroup'sshares establishmentoftheproposedbranchwithinoneyearofthe arewidelyheld,withnoshareholderorgroupofsharehold date of this order, unless such period is extended by the ers controlling more than 5 percent of shares. Bank pro Board or the Federal Reserve Bank of St. Louis, acting vides a variety ofbanking services to retail and corporate underauthoritydelegatedbythe Board.l1 customers in 27 countries, includingthe United States.3 In By orderofthe Board ofGovernors, effective June 20, the UnitedStates,Bankoperatesanuninsured statebranch 2007. inNewYork,NewYork; representativeofficesinHouston, Texas,andLosAngeles,California;andGreenwichCapital Voting forthis action: ChairmanBernanke, Vice Chainnan Kohn, Markets, Inc. ("GCM"), Greenwich, Connecticut, a regis andGovernorsWarsh,Kroszner,andMishkin. tered broker-dealer specializing in debt capital markets services. Bank also owns Citizens Financial Group, Inc. ROBERT DEY. FRIERSON ("Citizens"), Providence, Rhode Island, a registered bank Deputy Secretary ofthe Board holdingcompanywith$163billioninconsolidatedassets.4 Bank is a qualifying foreign banking organization under ORDERS ISSUED UNDER Regulation K,5 INTERNATIONAL BANKING ACT The establishment ofthe Greenwich branch is the first component in a long-range plan to relocate Bank's U.S. branchandGCM tothesamelocation.Aftercompletionof The Royal Bank ofScotland pIc anewcorporate headquarters in Stamford, Connecticut, in late2008 or early 2009, Bank expectsto move the Green Edinburgh, Scodand wichbranchand GCM to Stamford. Under the IBA and Regulation K, in acting on an Order Approving Establishment of a Branch application by a foreign bank to establish a branch, the Boardmustconsiderwhetherthe foreign bank(I)engages The Royal Bank of Scotland pIc ("Bank"), Edinburgh, directly in the business of banking outside of the United Scotland,aforeignbankwithinthemeaningoftheInterna States; (2) has furnished to the Board the infonnation it tional Banking Act ("IBA"), has applied under sec needs to assess the application adequately; and (3) is tions 5(a) and 7(d) of the IBAI to establish a branch in subject to comprehensive supervision on a consolidated Greenwich, Connecticut. The Foreign Bank Supervision basis by its home-country supervisor.6 The Board also EnhancementAct of 1991, which amended the IBA, pro considers additional standards set forth in the IBA and vides that a foreign bank must obtain the approval ofthe Regulation K,7 Boardtoestablishabranchinthe UnitedStates. 2. AssetdataareasofSeptember30,2006. 3. Bank also conducts banking activities through its subsidiary, II. ThecommenterrequestedthattheBoardholdapublicmeeting NationalWestminsterBankPic,London,UnitedKingdom. orhearingontheproposal.TheActdoesnotrequiretheBoardtohold 4. AssetdataareasofSeptember30,2006. a public hearing on an application to establish a branch. Under its 5. 12CFR211.23(b). rules,theBoardmay,initsdiscretion,holdapublicmeetingorhearing 6. 12 U.S.c. §3105(d)(2); 12CFR 211.24. In assessingthis stan onan applicationifnecessaryorappropriatetoclarifyfactual issues dard, the Board considers, among other indicia of comprehensive, relatedtotheapplicationandtoprovideanopportunityfortestimony consolidatedsupervision,theextenttowhichthehorne-countrysuper (12CFR262.3(e),262.25(d».TheBoardhasconsideredcarefullythe visors:(i)ensurethatthebankhasadequateproceduresformonitoring commenter'srequestinlightofallthefacts ofrecord.IntheBoard's andcontrollingitsactivitiesworldwide;(ii)obtaininformationonthe view,thecommenterhadampleopportunitytosubmithisviewsand, conditionofthebankanditssubsidiariesandofficesthroughregular in fact, submitted written comments that the Board has considered examinationreports, auditreports, orotherwise; (iii)obtaininfonna carefullyinactingontheproposal.Thecommenter'srequest failsto tion on the dealings withand relationship between the bankand its demonstrate why written comments do not present his views ad affiliates, both foreign and domestic; (iv) receive from the bank equatelyorwhyameetingorhearingotherwisewouldbenecessaryor financial reports that are consolidated on a worldwide basis or appropriate.Forthesereasons,andbasedonallthefactsofrecord,the comparableinfonnation thatpermits analysis ofthe bank's financial Boardhasdeterminedthatapublicmeetingorhearingisnotrequired conditiononaworldwideconsolidatedbasis; (v)evaluate prudential orwarrantedinthiscase.Accordingly,therequestforapublicmeeting standards, such as capital adequacy and risk asset exposure, on a orhearingontheproposalisdenied. worldwidebasis.Nosinglefactorisessential,andotherelementsmay infonntheBoard'sdetermination. I. 12U.S.C.§§3103(a)and3105(d). 7. 12U.S.c. §3105(d)(3)-(4); 12CFR211.24(c)(2)-(3).

Legal Developments: Second Quarter, 2007 C105 Asnotedabove,Bankengagesdirectlyinthebusinessof relevant government authorities have been communicated bankingoutsidethe United States. Bankalso has provided withregardingaccesstoinfonnation.RBSGroupandBank theBoardwithinfonnationnecessarytoassesstheapplica have committed to make available to the Board such tion through submissions that address the relevant issues. infonnation on the operations of Bank and any of its With respect to supervision by home-country authorities, affiliates that the Boarddeems necessary to detennine and theFederalReservepreviouslyhasdeterminedthatBankis enforcecompliance withtheIBA, the BankHoldingCom subject to home-country supervision on a consolidated pany Act, and other applicable federal law. To the extent basis.sTherehasbeennomaterialchangeinthe mannerin thattheprovisionofsuchinfonnationtotheBoardmay be whichBankissupervisedbytheFinancialServicesAuthor prohibitedbylaworotherwise,RBS GroupandBankhave ity ("FSA"). Based on all the facts ofrecord, it has been committed to cooperate with the Board to obtain any determined thatBankissubjecttocomprehensivesupervi necessaryconsents orwaivers that mightberequiredfrom sion on a consolidated basis by its home-country supervi third parties for disclosure ofsuchinfonnation. In lightof sor. thesecommitmentsandotherfactsofrecord,andsubjectto The Board has also taken into account the additional the condition described below, it has been determined that standards set forth in section 7 of the IBA and Regula RBS Group and Bank have provided adequate assurances tionK.9TheFSAhasnoobjectiontoBank'sestablishment ofaccess to any necessaryinformationthat the Board may ofthe proposedbranch. request. The United Kingdom's risk-based capital standards are With respect to the interstate aspect of this proposal, consistent with those established by the Basel Capital section 5(a)(2) ofthe IBA, as amended by section 104 of Accord. Bank'scapitalisinexcessofthe minimum levels the Riegle-Neal Interstate Banking and Branching Effi that would berequiredby the BaselCapitalAccord and is ciencyActof1994,10authorizesaforeignbanktoestablish consideredequivalenttocapitalthatwouldberequiredofa and operate a de novo state branch in a state outside its U.S. banking organization. Managerial and otherfinancial home state subject to certain requirements. The proposal resources ofBank are consistent with approval, and Bank complies with the requirements of section 5(a)(2) of the appears to have the experience and capacity to supportthe IBA.1lThe Board hasdeterminedthatall the othercriteria proposedbranch.Inaddition,Bankhasestablishedcontrols referred to in section 5(a)(3) of the IBA, including the and procedures for the proposed office to ensure compli criteria in section 7(d) ofthe IBA, have also been met,12 ance with U.S. law, as wellas controls and procedures for Accordingly,theproposedtransactionisconsistentwiththe its worldwideoperationsgenerally. requirements of section 5 of the IBA. Based on the The United Kingdom is a member of the Financial foregoing and allthefacts ofrecord, Bank'sapplicationto Action TaskForce and subscribes to its recommendations establish the proposed branch is hereby approved by the on measures to combat money laundering. In accordance with these recommendations, the United Kingdom has 10. 12U.S.C.§3103(a)(2). enacted laws and created legislative and regulatory stan II. SectionS(a)(2)oftheIBAauthorizesaforeignbanktoestablish dards to deter money laundering. Money laundering is a andoperateadenovostatebranchoutsideitshomestatetotheextent criminal offense in the United Kingdom, and financial that a state-chartered bank with the same home state as the foreign institutions are required to establish internal policies, pro bank may do so under section 18(d)(4) of the Federal Deposit InsuranceAct("FDIA").TheFederalDepositInsuranceCorporation cedures, and systems for the detection and prevention of has authorized state nonmember banks to establish de novo state money laundering throughout their worldwide operations. branchesoutsidetheirhomestate,pursuantto section 18(d)(4)ofthe Bank has policies and procedures to comply with these FDIA, when the two states involved pennit de novo entry on a laws and regulations. Bank's compliance with applicable nationwide reciprocal basis. Connecticut and Rhode Island pennit denovoentryonanationwidereciprocalbasis. laws and regulations is monitored by Bank's internal 12. SectionS(a)ofthe IBAalsorequiresthatcertainconditionsin auditorsandthe FSA. section 44ofthe FDIAbe metinorderfor the Boardtoapprove an With respect to access to infonnation about Bank's interstatebranchingtransaction.See 12U.S.c.§3103(a)(3)(C)(refer operations, the restrictions on disclosure in relevantjuris ringtosections44(b)(l),44(b)(3),and44(b)(4)oftheFDIA,12V.S.c. dictions in which Bank operates have been reviewed and §§183Iu(b)(1), (b)(3), and (b)(4)). The Board has detennined that Bank is in compliance with state filing requirements. Bank was adequatelycapitalizedasofthedatetheapplicationwasfiled,andon consummationofthisproposal,Bankwouldcontinuetobeadequately 8. The Royal Bank ofScotland Group pIc, 89 Federal Reserve capitalizedandadequatelymanaged.TheBoardhasdetennined,after Bulletin386(2003). consultation with the Secretary of the Treasury, that the financial 9. See12U.S.C.§3IOS(d)(3)--(4);12CFR211.24(c)(2)--(3).These resourcesofBankareequivalenttothoserequiredforadomesticbank standards include: whether the bank's home-country supervisor has to receive approval for interstate branching under section 44 ofthe consentedtotheestablishmentoftheoffice;thefinancialandmanage FDIA.TheBoardalsomusttakeintoaccountcommunityreinvestment rialresourcesofthebank;whetherthebankhasprocedurestocombat considerations, including the record of Bank's domestic insured moneylaundering,whetherthereisalegalregimeinplaceinthehome depository institutions, under the Community Reinvestment Act countrytoaddressmoneylaundering,andwhetherthehomecountryis ("CRA"). See 12 V.S.c. §3103(a)(3)(C); 12 U.S.C. §183Iu(b)(3). participating in multilateral efforts to combat money laundering; Bank'sdomesticinsureddepositoryinstitutions,ownedthroughCiti whetherthe appropriate supervisors in the home country may share zens,eachreceived"outstanding"or"satisfactory"ratingsatitsmost informationonthebank'soperationswiththeBoard;whetherthebank recentCRAperformanceevaluationsbytheappropriatefederal regu anditsU.S.affiliatesareincompliancewithU.S.law;theneedsofthe lators. Based on all the facts of record, the Board concludes that community;andthebank'srecordofoperation. communityreinvestmentconsiderationsareconsistentwithapproval.

C106 Federal Reserve Bulletin0 October 2007 Director of the Division of Banking Supervision and domestic subsidiaries offerinsurance, investment manage Regulation, with the concurrence ofthe General Counsel, ment, real estate brokerage, and property management pursuant to authority delegated by the Board. Should any services. Bank also operates representative offices and restrictions on access to information on the operations or money-transmittersubsidiariesintheUnitedKingdomand activities of Bank and its affiliates subsequently interfere Canada. with theBoard'sability to obtaininformationto determine Theproposedrepresentativeofficewouldactasaliaison and enforce compliance by Bank or its affiliates with between Bank's head office and existing and prospective applicablefederal statutes,theBoardmay requiretermina customers in the United States. The office would solicit tion of any of Bank's direct or indirect activities in the business, market products and services ofthe head office United States. Approval ofthe application also is specifi and ofBank'sreal estatebrokerage subsidiary inJamaica, cally conditioned on compliance by Bank with the condi and provide information to customers concerning their tions imposed in this order and the commitments made to accounts. In connection with Bank's mortgage lending the Board in connection with this application.13 The com operations, it also would solicit prospective borrowers, mitments and conditions referred to above are conditions assemble credit information, arrange for property inspec imposed in writing by the Board in connection with this tions and appraisals, assist in the preparation of loan decision and may be enforced in proceedings under applications, and transmit applications and supporting 12U.S.C. §1818againstBankandits affiliates. documentationto the headoffice. By order, approved pursuant to authority delegated by Under the IBA and Regulation K, in acting on an theBoard, effectiveApril 26, 2007. application by a foreign bank to establish a representative office, the Board mustconsider whether the foreign bank: ROBERT DEY. FRIERSON (1) engages directly in the business ofbanking outside of Deputy Secretary ofthe Board the United States; (2) has furnished to the Board the information it needs to assess the application adequately; Victoria Mutual Building Society and (3) is subject to comprehensive supervision on a Kingston, Jamaica consolidated basis by its home-country supervisor.4 The Board also considers additional standards set forth in the Order Approving Establishment of a IBAand Regulation K.5 The Board considers the supervi sion standard to have been when it determines that the Representative Office applicantbankissubjecttoasupervisoryframeworkthatis consistentwiththeactivitiesoftheproposedrepresentative Victoria Mutual Building Society ("Bank"), Kingston, office, taking into account the nature of such activities.6 Jamaica, aforeign bankwithinthe meaningoftheInterna This is a lesser standard than the comprehensive, consoli tional Banking Act ("IBN'), has applied under sec dated supervision standard applicable to applications to tion 1O(a)oftheIBA1toestablisharepresentativeofficein establish branch or agency offices of a foreign bank. The Miami, Florida. The Foreign Bank Supervision Enhance Board considers the lesserstandard sufficient for approval mentActof1991,whichamendedtheIBA, providesthata foreign bank must obtain the approval of the Board to establisharepresentativeofficein the UnitedStates. Noticeoftheapplication,affordinginterestedpersonsan 4. 12V.S.c. §3107(a)(2); 12CFR 211.24(d)(2). Inassessingthis opportunity to submit comments, has been published in a standard,theBoardconsiders,amongotherindiciaofcomprehensive, consolidatedsupervision,theextenttowhichthehome-countrysuper newspaper of general circulation in Miami-Dade County, visors(i)ensurethatthebankhasadequateproceduresformonitoring Florida (The Miami Herald, February 18, 2005). The time andcontrollingitsactivitiesworldwide;(ii)obtaininformationonthe for filing comments has expired, and all comments have conditionofthebankanditssubsidiariesand officesthroughregular beenconsidered. examinationreports, auditreports, orotherwise;(iii)obtaininforma Bank, with total consolidated assets of approximately tion on the dealings with and relationship between the bank and its affiliates, both foreign and domestic; (iv) receive from the bank $682 million,2 is the fourth largest deposit-taking institu financial reports that are consolidated on a worldwide basis or tion andsecondlargestbuilding societyinJamaica.3 Bank comparable informationthat permits analysis ofthebank's financial primarilyengagesinresidentialmortgagelendingandretail conditionona worldwide consolidated basis; (v)evaluate prudential banking activities through 15 offices in Jamaica. Bank's standards, such as capital adequacy and risk asset exposure, on a worldwidebasis.Nosinglefactorisessential,andotherelementsmay informtheBoard'sdetermination. 5. 12V.S.c. §3105(d)(3H4); 12CFR211.24(c)(2H3). 13. TheBoard'sapprovalofthisapplicationdoesnotsupplantthe 6. See, e.g., Banco Latinoamericanode Exportaciones S.A., Fed authority ofConnecticut to license the proposed office ofBank in eral Reserve Bulletin C128 (2006); Banco Financiera Comercial accordancewithanytermsorconditionsthatitmayimpose. Hondurefia, S.A., 91 Federal Reserve Bulletin 444 (2005); Jamaica National Building Society, 88 Federal Reserve Bulletin 59 (2002); 1. 12V.S.C. §3107(a). RHEINHYP Rheinische Hypothekenbank AG, 87 Federal Reserve 2. AssetdataareasofDecember31,2006. Bulletin 558 (2001); see also Promstroybank ofRussia, 82 Federal 3. Bankisamutualorganizationwithmorethan680,000members. Reserve Bulletin 599 (1996); Komercni Banka. a.s., 82 Federal Eachmemberisconsideredtobeashareholderandhasonevote.No Reserve Bulletin 597 (1996); Commercial Bank "Ion Tiriac,"S.A., singleshareholdercontrolstheorganization. 82FederalReserveBulletin592(1996).

Legal Developments: Second Quarter; 2007 CI07 ofrepresentative-officeapplicationsbecauserepresentative standing with its home-country supervisor, financial and officesmay notengageinbanking activities.? managerial factors are consistent with approval of the In connection with this application, Bank has provided proposed representative office. Bank appears to have the certaincommitmentstotheBoardthatlimittheactivitiesof experience and capacity to supportthe proposedrepresen therepresentativeoffice.Ithascommittedthattherepresen tativeofficeandhasestablishedcontrolsandproceduresfor tative office wouldengage only incertain specified activi the proposed representative office to ensure compliance ties and would not make creditdecisions; solicitoraccept with U.S. law, as well as controls and procedures for its deposits; processorinitiatetransactionson behalfofBank; worldwideoperationsgenerally. orengageinactivities related to securitiestrading, foreign Although Jamaica is not a member of the Financial exchange, ormoney transmission. ActionTaskForce, Jamaicais a memberofthe Caribbean Asnotedabove,Bankengagesdirectlyinthebusinessof FinancialActionTaskForceandsubscribestoitsmeasures bankingoutside the United States. Bankalso has provided on combating money laundering and terrorist financing. theBoardwithinformationnecessarytoassesstheapplica Jamaica also participates in other international fora that tion through submissionsthat address therelevantissues. address the prevention of money laundering and terrorist Withrespecttosupervisionbyhome-countryauthorities, financing.lO It has enacted laws and the BOJ has promul the Board has considered the following information. The gated implementing regulations and guidelines aimed at BankofJamaica ("B01") is the licensing, regulatory, and preventingmoneylaunderingandterroristfinancing.Money supervisory authority for banks and all other financial launderingandfinancing terrorismare criminaloffensesin institutions in Jamaica and, as such, is the home-country Jamaica. The laws, regulations, and guidelines require supervisor for Bank. The BOJ has pursued a program of financial institutions,includingbuildingsocieties,toestab reforms intended to update its regulatory and supervisory lish and implement policies, procedures, and controls for framework. The BOJ authorizes the establishment of for the purposeofpreventing and detecting money laundering eignofficesofJamaicanbanks,regulatesthose offices, and and terrorist financing and to report certain cash transac reviews their operations in connection with annual on-site tionsandsuspicioustransactionsto appropriateauthorities. examinationsofthe headoffice. An institution's compliance with applicable laws, regula TheBoardpreviouslydetermined,inconnectionwithan tions, and guidelines is monitored by the BOJ and the application involving another bank from Jamaica, that the institution'sexternalauditors. Bankhaspoliciesandproce bank was subject to a supervisory framework that is dures tocomplywiththese lawsandregulations. consistentwiththeactivitiesoftheproposedrepresentative With respect to access to information on Bank's opera office, taking into account the nature of such activities.8 tions,therestrictionsondisclosureinrelevantjurisdictions Bank is supervised by the BOJ on substantially the same inwhichBankoperateshavebeenreviewed,andtheBoard termsandconditionsasthatotherJamaicanbank.Basedon has communicated with relevant government authorities allthefacts ofrecord, includingcommitmentsprovidedby regarding access to information. Bank has committed to Bank limiting the activities of the proposed office, it has make available to the Board such information on the been determined that Bank is subject to a supervisory operations ofBank and any of its affiliates as the Board framework that is consistent with the activities of the deemsnecessarytodetermineandenforcecompliancewith proposed representative office, taking into account the the IBA, the Bank Holding Company Act, and other natureofsuchactivities. applicable federal law. To the extent that the provision of Theadditionalstandardssetforthinsection7oftheIBA suchinformationtotheBoardmay beprohibitedbylawor and Regulation Khave also beentaken into account.9The otherwise, Bank has committed to cooperate with the BOJ has noobjectionto the establishmentofthe proposed Board to obtain any necessary consents or waivers that representativeoffice. mightberequiredfrom third partiesfor disclosure ofsuch Withrespecttothefinancial andmanagerialresourcesof information. In addition, subject to certain conditions, the Bank, taking into consideration its record ofoperations in BOJ may share information on Bank's operations with its home country, its overall financial resources, and its other supervisors, including the Board. In light of these commitments and otherfacts ofrecord, and subject to the condition described below, it has been determined that 7. 12CFR2l1.24(d)(2». 8. JamaicaNationalBuildingSociety,88FederalReserveBulletin Bank has provided adequate assurances of access to any 59(2002). necessary informationthatthe Boardmay request. 9. See 12 U.S.c. §3l05(d)(3H4); 12 CFR 2l1.24(c)(2H3). The On the basisofall thefacts ofrecord, andsubjectto the additionalstandardssetforthinsection7oftheIBAandRegulationK commitments made by Bank, as well as the terms and include the following: whether the bank's home-country supervisor has consented to the establishment of the office; the financial and managerialresourcesofthebank;whetherthebankhasproceduresto combatmoneylaundering,whetherthereisalegalregimeinplacein 10. Jamaica is a memberofthe Organization ofAmerican States thehomecountrytoaddressmoneylaundering,andwhetherthehome Inter-American Drug Abuse Control Commission Group ofExperts country is participating in multilateral efforts to combat money fortheControlofMoneyLaunderingandtheInter-AmericanConven laundering; whetherthe appropriatesupervisorsin the home country tion against Corruption. Jamaica is also party to the 1988 United may share information on the bank's operations with the Board; NationsConventionagainsttheIllicitTrafficofNarcoticsandPsycho whetherthe bank and its U.S. affiliates are in compliance with U.S. tropic Substances and the United Nations International Convention law;theneedsofthecommunity;andthebank'srecordofoperation. againstTransnationalOrganizedCrime.

C108 Federal Reserve Bulletin0 October 2007 conditions set forth in this order, Bank's application to imposed in writing by the Board in connection with this establishtherepresentativeofficeisherebyapprovedbythe decision and may be enforced in proceedings under Director of the Division of Banking Supervision and 12U.S.c. §1818againstBankandits affiliates. Regulation, with the concurrence ofthe General Counsel, By order, approved pursuant to authority delegated by pursuanttoauthoritydelegatedbytheBoard.ll Shouldany theBoard, effectiveJune 14,2007. restrictions on access to information on the operations or activities of Bank and its affiliates subsequently interfere ROBERT DEY. FRIERSON with theBoard'sability to obtaininformationtodetermine Deputy Secretary ofthe Board and enforce compliance by Bank or its affiliates with applicablefederalstatutes,theBoardmayrequireorrecom mend termination of any of Bank's direct or indirect activitiesinthe United States.Approvalofthis application also is specifically conditioned on compliance by Bank with the commitments madeinconnectionwiththis appli cationand withtheconditionsinthisorderPThecommit ments and conditions referred to above are conditions II. See12CPR265.7(d)(l2). 12. The Board's authority to approve the establishment of the proposedrepresentativeofficeparallelsthecontinuingauthorityofthe state of Florida to license offices of a foreign bank. The Board's approvalofthisapplicationdoesnotsupplanttheauthorityofthestate license the representative office in accordance with any terms or ofFloridaoritsagent, theFloridaOfficeofFinancialRegulation, to conditionsthatitmayimpose.

Cl09 December 2007 Legal Developments: Third Quarter, 2007 ORDERS ISSUED UNDER BANK organization in the United States.4 Bank ofAmerica con HOLDING COMPANY ACT trols seven insured depository institutions5 that operate in thirty-one states and the District ofColumbia. In Illinois, Bank ofAmerica is the 14th largest depository organiza ORDERS ISSUED UNDER SECTION 3 OF tion, controlling deposits of $5.4 billion, which represent 1.6 percent of the total amount of deposits of insured THE BANK HOLDING COMPANY ACT depository institutionsinthe state ("statedeposits").6 ABN AMRO North America has total consolidated Bank ofAmerica Corporation assets of approximately $160 billion and controls indi rectly two depository institutions, LaSalle Bank and La Charlotte, North Carolina Salle Bank Midwest, which operate in Illinois, Indiana, and Michigan. In Illinois, ABN AMRO North America is Order Approving the Acquisition of a Bank the second largest depository organization, controlling Holding Company deposits of $37 billion, which represent 11.2 percent of state deposits. Bank of America Corporation ("Bank of America"), a On consummation of the proposal, Bank of America financial holdingcompanywithinthe meaningoftheBank wouldremainthesecondlargestdepositoryorganizationin Holding Company Act ("BHC Act"), has requested the theUnitedStates,withtotalconsolidatedassetsofapproxi Board's approval under section 3 of the BHC Act) to mately $1.7 trillion. Bank ofAmerica would become the acquire ABN AMRO North America Holding Company largest depository organization in Illinois, controlling ("ABN AMRO North America") and thereby indirectly deposits of approximately $42.4 billion, which represent acquire LaSalle Bank Corporation ("LaSalle"), both of approximately 12.9 percent of the total amount of state Chicago, Illinois, and its subsidiary banks, LaSalle Bank deposits. National Association ("LaSalle Bank"), Chicago, and LaSalle Bank Midwest National Association ("LaSalle BankMidwest"),Troy,Michigan.2 INTERSTATE AND DEPOSIT CAP ANALYSIS Notice ofthe proposal, affording interested persons an opportunity to submit comments, has been published Section 3(d) ofthe BHCAct allows the Boardto approve (72 Federal Register 31,582 (2007». The time for filing an application by a bank holding company to acquire comments has expired, and the Board has considered the control of a bank located in a state other than the bank proposal and all comments received in lightofthe factors holding company's home state if certain conditions are setforth intheBHCAct.3 met. ForpurposesoftheBHCAct, thehomestateofBank Bank of America, with total consolidated assets of of America is North Carolina,? and ABN AMRO North approximately$1.5trillion,isthesecondlargestdepository America'ssubsidiarybanksare locatedinIllinois,Indiana, andMichigan.8 1. 12U.S.c. §1842. 2. ABN AMRO NorthAmerica is a wholly owned subsidiary of ABNAMRO BankN.v. ("ABNAMRO"),Amsterdam, the Nether 4. AssetdataareasofJune30,2007,andareadjustedtoreflectthe lands.BankofAmericaalsoproposestoacquiretwoothersubsidiaries acquisition by Bank of America of U.S. Trust Corporation and its ofABNAMRONorthAmerica,StandardFederalInternational,LLC subsidiary bank, United StatesTrustCompany, NationalAssociation and LaSalleTradeServicesCorporation, bothofChicago,which are ("U.S. Trust Bank"), both of New York, New York, that was agreementcorporations undersection25ofthe FederalReserveAct consummated on July 2, 2007. See Bank ofAmerica Corporation, ("FRA"), 12 U.S.c. §601 et seq. In addition, Bank of America 93FederalReserveBulletinC49(2007)("BOA/U.S. TrustOrder"). proposestoacquirethenonbankingsubsidiariesofABNAMRONorth 5. Inthiscontext,insureddepositoryinstitutionsincludecommer America, other than ABN AMRO WCS Holding Company ("WCS cialbanks,savingsbanks,andsavingsassociations. Holding"),NewYork, NewYork,inaccordancewithsection4(k)of 6. StatedepositdataandrankingsareasofJune30,2006. theBHCAct,12U.S.C.§1843(k).ABNAMRONorthAmericawould 7. See 12U.S.C. §1842(d).Abankholdingcompany'shomestate divestWCSHoldinganditssubsidiariesbydistributingthemtoABN is the state in which the total deposits ofall bankingsubsidiaries of AMRObeforeBankofAmericaconsummatestheproposed transac suchcompanywerethelargestonJuly 1, 1966,orthedateonwhich tion. thecompanybecameabankholdingcompany,whicheverislater. 3. Four commenters supported the proposal, and 18 commenters 8. Forpurposesofsection3(d)oftheBHCAct,theBoardconsiders expressedconcernsaboutvariousaspectsoftheproposal. a bank to be located in the states in which the bank is chartered or

ClIO Federal Reserve Bulletin0 December 2007 The Board may not approve an interstate acqUisItion Basedonthelatestavailabledepositdatareportedbyall undersection3(d)iftheapplicant(includingall itsinsured insureddepository institutions,thetotalamountofdeposits depository institutionaffiliates)controls, oronconsumma of insured depository institutions in the United States is tion ofthe proposed transaction would control, more than approximately $6.828 trillion as of June 30, 2007. Also 10 percent of the total amount of deposits of insured basedonthelatestCallReport,BankofAmerica(including depository institutions in the United States ("nationwide all its insured depository institutiori affiliates) controls deposit cap").9As required by section 3(d), the Boardhas depositsofapproximately$615.4billion,andABNAMRO carefullyconsideredwhetherBankofAmericacontrols, or NorthAmericacontrolsdepositsofapproximately$59.1bil on consummation ofthe proposed transaction would con lion.BankofAmerica,therefore,currentlycontrolsapproxi trol, morethan 10percentofthetotalamountofdepositsof mately 9.01 percentoftotal U.S. deposits. Onconsumma insured depository institutionslO in the United States. In tion ofthe proposed transaction, Bank ofAmerica would analyzing this matter, the Board calculated the percentage control approximately 9.88 percent ofthe total amount of of total deposits of insured depository institutions in the deposits of insured depository institutions in the United United States and the total deposits that Bank ofAmerica States.Accordingly, the Board finds that Bank ofAmerica controls, and on consummation of the proposal would does not now control, and on consummation of the pro control, based on the definition of "deposit" in the FDI posedtransactionwouldnotcontrol,anamountofdeposits Act,II the deposit data collected in reports filed by all thatwouldexceedthe nationwidedepositcap.15 insured depository institutions,12 and the methods and Section 3(d) also prohibits the Board from approving a adjustments used by the FDIC to compute total deposits. proposalif, onconsummation, the applicant wouldcontrol These calculations were made using the methodology 30percentormore ofthe totaldeposits ofinsureddeposi described in the Board's 2004 order approving Bank of toryinstitutionsinanystateinwhichboththeapplicantand America's acquisition of FleetBoston Financial Corpora the organization to be acquired operate an insured deposi tion13 and take into account the voluntary use by some tory institution,ortheapplicablepercentageofstatedepos insured depository institutions of the newly revised Call its established by state law ("state deposit cap").16 On Report and Thrift Financial Report forms, which became consummation of the proposal, Bank of America would availablein thefirst quarterof2007.14 controllessthan 30percentofthetotalamountofdeposits of insured depository institutions in Illinois, Indiana, and Michigan and would not hold deposits in excess of any headquarteredoroperatesabranch. See 12U.S.C. §§1841(0)(4H7) applicable state depositcaps. and 1842(d)(I)(A)and(d)(2)(B). 9. Several commenters expressed concerns about the proposal's All other requirements of section 3(d) ofthe BHCAct consistencywiththenationwidedepositcap. also would be met on consummation of the proposal.17 10. The BRC Act adopts the definition of "insured depository Based on all the facts ofrecord, the Boardis permitted to institution" used in the Federal Deposit Insurance Act (12 U.S.c. approve the proposalundersection3(d)oftheBHCAct. §1811etseq.)("FDIAct"). See 12U.S.c. §1841(n).TheFDIAct's definition of "insured depository institution" includes all banks (whetherornottheinstitutionisabankforpurposesoftheBRCAct), COMPETITIVE CONSIDERATIONS savingsbanks,andsavingsassociationsthatareinsuredbytheFederal DepositInsurance Corporation ("FDIC")and insured U.S. branches Section 3 of the BHC Act prohibits the Board from offoreignbanks,aseachofthosetennsisdefinedintheFDIAct.See 12U.S.c. §1813(c)(2). approving a proposal that would result in a monopoly or 11. Section3(d)oftheBRCActspecificallyadoptsthedefinitionof "deposit" in the FDIAct (12 U.S.C. §1842(d)(2)(E» (incorporating thedefinitionof"deposit"at12U.S.C.§1813(1». usingtherevised versionsoftheCallReportandtheThriftFinancial 12. Each insured bank in the United States must report data Report. The amount of deposits held by those institutions was regarding its total deposits in accordance with the definition of computedasoutlinedinAppendixA. "deposit"intheFDIActonthe institution'sConsolidatedReportof 15. Bank of America's lead bank, Bank of America, National ConditionandIncome("CallReport").Eachinsuredsavingsassocia Association, Charlotte, North Carolina, recently acquired nonvoting tionsimilarlymustreportitstotal deposits on the institution'sThrift convertiblesharesofCountrywideFinancialCorporation("Country Financial Report. Deposit data for FDIC-insured U.S. branches of wide"), Calabasas, California, which operates a savings association. foreignbanksandfederalbranchesofforeignbanksareobtainedfrom ThisinvestmentbyBankofAmericawasanoncontrollinginvestment the ReportofAssetsandLiabilitiesofU.S.BranchesandAgenciesof forpurposesoftheBRCActandwasmadepursuanttosection4(c)(6) ForeignBanks.ThesedataarereportedquarterlytotheFDICandare oftheBRCAct(12U.S.C.§1843(c)(6».Becausetheinvestmentdid publiclyavailable. notcauseCountrywide'ssubsidiarysavingsassociationtobecomean 13. Bank ofAmerica Corporation, 90 Federal Reserve Bulletin "affiliate" of Bank of America, as defined by the BRC Act, the 217, 219 (2004) ("BOA/Fleet Order"); see also Bank ofAmerica deposits of Countrywide are not included in the calculation of the Corporation,92FederalReserveBulletinC5(2006)(orderapproving depositcap,which,bystatute,refersonlytoaffiliatedinsureddeposi Bank of America's merger with MBNA Corporation, Wilmington, toryinstitutionsofabankholdingcompany.See12U.S.c.§I841(k). Delaware)("BOA/MBNAOrder"». 16. 12U.S.c.§1842(d)(2)(BHD). 14. Reporting on the revised Call Report and Thrift Financial 17. Bank of America is adequately capitalized and adequately Report forms is voluntary until calendar year 2008. Most insured managed as defined by applicable law (12 U.S.c. §1842(d)(I)(A». depository institutions continue to use the previously authorized LaSalleBankandLaSalleBankMidwesthavebeeninexistenceand version ofthese forms. To compute the amount ofdeposits held by operatedfortheminimumperiodoftimerequiredbyapplicablestate those institutions, the Board used the fonnula described in the law. See 12 U.S.c. §1842(d)(I)(B). The other requirements in sec BOA/FleetOrdertocombinetheappropriate lines fromtheprevious tion3(d)oftheBRCActalsowouldbemetonconsummationofthe versionoftheforms. Someinsureddepositoryinstitutionsarealready proposal.

Legal Developments: Third Quarter, 2007 C111 would be in furtherance of an attempt to monopolize the any relevant banking market. In addition, the appropriate business of banking in any relevant banking market. The banking agencies have been afforded an opportunity to BHC Act also prohibits the Board from approving a bank commentandhavenot objectedtothe proposal. acquisition that would substantially lessen competition in Basedonallthefactsofrecord,theBoardconcludesthat any relevant banking market, unless the anticompetitive consummation of the proposal would not have a signifi effectsofthe proposalareclearlyoutweighedinthepublic cantly adverse effect on competition or on the concentra interest by the probable effect ofthe proposal in meeting tionofresources in any ofthe five banking markets where theconvenienceandneedsofthecommunitytobeserved.18 BankofAmericaandABNAMRaNorthAmericacompete BankofAmericaandABNAMRaNorthAmerica have directly orin any otherrelevant banking market. Accord subsidiary depository institutions that compete directly in ingly, the Boardhas determinedthatcompetitiveconsider five banking markets in Illinois: Aurora, Chicago, Elgin, ationsareconsistentwithapproval. Joliet, and Woodstock. The Board has reviewed carefully the competitive effects of the proposal in each of these FINANCIAL, MANAGERIAL, AND SUPERVISORY banking markets in light of all the facts of record. In CONSIDERATIONS particular,theBoardhasconsideredthenumberofcompeti torsthatwouldremaininthemarkets,therelativesharesof Section3oftheBHCActrequirestheBoardtoconsiderthe total deposits in depository institutions in the markets financial and managerial resources andfuture prospects of ("market deposits") controlled by Bank ofAmerica and the companies and depository institutions involved in the ABN AMRa North America,19 the concentration level of proposal and certain other supervisory factors. The Board marketdeposits and the increase in this level as measured has considered these factors in light of all the facts of by the Herfindahl-Hirschman Index ("HHI") under the record, including confidential reports of examination and Department of Justice Merger Guidelines ("DOJ Guide other supervisory information received from the relevant lines"),20and othercharacteristics ofthe markets. federal and state supervisorsofthe organizations involved Consummationoftheproposalwouldbeconsistentwith inthe proposal, publiclyreported andotherfinancial infor Board precedent and within the thresholds in the DOJ mation, and informationprovidedbyBankofAmerica. Guidelines in each of the five banking markets.21 The Inevaluatingfinancial factorsinexpansionproposalsby change in the HHI's measure of concentration would be banking organizations, the Board reviews the financial small and numerous competitors would remain in each condition ofthe organizations involved on both a parent market. On consummation, three markets would remain only and consolidatedbasis, as wellasthe financial condi unconcentratedandtwo marketswouldremainmoderately tion of the subsidiary banks and significant nonbanking concentrated, as measuredbythe HHI. operations.Inthisevaluation,theBoardconsidersavariety The DOJ has conducted adetailed review ofthe poten of information, including capital adequacy, asset quality, tialcompetitiveeffectsofthe proposalandhas advisedthe and earnings performance. In assessing financial factors, Board that consummation of the transaction would not the Board consistently has considered capital adequacy to likely haveasignificantly adverseeffectoncompetitionin be especially important. The Board also evaluates the financial condition of the combined organization at con summation,includingitscapitalposition,assetquality,and 18. 12U.S.c. §I842(c)(I). earningsprospects, andtheimpactoftheproposedfunding 19. DepositandmarketsharedataareasofJune30,2007,adjusted toreflectmergersandacquisitionsthroughJuly9,2007,andarebased ofthe transaction. oncalculationsinwhichthedepositsofthriftinstitutionsareincluded The Board has considered carefully the proposal under at SO percent. The Boardpreviously has indicated thatthrift institu the financial factors. Bank ofAmerica and its subsidiary tions have become, or have the potential to become, significant banks, LaSalle Bank, and LaSalle Bank Midwest are all competitorsofcommercialbanks.See.e.g.,MidwestFinancialGroup, well capitalizedand would remain soon consummationof 75 FederalReserveBulletin386,387(1989);NationalCityCorpora tion, 70 Federal Reserve Bulletin 743. 744 (1984). Thus. the Board the proposal. Based onits review ofthe record, the Board regularlyhasincludedthriftdepositsinthemarketsharecalculationon findsthatBankofAmericahassufficientfinancialresources a50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.•77Federal to effect the proposal. The proposed transaction is struc ReserveBulletin52.SS(1991). tured as a cash purchase of shares, and Bank ofAmerica 20. Underthe DOJGuidelines, a market is considered unconcen tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated willuseexistingresources to fundthepurchase. if the post-merger HHI is between 1000 and 1800. and highly TheBoardalsohasconsideredthemanagerialresources concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof ofthe organizations involved and the proposed combined Justice ("DOJ") has informed the Board that a bank merger or organization. The Board has reviewed the examination acquisition generally will notbechallenged (in the absence ofother records ofBankofAmerica,ABNAMRO NorthAmerica, factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI is at least 1800 and the merger increases the HHI more than 200 and their subsidiary banks, including assessments oftheir points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds management, risk-management systems, and operations.22 forscreeningbankmergersandacquisitionsforanticompetitiveeffects implicitly recognize the competitive effects of limited-purpose and othernondepositoryfinancialentities. 22. Acommenteropposing the proposal expressed concern about 21. These markets and the effects ofthe proposal on the concen BankofAmerica'sconnectiontoinvestigationsandlawsuitsrelatedto tration of banking resources in these markets are described in the bankruptcy ofParmalat SpA. Parma, Italy. The commenteralso Appendix B. expressedunsubstantiatedconcernsaboutBankofAmerica'sstudent

C1l2 Federal Reserve Bulletin0 December 2007 In addition, the Board has considered its supervisory of its entire community, including low- and moderate experiences and those ofthe other relevant bank supervi income("LM!")neighborhoods,inevaluatingbankexpan sory agencies with the organizations and their records of sionary proposals.26 compliance with applicable banking law, including anti The Board has considered carefully all the facts of money-laundering laws.23 The Board also has considered record,includingreportsofexaminationoftheCRAperfor Bank ofAmerica's plans for implementing the proposal, mance records ofthesubsidiarybanksofBankofAmerica including with respect to the proposed managementofthe andABNAMRONorthAmerica,datareportedbyBankof organizationafterconsummation. America under the Home Mortgage Disclosure Act Basedonallthefactsofrecord,theBoardhasconcluded ("HMDA"),27 other information provided by Bank of thatconsiderationsrelating to the financial and managerial America, confidential supervisory information, and public resourcesandfutureprospectsoftheorganizationsinvolved commentsreceivedonthe proposal. intheproposalareconsistentwithapproval,asaretheother Four commenters supported the proposal. Those com supervisory factors undertheBHCAct.24 menterscommendedBankofAmerica'sfocusoneconomic integration in the communities in whichitoperates, spon CONVENIENCE AND NEEDS CONSIDERATIONS sorship of homebuyer events in LMI communities, and financial supportfor small businessand microlending pro Inactingonaproposalundersection3oftheBHCAct, the grams.Severalothercommentersexpressedconcernsabout Boardisrequiredto considertheeffectsoftheproposalon eitherthelendingrecordofBankofAmericaoritsabilityto theconvenienceandneedsofthecommunitiestobeserved adequately meet its CRA obligations, and some of them andtotakeintoaccounttherecordsoftherelevantinsured opposed the proposal or recommended approval only if depositoryinstitutionsundertheCommunityReinvestment subjectto conditions suggestedby the commenter.28 Some Act ("CRA").25 The CRA requires the federal financial commentersallegedthatBankofAmericahasnotaddressed supervisoryagenciestoencourageinsureddepositoryinsti thediversityandcommunityreinvestmentneedsofCalifor tutions to helpmeetthecreditneedsofthe localcommuni nia communities or expressed concern about the CRA ties in which they operate, consistent with their safe and performance of Bank of America in California. Another soundoperation,andrequirestheappropriatefederal finan commenterallegedthatBankofAmericahasdiscriminated cial supervisory agency to take into account a relevant against,andhasnotaddressedtheconvenienceandneedsof, depository institution's record ofmeeting the creditneeds LMI and minority residents of Chicago. One other com menteralleged more generally, basedonHMDAdata, that Bank of America has engaged in disparate treatment of loanpolicies.TheBoardhasconsideredthesecommentsinlightofall the facts of record, including reports ofexamination assessing the minorityindividualsinhome mortgagelending. financial and managerial resources ofthe organizations, information on the allegations raised by the pending lawsuits, and information A. eRAPerformance Evaluations providedbytheOfficeoftheComptrolleroftheCurrency("OCC"). 23. Aspartofitsconsiderationofmanagerialfactors,theBoardhas As provided in the CRA, the Board has evaluated the reviewedconfidentialsupervisoryinformationonthepolicies, proce convenienceandneedsfactorinlightofthe evaluationsby dures, andpracticesofBankofAmericaand itssubsidiary banks for complying with the BankSecrecyActand consulted withthe acC. theappropriatefederalsupervisorsoftheCRAperformance Onecornmenterreiteratedconcernsthatitpreviouslyexpressedabout records ofthe relevant insured depository institutions. An thehandlingofcertainmoneytransfersthroughtheNewYorkbranch institution's most recentCRAperformance evaluationis a ofBank ofAmerica, National Association ("BA Bank"), Charlotte, particularly important consideration in the applications NorthCarolina.TheBoardnotesthatthismatterwasaddressedinthe BOA/U.S.TrustOrderatfootnote22andincorporatesthosefindingsin thisorder. 24. Some commentersexpressed concerns aboutBank ofAmeri 26. 12U.S.C.§2903. ca's relations with unaffiliated third parties engaged in subprime 27. 12U.S.C. §2801etseq. lending.ThecommentersprovidednoevidencethatBankofAmerica 28. Some commenters criticized Bank ofAmerica's performance has originated, purchased,orsecuritized "predatory" loansorother underitspreviouscommunityreinvestmentpledges,urgedtheBoard wise engaged in abusive lending practices. Bank of America has torequireBankofAmericatoprovidespecificpledgesorplansorto policies and procedures to help ensure that the subprime loans it takecertainfutureactions,oraskedtheBoardtoconditionitsapproval purchasesandsecuritizesareincompliancewithapplicablestateand onacommitmentbyBankofAmericatoimproveitsCRArecord.The federal consumer protection laws. Bank of America stated that it Board consistently has stated that neither the CRA nor the federal conducts extensive due diligence reviews of the third-party loan bankingagencies' CRAregulations require depository institutionsto originators with which it does business, as well as the loans that it make pledges or enter into commitments or agreements with any purchasesandtheservicersofeachpool,tohelpensurethatBankof organization and that the enforceability of any such third-party Americaisnotfacilitating"predatory"lending.TheBoardexpectsall pledges,initiatives,andagreementsaremattersoutsidetheCRA.See bankingorganizationstoconducttheiroperationsinasafeandsound BOA/FleetOrderat232-33.Instead,theBoardfocusesontheexisting manner with adequate systems to manage operational, compliance, CRA performance record ofan applicant and the programs that an andreputationalrisksandwilltakeappropriatesupervisoryactionsto applicanthasinplacetoservethecreditneedsofitsassessmentareas addressandpreventabusivelendingpractices. atthe time the Boardreviews aproposal underthe convenienceand 25. 12U.S.c.§2901 etseq.; 12U.S.c. §1842(c)(2). needsfactor.

Legal Developments: Third Quarter, 2007 C113 processbecauseitrepresentsadetailed,on-siteevaluationof has consulted with the OCC with respect to BA Bank's the institution's overall record of performance under the CRAperformancesince theBOA/U.S. Trust Order. CRAbyitsappropriatefederalsupervisor.29 In the BOA 200I Evaluation, examiners commended Bank of America's lead bank, BA Bank, received an BA Bank's overall lending performance, which they de "outstanding" rating at its most recent CRA performance scribed as demonstrating excellent or good lending-test evaluation by the OCC, as ofDecember31,2001 ("BOA results in all its rating areas. Examiners reported that the 2001 Evaluation").3o The two other subsidiary banks of bank's distribution of HMDA-reportable mortgage loans Bank ofAmerica subject to the CRA, FIACard Services, among areasofdifferentincomelevels was good, andthey N.A., Wilmington, Delaware, and U.S. Trust Bank, also commended BA Bank for developing mortgage loan pro received "outstanding" ratings at their most recent CRA grams with flexible underwriting standards. In addition, performanceevaluations.31 examiners reported that the bank's small business lending ABN AMRO North America's lead subsidiary bank, wasexcellentorgoodinthemajorityofitsratingareas,and LaSalleBank,receivedan "outstanding"rating atits most they commended the distribution of small business loans recent CRA performance evaluation by the OCC, as of amongbusinessesofdifferentsizesinseveralofBABank's December 31, 2002 ("2002 Evaluation").32 The other assessmentareas.36ExaminersalsonotedintheBOA2001 subsidiarybank,LaSalleBankMidwest, receiveda "satis Evaluation that BA Bank's level of community develop factory" rating atits mostrecentCRAperformanceevalu mentlending wasexcellent. ation by the OCC, as of December 31, 2002.33 Bank of Since the BOA 2001 Evaluation, BA Bank has main Americahasrepresentedthatitwouldcombinethecommu tained a substantial level of home mortgage, small busi nity development and community investment activities of ness, and community development lending. In 2005 and BA Bank and ABN AMRO North America's subsidiary 2006, the bank originated more than 756,000 HMDA banks tostrengthenandhelp meetthe bankingneedsofits reportable home mortgage loans totaling approximately communities.34 $161 billion throughout its assessment areas, including eRA Performance ofBA Bank. The BOA2001 Evalua more than $18 billion in loans to LMI individuals.J7 In tion was discussed in the BOA/Fleet Order.35 The Board 2006,BABankwasrecognizedbytheU.S. SmallBusiness also considered BABank's CRA performance earlierthis Administration ("SBA") for the ninth consecutive yearas yearintheBOAlU.S. TrustOrder.Basedonareviewofthe the leading small business lenderin the country, based on record in this case, the Board hereby reaffirms and adopts its origination ofSBAloans totaling more than $405 mil the facts and findings detailed in those orders concerning lion.38As noted in the BOAlU.S. Trust Order, BABank's BA Bank's CRA performance record. Bank of America community development lending during 2005 and 2006 also providedthe Board withadditionalinformationabout totaledapproximately $5.8billion.39 its CRA performance since the Board last reviewed such In the BOA 2001 Evaluation, examiners reported that mattersintheBOAlU.S. TrustOrder.Inaddition,theBoard BA Bank consistently demonstrated strong performance under the investmenttest, noting that its performance was excellentorgoodin the majority ofits assessmentareas.40 29. SeeInteragencyQuestionsandAnswersRegardingCommunity Reinvestment,66FederalRegister36,620and 36,639(2001). 36. In this context, "smallbusinessloans"are loans withoriginal 30. The evaluation period for the BOA 2001 Evaluation was amountsof$1 millionorlessthataresecuredbynonfarm,nonresiden January 1,2000,throughDecember31,2001. tial propertiesorarecommercialandindustrialloanstoborrowersin 31. FIACardServices,N.A., formerly known as MBNAAmerica theUnitedStates. Bank, National Association, was last evaluated by the OCC as of 37. InCaliforniain2005and2006,thebankoriginatedmorethan April4,2005.U.S.TrustBankwasformedin2006bytheconversion 150,000 HMDA-reportable home mortgage loans totaling approxi ofUnitedStatesTrustCompanyofNewYork("USTCNewYork")to mately $51 billion throughout its assessment areas, including more a national bank charter and its subsequent merger with U.S. Trust than $2.8 billioninloans to LMIindividuals. In the Chicagometro Company, National Association ("USTC Los Angeles"). The CRA politanstatisticalarea("MSA"),thebankoriginatedmorethan20,000 performance of USTC New York was evaluated by the Federal HMDA-reportable home mortgage loans totaling approximately Reserve BankofNew Yorkas ofMarch IS, 2004, beforeits saleto $2.2 billion throughout its assessment areas, including more than BankofAmericaandconversionto a national bankcharterin 2006. $610millioninloanstoLMIindividuals. TheCRAperformanceofUSTCLosAngeleswaslastevaluatedbythe 38. Bank ofAmerica represented that BABank's small business OCC as ofOctober IS, 2002. The OCC has not yet evaluated U.S. loans ofless than $50,000in Californiain 2006 more than doubled TrustBank'sCRAperformance. fromthelevelattainedin2005,bothinnumberanddollaramountsof 32. Theevaluationperiod forthe2002Evaluation was January I, suchloans. 2000,throughDecember31,2002. 39. BABank'scommunitydevelopmentlendingduring 2005and 33. LaSalleBankMidwestwas formerly knownasStandardFed 2006 in its California assessment areas and in the Chicago market eralBank,N.A.,Troy,Michigan. totaled approximately$1.2 billionand$34million, respectively. BA 34. Several commenters questioned Bank ofAmerica's efforts in Bank has enteredinto partnerships withapproximately500housing awarding contracts to minority- and women-owned businesses. Al counseling agencies throughout its assessment areas, including 16 thoughtheBoardfullysupportsprogramsdesignedtopromoteequal housing-counselingagenciesintheChicagometropolitanarea,tooffer opportunityandeconomicopportunitiesforallmembersofsociety,the pre-andpost-purchasehomemortgagecounselingtoLMIborrowers. commentsaboutsupplierdiversityprogramsarebeyondthefactorsthe Suchcounselingincludesreviewingthebuyer'screditreport,income, BoardisauthorizedtoconsiderundertheBHCAct.Seee.g.,Deutsche anddebt;preparingabudget;andconductinganaffordabilityanalysis. BankAG,85FederalReserveBulletin509,513(1999). 40. One commenter criticized the amount of Bank ofAmerica's 35. BOA/FleetOrderat225-229. charitabledonationsanditsmethodologyformakingthesedonations.

C114 Federal Reserve Bulletin0 December 2007 During the evaluation period, BABank funded more than ing $182 million in loans for affordable housing and 17,000housing units forLMIfamilies withitscommunity multifamily communitydevelopmentprojects. developmentinvestmentsthroughoutitsassessmentareas.41 Inthe2002Evaluation,examinerscharacterizedLaSalle Examiners commended BA Bank for taking a leadership Bank'sperformanceundertheinvestmenttestasexcellent. role in developing and participating in complex invest They reportedthatthe bankmade more than 700qualified ments that involved multiple participants and both public community development investments totaling approxi and privatefunding. mately $140 million during the evaluation period, despite Since the BOA 2001 Evaluation, BA Bank has main significantcompetitionfrommorethan300insureddeposi tained a substantial level of community development tory institutions in its assessment areas. Examiners also investment activities in its assessment areas. Bank of reportedthatLaSalleBankmade715CRAqualifiedgrants AmericarepresentedthatBABank'squalifyingcommunity andcontributionstocommunityorganizationsinitsassess development investments totaled approximately $3.7 bil mentareasduringtheevaluationperiod,totaling morethan lion during 2005 and 2006, and thatBABank's subsidiary $4 million, with half ofthose grants and contributions to community development corporation had helped develop organizations providing community development services more than 6,200 housing units inLMI census tracts orfor to LMI individuals. In addition, examiners commended LMIindividuals since2003.42 LaSalleBank'sexcellentlevelofcommunitydevelopment ExaminerscommendedBABank's serviceperformance services, particularly inproviding financial education. throughout its assessment areas in the BOA2001 Evalua tion. They reported that the bank's retail delivery systems B. HMDA and Fair Lending Record were generally good and that the bank's distribution of branchesamonggeographiesofdifferentincomelevelswas TheBoardhascarefullyconsideredthefairlendingrecords adequate. Examiners also commended BA Bank for its and HMDA data of Bank of America in light of public community development services, which typically re comments received on the proposal. One commenter al sponded to the needs of the communities served by the leged, based on 2005 HMDA data, that Bank ofAmerica bankthroughoutitsassessmentareas. denied the home mortgage loan applications of African eRA Performance ofLaSalle Bank. As noted, LaSalle American and Hispanic borrowers more frequently than Bankreceivedanoverall "outstanding" rating inthe 2002 those of nonminority applicants in various MSAs and Evaluation,with "outstanding"ratingsonboththelending nationwide.Thecommenteralsoalleged,basedon2005and andinvestmenttestsanda "highsatisfactory"ratingonthe preliminary2006HMDAdata,thatBankofAmericaandits servicetest.ExaminersnotedthatLaSalleBank'smortgage subsidiarybanksmadedisproportionatelyhigher-costloans andsmall businesslendingperformancewasexcellentand toAfrican American and Hispanic borrowers than to non hadapositiveimpactonindividualsandbusinessesinLMI minority borrowers.43 The Board has focused its analysis areas as well as persons of different income levels. In primarilyonthe 2006HMDAdatareportedbyBABank.44 addition, examiners found that the bank's community Although the HMDAdata might reflect certain dispari developmentlendingactivitywasexcellentandthatseveral ties in the rates of loan applications, originations, and linesofbusiness, ranging from commercialcreditto apart denialsamong membersofdifferentracialorethnicgroups mentlending, contributedto the bank's community devel in certain local areas, they provide an insufficient basis by opment lending efforts. Examiners noted that during the themselves on which to conclude whether or not Bank of evaluation period, LaSalle Bank extended 390community America is excluding or imposing higher costs on any developmentloanstotalingmorethan$523million,includ- group on a prohibited basis. The Board recognizes that HMDAdataalone,evenwiththerecentadditionofpricing information, provide only limited information about the covered loans.45 HMDA data, therefore, have limitations Bank of America represented that it has a record of providing significant corporate philanthropic donations in all the communities thatitserves.TheBoardnotesthatneithertheCRAnortheagencies' implementingrulesrequireinstitutionstoengageincharitablegiving. 43. Beginning January 1, 2004, the HMDA data required to be 41. BankofAmericaalsohasprovidedgrantstononprofitorgani reportedbylenderswereexpandedtoincludepricinginformationfor zations that promote SBA programs and originate microloans in loansonwhichtheannualpercentagerate(APR)exceedstheyieldfor amountsaslowas$500. U.S.Treasurysecuritiesofcomparablematurity3ormorepercentage 42. BankofAmericarepresentedthatBABank'squalifyingcom points for first-lien mortgages and 5 or more percentage points for munitydevelopmentinvestmentsduring2005and2006initsCalifor second-lienmortgages(12CFR203.4.) niaassessmentareasandintheChicagomarkettotaledapproximately 44. TheBoardreviewedHMDAdataforBABanknationwideand $821 millionand$82million, respectively. BankofAmericafurther intheMSAsnotedbythecommenter. representedthatBABankmadeatleast 11 LowIncomeHousingTax 45. Thedata,forexample,donotaccountforthepossibilitythatan Creditinvestmentstotalingmorethan$134millionin2005and2006 institution'soutreacheffortsmayattractalargerproportionofmargin inCalifornia,whichsupportedtherenovationorconstructionof1,070 ally qualified applicants than other institutions attract and do not housingunits forLMIindividualsandseniorcitizens.Thebankalso provideabasisforanindependentassessmentofwhetheranapplicant stated that it has allocated more than $27 million to California who was denied creditwas, in fact, creditworthy. Inaddition, credit CommunityDevelopmentFinancialInstitutions("CDFIs")since2005 history problems, excessive debtlevels relative to income, and high in more than 20 ofits assessment areas, including $9.4 million for loanamountsrelativetothevalueoftherealestatecollateral(reasons CDFIsfocusedonsmallbusinessmicrofinancingand$17.7millionfor mostfrequently citedforacreditdenialorhighercreditcost)arenot CDFIsfocusedonaffordablehousing. availablefromHMDAdata.

Legal Developments: Third Quarter; 2007 CllS that make them an inadequate basis, absentotherinforma C. Conclusion on Convenience and Needs and tion, for concluding that an institution has engaged in CRA Performance illegal lendingdiscrimination. The Boardis neverthelessconcernedwhen HMDAdata TheBoard has consideredcarefully all the facts ofrecord, foraninstitutionindicatedisparitiesinlendingandbelieves includingreportsofexaminationoftheCRArecordsofthe thatalllendinginstitutionsareobligatedtoensurethattheir institutions involved, information provided by Bank of lending practices are basedoncriteriathatensure not only America, comments received on the proposal, and confi safe and sound lending but also equal access to credit by dential supervisory information.47 BankofAmerica repre creditworthyapplicantsregardlessoftheirraceorethnicity. sented that the proposal would result in greater conve Because ofthe limitations ofHMDA data, the Board has nienceforBankofAmericaandLaSallecustomersthrough consideredthesedatacarefullyandtakenintoaccountother expanded delivery channels and a broader range of prod information, including examination reports that provide ucts and services. Based on a review ofthe entire record, on-siteevaluationsofcompliancewithfairlendinglawsby and for the reasons discussed above, the Board concludes Bank ofAmerica and its subsidiaries. The Board also has that considerations relating to the convenience and needs consultedwith the acc, the primary federal supervisorof factor and the CRA performance records of the relevant BankofAmerica's subsidiary banks. insureddepository institutionsare consistentwithapproval The record, including confidential supervisory informa ofthe proposal.48 tion, indicates that Bank of America has taken steps throughpoliciesandproceduresto ensurecompliancewith CONCLUSION fair lending andotherconsumerprotection laws and regu Based on the foregoing, and in light of all the facts of lations.46BankofAmerica'scomplianceprogramincludes record, the Board has determined that the application fair-lending policy and product guides, compliance file should be, and hereby is, approved.49 In reaching its reviews, testing of HMDA data's integrity, and other quality-assurance measures. In addition, Bank ofAmerica representedthatitprovidesfairlendingtrainingannuallyto 47. Somecommentersexpressedconcernthattheproposedacqui sition would result in a loss of jobs. The effect of a proposed ensure that Bank ofAmerica's associates understand their transactiononemploymentinacommunityis notamongthe factors responsibility for complying with the fair lending policy that the Boardisauthorized toconsiderunderthe BHCAct,and the and how to employ fair lending "best practices" in all federal bankingagencies, courts,and the Congressconsistentlyhave aspectsofthe lending process. BankofAmericahasstated interpretedtheconvenienceandneedsfactortorelatetotheeffectofa that its fair lending policies will continue to apply to proposal on the availability and quality of banking services in the community. See, e.g., Wells Fargo & Company, 82 Federal Reserve currentBankofAmericaoperations and that itwill review Bulletin445,457(1996). and make appropriate modifications to the fair lending 48. One commenter reiterated comments it made in connection policies that will apply to the operations ofLaSalle Bank withthe BOA/Fleet OrderandBOA/MBNA Order, urging the Board and LaSalle Bank Midwest after consummation of the not to approve the proposal until Bank of America meets certain "commitments"regardingitslendingprogramsinHawaiianditsgoal proposal. formortgagelendingtoNativeHawaiiansonHawaiianHomeLands. The Board also has considered the HMDAdata in light Seee.g., BOA/FleetOrderat232-33.Asnotedinthatorder,Bankof of other information, including the programs described America's publicly announced plans to engage in certain lending above and the overall performance records ofthe subsid programs in Hawaii were not commitments to the Board, and these iary banks of Bank of America under the CRA. These planswerenotconditionstotheBoard'sapprovalsinearlierapplica tions by Bank of America or its predecessors. See id. As also established efforts and record ofperformance demonstrate previously noted, the Board views the enforceability ofsuch third that the institutions are active in helping to meetthe credit partypledges,initiatives,andagreementsasmattersoutsidetheCRA. needsoftheirentirecommunities. Bank of America has represented that it has complied with its commitmenttotheStateofHawaii'sDepartmentofHawaiianHome Landsbymakingloansandinvestmentsexceeding$151 millionunder thetermsofthatcommitment. 46. One commenteralleged that the terms ofBank ofAmerica's 49. Several commenters requested that the Board hold a public creditcardcontractsare unfairand deceptive and suggestedthatthe meetingorhearingontheproposal.Section3oftheBHCActdoesnot Board should require Bank of America to modify its credit card requiretheBoardtoholdapublichearingonanapplicationunlessthe contracts to avoid unfair and deceptive consequences and to adopt appropriatesupervisoryauthorityforthebanktobeacquiredmakesa certain credit card-related practices that have been adopted by other written recommendation ofdenial ofthe application. The Board has banking organizations. Bank ofAmerica has stated that it does not notreceivedsucharecommendationfromtheappropriatesupervisory engageinorcondonedeceptivepracticesandthatitconductsmultiple, authorities.Underitsrules,theBoardalsomay,initsdiscretion,holda ongoingreviewstoensurethattheterms,conditions,andmarketingof public meeting or hearing on an application to acquire a bank if its credit card products are appropriate and comply with applicable necessary or appropriate to clarify factual issues related to the laws and regulations, including the Truth in Lending Act and the application and to provide an opportunity for testimony (12 CFR Board's Regulation Z. The Board has consulted with the ace, the 225.16(e), 262.25(d». The Board has considered carefully the com primaryfederalsupervisorofBankofAmerica'ssubsidiarybankthat menters'requestsinlightofallthefactsofrecord.IntheBoard'sview, engagesincreditcardoperations. thecommentershad ample opportunityto submittheirviewsand, in

C1l6 Federal Reserve Bulletin0 December 2007 conclusion,theBoardhasconsideredallthefactsofrecord Votingfor this action: ChairmanBernanke, ViceChairman Kohn, inlightofthefactors thatis requiredtoconsiderunderthe andGovernorsWarsh,Kroszner,andMishkin. BHC Act, the FRA, and other applicable statutes.50 The ROBERT DEY. FRIERSON Board'sapprovalisspecificallyconditionedoncompliance Deputy Secretary ofthe Board byBankofAmericawiththeconditionsinthisorderandall thecommitmentsmadetotheBoardinconnectionwiththe proposal. For purposes of this transaction, these commit Appendix A mentsandconditionsare deemedtobeconditionsimposed in writing bythe Boardinconnectionwithits findings and Computation ofthe Amount ofDeposits Held by Institu decision and, as such, may be enforced in proceedings tions Using the Revised Call Report and Thrift Financial underapplicablelaw. ReportForms The proposal may not be consummatedbefore the 15th calendar day after the effective date ofthis order, or later than three months after the effective date of this order INSURED BANKS WITHOUT FOREIGN DEPOSITS unlesssuchperiodisextendedforgoodcausebytheBoard The amount of deposits held by insured banks without or by the Federal Reserve Bank of Richmond, acting foreign deposits using the revised Call Report was com pursuantto delegatedauthority. putedbyaddingthe "Totaldeposit liabilitiesbeforeexclu By order ofthe Board ofGovernors, effective Septem sions (gross) as defined in section 3(1) of the Federal ber 14, 2007. DepositInsuranceActand FDICregulations," reportedon Schedule RC-O, and the "Interest accrued and unpaid on fact, submitted written comments that the Board has considered depositsindomesticoffices,"reportedon ScheduleRC-G. carefullyinactingontheproposal.Thecommenters' requests fail to demonstrate why written comments do not present their views adequatelyorwhyameetingorhearingotherwisewouldbenecessary orappropriate.Forthesereasons,andbasedonallthefactsofrecord, INSURED BANKS WITH FOREIGN DEPOSITS the Board has determined that a public meeting or hearing is not required or warranted in this case. Accordingly, the requests for a Theamountofdepositsheldbyinsuredbankswithforeign publicmeetingorhearingontheproposalaredenied. deposits using the revised Call Report was computed by 50. Anumberofcommentershavecontendedthatalongerpublic comment period should have been provided in light of, or that subtracting "Total foreign deposits" from the "Total considerationoftheproposalshouldbedelayeduntil afinal disposi deposit liabilities before exclusions (gross) as defined in tion of, litigation in the Netherlands concerning the need for ABN Section3(1)oftheFederalDepositInsuranceActandFDIC AMRO shareholder approval of the proposed transaction. As dis regulations," reported on Schedule RC-O, and adding the cussedabove,theBoardhascarefullyreviewedtherecordinthiscase, "Interest accrued and unpaid on deposits in domestic inlightoftheBoard'slimitedjurisdictionundertheBHCActandthe InternationalBankingAct(12U.S.C.§3101etseq.).TheBoardnotes offices,"reportedonScheduleRC-G. thattheSupremeCourtoftheNetherlandshasruledthattheproposed acquisitionofABNAMRONorthAmericadidnotrequireshareholder approval and, accordingly, this matterhas been resolved. Further,as INSURED SAVINGS ASSOCIATIONS noted above, the commenters have had ample opportunityto submit their views and, in fact, have provided written submissions that the The amount of deposits held by insured savings associa Boardhas consideredcarefullyinacting on the proposal. Moreover, theBoardisrequiredunderapplicablelawanditsregulationstoacton tions using the revised Thrift Financial Report was com applications submitted under the BHC Act and the FRA within puted by subtracting "Total Foreign Deposits" from the specified time periods. Based on all the facts ofrecord, the Board "Total Deposit Liabilities Before Exclusions (Gross) as concludesthattherecordissufficienttoactonthisproposalunderthe Defined in Section 3(1) ofthe FDIAct and FDIC Regula factorstheBoardisrequiredtoconsiderundertherelevantstatutesand tions," reported on Schedule DI, and adding "Accrued that delay in consideringthe proposal orextension ofthe comment periodonthebasessetforthbythesecommentersisnotwarranted. InterestPayable-Deposits,"reported onScheduleSc.

Legal Developments: Third Quarter, 2007 e1l7 Appendix B ILLINOIS BANKING MARKETS WITH COMPETITIVE OVERLAP Market Remaining Amount deposit Resulting .Change in Bank Rank numberof ofdeposits shares HHI HHI competitors (percent) Aurora-The southern three tiers of townships in Kane County (Virgil, Campton, St. Charles, Kaneville, Blackberry, Geneva, Batavia, Big Rock, Sugar Grove, andAurora townships); Little Rock, Bristol, Oswego, Fox, and Kendall townships in Kendall County; andSandwich township in De Kalb County Bank ofAmerica Pre-Consummation ... 27 $42.5 mil. .6 1,042 1 40 ABNAMRO NorthAmerica .............. 25 $50.6 mil. .7 1,042 1 40 Bank ofAmerica Post-Consummation .. 18 $93.1 mil. 1.4 1,042 1 40 Chicago-Cook, Du Page, andLake counties Bank ofAmerica Pre-Consummation ... 12 $4.6 bil. 2.1 807 69 192 ABNAMRO North America .............. 1 $36.5 bil. 16.5 807 69 192 Bank ofAmerica Post-Consummation .. 1 $41.1 bil. 18.6 807 69 192 Elgin-Marengo, Seneca, Nunda, Riley, Coral, Grafton, andAlgonquin townships in McHenry County; andthe northern two tiers oftownships in Kane County (Hampshire, Rutland, Dundee, Burlington, Plato, and Elgin townships). Bank ofAmerica Pre-Consummation ... 27 $28.4 mil. .5 573 2 38 ABNAMRO NorthAmerica .............. 19 $107.4 mil. 1.7 573 2 38 Bank ofAmerica Post-Consummation .. 15 $135.7 mil. 2.2 573 2 38 Joliet-Will County (excluding Florence, Wilmington, Reed, Custer, and Wesley townships); AuxSable township in Grundy County; andNa-Au-Say and Seward townships in Kendall County. Bank ofAmerica Pre-Consummation ... 28 $46.5 mil. .6 1,203 3 53 ABN AMRO North America .............. 8 $202.2 mil. 2.5 1,203 3 53 Bank ofAmerica Post-Consummation .. 8 $248.7 mil. 3.1 1,203 3 53 Woodstock-Chemung, Alden, Hebron, Richmond, Burton, Dunham, Hartland, Greenwood, McHenry, andDorr townships in McHenry County Bank ofAmerica Pre-Consummation ... 19 $7.5 mil. .3 843 2 24 ABN AMRO North America .............. 9 $84.9 mil. 3.7 843 2 24 Bank ofAmerica Post-Consummation .. 9 $92.3 mil. 4.0 843 2 24 NOTE:Allamountsofdepositsareunweighted.Allrankings.marketdeposit shares. and HHls are basedon thrift institutiondeposits weighted at 50per cent.

el18 Federal Reserve Bulletin0 December 2007 Mercantile Bancorp, Inc. theBHCActaremetinthiscase.5Inlightofallthefactsof record, the Board is permitted to approve the proposal Quincy, Illinois undersection3(d)ofthe BHCAct. Order Approving the Acquisition of a Bank COMPETITIVE CONSIDERATIONS Holding Company Section 3 of the BHC Act prohibits the Board from Mercantile Bancorp, Inc. ("Mercantile"), a bank holding approving a proposal that would result in a monopoly or company within the meaning of the Bank Holding Com would be in furtherance of an attempt to monopolize the panyAct("BHCAct"),hasrequestedtheBoard'sapproval business of banking in any relevant banking market. The undersection 3oftheBHCAct! to acquireHNB Financial BHCAct also prohibits the Board from approving a bank Services, Inc. ("HNB") and thereby acquire its subsidiary acquisition that would substantially lessen competition in bank,HNB NationalBank("HNB Bank"),bothofHanni any relevant banking market, unless the anticompetitive bal,Missouri. effectsoftheproposalareclearly outweighedin the public Notice of the proposal, affording interested persons an interest by the probable effect ofthe proposal in meeting opportunitytosubmitcomments,hasbeenpublishedinthe theconvenienceandneedsofthecommunitytobeserved.6 FederalRegister(72FederalRegister33,506(2007».The MercantileandHNB havesubsidiarydepository institu time for filing comments has expired, and the Board has tions that compete directly in two banking markets: St. considered the application and all comments received in Louis, Missouri-Illinois; and Hannibal, Missouri. The lightofthe factors setforth insection 3ofthe BHCAct. Boardhasreviewedcarefullythecompetitiveeffectsofthe Mercantile, with total consolidated assets of approxi proposalineachbanking marketinlightofall thefacts of mately $1.4 billion, controls eight subsidiary banks that record. In particular, the Boardhasconsidered the number operateinFlorida,Illinois, Kansas, and Missouri. Mercan of competitors that would remain in the markets, the tile is the60th largestdepository organizationinMissouri, relativesharesoftotaldepositsindepositoryinstitutionsin controllingdepositsof$290.7million, whichrepresentless the markets ("marketdeposits") controlled by Mercantile than 1 percent of total deposits of insured depository and HNB,7 the concentration level ofmarket deposits and institutionsinMissouri ("statedeposits").2 the increase in this level as measured by the Herfindahl HNB, withtotalconsolidatedassetsof$164.9million,is HirschmanIndex("HHI")undertheDepartmentofJustice the IIIth largestdepository organizationinMissouri, con MergerGuidelines("DOJGuidelines"),8andothercharac trolling deposits of approximately $133.3 million. On teristicsofthe markets. consummation ofthis proposal, Mercantile wouldbecome the 35th largest depository organization in Missouri, con trolling deposits of approximately $424 million, which 5. 12 U.S.c. §§1842(d)(1)(AHB) and 1842(d)(2)(AHB). Mer representless than I percentofstatedeposits. cantileisadequatelycapitalizedandadequatelymanaged,asdefined byapplicablelaw. HNBBankhasbeeninexistenceandoperatedfor the minimum period of time required by Missouri state law (five INTERSTATE ANALYSIS years). See Mo. Rev. Stat. §362.077.1. On consummation of the proposal, Mercantilewould control less than 10 percentofthe total Section 3(d) ofthe BHCAct allows the Board to approve amount ofdeposits ofinsured depository institutions in the United an application by a bank holding company to acquire States. Mercantile also would comply with the state deposit cap in control of a bank located in a state other than the bank Missouri, whereitwillcontrolless than 13percentofstatedeposits. SeeMo.Rev.Stat.§362.915.Allotherrequirementsofsection3(d)of holding company's home state if certain conditions are theBHCActwouldbemetonconsummationoftheproposal. met. For purposes of the BHC Act, the home state of 6. 12U.S.c.§1842(c)(1). MercantileisIllinois,3 andHNB islocatedinMissouri.4 7. DepositandmarketsharedataareasofJune30.2006,adjusted Based on a review of all the facts of record, including toreflectmergersandacquisitionsthroughJuly6,2007,andarebased oncalculationsinwhichthedepositsofthriftinstitutionsareincluded relevant state statutes, the Board finds that the conditions at50 percent. The Boardpreviously has indicated that thrift institu for an interstate acquisition enumerated in section 3(d) of tions have become, or have the potential to become, significant competitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup, 75FederalReserveBulletin386,387(1989);NationalCityCorpora tion, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board 1. 12U.S.c.§1842. regularly has included thrift institution deposits in the market share 2. Asset data are as of March 31, 2007; statewide deposit and calculationona50percentweightedbasis.See, e.g., FirstHawaiian, ranking data are as of June 30, 2006, and reflect merger activity Inc.,77FederalReserveBulletin52,55(1991). through July6, 2007. In this context, insureddepository institutions 8. Under the DOJ Guidelines, a market is considered unconcen includecommercialbanks,savingsbanks,andsavingsassociations. tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated 3. See 12U.S.c. §1842(d).Abankholdingcompany'shomestate if the post-merger HHI is between 1000 and 1800, and highly isthe statein whichthe total deposits ofall banking subsidiaries of concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof suchcompanywerethelargestonJuly 1, 1966,orthedateonwhich Justice ("DOJ") has informed the Board that a bank merger or thecompanybecameabankholdingcompany,whicheverislater. acquisition generally will notbechallenged(inthe absence ofother 4. Forpurposesofsection3(d)oftheBHCAct,theBoardconsiders factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI a bankto be located in the states in which the bank is chartered or is at least 1800 and the merger increases the HHI more than 200 headquarteredoroperatesabranch.See 12 U.S.c. §§1841(0)(4H7) points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds and 1842(d)(1)(A)and 1842(d)(2)(B). forscreeningbankmergersandacquisitionsforanticompetitiveeffects

Legal Developments: Third Quarter, 2007 C1l9 Consummationoftheproposalwouldbeconsistentwith approximately 34.6percentofmarketdeposits onconsum Board precedent and within the thresholds in the DOJ mation ofthe proposal, and the HHI would increase 599 guidelines in the 5t. Louis market.9 On consummation of pointsto 1871. the proposal, there would be no increase in concentration The Board has considered carefully whether other fac and the 5t. Louis market would remain unconcentrated as tors either mitigate the competitive effects ofthe proposal measured by the HHI. In addition, numerous competitors or indicate that the proposal would have a significantly wouldremainin the market.10 adverse effect on competition in the market. The number The Hannibal banking market II warrants a detailed and strength offactors necessary to mitigate the competi review of the competitive effects because the post tiveeffectsofaproposaldependonthesizeoftheincrease consummationconcentrationlevelwouldexceedthethresh and the resulting level of concentration in the banking oldlevels in the DOJ Guidelines. In the Hannibalbanking market.J3 market, Mercantile is the largest depository organization, In this market, the record indicates that the proposal controlling deposits of approximately $106.3 million, would not have a significant adverse impact on competi whichrepresentapproximately 19percentofmarketdepos tion.Afterconsummationoftheproposal,tenotherdeposi its. HNB is the second largest depository organization in toryorganizationswouldcontinuetooperateinthemarket. the market, also controlling deposits of approximately In addition, the second largest competitor in the market $106.3million.Onconsummationoftheproposal,Mercan would have a branch network comparable to Mercantile's tile wouldremainthelargestdepositoryorganizationin the branchnetwork. market, controlling deposits ofapproximately $212.6 mil The Board also has concluded that the activities of a lion,whichrepresentapproximately37.9percentofmarket community credit union in the market exert a sufficient deposits.TheHHI would increase718 pointsto 1972. competitive influence to mitigate, in part, the potential Onethriftinstitutionoperatingin the marketservesas a adverse competitive effects of the proposal. The credit significant source of commercial loans and provides a union offers a wide range ofconsumer products, operates broad range of consumer, mortgage, and other banking street-level branches, and has membership open to all the products. Competition from this thrift institution closely residents in the market.14 This active community credit approximatescompetitionfromacommercialbank.Accord union controls approximately $10.8 million in deposits in ingly, the Boardhas concludedthat deposits controlled by the market, which represent approximately 1 percent of this institution should be weighted at 100 percent in market deposits on a 50 percent weighted basis. Account market-share calculations.J2 Accounting for the revised ing for the revised weightingofthese deposits, Mercantile weighting of these deposits, Mercantile would control wouldcontrolapproximately34.3percentofmarketdepos its on consummation ofthe proposal, and the HHI would implicitly recognize the competitive effects of limited-purpose and increase588 points to 1839. othernondepositoryfinancialentities. The DOJ has conducted adetailed review ofthe poten 9. TheSt.Louisbankingmarketisdefinedas: (1)inMissouri-the tialcompetitiveeffectsofthe proposalandhasadvised the cityofSt.Louis;Franklin,Jefferson,Lincoln,SaintCharles,St.Louis, Board that consummation of the transaction would not Warren, and Washingtoncounties;Roark, Boeuf, Canaan,and Brush likely haveasignificantly adverseeffectoncompetitionin Creek townships and the cities of Hermann and Owensville, all in GasconadeCounty;BoonetownshipinCrawfordCounty;andLoutre any relevant banking market. In addition, the appropriate townshipinMontgomeryCounty;and(2)inIllinois-Bond,Calhoun, banking agencies have been afforded an opportunity to Clinton,Jersey,Macoupin, Madison, Monroe,andSt.Claircounties; commentandhave notobjected tothe proposal. thewesternpartofRandolphCounty(definedbyRoute 3ontheeast Basedonallthefacts ofrecord, includingthenumberof andtheKaskaskiaRiveronthesouth),includingthecitiesofRedBud, Ruma,andEvansville;WashingtonCounty,excludingAshleyandDu competitors that would remain in the Hannibal banking Boistownships;andthecityofCentralia. market after consummation, the branch networks ofcom 10. On consummation of the proposal, the HHI would remain petitors, the presence ofan active credit union, and other unchanged at 665 for the St. Louis market. Mercantile operates the data, the Board concludes that consummation of the pro 63rdlargestdepositoryorganizationinthemarket,controllingdeposits posal would not have a significantly adverse effect on ofapproximately$100.4million,whichrepresentlessthan 1percent ofmarketdeposits.HNBoperatesthe I14thlargestdepositoryorgani competition oron the concentration ofresources in either zationinthemarket,controllingdepositsofapproximately$27.1 mil banking market where Mercantile and HNB compete lion.Afterconsummation, Mercantilewould operatethe56thlargest directly or in any other relevant banking market. Accorddepositoryorganizationinthemarket,controllingdepositsofapproxi mately$127.5million, whichrepresentlessthan I percentofmarket deposits.Onehundredthirty-ninedepositoryinstitutionswouldremain nationalaverageforallcommercialbanks.See FirstUnion Corpora inthebankingmarket. tion, 84FederalReserveBulletin489(1998). 11. The Hannibal banking market is defined as Marion and Ralls 13. SeeNationsBankCorporation,84FederalReserveBulletin129 countiesandtheMonroetownshipinMonroeCounty,allinMissouri. (1998). 12. The Board previously has indicated that it may consider 14. The Board previously has considered competition from simi competitionfromathriftinstitutionatalevelgreaterthan50percent larly active credit unions as a mitigating factor. See, e.g., The PNC ofits deposits when appropriate. See, e.g., Banknorth Group. Inc., Financial Services Group, Inc., 93 Federal Reserve Bulletin C65 75 Federal Reserve Bulletin 703 (1989). The thrift institution in the (2007); Wachovia Corporation, 92 Federal Reserve Bulletin C183 Hannibal banking market has a ratio ofcommercial and industrial (2006); F.N.B. Corporation,90FederalReserveBulletin481 (2004); loans to assets ofmore than 10percent, which is comparableto the GatewayBank& TrustCo.,90FederalReserveBulletin547(2004).

Cl20 Federal Reserve Bulletin0 December 2007 ingly, the Boardhasdeterminedthatcompetitiveconsider CONVENIENCE AND NEEDS CONSIDERATIONS ationsare consistentwith approval. Inactingonaproposalundersection3oftheBHCAct, the FINANCIAL, MANAGERIAL, AND SUPERVISORY Boardalso mustconsiderthe effectsoftheproposalonthe CONSIDERATIONS convenienceandneedsofthecommunitiestobeservedand take into account the records of the relevant insured Section3oftheBHCActrequirestheBoardtoconsiderthe depository institutionsundertheCommunityReinvestment financial and managerial resources andfuture prospects of Act ("CRA").15 All ofMercantile's banks received "out the companies and depository institutions involved in the standing" or "satisfactory" ratings at their most recent proposal and certain other supervisory factors. The Board CRA performance evaluations by the banks' primary fed has considered these factors in light of all the facts of eral supervisors. HNB Bank received a "satisfactory" record,includingconfidentialreportsofexamination,other rating at its most recent CRA performance evaluation by supervisoryinformationfromthe primaryfederal andstate theOfficeoftheComptrolleroftheCurrency,asofJuly 14, supervisors ofthe organizations involved in the proposal, 2003. After consummation of the proposal, Mercantile publicly reported and other financial information, and plans to integrate its CRA program with HNB Bank's informationprovidedbyMercantile. operations. Mercantile has represented that consummation Inevaluatingfinancialfactorsinexpansionproposalsby oftheproposalwouldallowittoprovideabroaderrangeof banking organizations, the Board reviews the financial financialproductsandservicesoveralargerarea.Basedon condition ofthe organizations involved both on a parent all the facts ofrecord, the Board concludes that consider only and on a consolidated basis, as well as the financial ationsrelatingtotheconvenienceandneedsofthecommu condition ofthe subsidiary depository institutions and the nitiestobeservedandtheCRAperformancerecordsofthe organizations' nonbanking operations. In this evaluation, relevant depository institutions are consistent with ap the Board considers a variety of information, including proval. capital adequacy, asset quality, and earnings performance. In assessing financial factors, the Board consistently has CONCLUSION consideredcapitaladequacytobeespeciallyimportant.The Board also evaluates the financial condition of the com Based on the foregoing and all the facts of record, the bined organization at consummation, including its capital Board has determined that the application should be, and position, asset quality, and earnings prospects, and the hereby is, approved. In reaching its conclusion, the Board impactofthe proposedfunding ofthe transaction. hasconsideredall thefacts ofrecordinlightofthefactors TheBoardhasconsideredcarefully the financial factors that it is required to consider under the BHC Act. The of the proposal. Mercantile, HNB, and their subsidiary Board'sapprovalisspecificallyconditionedoncompliance depository institutions currently are well capitalized and byMercantilewiththeconditionsimposedinthisorderand wouldremain soonconsummationofthe proposal. Based thecommitmentsmadetotheBoardinconnectionwiththe on its review of the record, the Board also finds that application. Forpurposesofthis action, theconditionsand Mercantile has sufficient financial resources to effect the commitments are deemed to be conditions imposed in proposal. The proposed transaction is structured as a cash writing by the Board in connection with its findings and purchasethatwouldbefundedfromtheproceedsofissuing decision herein and, as such, may be enforcedin proceed trustpreferredsecuritiesand debt. ingsunderapplicablelaw. TheBoardalsohasconsideredthe managerialresources The proposed transaction may not be consummated ofMercantile, HNB, and their subsidiary depository insti beforethe 15thcalendarday afterthe effectivedateofthis tutions.TheBoardhasreviewedtheexaminationrecordsof order, or laterthan three months after the effective date of these institutions, including assessments oftheir manage thisorder,unlesssuchperiodisextendedforgoodcauseby ment, risk-management systems, and operations. In addi the BoardortheFederalReserve Bankof5t. Louis, acting tion, the Board has consideredits supervisory experiences pursuanttodelegatedauthority. and those ofthe otherrelevant banking supervisory agen ByorderoftheBoardofGovernors,effectiveAugust7, cieswiththeorganizationsandtheirrecordsofcompliance 2007. with applicable banking laws and with anti-money Voting forthis action: Chairman Bemanke, ViceChairman Kohn, laundering laws. The Board also has considered Mercan andGovernorsWarsh,Kroszner,andMishkin. tile's plans for implementing the proposal, including the proposedmanagementafterconsummation. ROBERT DEY. FRIERSON Basedonallthefactsofrecord,theBoardhasconcluded Deputy Secretary ofthe Board thatconsiderations relating tothe financial and managerial resourcesandfutureprospectsoftheorganizationsinvolved intheproposalareconsistentwithapproval,asaretheother supervisoryfactors undertheBHCAct. 15. 12U.S.C.§2901 etseq.;12U.S.c. §1842(c)(2).

Legal Developments: Third Quarter, 2007 Cl21 Wells Fargo & Company INTERSTATE ANALYSIS San Francisco, California Section3(d)oftheBHCActallowstheBoardtoapprovean applicationbyabankholdingcompanytoacquirecontrolof Order Approving the Merger of Bank a bank located in a state other than the bank holding Holding Companies company's home state if certain conditions are met. For purposesofthe BHCAct, the home stateofWells Fargois Wells Fargo & Company ("Wells Fargo"), a financial Minnesota,4and GreaterBayislocatedinCalifornia.5 holding companywithin the meaningofthe BankHolding Based on a review of all the facts of record, including Company Act ("BHC Act"), has requested the Board's relevant state statutes, the Board finds that the conditions approval under section 3 of the BHC Act! to acquire for an interstate acquisition enumerated in section 3(d) of GreaterBayBancorp("GreaterBay"),EastPaloAlto, and theBHCActaremetinthiscase.6Inlightofallthefactsof its subsidiary bank, Greater Bay Bank, National Associa record, the Board is permitted to approve the proposal tion ("GB Bank"), PaloAlto, bothinCalifornia.2 undersection3(d)oftheBHCAct. Notice of the proposal, affording interested persons an opportunity to submit comments, has been published COMPETITIVE CONSIDERATIONS (72 Federal Register 35,246 (2007». The time for filing comments has expired, and the Board has considered the Section 3 of the BHC Act prohibits the Board from proposal and all comments received in lightofthe factors approving a proposal that would result in a monopoly or setforth inthe BHCAct. would be in furtherance of an attempt to monopolize the Wells Fargo, with total consolidated assets of approxi business of banking in any relevant banking market. The mately $539.9billion,isthefifth largestdepositoryorgani BHCAct also prohibits the Board from approving abank zationintheUnitedStates,3controllingdepositsofapproxi acquisition that would substantially lessen competition in mately $329.8 billion, which represent 4.3 percent of the any relevant banking market, unless the anticompetitive total amount ofdeposits ofinsured depository institutions effectsofthe proposalare clearlyoutweighed in thepublic in the United States. Wells Fargo's subsidiary banks oper interest by the probable effect ofthe proposal in meeting ate in 23 states, including California. Wells Fargo is the theconvenienceand needsofthecommunitytobeserved.? second largestdepository institutioninCalifornia, control WellsFargoandGreaterBayhavesubsidiarydepository ling $101.9billionindeposits. institutionsthatcompetedirectlyinfivebankingmarketsin GreaterBayhas totalconsolidatedassetsof$7.3 billion California: Monterey-Seaside-Marina; San Francisco and operates only in California. It is the 18th largest Oakland-San Jose; Santa Cruz; Santa Rosa; and Watson depositoryorganizationinthestate, controllingdeposits of ville. The Board has reviewed carefully the competitive approximately $5.3billion. effectsofthe proposalineachofthese banking marketsin On consummation of the proposal, Wells Fargo would lightofall the facts ofrecord. In particular, the Boardhas remain thefifth largestdepository institutionin the United consideredthenumberofcompetitorsthatwouldremainin States, with total consolidated assets of approximately the markets, the relative shares oftotal deposits in deposi $547.2 billion. Wells Fargo would control deposits of toryinstitutionscontrolledbyWellsFargoand GreaterBay approximately $335.3 billion, which represent approxi mately 4.4 percent of the total amount of deposits of 4. See 12U.S.c. §1842(d).Abankholdingcompany'shomestate insured depository institutions in the United States. In is the state in whichthe total deposits ofall banking subsidiaries of California, Wells Fargo would remain the second largest suchcompanywerethelargestonJuly I, 1966,orthedateonwhich depository organization, controlling deposits of approxi thecompanybecameabankholdingcompany,whicheverislater. 5. Forpurposesofsection3(d)oftheBHCAct,theBoardconsiders mately $107.2 billion, which represent approximately a bank to be located in the states in which the bank is chartered or 15 percent of the total amount of deposits of insured headquartered oroperatesabranch.See 12 U.S.C. §§1841(0)(4H7) depositoryinstitutionsin the state. and 1842(d)(I)(A)and 1842(d)(2)(B). 6. 12 U.S.c. §§I842(d)(I)(AHB) and 1842(d)(2)(AHB). Wells Fargoisadequatelycapitalizedandadequatelymanaged,asdefinedby 1. 12U.S.c.§1842. applicablelaw.Californiadoesnothave aminimumagerequirement 2. WellsFargoalsoproposestoacquirethenonbankingsubsidiaries applicabletothe proposal. On consummationofthe proposal,Wells of Greater Bay in accordance with section 4(k) of the BHC Act, Fargo would control less than 10 percent of the total amount of 12 U.S.C. §1843(k). In addition, Wells Fargo has requested the depositsofinsureddepositoryinstitutionsintheUnitedStatesandless Board's approval to hold and, in certain circumstances, exercise an than30percentofstatedeposits.Allotherrequirementsofsection3(d) option to purchase up to 19.9 percent ofGreater Bay's stock. The oftheBHCActwouldbemetonconsummationoftheproposal. optionwouldterminateonconsummationofWellsFargo'sacquisition 7. 12U.S.c.§1842(c)(l). ofGreaterBay. 8. DepositandmarketsharedataareasofJune30,2006,adjusted 3. AssetdataareasofJune30,2007;nationaldepositandranking to reflect mergers and acquisitions through June 29, 2007, and are dataareasofMarch31,2007;statewidedepositandrankingdataare based on calculations in which the deposits ofthrift institutions are as ofJune 30, 2006. In this context, insured depository institutions includedat50percent.TheBoardpreviouslyhasindicatedthatthrift includecommercialbanks,savingsbanks,andsavingsassociations. institutionshavebecome,orhavethepotentialtobecome,significant

C122 Federal Reserve BulletinD December 2007 inthemarkets("marketdeposits"),8theconcentrationlevel Inevaluatingfinancial factors inexpansionproposalsby of market deposits and the increases in these levels as banking organizations, the Board reviews the financial measured by the Herfindahl-Hirschman Index ("HHI") condition of the organizations involved on both a parent underthe DepartmentofJusticeMergerGuidelines("DOJ onlyandconsolidatedbasis, as wellas the financial condi Guidelines"),9andothercharacteristicsofthe markets. tionofthesubsidiarydepositoryinstitutionsandsignificant Consummationoftheproposalwouldbeconsistentwith nonbanking operations. In this evaluation, the Board con Board precedent and within the thresholds in the DOJ siders avarietyofinformation, includingcapitaladequacy, Guidelinesinall five bankingmarkets.10Onconsummation assetquality,andearningsperformance. Inassessingfinan of the proposal, each market would remain moderately cial factors, the Board consistently has considered capital concentrated, as measuredby the HHI.Also, thechangein adequacytobeespeciallyimportant.TheBoardalsoevalu theHHImeasureofconcentrationwouldbeverysmalland atesthefinancialconditionofthecombinedorganizationat numerouscompetitorswouldremain ineachmarket. consummation, including itscapitalposition, assetquality, The DOJ hasconducted a detailed review ofthe poten and earnings prospects, and the impact of the proposed tialcompetitiveeffectsofthe proposaland hasadvisedthe funding ofthe transaction. Board that consummation of the transaction would not The Board has considered the proposal carefully under likely haveasignificantly adverseeffectoncompetitionin the financial factors. Wells Fargo, Greater Bay, and their any relevant banking market. In addition, the appropriate subsidiarydepositoryinstitutionsarecurrentlywellcapital banking agencies have been afforded an opportunity to ized and would remain so on consummation of the pro commentandhavenotobjectedtothe proposal. posal. Based on its review ofthe record, the Board finds Basedonallthefactsofrecord,theBoardconcludesthat thatWells Fargo has sufficient financial resources to effect consummation of the proposal would not have a signifi theproposal.The proposedtransactionisstructuredprima cantly adverse effect on competition or on the concentra rily as ashareexchange. tion ofresources inany ofthe five banking markets where TheBoardalsohasconsideredthe managerialresources Wells Fargo and Greater Bay compete directly or in any ofthe organizations involved and the proposed combined otherrelevantbankingmarket. Accordingly, the Boardhas organization. The Board has reviewed the examination determined that competitive considerations are consistent records ofWells Fargo, Greater Bay, and their subsidiary withapproval. depositoryinstitutions,includingassessmentsoftheirman agement, risk-management systems, and operations. In FINANCIAL, MANAGERIAL, AND SUPERVISORY addition, the Board has considered its supervisory experi CONSIDERATIONS ences and those of the other relevant bank supervisory agencies with the organizations and their records ofcom Section3oftheBHCActrequirestheBoardtoconsiderthe pliancewithapplicablebankinglawsandwithanti-money financial and managerial resources and future prospects of laundering laws. Wells Fargo, Greater Bay, and their sub the companies and depository institutions involved in the sidiarydepositoryinstitutionsareconsideredwellmanaged. proposal and certainother supervisory factors. The Board The Board also has considered Wells Fargo's plans for has considered these factors in light of all the facts of implementing the proposal, including the proposed man record, including confidential reports of examination and agementafterconsummation. other supervisory information received from the relevant Basedonallthefactsofrecord,theBoardhasconcluded federal supervisors of the organizations involved in the thatconsiderationsrelating to the financial and managerial proposal,andpubliclyreportedandotherfinancialinforma resourcesandfutureprospectsoftheorganizationsinvolved tion, includinginformationprovidedbyWells Fargo. intheproposalareconsistentwithapproval,asaretheother supervisoryfactors underthe BHCAct. competitorsofcommercialbanks.See,e.g..MidwestFinancialGroup, 75FederalReserveBulletin386.387(1989);NationalCityCorpora CONVENIENCE AND NEEDS CONSIDERATIONS tion, 70 FederalReserve Bulletin 743, 744 (1984). Thus, the Board regularly has included thrift institution deposits in the market share Inactingonaproposalundersection3oftheBHCAct, the calculationona50percentweightedbasis.See. e.g., FirstHawaiian. Boardisrequiredto considerthe effectsoftheproposalon Inc.,77 FederalReserveBulletin52,55(1991). theconvenienceandneedsofthecommunitiestobeserved 9. Under the DOJ Guidelines, a market is considered unconcen tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated andtotakeintoaccounttherecords oftherelevantinsured if the post-merger HHI is between 1000 and 1800, and highly depositoryinstitutionsundertheCommunityReinvestment concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof Act ("CRA").]] The CRA requires the federal financial Justice CDOJ") has informed the Board that a bank merger or supervisory agenciestoencourageinsureddepositoryinsti acquisition generally will not bechallenged(in the absenceofother tutionstohelp meetthecreditneedsofthe localcommuni factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI is at least 1800 and the merger increases the HHI more than 200 ties in which they operate, consistent with their safe and points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds soundoperation,andrequirestheappropriatefederalfinan forscreeningbankmergersandacquisitionsforanticompetitiveeffects cial supervisory agency to take into account a relevant implicitly recognize the competitive effects oflimited-purpose and othernondepositoryfinancialentities. 10. Those banking markets and the effectsofthe proposal on the concentrationofbankingresourcesthereinaredescribedinAppendixA. II. 12U.S.c. §2901 etseq.;12U.S.c. §I842(c)(2).

Legal Developments: Third Quarter, 2007 C123 depository institution's record ofmeeting the creditneeds expressedconcernthatthe proposalwouldleadtoclosings of its entire community, including low- and moderate ofthe combinedorganization'sbranches. income("LMI")neighborhoods,inevaluatingbankexpan sionary proposals.12 A. eRA Performance Evaluations The Board has considered carefully all the facts of record, including evaluations of the CRA performance As providedin the CRA, the Boardreviewed the proposal records of the subsidiary depository institutions of Wells in light of the evaluations by the appropriate federal Fargo and Greater Bay, data reported by Wells Fargo and supervisorsoftheCRAperformancerecordsofthe insured Greater Bay under the Home Mortgage Disclosure Act depository institutionsofWellsFargoandGreaterBay.An ("HMDA"),13otherinformation provided by Wells Fargo, institution's most recentCRAperformance evaluationis a confidential supervisory information, and public comment particularly important consideration in the applications receivedontheproposal.Acommenterexpressedconcerns process because it representsadetailed, on-siteevaluation about Wells Fargo's record of serving the credit and oftheinstitution'soverallrecordofperformanceunderthe community-development-investment needs of its assess CRAbyits appropriatefederal supervisor.16 ment areas,14 particularly in California, and criticized a Wells Fargo's lead bank, WF Bank, received an "out specific credit product offered by WF Bank.ls The com standing" rating at its most recent CRA performance acc, menteralso alleged, basedon HMDAdata, thatWF Bank evaluationby the as ofSeptember30, 2004 ("2004 engaged in disparate treatment ofAfrican American indi WF Bank Evaluation"). Each of Wells Fargo's other viduals in home mortgage lending. In addition, the com subsidiary banks that is subject to the CRA received an menter contended, without specific allegations, that GB "outstanding" or "satisfactory" rating at its most recent Bankhaddemonstratedlittleresponsiveness tocommunity CRAperformance evaluation.J7 GB Bankalsoreceivedan acc, needs during its operating history. The commenter also "outstanding" CRAperformancerating by the as of May 17,2006("2006GB BankEvaluation").WellsFargo hasrepresentedthatitwouldimplementitsCRAprograms, policies, andprocedures atGB Bank. l2. l2U.S.C.§2903. 13. 12U.S.C. §2801etseq. eRA Performance ofWF Bank. In the 2004 WF Bank 14. Thecommenteralso requested thatWells Fargo renew certain Evaluation, the bank received "outstanding" ratings on community commitments that it made in 1998 and make annual each of the lending, investment, and service tests for its community goals. In addition, the comrnenter requested that Wells CRA performance overall and in California.18 Examiners FargoBank, NationalAssociation("WFBank"),SiouxFalls, South reported thatWFBank's overall lending performance was Dakota,agreetodeclare asix-monthmoratoriumon homemortgage foreclosuresbecauseofcurrentconcernsaboutthemortgageindustry. excellent and that it had a good distribution of home TheBoardhasconsistentlystatedthatneithertheCRAnorthefederal mortgage loans to borrowers of different income levels. bankingagencies' eRAregulationsrequire depository institutionsto They also noted that the bankhadan excellentgeographic make pledges or enter into commitments or agreements with any distribution ofsmallloans tosmallbusinesses.19 organization.See BankofAmerica Corporation,93 Federal Reserve In WF Bank's California assessment areas, examiners BulletinC49, C52 footnote 27(2007). Instead, the Boardfocuses on theexistingCRAperformancerecordofanapplicantandtheprograms concluded that the bank's distribution of loans among that an applicant has in place to serve the credit needs ofits CRA borrowersofdifferent income levels was goodandthatits assessmentareasatthe timethe Boardreviews aproposal underthe lending levels reflected an excellent responsiveness to convenience and needs factor. Wells Fargo represented that it will credit needs. Examiners reported that the bank's commu continuetocommunicatewith,andprovideinformationregardingits eRA performance 10, community organizations. Wells Fargo also nity development lending had a positive impact on its notedthatitworkswithcustomerswhoencounterfinancialdifficulties performance within the state and commendedthe bank for topreventforeclosureswheneverpossible. providing flexible lending programs to meet the credit IS.ThecommenterurgedWFBanktoreducethepriceofitsDirect Deposit Advance Service, which the commenter characterized as a costly payday-loan product. Wells Fargorepresentedthat theservice 16.SeeInteragencyQuestionsandAnswersRegardingCommunity provides an open-end line of credit available only to WF Bank's Reinvestment,66FederalRegister36,620and36,639(2001);72Fed checkingaccountcustomerswhohaverecurringincomeelectronically eralRegister37,922at37,951 (2007). deposited in their checking accounts. Wells Fargo indicated that 17.AppendixBlists themostrecentCRAratingsofWellsFargo's although the service is a higher-priced form of credit, it provides othersubsidiarydepositoryinstitutionsthataresubjecttotheCRA. customers with short-term emergency access to funds. Wells Fargo 18.Theevaluationperiodforthe Californiaassessmentareas was indicatedthatithasdevelopedtoolstohelpcustomersunderstandhow October I, 2001, throughDecember31, 2003, forHMDAandsmall the service works and whetherotherlower-costalternatives may be business lending under the lending test; and November I, 2001, available.TheBoardhasconsultedwiththeOfficeoftheComptroller through September 30. 2004, for community development lending of the Currency ("OCC"), WF Bank's primary federal supervisor, underthelendingtestandfortheinvestmentandservicetests. aboutthisproduct.TheBoardalsorecognizesthatalthoughbankscan 19.Smallbusinessesarebusinesseswithgrossannualrevenuesof help to serve the banking needs ofcommunities by making certain $1 millionorless.Smallloanstosmallbusinessesincludeloanswith productsorservicesavailableoncertaintermsoratcertainrates,the original amounts of $1 million or less that are either secured by CRAneither requires an institution to provide any specific types of nonfarm, nonresidential properties or classified as commercial and productsorservicesnorprescribesthecostschargedforthem. industrialloans.

C124 Federal Reserve Bulletin0 December 2007 needs in itsassessmentareas, includingthe creditneedsof thatthebank'sperformanceundertheinvestmenttestinthe LMIindividualsandbusinesses.WFBankrepresentedthat SanFranciscoassessmentareawasexcellentandthatmany since the 2004 WF Bank Evaluation, it has provided 401 of the bank's qualified investments provided affordable community development loans in Californiatotaling more housingandeconomicrevitalization. Examinersfoundthat than$1.2billion.20 GB Bank's distributionofbranches was goodand that the Examiners characterized the bank's investment activity bank's retail services and alternate delivery systems were inthe 2004WFBankEvaluationas reflectingan excellent responsive to the needs of the community. They also level of responsiveness to a wide variety of community commendedGB Bank'scommunity developmentservices. development needs in its California assessment areas, particularlytheneedfor affordablehousing.They reported B. Branch Closings thatWFBankfunded 4,038 investmentsduring the evalu ation period, totaling more than $307 million and benefit The commenter expressed concern about the proposal's ing more than 2,000 different entities that help meet possibleeffectonbranchclosings.WellsFargorepresented community developmentneeds. WFBankrepresented that thatasaresultoftheacquisition, branchesmightbeclosed it has generally provided increased levels of community inthosemarkets wherebranchesofWFBankoverlapwith development investments since the 2004WFBankEvalu those of GB Bank but that it has not made any decisions ation. The bank stated that between 2004 and 2006 it aboutspecific branchesto be closed,relocated, orconsoli providedmore than4,450communitydevelopmentinvest dated. Wells Fargo has indicated that it would follow its mentsandgrantsinCaliforniatotalingmorethan$330mil ownbranchclosing policy withrespecttobranchclosings, lion, including more than $11 million in investments and relocations, andconsolidationsrelated totheproposal. grantsin SanFrancisco. Inaddition, WFBankrepresented The Board has considered carefully Wells Fargo's that it has made numerous investments in or grants to branchclosingpolicyanditsrecordofopeningandclosing programs directed at community-based small businesses branches. The Board notes that the branch closing policy, since 2004. which applies to all Wells Fargo subsidiary banks that are ExaminerscommendedWFBankforprovidingservices subjecttotheCRA,generallyrequiresaCRAimpactreport that showed an excellent responsiveness to banking needs andrecommendationtobepreparedforanybranchclosing in its assessment areas. They reported that the bank's inanLMIarea.ACRAimpactreportalso isrequiredfor a services were accessible to essentially all portions of its branch closing that is more than five miles from another assessment areas and that the bank's alternative delivery WellsFargobranch. EachCRAimpactreportmustinclude systems, including ATMs, banking by phone or mail, and alternatives to closing and steps that could be taken to Internet banking, helped accessibilitythroughout all geog mitigate the effectofthe proposed closing onthe commu raphies. Examinersalso noted thatthe levelofcommunity nity served. development services the bank provided had an overall In the 2004 WF Bank Evaluation, examiners reported positiveinfluenceonitsperformanceundertheservicetest thatthe bank's branchopeningandclosingactivityinLMI areasdidnothaveanimpactontheoverallevaluationofits in its California assessment areas. WF Bank represented that since the 2004 WF Bank Evaluation, it also has performanceundertheservicetestinCalifornia.Examiners implementedseveralprogramstoimprovefinancialliteracy noted, however, that such activity in the assessment areas and to make banking services accessible to traditionally receivingfull-scope reviewsgenerally hadapositiveeffect ontheevaluationofthebank'sperformance.TheBoardhas underservedcommunities. aee eRA Performance of GB Bank. As noted, GB Bank consulted with the on WF Bank's record of branch received an overall "outstanding" rating in the 2006 GB openingsandclosingssincethe2004WFBankEvaluation. aee Bank Evaluation.21 Examiners reported that the bank's The will continue to review WF Bank's record of level of lending activity was adequate and that its geo opening and closing branches in the course ofconducting graphic distribution ofsmall loans to businesseswas good eRAperformanceevaluations. intheSanFranciscoBayAreaassessmentarea. Examiners TheBoardalso hasconsideredthatfederal banking law alsocommendedGB Bank's level ofcommunity develop providesaspecificmechanismfor addressing branchclos mentlendingandnotedthatthe bankmade 89 community ings. Federallawrequires aninsureddepository institution developmentloanstotaling$294millioninthisassessment to provide notice to the public and to the appropriate areaduringtheevaluationperiod.Inaddition,theyreported federal supervisoryagency beforeclosingabranch.22 20. ThecommenterurgedWellsFargotoprovidea"one-stop"loan productformultifamilyhousingtoenhanceitscompetitivepositionin 22. Section 42 of the Federal Deposit Insurance Act (12 U.S.c. California.WellsFargonotedthatWFBankhasrecently established §183Ir-l),as implementedbythe Joint Policy StatementRegarding suchaloan productthat isavailableto the bank'sexistingnonprofit BranchClosings(64FederalRegister34,844(1999»,requiresthata developersofaffordablemultifamilyhousing. bank provide the public with at least 30 days' notice and the 21. The evaluation periodfor the 2006 GB BankEvaluation was appropriate federal supervisory agency and customers ofthe branch January 1,2004, through December31, 2005, for HMDAand CRA withat least 90days' notice beforethe date ofthe proposed branch dataunderthelendingtest;andJanuary1,2004,throughJune5,2006, closing. The bank also is required to provide reasons and other forcommunitydevelopmentlendingunderthelendingtestandforthe supportingdatafortheclosing,consistentwiththeinstitution'swritten serviceandinvestmenttests. policyforbranchclosings.

Legal Developments: Third Quarter; 2007 el25 C. HMDA and Fair Lending Record on-siteevaluationsofcompliancewithfairlendinglawsby Wells Fargo and its subsidiaries. The Board also has TheBoardhascarefullyconsideredthefairlendingrecords consultedwith the acc, the primaryfederal supervisorof andHMDAdataofWellsFargoandGreaterBayinlightof WFBank. public commentreceivedon the proposal. The commenter The record, including confidential supervisory informa allegedthatWellsFargohadengagedindisparatetreatment tion, indicates that Wells Fargo has taken steps to ensure of African American individuals in the pricing of home compliance with fair lending and other consumer protec mortgage loans in six Metropolitan Statistical Areas tion laws. All Wells Fargo business units, whether those ("MSAs"), including the LosAngeles MSA.23The Board units are separate companies or line-of-business depart has focused itsanalysis onthe 2005 and preliminary 2006 ments in a subsidiary bank or nonbanking subsidiary, HMDAdatareportedbyWellsFargo.24 developandmaintaincomprehensivecomplianceprograms Although the HMDAdata might reflect certain dispari for all laws and regulations applicable to their business, ties in the rates of loan applications, originations, and includingfair lendingcomplianceprograms.WellsFargo's denialsamongmembersofdifferentracialorethnicgroups Compliance and Risk Management Group provides over incertainlocalareas, they provide an insufficientbasis by sightfor and guidanceon these complianceprograms, and themselves on which to conclude whether or not Wells a corporate fair lending committee that includes senior Fargo is excluding orimposing highercosts on any group executivesfromWellsFargo'sconsumerlendingsubsidiar on a prohibited basis. The Board recognizes that HMDA ies coordinates Wells Fargo's enterprise-wide fair lending data alone, even with the recent addition ofpricing infor strategy. Wells Fargo's subsidiary banks and home mort mation,provideonlylimitedinformationaboutthecovered gage lending subsidiaries provide fair lending training for loans.25HMDAdata, therefore, havelimitations that make theiremployeesandconductself-assessmentsandauditsto them an inadequate basis, absent other information, for verify compliance and consistent underwriting practices. concludingthataninstitutionhasengagedinillegallending Several subsidiaries also provide second-review programs discrimination. for credit applications designated for denial. Wells Fargo TheBoardisneverthelessconcernedwhen HMDAdata has statedthat it will review and make appropriatemodifi foraninstitutionindicatedisparitiesinlendingandbelieves cations to the fair lending policies for GB Bank's opera thatalllendinginstitutionsareobligatedtoensurethattheir tions afterconsummationofthe proposal. lending practices are basedoncriteriathatensure notonly The Board also has considered the HMDAdata in light safe and sound lending but also equal access to credit by of other information, including the programs described creditworthyapplicantsregardlessoftheirraceorethnicity. above and the overall performance records ofthe subsid Because ofthe limitations ofHMDAdata, the Board has iarybanksofWellsFargoandGreaterBayundertheCRA. consideredthesedatacarefullyandtakenintoaccountother Theseestablishedeffortsandrecords ofperformancedem information, including examination reports that provide onstrate that the institutions are active in helping to meet the creditneedsoftheirentirecommunities. 23. The commenter based the allegation on a study it recently completedusingloan-pricingdatareportedunderHMDAin2005.The D. Conclusion on Convenience and Needs and comrnenterurged WF Bankto institute an underwriting systemthat CRA Performance directs a borrower to the least expensive loan available to that customerregardlessofthelendingchannelchosenbythecustomerto TheBoard hasconsideredcarefully all the facts ofrecord, apply for a loan. Wells Fargo noted that the study did not include FederalHousingAdministrationloansdesignedforLMIborrowersor includingreportsofexaminationoftheCRArecordsofthe reflectthe fact thatthemajorityofWellsFargo'sloanstoindividuals institutionsinvolved,informationprovidedbyWellsFargo, werepricedbelow thethresholdsthatrequireHMDApricereporting. publiccommentreceivedonthe proposal, andconfidential WellsFargohasrepresentedthatitspricingisfullydisclosed,competi supervisory information. Wells Fargo has represented that tive, and reflects the customer's particular credit risk. In addition, WellsFargostatedthatitssubsidiarybanksofferprimepricingoptions consummationoftheproposalwould providecustomersof toallfirstmortgagecustomerswhoqualifyforsuchpricingregardless Greater Bay with expanded access to the products and ofthechannelordivisionthroughwhichthecustomerapplies. services offered by Wells Fargo's bank and nonbank sub 24. The Board reviewed HMDA data reported by Wells Fargo's sidiaries.Basedonareviewoftheentirerecord,andforthe significantlendingsubsidiariesinCaliforniaandTexasandintheLos reasons discussed above, the Board concludes thatconsid Angeles, Houston, and ChicagoMSAs whereWells Fargo'sprimary assessmentareasarelocated.TheBoardnotesthat2006HMDAdata erations relating to the convenience and needs factor and are preliminaryand that final data will not be available for analysis the CRA performance records of the relevant insured untilfall 2007. depository institutions are consistent with approval ofthe 25. Thedata,forexample,donotaccountforthepossibilitythatan proposal. institution'soutreacheffortsmayattractalargerproportionofmargin ally qualified applicants than other institutions attract and do not provideabasisforanindependentassessmentofwhetheranapplicant CONCLUSION who was denied creditwas, in fact, creditworthy. In addition, credit history problems, excessive debtlevels relative to income, and high Based on the foregoing, and in light of all the facts of loanamountsrelativetothevalueoftherealestatecollateral(reasons record, the Board has determined that the applications mostfrequentlycitedforacreditdenial orhighercreditcost)arenot should be, and hereby are, approved. In reaching its availablefromHMDAdata.

C126 Federal Reserve Bulletin0 December 2007 conclusion,the Boardhasconsideredallthefactsofrecord than three months after the effective date of this order, in light ofthe factors that it is required to consider under unlesssuchperiodisextendedforgoodcausebytheBoard the BRC Act and other applicable statutes. The Board's or by the Federal Reserve Bank of San Francisco, acting approval is specifically conditioned on compliance by pursuantto delegatedauthority. Wells Fargo with the conditions in this order and all the ByorderoftheBoardofGovernors,effectiveAugust21, commitments made to the Board in connection with the 2007. proposal. For purposes ofthis transaction, these commit Voting for this action: Chairman Bernanke, Vice Chairman Kohn, mentsandconditionsaredeemedtobeconditionsimposed andGovernorsWarsh, Kroszner,andMishkin. in writingby the Boardinconnectionwithitsfindings and decision and, as such, may be enforced in proceedings ROBERT DEV. FRIERSON underapplicablelaw. Deputy Secretary ofthe Board The proposal may notbe consummatedbefore the 15th calendar day after the effective date ofthis order, or later Appendix A BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES Market Remaining Amount deposit Resulting Change Bank Rank number of ofdeposits shares HHI in HHI competitors (percent) MONTEREy-SEASIDE-MARINA BANKING MARKET Monterey-Seaside-Marina- Monterey-Seaside-Marina Ranally Metro Area (RMA) Wells Fargo Pre-Consummation ..... 1 $659.8 mil. 22.6 1,499 17 14 GreaterBay .............................. 13 $10.8 mil. .4 1,499 17 14 Wells Fargo Post-Consummation .... 1 $670.6 mil. 23.0 1,499 17 14 SAN FRANCISCO-OAKLAND-SAN JOSE BANKING MARKET San Francisco-OakLand-San Jose- San Francisco-OakLand-San Jose RMA andthe towns ofByron, Hollister, Pescadero, Point Reyes Station, and San Juan Bautista Wells Fargo Pre-Consummation ..... 2 $40.5 bil. 19.4 1,427 93 109 GreaterBay .............................. 9 $5.0 bi!. 2.4 1,427 93 109 Wells Fargo Post-Consummation .... 2 $45.5 bil. 21.8 1,427 93 109 SANTA CRUZ BANKING MARKET Santa Cruz-Santa Cruz RMA Wells FargoPre-Consummation ..... 3 $420.0 mil. 13.8 1,767 215 12 Greater Bay .............................. 6 $236.9 mil. 7.8 1,767 215 12 Wells Fargo Post-Consummation .... 2 $656.9 mil. 21.6 1,767 215 12 SANTA ROSA BANKING MARKET Santa Rosa-Santa Rosa RMA and the cityofCloverdale Wells Fargo Pre-Consummation ..... 3 $830.1 mil. 13.8 1,043 3 21 GreaterBay .............................. 18 $7.1 mil. .1 1,043 3 21 Wells Fargo Post-Consummation .... 3 $837.3 mil. 14.0 1,043 3 21

Legal Developments: Third Quarter, 2007 C127 Appendix A-Continued BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued Market Remaining Amount deposit Resulting Change Bank Rank number of ofdeposits shares HHI in HHI competitors (percent) WATSONVILLE BANKING MARKET Watsonville-Watsonville RMA Wells Fargo Pre-Consummation ..... I $187.8 mil. 23.5 1,650 113 11 GreaterBay .............................. 10 $19.3 mil. 2.4 1,650 113 11 Wells Fargo Post-Consummation .... I $207.2 mil. 25.9 1,650 113 11 NOTE: Data are as of June 30, 2006. An amounts of deposits are un weighted.Anrankings.marketdepositshares.andHHIsarebasedonthriftin stitutiondepositsweightedat50percent. Appendix B CRA PERFORMANCE EVALUATIONS Subsidiary Bank CRARating Date Supervisor 1. Placer Sierra Bank, Satisfactory March 2005 Federal Reserve Auburn, California 2. Wells Fargo Bank Northwest, Satisfactory December 2005 OCC National Association, Ogden Utah 3. Wells Fargo HSBCTrade Bank, National Outstanding June 2006 OCC Association, San Francisco, California 4. Wells Fargo Financial National Bank, Outstanding June 2006 OCC Las Vegas, Nevada 5. Wells Fargo Financial Bank, Outstanding March 2005 FDIC Sioux Falls, SouthDakota ORDERS ISSUED UNDER SECTION 4 OF MidAmericaBank, fsb ("MidAmerica"), asavings asso ciation, by merging with its holding company, MAF Ban THE BANK HOLDING COMPANY ACT corp, Inc. ("MAF"), both of Clarendon Hills, Illinois. National City also has requested the Board's approval under those provisions to acquire St. Francis Equity Prop National City Corporation erties, Inc. ("St. Francis"), Brookfield, Wisconsin, a sub Cleveland, Ohio sidiaryofMidAmerica, andtherebyengageincommunity development . activities in accordance with sec Order Approving the Acquisition of a tion 225.28(b)(l2)ofthe Board'sRegulationy'2 Savings Association and Notice to Engage in Notice ofthe proposal, affording interested persons an Nonbanking Activities opportunitytosubmitcomments,hasbeenpublishedinthe FederalRegister(72FederalRegister28,491 (2007».The National City Corporation ("National City"), a financial time for filing comments has expired, and the Board has holdingcompany withinthe meaningofthe BankHolding consideredtheproposalandallcommentsreceivedinlight Company Act ("BHC Act"), has requested the Board's ofthe factors setforth in section4oftheBHCAct. approval under sections 4(c)(8) and 4(j) of the BHC Act andsection225.24oftheBoard'sRegulationyl toacquire 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 sec I. 12V.S.c.§§1843(e)(8)andG); 12CFR225.24. tion4(k)oftheBHCAct, 12V.S.c.§1843(k).

Cl28 Federal Reserve BulletinD December 2007 NationalCity,withtotalconsolidatedassetsof$138.5bil interestfactors, the Boardreviews the financial and mana lion,isthe13thlargestdepositoryorganizationintheUnited gerialresourcesofthecompaniesinvolved,theeffectofthe States,controllingdeposits ofapproximately $88.6billion, proposal on competition in the relevant markets, and the whichrepresentapproximately Ipercentofthetotalamount public benefits of the proposal.9 In acting on a notice to ofdeposits ofinsureddepository institutionsin the United acquire a savings association, the Board also reviews the States.3NationalCitycontrolsoneinsureddepositoryinsti records ofperformance ofthe relevant insured depository tution,NationalCityBank,Cleveland,Ohio,thatoperatesin institutions under the Community Reinvestment Act eight states.4National City is the ninth largest depository ("CRA").l0The Board has considered the proposal under organization in Illinois, controlling deposits of approxi these factors in light of all the facts of record, including mately$7.2billion,whichrepresentapproximately2.3per confidentialsupervisoryandexaminationinformation,pub cent ofthe total amount ofdeposits ofinsured depository licly reported financial and other information, and public institutionsinthestate("statedeposits"). comments submittedontheproposal. MAF has total consolidated assets of approximately $10.4 billion and Mid America, MAP's only subsidiary COMPETITIVE CONSIDERATIONS insureddepository institution, operatesinIllinoisandWis consin. MAFis the 12thlargestdepository organizationin TheBoardhasconsideredcarefully the competitiveeffects Illinois, controllingdeposits ofapproximately $5.7billion. of National City's acquisition of MAF, including Mid Onconsummationoftheproposal, NationalCity would America and St. Francis'!! National City Bank and Mid remain the 13th largest insured depository organization in America compete directly in four banking markets in theUnitedStates,withtotalconsolidatedassetsofapproxi Illinois:Aurora,Chicago,Elgin,andJoliet.!2TheBoardhas mately$150.7billion.NationalCitywouldcontroldeposits reviewedcarefullythecompetitiveeffectsoftheproposalin ofapproximately $95.7billion,representing 1.4percentof each of these banking markets in light of all the facts of the total amount ofdeposits ofinsured depository institu record.Inparticular,theBoardhasconsideredthenumberof tions in the United States. InIllinois, NationalCity would competitors that would remain in the markets, the relative become the fourth largestinsureddepository organization, share of total deposits of National City Bank and Mid controlling deposits ofapproximately $12.9 billion, which Americainthemarkets("marketdeposits"),13theconcen representapproximately 4percentofstatedeposits. trationlevelofmarketdepositsandtheincreaseinthislevel TheBoardpreviouslyhasdeterminedbyregulation that as measured by the Rerfindahl-RirschmanIndex ("HHI") the operation of a savings association by a bank holding underthe DepartmentofJusticeGuidelines("DOlGuide company is closely related to banking for purposes of lines"),!4andothercharacteristicsofthe markets. section 4(c)(8) ofthe BHC Act.5 The Board requires that savings associations acquired by bank holding companies 9. See12CFR225.26;see,e.g.,BancOneCorporation,83Federal conformtheirdirectand indirectactivitiestothosepermis ReserveBulletin602(1997). sible for bank holding companies under section 4 of the 10. 12U.S.c.§2901etseq. BRCAct.6NationalCityhascommittedtoconformall the II. See First Hawaiian, Inc., 79 Federal Reserve Bulletin 966 activities of Mid America to those that are permissible (1993). under section 4(c)(8) of the BRC Act and Regulation Y 12. These banking markets and the effects ofthe proposal on the concentration of banking resources in them are described in the The Board also has determined that community develop appendix. mentactivitiesarecloselyrelatedtobanking,andNational 13. Deposit and market-share data are as ofJune 30, 2006, and City has committed to conduct those activities in accor reflect merger activity through July 5, 2007. The deposits of thrift dance withtheBoard'sregulations andorders.? institutions are included at 50 percent, except as noted below. The Boardpreviouslyhasindicatedthatthriftinstitutionshavebecome,or Section4(j)(2)(A)oftheBRCActrequirestheBoardto have the potentialto become, significantcompetitors ofcommercial determine that the proposed acquisition of Mid America banks. See. e.g., Midwest Financial Group, 75 Federal Reserve and St. Francis "can reasonably be expected to produce Bulletin 386 (1989); National City Corporation, 70 FederalReserve benefitstothepublicthatoutweighpossibleadverseeffects, Bulletin 743 (1984). Thus, the Board regularly has included thrift such as undue concentration of resources, decreased or institution deposits in the market-share calculation on a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve unfaircompetition,conflictsofinterests, or,unsoundbank Bulletin52(1991). Inthiscase,MidAmerica'sdepositsareweighted ingpractices."8Aspartofitsevaluationunderthesepublic at50percentpre-mergerandat100percentpost-mergertoreflectthe resultingownershipbyacommercialbankingorganization. 14. Under the DOJGuidelines,a market is considered unconcen 3. Assetand nationwidedeposit-rankingdataare as ofMarch31, tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated 2007.StatewidedepositandrankingdataareasofJune30,2006,and if the post-merger HHI is between 1000 and 1800, and highly reflect mergeractivitythrough July 5, 2007. Inthis context, insured concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof depositoryinstitutionsincludecommercialbanks,savingsbanks,and Justice ("DOl") has informed the Board that a bank merger or savingsassociations. acquisitiongenerally will notbechallenged (in the absence ofother 4. National CityBankoperatesbranchesin Florida, Illinois, Indi- factorsindicatinganticompetitiveeffects)unlessthepostmergerHHI ana,Kentucky,Michigan,Missouri,Ohio,andPennsylvania. is at least 1800 and the merger increases the HHI more than 200 5. 12CFR225.28(b)(4)(ii). points.TheDOJhasstatedthatthehigherthannormalHHIthresholds 6.Id. forscreeningbankmergersandacquisitionsforanticompetitiveeffects 7. 12CFR225.28(b)(1I). implicitly recognize the competitive effects of limited purpose and 8. 12U.S.c.§1843(j)(2)(A). othernondepositoryfinancialentities.

Legal Developments: Third Quarter, 2007 Cl29 Consummationoftheproposalwouldbeconsistentwith remain so on consummation ofthe proposal. Based on its Board precedent and the DOJ Guidelines in each relevant reviewoftherecord, theBoardfinds thatNationalCityhas banking market. After consummation ofthe proposal, the sufficient financial resources to effect the proposal. The Chicago and Elgin markets would remain unconcentrated, proposedtransactionisstructuredas ashareexchange. and the Aurora and Joliet markets would remain moder TheBoardalso hasconsideredthe managerialresources atelyconcentrated.Ineachofthesemarkets, thechangesin ofthe organizations involved and the proposed combined the HHI measure of concentration would be small and organization. The Board has reviewed the examination numerouscompetitorswouldremain. Basedonallthefacts recordsofNationalCity,MAP,andtheirsubsidiarydeposi ofrecord, the Board has concluded that consummation of tory institutions, including assessments of their manage the proposal would not have a significantly adverse effect ment, risk-management systems, and operations. In addi oncompetitionorontheconcentrationofresourcesinany tion, the Board has considered its supervisory experiences ofthefourbankingmarketswhereNationalCityBankand and those ofthe otherrelevantfinancial supervisory agen Mid America compete directly or in any other relevant cieswiththeorganizationsandtheirrecordsofcompliance bankingmarket. with applicable banking law and with anti-money The Board also has considered the effects of the pro laundering laws. National City, MAP, and theirsubsidiary posed transaction on competition in community develop depository institutions are consideredto be well managed. ment activities. National City and St. Francis do not both The Board also has considered National City's plans for engage in community development activities in any rel implementing the proposal, including the proposed man evant market. Moreover, the market for this nonbanking agementafterconsummation. activity islocalinscopeandunconcentrated, andthereare Basedonallthefactsofrecord,theBoardhasconcluded numerousparticipantsthatengageintheseactivities.Based thatthefinancial andmanagerialresourcesoftheorganiza onallthefactsofrecord,theBoardconcludesthatconsum tions involvedin the proposalare consistentwithapproval mation of the proposal would not have a significantly undersection4ofthe BHCAct. adverseeffectoncompetitionamong providersofcommu eRA nitydevelopmentactivitiesinany relevantmarket. PERFORMANCE RECORDS FINANCIAL AND MANAGERIAL RESOURCES As previously noted, the Board considers the records of perfonnanceundertheCRAoftherelevantinsureddeposi Inreviewing the proposalundersection4oftheBHCAct, tory institutions when acting on a notice to acquire a theBoardhascarefullyconsideredthefinancial and mana savingsassociation.TheCRArequiresthefederal financial gerialresourcesofNationalCity,MAP,andtheirsubsidiar supervisoryagenciestoencourageinsureddepositoryinsti ies. TheBoard also has reviewed the effectthe transaction tutionstohelp meetthecreditneedsofthelocalcommuni would have on those resources in light ofall the facts of ties in which they operate, consistent with their safe and record, includingconfidentialreportsofexamination,other soundoperation,andrequirestheappropriatefederalfinan supervisory infonnation from the primary federal supervi cial supervisory agency to take into account a relevant sors of the organizations involved in the proposal, and depository institution's record ofmeeting the creditneeds publiclyreportedandotherfinancialinfonnation,including of its entire community, including low- and moderate infonnation providedbyNationalCity. income("LMI")neighborhoods,inevaluatingbankexpan Inevaluating financial resources inexpansionproposals sionary proposals.15 by banking organizations, the Board reviews the financial TheBoardhasconsideredcarefullyallthefactsofrecord, condition of the organizations involved on both a parent including evaluations ofthe CRA perfonnance records of onlyandconsolidatedbasis, as wellas the financial condi National City's and MAP's subsidiary depository institu tion of the subsidiary insured depository institutions and tions, data reported under the Home Mortgage Disclosure significant nonbanking operations. In this evaluation, the Act ("HMDA")16 bythe subsidiariesofNational City and Boardconsidersavarietyofinfonnation, includingcapital MAFthatengageinhomemortgagelending,otherlending adequacy, asset quality, and earnings perfonnance. In datareportedundertheCRA,otherinfonnationprovidedby assessing financial resources, the Board consistently has National City and MAF, confidential supervisory infonna consideredcapitaladequacytobeespeciallyimportant.The tion provided by the federal supervisorofeach bank, and Board also evaluates the financial condition of the com publiccommentreceivedontheproposal. bined organization at consummation, including its capital The Board received a comment related to the CRA position, asset quality, and earnings prospects, and the perfonnance records of National City Bank and Mid impactofthe proposedfunding ofthe transaction. America. The commenter alleged that in the Milwaukee The Board has carefully considered the proposal under thefinancial factors. NationalCity,MAF,andtheirsubsid 15. 12U.S.c.§2903. iary depository institutions are well capitalized and would 16. 12U.S.C.§2801 etseq.

C130 Federal Reserve BulletinD December 2007 area, NationalCityhasnotadequatelyservedthe mortgage SincetheNCEvaluation,NationalCityhascontinuedits creditneedsofLMIborrowers!?andthatMidAmericahas high level of CRA lending activity. In 2005 and 2006, it notprovidedadequatelevelsofloansoflessthan$100,000 made more than $22 billion HMDA-reportable loans in to businesses.IS National City Bank's assessmentareas. NationalCity also As provided in the CRA, the Board has evaluated the madeapproximately $1.2billionintotalqualifiedcommu proposal in light of the evaluations by the appropriate nitydevelopmentloansduring2005and2006inthebank's federal supervisorsofthe CRAperformancerecords ofthe assessmentareas. relevant insured depository institutions. An institution's Examiners rated NationalCity's performance under the most recent CRAperformance evaluation is a particularly investment testas "outstanding" or "high satisfactory" in importantconsiderationintheapplicationsprocessbecause mostofthe states reviewed. They reported that the bank's it represents a detailed, on-site evaluation of the institu investments were complex in nature and demonstrated tion's overallrecord ofperformanceunderthe CRAby its excellent responsiveness to the needs of the community. appropriatefederal supervisor.!9 During the evaluation period, the bank made qualified National CityBankreceived an "outstanding" rating at investments totaling more than $182 million and contrib its most recentCRAperformance evaluationbythe Office uted more than $5 million to charities with community oftheComptrolleroftheCurrency("OCC"),asofJune30, developmentpurposes. 2005 ("NC Evaluation").2o Mid America received an NationalCitycontinuedtomakeasignificantamountof "outstanding" rating at its most recent CRAperformance qualifiedinvestmentssincetheNCEvaluation.In2005and evaluationbytheOfficeofThriftSupervisionCOTS"), as 2006, National City made approximately $222 million in of July 18, 2005 ("MA Evaluation"). National City has qualified investments and grants in the bank's assessment indicatedthatMidAmerica'sCRAprogramwill remain in areas. These investments included several projects that placeonconsummationofthe proposal. createdaffordablehousingthroughthelow-income-housing CRA Performance ofNational CityBank. In addition to taxcreditprogram. the overall "outstanding" rating that National City Bank Examiners concluded that the bank's retail banking received in the NC Evaluation, the bank received separate services generally were accessible to geographies and overall "outstanding"or "satisfactory"ratingsforitsCRA individuals of different income levels. They also reported performance in each of the states reviewed. Examiners thatthebankgenerallyprovidedahighlevelofcommunity reported that the bank's distribution of HMDA loans to development services, including service by bank employ borrowersofdifferent income levels wasexcellent, as was eesontheboardsofnonprofitgroupsinvolvedinproviding the bank'sdistributionofsmallloanstobusinessesinLMI affordable housingandotherservicestoLMIindividuals. census tracts.2!Examiners stated that the bank's recordof CRA Performance of Mid America. As noted, Mid community developmentlendingandqualifiedcommunity Americareceivedanoverall"outstanding"ratingintheMA development investments demonstrated excellent respon Evaluation.22Underthelendingtest,examinerscommended sivenessto communitycreditandinvestmentneeds. thesavingsassociation'sresponsivenesstothecreditneeds of its assessment areas. Examiners characterized Mid Americaasamarketleaderinoriginatingmortgagesreport ableunderHMDAinLMIgeographiesandtoLMIborrow 17. Asthecommenteracknowledges, NationalCityBankoperates ers when compared with its peer group. In addition, they nobranchesintheMilwaukeearea.TheMilwaukeearea,therefore,is notpartofthebank'sassessmentareasforpurposesofevaluatingits commendedMidAmericaforofferingnumerousinnovative CRAperformance. and flexible programstoLMIborrowers,including several 18. The commenter also requested that National City and Mid mortgage lending programsintheChicagoandMilwaukee Americacommittoimplementanumberofthe commenter'srecom areas underwhichthesavings association made more than mendations.The Board has consistently found that neitherthe CRA 1,100loanstotalingmorethan$167million.Examinersalso northefederalbankingagencies' CRAregulationsrequiredepository institutionstomakepledgesorenterintocommitmentsoragreements reported thatthesavingsassociation'sgeographicdistribu with any organization. See, e.g., Bank of America Corporation, tion of small loans to businesses was good and that a 93 Federal Reserve Bulletin C52, footnote 27 (2007). Instead, the significant percentage of Mid America's small loans to BoardfocusesontheexistingCRAperformancerecordofanapplicant businesseswereinamountsof$100,000orless. 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 In theMAEvaluation, examinersdescribedMidAmeri proposedacquisitionofaninsureddepositoryinstitution. ca's performance as a community development lender as 19. SeeInteragencyQuestionsandAnswersRegardingCommunity excellent.Duringtheevaluationperiod,thesavingsassocia Reinvestment,66FederalRegister36,620at36,640(2001). tion originated community development loans totaling 20. TheevaluationperiodswereOctoberI, 1999,throughDecem ber 31, 2004, for the lending test; and February 23, 2000, through June30,2005,fortheserviceandinvestmenttests.TheNCEvaluation includedtheactivitieswithinNationalCityBank'sassessmentareasof 22. TheevaluationperiodswereJanuary 1,2003,throughDecem fiveaffiliatedbanksthatwereconsolidatedintoNationalCityBankin ber31,2005,forthelendingtest;andJuly 1,2002,throughJune30, July 2006 and of three nonbank mortgage lending subsidiaries of 2005,fortheserviceandinvestmenttests.Full-scopeevaluationswere NationalCity. conducted in the Chicago-Naperville-Joliet Metropolitan Statistical 21. "Smallloanstobusinesses"areloanswithoriginalamountsof Area("MSA") in Illinois,and in the Milwaukee-WaukeshaMSAin $1 millionorless thatare eithersecuredby nonfarm, nonresidential Wisconsin. Limited-scopeevaluationswere conductedinotherareas propertiesorclassifiedascommercialandindustrialloans. inWisconsin.

Legal Developments: Third Quarter; 2007 C131 $53.4million,includingmorethan$40millioninmultifam additionofpricinginformation, provideonlylimitedinfor ily loans that supported affordable housing in LMI areas. mation about the covered loans.24 HMDAdata, therefore, ExaminersalsoreportedthatMidAmericamadequalifying havelimitationsthatmakethemaninadequatebasis,absent communitydevelopmentinvestmentsduringtheevaluation other information, for concluding that an institution has periodtotaling$18.3million,whichincludedinvestmentsin engagedinillegallendingdiscrimination. Chicago-basedcommunityinvestmentfunds foraffordable TheBoardis neverthelessconcerned when HMDAdata housing development and in 14 projects in Wisconsin that foraninstitutionindicatedisparitiesinlendingandbelieves wereeligibleforthe low-incomehousingtax credit. thatalllendinginstitutionsareobligatedtoensurethattheir ExaminersnotedthatMidAmerica's retaildeliverysys lendingpractices are basedoncriteriathatensure notonly tems were reasonably accessible to all geographies in its safe and sound lending but also equal access to credit by assessment areas. In addition, examiners reported that the creditworthyapplicantsregardlessoftheirraceorethnicity. bank provided a reasonable level of community develop Because of the limitations ofHMDAdata, the Board has ment services and noted that bank employees conducted consideredthesedatacarefullyandtakenintoaccountother morethan 200seminars on homebuyingandservedonthe information, including examination reports that provide boardsoforganizationsthataddresscommunityneedssuch on-site evaluations ofcompliance by National City, MAF, as affordable housing and educational programs for inner andtheirsubsidiarieswithfairlendinglaws.TheBoardhas cityyouths. consultedwiththeOCCandtheOTSaboutthefair-lending Conclusion on CRA Performance. Basedonareview of and consumer-protection compliance records of National the entirerecord, and for the reasons discussed above, the City Bankand MidAmerica. Board has concluded that considerations relating to the The record indicates that National City and MAF have CRAperformancerecords ofthe relevantdepository insti takenstepstoensurecompliancewithfairlendingandother tutions are consistentwithapproval. consumer protection laws. National City has a centralized compliance function and has implemented corporate-wide OTHER CONSIDERATIONS compliance policies and procedures to help ensure that all NationalCitybusinesslinescomplywithallfairlendingand Inlightofpubliccommentsontheproposal,theBoardalso otherconsumerprotectionlawsandregulations.Itemploys hascarefullyconsideredthefairlendingrecordandHMDA compliance officers and staff responsible for compliance datareported by subsidiariesofNationalCity and MAFin training and monitoring, and conducts file reviews for its evaluation ofthe public interest factors. Acommenter compliancewithfederalandstateconsumerprotectionrules alleged, based on 2005 HMDA data for the Milwaukee andregulationsforallproductlinesandoriginationsources. MSA, that National City made a disproportionately small NationalCityalsoregularlyperformsself-assessmentsofits numberofmortgageloanstofemale borrowersandmadea compliance withfair lendinglaws and providestraining in disproportionately high numberofhigh-cost loans to His fair lending policy for its employees. MAF also employs panic borrowers.23 The commenter also alleged that Mid compliancetechniques,suchasasecond-reviewprocessfor Americamadeadisproportionately smallnumberofprime mortgage loans and annual fair lending training for its loans to African American borrowers. The Board has employees.MAFalsoconductsinternaltestingofproducts analyzed the 2005 and 2006 HMDA data reported by the and practices for illegal discrimination, which includes insureddepository institutionsubsidiariesofNationalCity testingforpotentialsteeringofcertainproductstominority and MAFin their primary assessment areas, including the borrowers and the use ofregression analysis ofcredit and Milwaukee MSA, and statewide in the states where those pricing decisions. National City has indicated that Mid institutionsoperatedbranches. America's fair lendingand consumercompliance program Although the HMDAdata might reflect certain dispari willremain inplaceonconsummationoftheproposal. ties in the rates ofloan applications, originations, denials, TheBoardalsohasconsideredtheHMDAdatainlightof or pricing among members of different racial or ethnic otherinformation,includingthe CRAperformancerecords groups in certain local areas, they provide an insufficient ofNational City Bankand MidAmerica. Basedon all the basis by themselves on which to conclude whetheror not factsofrecord,theBoardhasconcludedthatthefairlending National City or MAF is excluding or imposing higher credit costs on those groups on a prohibited basis. The Board recognizes that HMDA data alone, even with the 24. Thedata,forexample,doesnotaccountforthepossibilitythat an institution's outreach efforts may attract a larger proportion of marginallyqualified applicants than otherinstitutions attractand do 23. Beginning January I, 2004, the HMDA data required to be not provide a basis for an independent assessment of whether an reportedbylenders wereexpandedtoincludepricinginformationfor applicantwhowasdeniedcreditwas,infact,creditworthy.Inaddition, loansonwhichtheannualpercentagerate(APR)exceedstheyieldfor credithistory problems,excessivedebtlevelsrelativetoincome,and U.S.Treasurysecuritiesofcomparablematurity3ormorepercentage high loan amounts relative to the value ofthe real estate collateral points for first-lien mortgages and 5 or more percentage points for (reasonsmostfrequentlycitedforacreditdenialorhighercreditcost) second-lienmortgages(12CFR203.4). arenotavailablefromHMDAdata.

C132 Federal Reserve Bulletin 0 December 2007 record and HMDA data of National City and MAF are hereby is, approved. In reaching its conclusion, the Board consistentwithapprovalundersection4oftheBHCAct. hasconsideredall thefacts ofrecordin lightofthe factors that it is required to consider under the BHC Act. The PUBLIC BENEFITS Board'sapprovalisspecificallyconditionedoncompliance by National City and Mid America with the conditions Aspartofitsevaluationofthepublicinterestfactors under imposed in this order and the commitments made to the section 4 of the BHC Act, the Board also has reviewed Boardinconnectionwiththenotice.TheBoard'sapproval carefullythepublic benefitsandpossibleadverseeffectsof alsoissubjecttoalltheconditionssetforthinRegulationY, the proposal. The record indicates that consummation of including those in sections 225.7 and 225.25(c),25 and to the proposal would result in benefits to consumers and the Board's authority to require such modification or businessescurrentlyservedbyMidAmerica.NationalCity termination ofthe activities ofthe bank holding company has represented that the proposed transaction would pro or any of its subsidiaries as the Board finds necessary to videMidAmerica'scustomerswithexpandedproductsand ensure compliance with, and to prevent evasion of, the services, including a wider range of commercial lending provisionsoftheBHCActandtheBoard'sregulationsand products, brokerage, and trust services. In addition, Na ordersissuedthereunder. Forpurposesofthis action, these tionalCityhasrepresentedthatitsacquisitionofSt.Francis conditions and commitments are deemed to be conditions would facilitate the provision of low-income housing, imposed in writing by the Board in connection with its includingaffordable housingfor seniors, inWisconsin. findings anddecisionhereinand, assuch,maybeenforced The Board has determined that the conduct of the inproceedingsunderapplicable law. proposed nonbanking activities within the framework of The acquisition shall not be consummated later than RegulationYandBoardprecedentis not likely toresultin three months after the effective date of this order, unless adverseeffects, such asundueconcentrationsofresources, such periodisextendedforgoodcausebythe Boardorby decreased or unfair competition, conflicts of interests, or the FederalReserve BankofCleveland, acting pursuantto unsoundbankingpractices.Basedonallthefactsofrecord, delegated authority. the Board has concluded that consummation of the pro ByorderoftheBoardofGovernors,effectiveAugust29, posalcanreasonablybeexpectedtoproducepublicbenefits 2007. that would outweigh any likely adverse effects. Accord ingly, the Board has determined that the balance of the Votingfor this action: ChainnanBernanke, ViceChairmanKohn, andGovernorsWarsh,Kroszner,andMishkin. public benefits under section 4(j)(2) of the BHC Act is consistentwithapproval. ROBERT DEY. FRIERSON Deputy Secretary ofthe Board CONCLUSION Based on the foregoing and all the facts of record, the Board has determined that the proposal should be, and 25. 12CFR225.7and225.25(c). Appendix ILLINOIS BANKING MARKETS WITH COMPETITIVE OVERLAP Market Amount Remaining deposit Resulting Change Bank Rank ofdeposits numberof shares HHI inHffi (dollars) competitors (percent) Aurora-the southern three tiers of townships in Kane County (Virgil, Compton, St. Charles, Kaneville, Blackberry, Geneva, Batavia, Big Rock, Sugar Grove, andAurora townships); Little Rock, Bristol, Oswego, Fox, andKendall townships in Kendall County; and Sandwich township in DeKalb County National City Pre-Consummation .... 14 110,529 1.6 1,041 -12 40 MAF ........................................ 22 68,727 1.0 1,041 -12 40 National City Post-Consummation ... 6 247,982 3.6 1,041 -12 40

Legal Developments: Third Quarter, 2007 C133 Appendix-Continued ILLINOIS BANKING MARKETS WITH COMPETITIVE OVERLAP-Continued Market Amount Remaining deposit Resulting Change Bank Rank ofdeposits number of shares HHI in HHI (dollars) competitors (percent) Chicago-Cook, Du Page, andLake counties NationalCity Pre-Consummation .... 12 4,269,259 2.0 741 --4 183 MAF ........................................ 17 2,427,389 1.1 741 --4 183 NationalCity Post-Consummation .., 4 9,124,037 4.1 741 --4 183 Elgin-Marengo, Seneca, Nunda, Riley, Coral, Grafton, andAlgonquin townships in McHenry County; and the northern two tiers oftownships in Kane County (Hampshire, Rutland, Dundee, Burlington, Plato, andElgin townships) NationalCity Pre-Consummation .... 37 12,979 .2 571 18 37 MAF ........................................ 8 284,241 4.8 571 18 37 NationalCity Post-Consummation .., 2 581,461 9.4 571 18 37 Joliet-Will County (excluding Florence, Wilmington, Reed, Custer, and Wesley townships); Aux Sable township in Grundy County; and Na-Au-Say andSeward townships in Kendall County National City Pre-Consummation .... 7 245,060 3.0 1,200 -8 48 MAF ........................................ 24 69,879 .9 1,200 -8 48 National City Post-Consummation ... 4 384,817 4.7 1,200 -8 48 NOTE:Allrankings.marketdepositshares,andHHlsarebasedonthriftin stitutiondeposits weightedat 50percent,exceptthatMAP's thriftinstitution depositsareweightedat50percentpre-mergerand 100percentpost-merger. Order Determining that Certain Activities imposedatemporarymoratoriumonactingonapplications Are Complementary to the Financial Activity fordepositinsurancebyILCscontrolledbycompaniesthat are engagedinany nonbanking activity thatis not permis of Underwriting and Selling Health Insurance sibleforanFHCundersection4oftheBHCAct2orforall savings and loan holding companies under the Home TheFederal DepositInsurance Corporation ("FDIC") has Owners' LoanAct.3 askedtheBoardtodetermine whetherthe disease manage Section 4(k) of the BHC Act permits a bank holding ment and mail-order pharmacy activities described below company that qualifies to be an FHC to engage in abroad and conducted by WellPoint, Inc. ("WellPoint"), India rangeofactivitiesthataredefinedbystatutetobefinancial napolis, Indiana, are permissible for a financial holding in nature.4 The BHC Act also permits FHCs to engage in company ("FHC") underthe BankHoldingCompanyAct any activitythattheBoarddetermines,inconsultationwith ("BHC Act"), as amended by the Gramm-Leach-Bliley Act("GLB Act"). WellPointhas filed an application with the FDIC to obtain deposit insurance for a proposed de novo industrial loancompany ("ILC"),ARCUS Financial whetherthe disease managementand mail-orderpharmacy activities Bank, Salt Lake City, Utah ("Bank").! The FDIC has describedbelowarepennissibleforFHCs.Thisorderdoesnotaddress any otherissues raised by the deposit insurance application filed by WellPointwiththeFDICorthespeciailLCexceptionintheBRCAct. 2. 12U.S.C.§1843. 1. Becauseofthespecialexceptionfromthedefinitionof"bank"in 3. See Moratorium on Certain Industrial Bank Applications and the BRC Act for ILCs chartered in certain slates (12 U.S.C. Notices, 72 Federal Register 5290 (Feb. 5, 2007). The FDIC's §I841(c)(2)(R),WellPoint would not becomea bank holding com moratoriumisscheduledtoexpireonJanuary31,2008. pany on acquisitionofBank. This orderaddresses only the issue of 4. See 12U.S.C. §I843(k)(4).

C134 Federal Reserve Bulletin0 December 2007 the Secretary ofthe Treasury, to be financial in nature or chronic or complex health conditions, such as diabetes or incidentalto afinancial activity.5 kidney or heartdisease. WelIPointemployees then contact In addition, the BHCAct permits an FHC to engage in and work with the plan member(and his orherphysician, any activity that the Board (in its sole discretion) deter asappropriate)toprovideinformationontreatmentoptions mines, by regulation or order, is "complementary to a andwaysofmanagingthemember'scareinanappropriate financial activity anddoes notposeasubstantialrisktothe andcost-effectivemannerandto helpcoordinatethe mem safety or soundness ofdepository institutions orthe finan ber's access to and use of health services and related cial system generally."6 This statutory provision was insurance coverages. intendedtoallowtheBoardtopermitanFHCtoengage,on Other disease management services provided by Well alimitedbasis,inanactivitythatappearstobecommercial Point to plan members include flu vaccinations; health ratherthanfinancialinnaturewhentheactivityismeaning screeningsandassessments(forexample,forcholesterolor fully connected to a financial activity such that it comple blood pressure); a toll-free "Nurse Line" to respond to ments the financial activity.? This limited authority was questionsaboutinjuriesorconditions;accesstoonlineand designed to allow FHCs to remain competitive with other audiotape libraries with information on a wide variety of providersoffinancial services andto betterprovide finan health topics; and assistance in developing personalized cial services to their customers in a developing market plans for achieving a variety ofhealth-related goals, such place.AlthoughWelIPointis not abankholding company, as tobacco-use cessation, weight and stress management, the FDIC has requested that the Board determine the and proper diet and nutrition. These disease management permissibility of WellPoint's disease management and servicestypicallyareprovidedby,orunderthedirectionof, mail-order pharmacy activities under the BHC Act, as licensed health-care professionals (including doctors and amendedbythe GLBAct. nurses)employedbyWellPoint. WellPoint is principally engaged in underwriting and The WellPoint subsidiaries engaged in providing mail selling health insurance. Underwriting and selling health order pharmacy services fill prescriptions for customers insurance as principal, agent, or broker are activities whohavepharmacybenefitinsurancecoveragefromWell deemed by Congress in the GLB Act to be financial in Point or another insurance company, provide drug-related nature.8 WellPoint is one of the largest health insurance information to customers, and track potential issues with companies in the United States, with total revenues of customer prescriptions, such as drug interactions. WelI $57 billion for the year ending December 31, 2006, and Point'smail-orderpharmacysubsidiariesarestate-licensed total assets of $51.8 billion as of December 31, 2006. andemploy state-licensedpharmacists.WellPointhasindi WellPoint,throughitsregulatedinsurancecompanysubsid cated that most customers who use mail-order pharmacy iaries, provides health insurance in 21 states, is the Blue services are persons with chronic health conditions or CrosslBlueShieldlicenseein14states,andprovideshealth "maintenance" medicationrequirements.9 insurance to more than 34 million members. WellPoint's WellPoint's disease management and mail-order phar insuranceofferingsincludepreferredprovider,healthmain macyactivitiesarenotwithinthescopeofactivitiesthat,to tenance, point of service, Medicare and Medicaid health date, have been determined to be financial in nature, plans; vision,dental, pharmacy benefit, life, disability, and incidental to a financial activity, or complementary to a long-termcareinsurance products; and consumer-directed, financial activity underthe BHCAct.Theactivitiesdo not high-deductible,andlimited-servicehealthinsuranceprod themselves involve the provision of insurance, are not ucts. WellPoint also engages in a variety ofrelated activi regulated as insurance by state insurance authorities, and ties, includingclaimsprocessing. are not provided by an affiliate that is licensed as an Inaddition,WellPointprovidesdiseasemanagementand insurancecompanyorasaninsuranceagentorbroker.Both mail-orderpharmacyservicestopersonswhoobtainhealth activitiesalsoinvolve the provisionofhealth-careservices insurance from WellPoint or another insurance company. that, while related to insurance underwriting activities, are Theseactivitiesareconductedthroughsubsidiariesthatare themselves nonfinancial activities. The Board concludes, not themselves insurance companies. Through its disease however, for the reasons set forth below, that there is a management services, WelIPoint provides insurance plan reasonable basis for construing these activities as comple members with access to a variety of tools and resources mentary to a financial activity within the meaning of the designed to help them maintain healthy lifestyles and GLB Act. 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, 9. WellPointoffersthesemail-orderpharmacyservicesaspartofa broader "pharmacy benefit management" program offered by its subsidiaries.Pharmacybenefitmanagers("PBMs")provideemploy 5. Jd.at§1843(k)(I)(A)and(2). ersavarietyofservicestoimprovethepharmacybenefitcoveragesfor 6. Jd. at§1843(k)(l)(B). employees,includingarranginganetworkofretailpharmacieswhere 7. See 145CongoRec.HII529(dailyed.Nov.4,1999)(Statement planmemberscan fill prescriptionsundertheplanandassistingplan ofChairman Leach) ("It is expected that complementary activities sponsorsindevelopingandmanagingthelistofdrugsandtheircosts would notbe significantrelative tothe overall financial activitiesof that the plan will cover. See Federal Trade Commission, Pharmacy theorganization."). Benefit Managers: Ownership of Mail-Order Pharmacies at p. ii 8. 12U.S.C.§1843(k)(4)(B). (August2005)("FTCReport").

Legal Developments: Third Quarter, 2007 C13S Both disease management and mail-order pharmacy lessthan4percentofWellPoint'sconsolidatedtotalannual activities helpemployersthatobtainhealthinsurancefrom revenues. The total assets of WellPoint's subsidiaries an insurance company to manage and reduce the risks and engaged in disease management and mail-order pharmacy costs of providing health insurance to employees. Well activities also constitute less than 4 percent of the total Point has indicated that many ofits customers request or capital (calculated in accordance with applicable statutory demand that health insurers include disease management accounting principles) ofall regulated insurance company services or mail-order pharmacy services in the health subsidiaries and health plans of WellPoint. To limit the insurance program designed for the customer and its potential size and safety and soundness risks of the pro employees. WellPoint has indicated that employers do so posed activities, the Board has conditioned its determina because the services help employers better manage and tion in this order that the disease management and mail reducetheirhealthinsurancecosts(i)inthecaseofdisease order pharmacy activities conducted by WellPoint are management services, by promoting healthy lifestyle complementary to a financial activity on the requirement choices,reducingunnecessarydoctororhospitalvisits,and that these activities in the aggregate must not account for assisting customers with chronic conditions in developing morethan2percentofWellPoint'sconsolidatedtotalassets and pursuing available treatment options to manage prop or 5 percent ofits consolidated total annual revenues. In erly their condition; and (ii) in the case of mail-order addition, the total assets of WellPoint's subsidiaries en pharmacyservices,byprovidingemployersandemployees gaged in disease management or mail-order pharmacy (particularly those with chronic conditions) access to a activitiesin the aggregate may notexceed5 percentofthe low-costproviderofprescriptions. total capital (calculated in accordance with applicable WellPoint also has provided data demonstrating that statutory accounting principles) of all regulated insurance many of the largest health insurers in the United States company subsidiariesand health plansofWellPoint. provide disease management and mail-order pharmacy The Board also has considered the types of risks to services both to their own insurance customers and to whichWellPointisexposedbyconductingdiseasemanage customersofotherhealthinsurancecompanies.Thesedata ment and mail-order pharmacy activities and confidential indicate,forexample, thatofthe tenlargesthealthinsurers information provided by WellPoint concerning how it in the United States in terms ofthe dollar value ofdirect manages and addresses those risks. WellPoint has indi premiumswrittenin2006,sixprovidediseasemanagement cated,forexample,thatitmaintains liability insuranceand services and five provide mail-order pharmacy services. provides extensive training to the employees engaged in 10 Thesedataalsoindicatethatforbothservicesallbutoneof these activities to ensure compliance with applicable laws these large insurance companies currently provide the andregulations, including relevant privacy laws and regu serviceto customerswho obtain healthinsurance from the lations. TheBoardnotes, moreover, that WellPoint's mail insurance company or another insurance company. The order pharmacy units and the pharmacists they employ, as FederalTradeCommissionalso hasfound that many large wellasthedoctorsandnursesemployedbythesubsidiaries insurers provide "in-house" PBM services and that many engaged indisease managementservices, are licensed and PBMsowntheirownmail-orderpharmacies.11 regulatedby appropriate statelicensing boards. Based on the foregoing and other facts of record, the WellPointalso has indicatedthatitdoes notexpectthat Board concludes that disease management and mail-order Bankwill makeloansto, engageincross-marketingactivi pharmacy activities complement the financial activity of ties with, or have other direct business relationships with underwritingandseIlinghealthinsurance. the WellPoint subsidiaries that provide disease manage As noted above, section 4(k)(l)(B) of the BHC Act ment or mail-order pharmacy services. Any future exten requires that the Board determine that any proposed sionsofcreditbyBankto,orothercoveredtransactionsby complementary activity does not pose a substantial risk to Bank with, these orotheraffiliates, including any covered the safety or soundness of depository institutions or the transaction with an unaffiliated person the proceeds of financial system generally.12 Moreover, the Board previ which are transferred to or used for the benefit of an ously has stated that complementary activities should be affiliate, must comply with sections 23A and 23B of the limited in size and scope relative to the financial activities FederalReserveActand the Board'sRegulationW.14 that they complement.13 Forthesereasons,theBoardconcludesthattheproposed WellPoint's disease management and mail-order phar activities do not pose a substantial risk to the safety and macy activities in the aggregate currently accountfor less soundnessofdepository institutionsorthe financialsystem than I percentofWellPoint's consolidated total assets and generally.15 10. These data are based on a 2006 National Association of InsuranceCommissionersreportofmarketshare bydirectpremiums 14. 12V.S.c. 371c,37Ic-l;12CFRPart223. written by all accident and health insurance carriers and have been 15. Becausethis orderisissuedinresponseto arequest fromthe adjusted to exclude certain large insurance carriers that engage FDIC,the Boardhas notdetermined whetherWellPoint'sconductof exclusively or predominantly in underwriting nonhealth accident the proposed activities "can reasonably be expected to produce insurance. benefitstothepublic,suchasgreaterconvenience,increasedcompe 11. SeeFTCReportatp.iandv. tition, or gains in efficiency, that outweigh possible adverse effects, 12. 12V.S.C. §I843(k)(l)(B). suchasundueconcentrationofresources,decreasedorunfaircompe 13. See68FederalRegister68493,68497(Dec.9,2003). tition, conflicts of interests, or unsound banking practices." See

C136 Federal Reserve Bulletin0 December 2007 TheBoard'sdecisionisbasedon all the facts ofrecord, ers through more than 950 branches in Canada. It also includingthe representations madetotheBoardinconnec provides stock brokerage, insurance brokerage, fund man tionwiththisorder.TheBoard'sdecisionissubjectto, and agement,andfinancialadvisoryservicesthroughsubsidiar is specifically conditioned on compliance with, the terms ies. In the United States, BNS operates branches inHous andconditions setforth in this order. ton, Texas; Portland, Oregon; and New York, New York; By orderofthe Board ofGovernors, effective Septem and agencies in Atlanta, Georgia;'and San Francisco, ber7,2007. California. BNS also has branches in the U.S. Virgin Islands and Puerto Rico. Scotia Bank de Puerto Rico Voting for this action: Chairman Bernanke,Vice Chairman Kohn, ("ScotiaBank"), San Juan, BNS's subsidiary bank, oper andGovernorsWarsh, Kroszner,andMishkin. ates only in Puerto Rico. BNS also provides custody and trust services through The Bank of Nova Scotia Trust ROBERT DEV. FRIERSON CompanyofNewYork,NewYork,NewYork,anondeposi Deputy Secretary ofthe Board tory trustcompany. FBC, with total consolidated assets of approximately ORDERS ISSUED UNDER SECTIONS 3 AND $17.3 billion, is the45thlargestdepository organizationin 4 OF THE BANK HOLDING COMPANY ACT the United States, controlling deposits of approximately $10.8 billion, which represent less than 1 percent of the total amount ofdeposits ofinsured depository institutions The Bank ofNova Scotia intheUnitedStates.41fBNSweredeemedtocontrolFBC, Toronto, Canada BNS would become the 42nd largestdepository organiza tion in the United States, with total consolidated assets of Order Approving the Acquisition of Shares approximately$18.9billion,controllingdepositsofapproxi mately $12.4billion. of a Bank and a Savings Association NONCONTROLLING INVESTMENT TheBankofNovaScotia("BNS"),aforeignbankthatisa financial holdingcompany forpurposesofthe BankHold Although the acquisitionofless than acontrolling interest ingCompanyAct("BHCAct"), hasrequestedtheBoard's in a bank or bank holding company is not a normal approval under section 3 of the BHC Act! to acquire acquisitionforabankholdingcompany,therequirementin 10 percent ofthe outstanding voting shares ofFirst Ban section 3(a)(3) of the BHC Act to obtain the Board's Corp ("FBC"), San Juan, and, indirectly, its subsidiary approval before a bank holding company acquires more bank, FirstBank ofPuerto Rico, Santurce, both of Puerto than5 percentofthe voting sharesofabanksuggeststhat Rico. In addition, BNS has requested approval under Congresscontemplatedacquisitions by bankholdingcom section 4 of the BHC Act to acquire indirectly FBC's paniesofbetween5and 25 percentofthe voting sharesof subsidiary savings association, FirstBank Florida, Miami, banks.5 On this basis, the Board previously has approved Florida.2 the acquisition by a bank holding company ofless than a Notice ofthe proposal, affording interested persons an controllinginterestinabankorbankholdingcompany.6 opportunitytosubmitcomments,hasbeenpublishedinthe BNS has stated that it does not propose to control or FederalRegister(72FederalRegister18,250(2007».The exercise a controlling influence over FBC and that its time for filing comments has expired, and the Board has indirectinvestmentinFBC's subsidiarydepository institu consideredthenoticeandallcommentsreceivedinlightof tions would also be apassiveinvestment. BNS has agreed thefactors setforth insections 3and 4oftheBHCAct. to abide by certain commitments ("Passivity Commit BNS, with total consolidated assets of $373 billion, is ments") that are substantially similar to commitments the third largestcommercialbankinCanada3 and provides previously relied on by the Board in determining that an avarietyofbankingservicestoretailandcorporatecustominvesting bank holding company would not be able to exercise acontrollinginfluence overanotherbankholding 12 U.S.C. §1843(j)(2). For the same reason, the Board has not reviewedthefinancialandmanagerialresourcesofWellPointandthe otherfactorssetforthinsection225.26(b)oftheBoard'sRegulationY (12CFR§225.26(b». 4. Domestic asset data are as of March 31, 2007; deposit and rankingdataareasofJune30,2006,andreflectsubsequentmergers and acquisitions through April6, 2007. In this context,the "United I. 12U.S.C.§1842.See 12CFR225.15. 2. 12 U.S.c. §1843. See 12 CFR 225.24. BNS's indirect invest States" includes any state of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, mentsinthenonbanksubsidiariesofFBCandFirstBaokFlorida,allin AmericanSamoa, and the Virgin Islands. Inthis context,depository PuertoRicoandtheU.S.VirginIslands,aremadeinaccordancewith institutions include commercial banks, savings banks, and savings section 4(c)(9) of the BHC Act and 225.23(f)(1) ofRegulation K, associations. becausetheselocationsare outsidethe UnitedStatesforpurposesof 5. See 12U.S.c. §1842(a)(3). the International BankingAct("IBA") and Regulation K(12 U.S.C 6. See. e.g., Passumpsic Bancorp, 92 Federal Reserve Bulletin §3101(7);12U.S.C.§1843(c)(9);12CFR211.23(f)(1)and211.2(i». C175(2006);BrooklineBancorp. MHC, 86FederalReserveBulletin 3. Canadianassetand rankingdataareasofApril30,2007. Both 52(2000). arebasedontheexchangeratethenineffect.

Legal Developments: Third Quarter, 2007 C137 companyforpurposesoftheBHCAct.7Forexample,BNS Thomas and the St. Croix banking markets in the U.S. has committed not to exercise or attempt to exercise a Virgin Islands.12 BNS and First Bank Florida do not controlling influence over the management or policies of competedirectly in any bankingmarket. FBC or any of its subsidiaries; not to seek or accept TheBoardhasreviewedcarefullythecompetitiveeffects representationontheboardofdirectorsofFBCoranyofits oftheproposalineachofthesebankingmarketsinlightof subsidiaries;andnottohaveanydirector,officer,employee, allthefactsofrecord.Inparticular,theBoardhasconsidered or agent interlocks with FBC or any of its subsidiaries. thenumberofcompetitorsthatwouldremaininthebanking BNS also has committed not to attempt to influence the markets; the relative shares oftotal deposits in depository dividend policies, loan decisions, oroperations ofFBC or institutionsinthemarket("marketdeposits")controlledby any ofitssubsidiaries. FBCandBNS;13theconcentrationlevelofmarketdeposits Based onthese considerations and all the otherfacts of andtheincreaseinthelevelasmeasuredbytheHerfindahl record, the Board has concluded that BNS would not HirschmanIndex("HHI")undertheDepartmentofJustice acquirecontrolof,orhavethe ability toexerciseacontrol MergerGuidelines ("DOJGuidelines");14othercharacter linginfluenceover, FBC orits subsidiary depository insti isticsofthe market; and the Passivity Commitmentsmade tutions through the proposed acquisition ofFBC's voting byBNS withrespect toFirstBankofPuertoRico. shares. The Board notes that the BHC Act would require BNStofileanapplicationandreceivetheBoard'sapproval A. Banking Markets within Established Guidelines before the company could directly or indirectly acquire additional shares ofFBC orattempt to exercise a control Consummation of the proposal would be consistent with linginfluenceoverFBC.8 Board precedent and within the thresholds in the DOJ Guidelines in the Aguadilla, Mayaguez, Ponce, and San COMPETITIVE CONSlDERATlONS Juan banking marketsinPuertoRicO.15 Onconsummation Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or Becausethe U.S. Virgin Islandsare nota "State" for purposesof would be in furtherance of an attempt to monopolize the the IBA, however, the limitation on retail deposit-taking does not business ofbanking in any relevant banking market. The apply to branches of foreign banks in the U.S. Virgin Islands BHCAct also prohibits the Board from approving a bank (12 U.S.C. §§3101(7) and 3104(c». As such, branches of foreign acquisition that would substantially lessen competition in banksoperatinginthe U.S. Virgin Islands may accept retaildeposits and offerafull range ofbankingservicesindirect competition with any relevant banking market, unless the anticompetitive localdepositoryinstitutionstotheextentpermissibleunderlocallaw effectsoftheproposalare clearlyoutweighedin thepublic andregulation. Inlightofall the facts ofrecord, includinginforma interest by the probable effect ofthe proposal in meeting tion provided by the U.S. Virgin Islands Division of Banking and theconvenienceandneedsofthecommunitytobeserved.9 Insurance, the Board has concluded that BNS does compete with localdepository institutionsfor retail deposits, small business loans, The Board also mustconsiderthe competitiveeffects ofa and various other banking services in the U.S. Virgin Islands and proposal to acquire a savings association under the public that uninsured deposits held by BNS branch offices, therefore, benefitsfactorofsection4ofthe BHCAct. should beincluded for purposes ofcalculatingrelevant marketdata. FirstBankofPuertoRicoandScotiaBank,whosedepos 12. TheSI.John-St.Thomasbankingmarketincludestheislandsof its are insured by the Federal Deposit Insurance Corpora St.John and SI.Thomas. The SI. Croixbankingmarketincludes the islandofSI.Croix. tion ("FDIC"), compete directly in the Aguadilla, May 13. Deposit and market share data are as ofJune 30, 2006, are aguez, Ponce, and San Juan banking markets in Puerto adjusted to reflect subsequent mergers and acquisitions through Rico.to BNS also competes directly with FirstBank of April6,2007,andarebasedoncalculationsinwhichthedeposits of Puerto Rico through branch officesll in the St. John-St. thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhas indicatedthatthriftinstitutionshavebecome,orhavethepotentialto become, significant competitors of commercial banks. See, e.g., 7. ThecommitmentsmadebyBNSaresetforthinAppendixA. Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); 8. See. e.g.. EmigrantBancorp, Inc., 82 FederalReserveBulletin National City Corporation, 70 Federal ReserveBulletin743 (1984). 555 (1996); First Community Bancshares. Inc., 77 Federal Reserve Thus, the Board regnlarly has included thrift deposits in the market Bulletin50(1991). share calculation on a 50 percent weighted basis. See, e.g., First 9. 12U.S.c.§1842(c)(I). Hawaiian. Inc.,77FederalReserveBulletin52(1991). 10. Thesebankingmarkets, andthe effectsofthe proposal onthe 14. Underthe DOJ Guidelines, a marketis considered unconcen concentrationofbankingresources inthesemarkets,aredescribedin tratedifthepost-mergerHHIisunder1000,moderatelyconcentrated AppendixB. if the post-merger HHI is between 1000 and 1800, and highly 11. Deposits held by BNS's branch offices in the U.S. Virgin concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof Islands are not insured by the FDIC. Pursuantto the IBA, aforeign Justice ("DOl") has informed the Board that a bank merger or bank wishing to engage in retail deposit-takingin the United States acquisition generally will not bechallenged (in the absence ofother must organize or acquire an insured U.S. depository institution. factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI Branch offices offoreign banks, with few exceptions, must confine is at least 1800 and the merger increases the HHI more than 200 their deposit-taking in the United States to activities not requiring points.TheDOlhasstatedthatthehigher-than-normalHHIthresholds FDIC insurance, such as wholesale deposit-taking (12 U.S.C. forscreeningbankmergersandacquisitionsforanticompetitiveeffects §3104(c».Typically,theBoardhastakentheviewthatthesebranches implicitly recognize the competitive effects of limited-purpose and do not fully compete with U.S. depository institutions for purposes othernondepositoryfinancialentities. ofthe competitive analysis. See Banco Santander Central Hispano. 15. The effect of the proposal on the concentration of banking SA. 92 Federal Reserve BulletinCISI (2006). resourcesinthesemarketsisdescribedinAppendixB.

Cl38 Federal Reserve Bulletin0 December 2007 of the proposal, three banking markets would remain ability ofBNS to control FBC. Although the Board previ highly concentrated and one market would remain moder ously hasnotedthatonecompanyneednotacquirecontrol atelyconcentrated,asmeasuredbytheHHI.Thechangein of another company to lessen competition between them the HHIin the three highlyconcentratedmarkets wouldbe substantially, both BNS and FBC have proposed special small. In each of the four banking markets, numerous safeguards to limit access by BNS to competitively sensi competitors wouldremain. tive infonnation and to limit the potential for BNS to influence the policies or management of FBC in the St. B. Two Banking Markets Warranting Special John-St. ThomasandSt. Croix banking markets.17 Scrutiny As noted, the record shows that BNS intends to be a passiveinvestorandthatthere willbenoofficerordirector BNS and FBC compete directly in two banking markets interlocks between BNS and FBC or FirstBank ofPuerto thatwarrantadetailedreview: St.John-St.ThomasandSt. Rico, although FBC has agreed to allow BNS to have a Croix.As discussedbelow, ifBNS were to acquirecontrol nonparticipating observer on FBC's board. The Board ofFBC,thepost-consummationconcentrationlevelswould recognizes that a significant reduction in competition can exceed the DOJ Guidelines, and BNS's resulting market result from the sharing ofnonpublic financial infonnation sharewouldexceed 35 percentin bothmarkets. between two organizations that are not under common St. John-St. Thomas Banking Market. BNS is the third control. To address this concern, FBC and BNS have largest depository institution in the St. John-St. Thomas committed that FBC would restrict BNS from having market, controlling $212 million in deposits, which repre accesstoanyinfonnationthatwouldallowanticompetitive sents 13.3 percentofmarketdeposits. FirstBankofPuerto behaviorin the St. John-St. Thomas and St. Croix banking Rico is the second largest depository institution in the markets. Forexample, BNS would not be provided access market, controlling $576 million indeposits, which repre to operational or management infonnation regarding the sents 36.2 percent of market deposits. If considered a operations of FBC in the U.S. Virgin Islands, and BNS's combined organization on consummation ofthe proposal, representative will not be present when any matters con BNS and FirstBank of Puerto Rico would be the largest cerning those operations are presented to FBC's board. depository organizationin the banking market, controlling These restrictions and commitments, includingthe Passiv $788 million in deposits, which would represent approxi ity Commitments noted above, limit BNS's access to mately 49.5 percent of market deposits. The proposal confidential infonnation that could enable it to engage in wouldexceedtheDOJGuidelinesbecausetheHHIforthe anticompetitivebehaviorintheSt.John-St.ThomasandSt. St. John-St. Thomas banking market would increase 965 Croixbankingmarkets with respecttoFirstBankofPuerto pointsto5000. Rico. Anticompetitive behavior otherwise might occur in St. Croix Banking Market. BNS is the third largest these banking markets through either coordinating BNS's depository institution in the St. Croix market, controlling activities with FBCorinfluencingthebehaviorofFBC.18 $131 million indeposits, which represents 20.8 percentof market deposits. FirstBank of Puerto Rico is the largest C. Views of OtherAgencies and Conclusion on depository institution in the market, controlling $177 mil Competitive Considerations lion in deposits, which represents 28.1 percent of market deposits. If considered a combined organization on con The DOJ also has reviewed the proposal and has advised summation ofthe proposal, BNS and FirstBank ofPuerto theBoardthatitdoesnotbelievethatBNS'sacquisitionof RicowouldbethelargestdepositoryorganizationintheSt. 10percentofthe votingsharesofFBCwouldlikelyhavea Croixbankingmarket,controlling$308millionindeposits, significantly adverse effectoncompetition in any relevant which would represent approximately 48.9 percent of banking market at this time. The appropriate banking market deposits. The proposal would exceed the DOJ agencies have been afforded an opportunity to comment Guidelines because the HHI for the St. Croix banking and have notobjectedto the proposal. market would increase 1171 pointsto 3359. Accordingly,inlightofallthefacts ofrecord, theBoard Competitive Effects in the Two Markets. The market concludes that consummation of the proposal would not indexes suggestthat consummation ofthe proposal would haveasignificantlyadverseeffectoncompetitionoronthe raise competitive issues in both the St. John-St. Thomas and St. Croix banking markets.16After careful analysis of 17. See. e.g.. Passumpsic Bancorp, 92 Federal Reserve Bulletin the record, the Board has concluded, however, that no e175 (2006); BOK Financial Corp., 81 Federal Reserve Bulletin significantreductionincompetitionis likelytoresultfrom 1052, 1053-54 (1995); SunTrust Banks. Inc., 76 Federal Reserve BNS'sproposedindirectinvestmentinFirstBankofPuerto Bulletin 542 (1990); FirstState Corp., 76 Federal Reserve Bulletin Rico. Ofparticularsignificanceinthiscaseis thestructure 376, 379 (1990); Sun Banks, Inc., 71 Federal Reserve Bulletin 243 ofthe proposedinvestment, which is designed to limit the (1985). 18. There are no other legal, contractual, or statutory provisions thatwouldallowgreateraccesstothebank'sfinancialinfoffi1ationin 16. TheBoardalsonotesthatonedepositoryinstitutionenteredthe the two banking markets than is available to shareholders with less St.Thomas-St.Johnbankingmarketdenovoin2006. thana5percentinterest.

Legal Developments: Third Quarter, 2007 e139 concentration ofresources in any relevantbanking market TheBoardalsohasconsideredthemanagerialresources and that competitive considerations are consistent with ofthe organizationsinvolved.TheBoardhas reviewedthe approval. examinationrecordsofFBC,itsdepositoryinstitutions,and theU.S. bankingoperationsofBNS,includingassessments FINANCIAL, MANAGERIAL, AND SUPERVISORY oftheirmanagement,risk-managementsystems,andopera CONSIDERATIONS tions. Inaddition, theBoardhasconsideredits supervisory experiences and those of other relevant banking supervi Section3oftheBRCActrequirestheBoardtoconsiderthe sory agencies, including the Office ofThrift Supervision financial and managerial resources and future prospectsof ("OTS") and the FDIC, with the organizations and their the companies and depository institutions involved in the records of compliance with applicable banking law and proposal and certain other supervisory factors. The Board withanti-money-Iaunderinglaws.20 also reviews financial and managerial resources of the Basedonallthefactsofrecord,theBoardhasconcluded organizationsinvolvedinaproposalundersection4 ofthe thatconsiderationsrelatingtothemanagerialresourcesand BRC Act.\9 The Board has carefully considered these future prospects ofthe organizations involved in the pro factorsinlightofallthefactsofrecord,includingconfiden posal are consistent with approval. Section 3 ofthe BRC tial supervisory and examination information from the Act also provides that the Board may not approve an various U.S. banking supervisors of the institutions in application involving a foreign bank unless the bank is volved, publicly reported and other financial information, subject to comprehensive supervision or regulation on a and information provided by BNS. The Board also has consolidated basis by the appropriate authorities in the consultedwiththeOfficeoftheSuperintendentofFinancial bank's home country.2\ As noted, the OSH is the primary Institutions("OSH"),theagencywithprimaryresponsibil supervisor ofCanadian banks, including BNS. The Board ity for the supervision and regulation ofCanadian banks, previously has determinedthat BNS is subjectto compre includingBNS. hensive supervision on a consolidated basis by its home Inevaluatingthefinancialfactorsinexpansionproposals countrysupervisor.22Basedonthisfinding andallthefacts by banking organizations, the Board reviews the financial ofrecord, the Board has concludedthat BNS continues to condition ofthe organizations involved both on a parent besubjecttocomprehensivesupervisiononaconsolidated only and on a consolidated basis, as well as the financial basisbyits home-country supervisor. condition of the subsidiary depository organizations and Basedonallthefactsofrecord,theBoardhasconcluded significant nonbanking operations. In this evaluation, the thatconsiderationsrelating to the financial and managerial Boardconsidersavarietyofinformation, including capital resourcesandfutureprospectsoftheorganizationsinvolved adequacy, asset quality, and earnings performance. In assessing financial factors, the Board consistently has consideredcapitaladequacytobeespeciallyimportant.The Board also evaluates the financial condition of the pro 20. OnMarch 16,2006,theBoardissuedaceaseanddesistorder forma organization, including its capital position, asset ("Order") requiring FBC to address accounting deficiencies for quality, and earnings prospects, and the impact of the certain mortgage loans, which subsequently led it to restate the proposedfunding ofthe transaction. company's financial statements. See In theMatterofFirstBancorp, Doc. No. 06-006-B-HC. In a separate and coordinated action, the TheBoardhascarefully consideredthe financial factors FDICalsoissuedaceaseanddesistorderagainstFirstBankofPuerto ofthis proposal. Canada'srisk-based capital standards are Rico. The Order required, among other actions, that FBC hire an consistent with those established by the Basel Capital independent consultant to review its mortgage portfolio; establish Accord ("Accord"). The capital ratios of BNS would policiesand procedures to ensureappropriate classificationofloans; continue to exceed the minimum levels that would be submitawrittencapitalplantoensurethattheconsolidatedorganiza tionmaintainsanadequatecapital position;andsubmitanacceptable requiredundertheAccordandareconsideredequivalentto liquidity contingency plan. The Board has reviewed carefully the the capitallevelsthatwouldbe requiredofaU.S. banking progressmadebyFBCinimplementingtheOrder'srequirements.The organization. Furthermore, the U.S. subsidiary depository Boardexpects that FBC will continue to take all necessary steps to institutionsinvolvedarewellcapitalizedandwouldremain ensurecompliancewiththeOrder. so on consummation. The Board also has considered the 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 financial resources of BNS and the other organizations home-country supervision under the standards set forth in Regula involvedandtheeffectsofthisproposalonthe capitaland tionK.See12CFR225.13(a)(4).RegulationKprovidesthataforeigu financial resources of FBC and its subsidiary depository bank will be considered subject to comprehensive supervision or institutions. Basedonitsreviewofthesefactors, theBoard regulation on a consolidated basis ifthe Board determines that the bankissupervisedorregulatedinsuchamannerthatitshome-country finds that BNS has sufficient financial resources to effect supervisorreceivessufficientinformationontheworldwideoperations the proposal and that the financial factors are consistent ofthebank,includingitsrelationshipwithanyaffiliates,toassessthe with approval. The proposed transaction is structured as a bank's overall financial condition and its compliance with laws and share purchasetobefunded withavailablecashresources. regulations.See 12CPR211.24(c)(l). 22. The Bank ofNova Scotia, 93 Federal Reserve Bulletin C73 (2007). 19. 12CFR225.26(b).

C140 Federal Reserve Bulletin 0 December 2007 intheproposalareconsistentwithapproval,asaretheother communities to be served and the CRA performance supervisoryfactors.23 recordsoftherelevantdepositoryinstitutionsareconsistent withapproval. CONVENIENCE AND NEEDS AND CRA PERFORMANCE CONSIDERATIONS PUBLIC BENEFITS Inactingonaproposalundersection3oftheBHCAct,the As noted above, BNS also has filed a notice under sec Boardalso mustconsiderthe effectsoftheproposalonthe tion 4(c)(8) and 4(j) of the BHC Act for its proposed convenienceandneedsofthecommunitiestobeservedand indirectinvestmentinFirstBankFlorida.TheBoardprevi take into account the records of the relevant insured ously has determined by regulation that the operationofa depositoryinstitutionsundertheCommunityReinvestment savings association by a bank holding company is closely Act("CRA").24TheBoardalsomustreviewtherecordsof related to banking for purposes of section 4(c)(8) of the performanceundertheCRAoftherelevantinsureddeposi BHC Act.27 To approve this notice, the Board also must tory institutionswhenactingonanoticeundersection4of determine that the proposed acquisition of FirstBank the BHC Act to acquire voting securities of an insured Florida "canreasonablybeexpectedtoproducebenefitsto savingsassociation.25 the public that outweigh possible adverse effects, such as As provided in the CRA, the Board has evaluated the undue concentration of resources, decreased or unfair proposal in light of the evaluations by the appropriate competition, conflicts of interests, or unsound banking federal supervisorsoftheCRAperformancerecordsofthe practices."28 relevant insured depository institutions. An institution's As part of its evaluation of the public interest factors most recent CRAperformance evaluation is a particularly under section 4 ofthe BHC Act, the Board has reviewed importantconsiderationintheapplicationsprocessbecause carefullythepublicbenefitsandpossibleadverseeffectsof it represents a detailed, on-site evaluation of the institu the proposal. The record indicates that consummation of tion's overall record ofperformance underthe CRAby its theproposalwouldresultinbenefitstoconsumerscurrently appropriatefederal supervisor.26 served by FBC. BNS's investment in FBS, and thus Scotia Bank received a "satisfactory" rating from the indirectly in FirstBank Florida, would strengthen FBC's FDICatitsmostrecentCRAperformanceevaluation,asof capital position and allow FBC to better serve its custom March 1, 2005. FirstBank of Puerto Rico received a ers.Forthereasonsdiscussedaboveandbasedontheentire "satisfactory" rating at its most recent CRA performance record, the Board has determined that the conduct of the evaluation by the FDIC, as of September 1, 2006, and proposed nonbanking activities within the framework of FirstBankFloridareceiveda"satisfactory"ratingfrom the RegulationYandBoardprecedentis not likely toresultin OTS atits mostrecentCRAperformanceevaluation, as of adverse effects, such as undue concentration ofresources, February 28, 2005. decreased or unfair competition, conflicts of interests, or Basedonallthefactsofrecord,theBoardconcludesthat unsoundbanking practices. considerationsrelatingtotheconvenienceandneedsofthe Basedonallthefactsofrecord,theBoardconcludesthat consummation ofthe proposal canreasonably be expected to produce public benefits that would outweigh any likely adverseeffects.Accordingly,theBoardhasdeterminedthat 23. Section3oftheBHCActalsorequirestheBoardtodetermine thatan applicanthas providedadequateassurances thatitwill make the balance ofthe public benefits under section 4(j)(2) of availabletotheBoardsuchinformationonitsoperationsandactivities the BHCActisconsistentwithapproval. and those ofits affiliates thatthe Boarddeems appropriate to deter mine and enforce compliance with the BHC Act (12 U.S.c. OTHER CONSIDERATIONS §1842(c)(3)(A)).The Boardhas reviewed therestrictions ondisclo sureintherelevantjurisdictionsin whichthe applicantoperates and has communicated with relevant government authorities concerning BNSalsorequeststhatitbepermittedtoacquireanindirect access to information. In addition, BNS previously has committed interest in FBC's noncontrolling minority investment in that, to the extent not prohibited by applicable law, it will make SunAmericanBancorpanditssubsidiarybank,SunAmeri available to the Board such information on the operations of its can Bank, both inBocaRaton, Florida (collectively, "Sun affiliates that the Board deems necessary to determine and enforce American"), without filing an application for the Board's compliancewiththeBHCAct,the IBA,and otherapplicablefederal law. BNSalsopreviouslyhascommittedtocooperatewiththeBoard priorapproval undersection 3ofthe BHCAct.29FBChas toobtainanywaiversorexemptionsthatmaybenecessarytoenable entered into and complied with commitments not to exeritsaffiliatestomakesuchinformationavailabletotheBoard. Inlight of these commitments, the Board has concluded that BNS has providedadequateassurancesofaccesstoanyappropriateinformation theBoardmayrequest. 27. 12CFR225.28(b)(4)(ii). 24. 12U.S.C.§2901etseq.; 12U.S.C.§I842(c)(2). 28.See 12V.S.c. §1843(j)(2)(A). 25. See. e.g.,NorthForkBancorporation, Inc.,86FederalReserve 29. 12V.S.c. §1842(a)(3).In2004,FBCwasapprovedtoacquire Bulletin767(2000). up to 9.9 percent of the voting shares of Sun American Bancorp, 26. SeeInteragencyQuestionsandAnswersRegardingCommunity previously Southern Security Bank Corporation. See letter to Ms. Reinvestment,66Federal Register36,620 at36,640 (2001);72 Fed Szendrey-RamosfromMs.Tham,FederalReserveBankofNewYork, eralRegister37,922at37,951 (2007). datedMay 10,2004.

Legal Developments: Third Quarter, 2007 C141 ciseorattempttoexerciseacontrollinginfluenceoverSun Appendix A American that are similar to the Passivity Commitments notedabove. and BNS would have no meaningfulinterac PASSIVITY COMMITMENTS tion or influence over SunAmerican through BNS's pro posed minority, noncontrolling investment in FBC. Based Inconnection with its application to acquire up to 10 per onall thefacts ofrecord,theBoardhasdeterminedthatno cent of First BanCorp ("FBC"), San Juan, Puerto Rico, regulatory purpose would be served by requiring BNS to BankofNovaScotia("BNS"),Toronto,Canada, commits file an application under the BHCAct for such an invest thatit will notdirectlyorindirectly: ment;accordingly,theBoardwillnotrequireBNStofilean 1. Exercise orattempt to exercise acontrolling influence application.30 overthe management orpolicies ofFBC orany ofits subsidiaries; 2. Seekoracceptrepresentationonthe boardofdirectors CONCLUSION ofFBC orany ofits subsidiaries; 3. Have or seek to have any employee or representative Based on the foregoing and all the facts of record, the serve as an officer, agent, oremployee ofFBCorany Board has determined that the application and notice ofits subsidiaries; should be, and hereby are, approved. In reaching its 4. Take any action that would cause FBC or any of its conclusion,theBoardhasconsideredallthefacts ofrecord subsidiaries to become a subsidiary ofBNS or any of in light ofthe factors that it is required to consider under BNS'ssubsidiaries; the BHCAct. The Board's approval is specifically condi 5. Acquireorretainsharesthatwouldcausethecombined interests of BNS and any of BNS's subsidiaries and tionedoncompliancebyBNSwiththeconditionsimposed theirofficers,directors,andaffiliatestoequalorexceed in this order and the commitments made to the Board in 25 percentofthe outstanding voting shares ofFBC or connection with the proposal. The Board'sapprovalofthe any ofitssubsidiaries; nonbankingaspectsoftheproposalisalsosubjecttoallthe 6. Proposeadirectororslateofdirectors inoppositionto conditions set forth in Regulation Y, including those in a nominee or slate of nominees proposed by the sections225.7and225.25(c),31 andtotheBoard'sauthority managementorboardofdirectorsofFBCorany ofits subsidiaries; torequiresuchmodificationorterminationoftheactivities 7. Solicit or participate in soliciting proxies with respect of BNS or any of its subsidiaries as the Board finds to any matterpresentedto the shareholders ofFBC or necessary to ensure compliance with, and to prevent eva any ofits subsidiaries; sion of, the provisions of the BHC Act and the Board's 8. Attempttoinfluencethedividendpoliciesorpractices; regulations and orders issued thereunder. For purposes of theinvestment,loan,orcreditdecisionsorpolicies;the thisaction, theconditionsandcommitmentsaredeemedto pricing of services; personnel decisions; operations activities (including the location of any offices or be conditions imposed in writing by the Board in connec branches or their hours of operation, etc.); or any tion withitsfindings anddecisionhereinand, assuch, may similaractivitiesofFBCorany ofitssubsidiaries; beenforcedin proceedingsunderapplicable law. 9. Disposeorthreatentodispose ofsharesofFBCorany The bank-related portion of the proposal shall not be of its subsidiaries in any manner as a condition of consummatedbefore the 15thcalendarday after the effec specific action or nonaction by FBC or any of its tive date ofthis order, and no partofthe proposal may be subsidiaries; or consummated later than three months after the effective 10. Enter into any other banking or nonbanking transac tions with FBC or any ofits subsidiaries, except that date ofthis order, unless such period isextended for good BNSmayestablishandmaintaindepositaccountswith cause by the Board or by the Federal Reserve Bank of FBC, provided that the aggregate balances ofall such NewYork, acting pursuantto delegatedauthority. accountsdonotexceed$500,000andthattheaccounts ByorderoftheBoardofGovernors,effectiveAugust9, aremaintainedonsubstantiallythesametermsasthose 2007. prevailing for comparable accounts of persons not affiliated withFBC. Votingforthis action: ChairmanBemanke, ViceChairman Kohn, andGovernorsWarsh,Kroszner.andMishkin. Notwithstanding the foregoing, BNS andFBC's subsid iary, FirstBankofPuertoRico, directly orindirectly, may ROBERT DEV. FRIERSON act as a syndication or administrative agent, or in a Deputy Secretary ofthe Board similaragency orarrangingcapacity, in connection with a loan syndicationorsimilarcreditoffering (together, "syn dication") in which the otherinstitution is a participating 30. The Board notes that the requirements ofsection 3(d) ofthe lenderor memberof the syndicate (together, "member"), BHC Act would be met if BNS were to acquire control of Sun American(12U.S.c.§1842(d). provided that (I) the total fee income derived by either 31. 12CFR225.7and225.25(c). party as amemberin such syndicationsin acalendaryear

C142 Federal Reserve Bulletin0 December 2007 will be less than 5 percent ofFirst Bank ofPuerto Rico's of all loans committed and originated by First Bank of total fee income in dollar amounts in that year, (2) the Puerto Rico in that year, and (3) any syndication-related loans booked by either party as a member in connection arrangements between BNS and First Bank of Puerto with such syndications in a calendaryear will account for Rico will be nonexclusive and on an arm's length basis no more than 10 percent of the aggregate dollar amount on market terms. Appendix B BNS AND FBC BANKING MARKETS CONSISTENT WITH BOARD PRECEDENTAND DOl GUIDELINES Share Amount ofmarket Remaining ofdeposits Resulting Change in Bank Rank deposit number of (millions HHI HHI shares competitors ofdollars) (percent) PuERTO RICO BANKING MARKETS Aguadilla-Aguada, Aguadilla, Anasco, Isabela, Lares, Moca, Rincon, andSan Sebastian municipios BNS Pre-Merger ........................ 6 28.6 2.31 3,175 12 8 FBC ........................................ 5 30.7 2.49 3,175 12 8 BNS Post-Merger ....................... 4 59.3 4.80 3,175 12 8 Mayaguez-Cabo Rojo, Hormigueros, Lajas, Las Marias, Maricao, Mayaguez, Sabana Grande, and San German municipios BNS Pre-Merger ........................ II 7.0 .35 2,633 3 10 FBC ........................................ 6 71.7 3.55 2,633 3 10 BNS Post-Merger ....................... 6 78.7 3.90 2,633 3 10 Ponce-Adjuntas, Coamo, Guanica, Guayanilla, Juana Diaz, Penuelas, Ponce, Santa Isabel, Villalba, and Yauco municipios BNS Pre-Merger ........................ 7 88.8 4.02 1,921 21 11 FBC ........................................ 10 56.3 2.55 1,921 21 11 BNS Post-Merger ....................... 5 145.1 6.57 1,921 21 11

Legal Developments: Third Quarter, 2007 C143 Appendix B-Continued BNS AND FBC BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued Share Amount ofmarket Remaining ofdeposits Resulting Change in Bank Rank deposit numberof (millions HHI HHI shares competitors ofdollars) (percent) San Juan-Aibonito, AguasBuenas, 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, TrujilloAlto, Utuado, Vega Alta, Vega Baja, Vieques. and Yabucoa municipios BNS Pre-Merger ........................ 11 1,044 1.95 1,521 87 10 FBC ........................................ 1 11,878 22.16 1,521 87 10 BNS Post-Merger ....................... 1 12,922 24.11 1,521 87 10 NOTE: Depositandmarket-sharedataare asofJune30.2006,areadjusted toreflectsubsequentmergers andacquisitions throughApril6, 2007,and are basedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat 50percent.Alldepositdataareinmillionsofdollars.DatafortheSt.Thomas St.JohnandSt.Croixbankingmarketsarediscussedintheorder. ORDERS ISSUED UNDER BANK the FederalReserveAct ("FRA") to establish and operate MERGER ACT branchesatthe locationsofthosebranches.3 Notice ofthe proposal, affording interested persons an opportunity to submit comments, has been published in County Bank local publicationsinaccordance withthe BankMergerAct and the Board's Rules of Procedure.4 As required by the Merced, California BankMergerAct, areportonthecompetitiveeffectsofthe merger was requested from the United States Attorney Order Approving the Acquisition and General and a copy of the request was provided to the Establishment of Branches FederalDepositInsuranceCorporation. The timefor filing comments has expired, and the Board has considered the County Bank,1 a state member bank, has requested the proposal and all comments received in lightofthe factors Board'sapprovalundersection18(c)oftheFederalDeposit setforth in the BankMergerActand the FRA. Insurance Act ("Bank Merger Act")2 to purchase all the CountyBank,withtotalassetsofapproximately$1.8bil assets and assume all the liabilities of eleven California lion,operatesonly inCalifornia.sCounty Bankis the45th branches ofNational Bank ofArizona ("NBA"), Tucson, largestinsureddepositoryinstitutioninCalifornia,control- Arizona. County Bank also has applied under section 9 of 3. 12V.S.c. §321.Thesebranchesarelistedintheappendix. 4. 12CFR262.3(b). 5. Asset data are as of March 31, 2007. Deposit data and state 1. County Bank is a subsidiary of Capital Corp of the West, rankings are as ofJune 30, 2006. In this context, the term "insured Merced,abankholdingcompany. depository institutions" includes insured commercial banks, savings 2. 12V.S.c. §1828(c). banks,andsavingsassociations.

el44 Federal Reserve Bulletin0 December 2007 ling deposits of approximately $1.5 billion, which repre Consummation of the proposal in the Fresno banking sents less than 1percentofthe total amountofdeposits of market9 would be consistent with Board precedent and insureddepositoryinstitutionsinthestate("statedeposits"). withinthethresholdsintheDOJGuidelines.1OOnconsum NBAoperates inArizona and California. In California, mationoftheproposal,itwouldremainmoderatelyconcen NBAis the 156th largest insured depository institution in trated, and numerous competitors would remain in the the state,controllingdepositsofapproximately$198.8mil market. lion. On consummation of the proposal, County Bank County Bank and NBA also compete directly in two would become the 40th largest insured depository institu banking markets, Los Banos and Merced,tl that require a tion in California, controlling deposits of approximately detailed review ofthe competitive effects ofthe proposal. $1.7 billion, which represents less than 1percent of state In each market, County Bank is the largest depository deposits. institution and already controls approximately half the marketdeposits. TheBoardpreviouslyhasrecognized that COMPETITIVE CONSIDERATIONS merger proposals involving a depository institution with a large market share relative to the shares of other market TheBankMergerActprohibitstheBoardfromapprovinga competitorswarrantclosereview.12 proposal that would result in a monopoly or would be in After careful analysis of the record, the Board has furtherance of any attempt to monopolize the business of concluded that no significant reduction in competition is bankinginany relevantbankingmarket.TheBankMerger likelytoresultfromCountyBank'sproposedacquisitionof ActalsoprohibitstheBoardfromapprovingaproposalthat NBA's branches in the Los Banos and Merced banking would substantially lessen competition in any relevant markets. As noted below, County Bank's existing market banking market, unless the anticompetitive effects of the shares in the two banking markets would increase only proposalareclearlyoutweighedinthepublicinterestbyits slightly on consummation ofthe proposal. Moreover, the probableeffectinmeetingtheconvenienceandneedsofthe increase in concentration levels in each of these highly community tobeserved.6 concentrated markets on consummation of the proposal County Bank and NBA compete directly in three rel would not exceed the threshold levels in the 001 Guide evant banking markets in California: Fresno, Los Banos, lines. The Boardhas also consideredotherfactors indicat andMerced.TheBoardhasreviewedcarefullythecompeti ingthattheproposalwouldnothaveasignificantlyadverse tiveeffectsofthe proposalineachbanking marketinlight effectoncompetitionineitherbanking market.J3 of all the facts of record. In particular, the Board has Los Banos Banking Market. County Bank is the largest consideredthenumberofcompetitorsthatwouldremainin insured depository institution in the Los Banos banking thebankingmarkets, therelative sharesoftotaldeposits in market, controlling deposits ofapproximately $217.3 mil depository institutions inthe markets ("marketdeposits") lion,whichrepresentapproximately49.8percentofmarket controlled by County Bank and NBA,7 the concentration deposits. NBAis the fifth largest depository institution in levelsofmarketdepositsandtheincreaseinthoselevelsas themarket,controllingdepositsofapproximately$6.4milmeasured by the Herfindahl-Hirschman Index ("HHI") undertheDepartmentofJusticeMergerGuidelines("DOJ Guidelines"),8andothercharacteristicsofthe markets. 9. TheFresnobankingmarketisdefinedastheFresnometropolitan area, including the Fresno Ranally Metro Area and the towns of Chowchilla,Kingsburg,Parlier,Reedley,OrangeCove,Dinuba,Coar segold,Oakhurst,Prather,andShaverLake. 6. 12U.S.C.§1828(c)(5). 10. On consummation of the proposal, the HHI would remain 7. DepositandmarketsharedataareasofJune30,2006,adjusted unchanged at 1208for theFresnomarket. CountyBankoperatesthe to reflect subsequent mergers and acquisitions through August 24, 14thlargestdepository institution inthe market,controllingdeposits 2007, and are based on calculations in which the deposits ofthrift ofapproximately$183.2million,whichrepresentslessthan2percent institutions are included at 50 percent. The Board previously has of market deposits. NBA controls $12.2 million in deposits, which indicatedthatthriftinstitutionshavebecome,orhavethepotentialto representslessthan1percentofmarketdeposits.Afterconsummation, become, significant competitors of commercial banks. See, e.g., CountyBankwouldbecomethe 13thlargestdepositoryinstitutionin Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); the market, controlling deposits of approximately $195.3 million, National City Corporation, 70 FederalReserveBulletin743 (1984). whichrepresentsapproximately2percentofmarketdeposits.Twenty Thus,theBoardregularlyhasincludedthriftinstitutiondepositsinthe sixdepositoryinstitutionswouldremaininthebankingmarket. market share calculation on a 50 percent weighted basis. See, e.g., 11. The Los Banos banking market is defined as southwestern FirstHawaiian, Inc.,77FederalReserveBulletin52(1991). Merced County, excluding the Merced Ranally MetroArea, living 8. Under the DOJ Guidelines, a market is considered unconcen ston, and Mariposa; and including the towns ofDos Palos and Los tratedifthepost-mergerHHIisunder 1000,moderatelyconcentrated Banos. if the post-merger HHI is between 1000 and 1800, and highly 12. See FirstarCorporation,87FederalReserveBulletin236,238 concentratedifthepost-mergerHHIexceeds1800.TheDepartmentof (2001); The Citizens Bank, 91 Federal ReserveBulletin 438 (2005); Justice ("DOl") has informed the Board that a bank merger or andFirstBuseyCorporation,93FederalReserveBulletinC90(2007). acquisition generally will notbechallenged(in the absence ofother 13. The Board has evaluated whether other factors mitigate the factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI competitiveeffectsoftheproposalorindicatethattheproposalwould is at least 1800 and the merger increases the HHI more than 200 have asignificantlyadverseeffectoncompetitioninthemarket.The points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds numberand strengthoffactors necessaryto mitigatethe competitive forscreeningbankmergersandacquisitionsforanticompetitiveeffects effectsofaproposaldependonthesizeoftheincreaseinandresulting implicitly recognize the competitive effects oflimited-purpose and levelofconcentration in abanking market. See NationsBank Corp., othernondepositoryfinancialentities. 84FederalReserveBulletin129(1998).

LegalDevelopments: Third Quarter, 2007 Cl45 lion. On consummation, County Bank would remain the likely have asignii,cantly adverseeffecton competition in largest depository institution in the market, controlling any relevant banking market. Based on all the facts of depositsofapproximately $223.7million. record, the Board concludes that consummation of the TheNBAdepositsthatCountyBankproposestoacquire proposal would not have a signii,cantly adverse effect on in the Los Banos market represent less than 1.5 percentof competitionorontheconcentrationofresourcesinthethree the total marketdeposits, and the HHI would increase 146 banking markets where County Bank and NBA compete points to 3477, which is consistent with the DOl Guide directly or in any other relevant banking market. Accord lines. Accordingly, the proposal would not signii,cantly ingly, the Boardhas determined thatcompetitive consider increase the marketconcentration. ationsareconsistentwithapproval. Otherfactorsindicatethattheincreaseinconcentrationin the Los Banosbankingmarket, asmeasured by the market FINANCIAL AND MANAGERIAL RESOURCES shareofthecombinedorganization,overstatesthepotential AND FUTURE PROSPECTS competitive effects of the proposal in the market. After consummation, two ofCountyBank'sthree competitors in The Bank Merger Act requires the Board to consider the the market would control 21 percent and 18 percent of i,nancial andmanagerial resources and future prospects of market deposits, respectively. In addition, the market ap the companies and depository institutions involved in the pearstobemoderatelyattractiveforentry.Forexample,the proposal and certain other supervisory factors. The Board population growth rate ofthe Los Banos market between has considered these factors in light of all the facts of 2002 and 2005 increased signii,cantly fasterthan the aver record, includingconi,dentialreportsofexamination,other age growth rate in other rural markets in California or in supervisoryinformationfrom the primaryfederal andstate ruralmarketsnationwideduringthesame time period.The supervisors ofthe organizations involved in the proposal, Los Banos market also experienced higherdeposit growth publicly reported and other i,nancial information, and rates than the average deposit growth rates in California information providedby CountyBank. nonmetropolitan counties and in nonmetropolitan counties Inevaluatingi,nancialfactors inexpansionproposals by nationwideduringthe lastthreeyears. banking organizations, the Board considers a variety of MercedBankingMarket. CountyBankalsoisthelargest measures in this evaluation, including capital adequacy, insured depository institution in the Merced banking mar assetquality,andearningsperformance.Inassessingi,nan ket,14controllingdepositsofapproximately$668.6million, cial factors, the Board consistently has considered capital which represent approximately 50.4 percent of market adequacytobeespeciallyimportant.TheBoardalsoevalu deposits. NBAis the tenth largestdepository institution in atesthei,nancialconditionofthecombinedorganizationat themarket,controllingdeposits ofapproximately$1.6mil consummation, including its capitalposition, asset quality, lion.Onconsummation,CountyBankwouldcontroldepos and earnings prospects, and the impact of the proposed its of approximately $670.2 million, which would repre funding ofthetransaction. sents 50.5 percentofmarketdeposits. CountyBankandNBAare well capitalized, andCounty CountyBankproposestoacquireonlyasmallamountof Bank would remain so on consummation ofthe proposal. deposits in thismarket,andtheproposal wouldnotsignii, CapitalCorpoftheWestalsowouldremainwellcapitalized cantly increase the market concentration. On consumma onconsummationoftheproposal.Basedonitsreviewofthe tion, County Bank's market share would increase by only record in this case, the Board i,nds that County Bank has 0.1 percent. The HHI would increase 12 points to 3035, sufficient l nancial resources to effect the proposal. The which isconsistentwith theDOJ Guidelines. proposed transaction is structured as a cash purchase that Other factors also indicate that this small increase in will be funded through the issuance of trust preferred concentrationintheMercedbankingmarketwouldnothave securitiesbyCapitalCorpoftheWest. signii,cant anticompetitive effects. After consummation, TheBoardalso has consideredthemanagerialresources eight insured depository institutions would continue to ofthe organizations involved and the proposed combined compete with CountyBankin the market.The marketalso organization. The Board has reviewed the examination appearstobemoderatelyattractiveforentry.Since2000,the records of County Bank and NBA, including assessments population in the banking market has grown more rapidly oftheirmanagement,risk-managementsystems,andopera than the average population growth in urban markets in tions. In addition, theBoardhas consideredits supervisory Californiaandnationwide. experienceswith the relevantorganizationsandtheorgani Agency ViewsandConclusiononCompetitiveConsider zations' records of compliance with applicable banking ations.TheDOJalsohasconductedadetailedreviewofthe law, including anti-money-laundering laws. County Bank potentialcompetitiveeffectsoftheproposalandhasadvised and NBA are considered to be well managed. The Board the Board that consummation of the proposal would not alsohasconsideredCountyBank'splansforimplementing the proposal, including the proposed management after consummation. 14. TheMercedbankingmarketisdel,nedastheMercedmetropoli tan area, including the Merced Ranally MetroAreaand the towns of Basedonallthefactsofrecord,theBoardconcludesthat LivingstonandMariposa. considerations relating to the i,nancial and managerial

C146 Federal Reserve Bulletin0 December 2007 resourcesandfutureprospectsoftheorganizationsinvolved the Board or the Federal Reserve Bank ofSan Francisco, intheproposalareconsistentwithapprovalundertheBank acting pursuanttodelegatedauthority. MergerAct. By order ofthe Board ofGovernors, effective Septem ber25, 2007. CONVENIENCE AND NEEDS CONSIDERATIONS Voting for this action: Chairman Bernanke,Vice Chairman Kohn, andGovernorsWarsh, Kroszner,andMishkin. In acting on a proposal under the Bank Merger Act, the Boardalsomustconsideritseffectsontheconvenienceand ROBERT DEY. FRIERSON needsofthecommunitiestobeservedandtakeintoaccount Deputy Secretary ofthe Board the records ofthe relevant insured depository institutions undertheCommunityReinvestmentAct("CRA").15County Appendix Bankreceiveda"satisfactory"ratingatitsmostrecentCRA performanceevaluationbytheFederalReserveBankofSan Francisco,asofMarch26,2007.NBAreceiveda"satisfac BRANCHES IN CALIFORNIA TO BE tory"ratingatitsmostrecentCRAperformanceevaluation ESTABLISHED BY COUNTY BANK by the Office of the Comptroller of the Currency, as of October 20, 2003. After consummation of the proposal, Caruthers County Bank plans to implement its CRA policies at the 2200WestTahoeAvenue NBAbranches.CountyBankhas representedthatconsum Coalinga mationoftheproposalwouldallow ittoprovide abroader 410NorthFifthStreet range offinancial productsand servicesoveralargerarea. Based on all the facts ofrecord, the Board concludes that Dos Palos considerationsrelatingtotheconvenienceandneedsofthe 2142Blossom Street communitiestobeservedandtheCRAperformancerecords of the relevant depository institutions are consistent with Farmersville approval. 400WestVisaliaRoad Hariford OTHER CONSIDERATIONS 890WestLaceyBoulevard CountyBankalsohasappliedundersection9oftheFRAto Lemoore establishandoperatebranchesatNBA'slocationslistedin 142WestD Street the appendix. The Board has assessed the factors it is required to consider when reviewing an application under Mendota section9oftheFRAandfindsthosefactorstobeconsistent 567 OllerStreet withapproval.16 Merced 2936GStreet CONCLUSION Needles Based on the foregoing and all facts of record, the Board 1019WestBroadwayStreet hasdeterminedthatthe applications shouldbe, andhereby are, approved. In reaching its conclusion, the Board has Tulare consideredallthe facts ofrecordinlightofthefactors that 140EastTulareAvenue it is required to consider under the Bank MergerAct and the FRA. TheBoard's approval is specifically conditioned Visalia on compliance by County Bank with the conditions im 800WestMainStreet posedinthisorder,thecommitmentsmade totheBoardin connection with the applications, and receipt ofall other East West Bank regulatory approvals. For purposes of this action, the conditions and commitments are deemed to be conditions Pasadena, California imposed in writing by the Board in connection with its Order Approving the Merger of Banks and findings anddecisionhereinand, assuch,maybeenforced inproceedingsunderapplicable law. Establishment of Branches The proposed transactions may not be consummated beforethe 15thcalendarday aftertheeffectivedate ofthis EastWestBankl hasrequestedtheBoard'sapprovalunder order, orlaterthan three months after the effectivedate of section18(c)oftheFederalDepositInsuranceAct2("Bank thisorder,unlesssuchperiodisextendedforgoodcauseby 1. East West Bank is a subsidiary of East West Bancorp, Inc., 15. 12U.S.c.§2901 etseq. Pasadena,California,afinancial holdingcompany. 16. 12U.S.C. §322; 12CFR208.6(b). 2. 12U.S.c. §1828(c).

Legal Developments: Third Quarter; 2007 C147 Merger Act") to merge with Desert Community Bank FINANCIAL AND MANAGERIAL RESOURCES ("Desert Bank"), Victorville, California, both state mem AND FUTURE PROSPECTS berbanks,withEastWestBankasthesurvivingentity.East West Bankalso has applied under section 9ofthe Federal The Bank Merger Act requires the Board to consider the ReserveAct ("FRA") to establish and operatebranches at financial and managerial resources and future prospects of DesertBank'smainofficeand branch10cations.3 the companies and depository institutions involved in the Notice of the proposal, affording interested persons an proposal and certain other supervisory factors. The Board opportunity to submit comments, has been published in has considered these factors in light of all the facts of localpublicationsinaccordancewith the BankMergerAct record, includingconfidentialreportsofexamination,other and the Board's Rules ofProcedure.4 As required by the supervisoryinformationfrom the primaryfederal andstate BankMergerAct,areportonthecompetitiveeffectsofthe supervisors ofthe organizations involved in the proposal, merger was requested from the United States Attorney publiclyreported andotherfinancial information, informa General and a copy of the request was provided to the tion provided by EastWest Bank, and public commenton FederalDepositInsuranceCorporation.The timefor filing the proposal. comments has expired, and the Board has considered the Inevaluatingfinancial factorsinexpansionproposalsby proposal and allcomments received in lightofthe factors banking organizations, the Board considers a variety of setforthintheBankMergerActand the FRA. measures in this evaluation, including capital adequacy, East West Bank, with total assets of approximately assetquality,andearningsperformance.Inassessingfinan $10.7billion, operatesinCaliforniaandTexas.5 InCalifor cial factors, the Board consistently has considered capital nia, EastWestBank is the 15th largestinsured depository adequacy tobeespeciallyimportant.TheBoardalsoevalu institution, controlling deposits ofapproximately $7.1 bil atesthe financialconditionofthecombinedorganizationat lion, which represent 1 percent of the total amount of consummation, includingits capital position, assetquality, deposits of insured depository institutions in the state and earnings prospects, and the impact of the proposed ("statedeposits"). funding ofthe transaction. DesertBankoperatesonly inCalifornia and is the 85th East West Bank and Desert Bank are well capitalized, largest insured depository institution in the state, control and the resulting bankwould remain soon consummation lingdepositsofapproximately$494.4million.Onconsum ofthe proposal. East West Bancorp will also remain well mationofthe proposal, EastWest Bank would remain the capitalizedonconsummationofthe proposal. Basedonits 15th largest insured depository institution in California, review ofthe record in this case, the Board finds thatEast controlling deposits of approximately $7.6 billion, which West Bank has sufficient financial resources to effect the represents 1.1 percentofstatedeposits. proposal. The proposedtransactionisstructuredas acom bination share exchange and cash purchase. East West COMPETITIVE CONSIDERATIONS Bankwilluseexistingresourcestofundthecashportionof the transaction. TheBankMergerActprohibitstheBoardfromapprovinga TheBoardalsohasconsideredthemanagerialresources proposal that would result in a monopoly or would be in ofthe organizations involved and the proposed combined furtherance ofany attempt to monopolize the business of organization. The Board has reviewed the examination bankinginanyrelevantbankingmarket.TheBankMerger records of East West Bank and Desert Bank, including ActalsoprohibitstheBoardfromapprovingaproposalthat assessments of their management, risk-management sys would substantially lessen competition in any relevant tems,andoperations.Inaddition, theBoardhasconsidered banking market, unless the anticompetitive effects of the its supervisory experiences with the relevantorganizations proposalareclearlyoutweighedinthepublicinterestbyits and the organizations' records of compliance with appli probableeffectinmeetingtheconvenienceandneedsofthe cable banking law, including anti-money-Iaundering laws. communitytobeserved.6 EastWestBankandDesertBank EastWestBankandDesertBankareconsideredtobewell do not compete directly in any relevant banking market. managed.TheBoardalsohasconsideredEastWestBank's Based on all the facts ofrecord, the Board has concluded plans for implementing the proposal, including the pro that consummation of the proposal would not have a posedmanagementafterconsummation. significantly adverse effect on competition or on the con Basedonallthefactsofrecord,theBoardconcludesthat centration of resources in any relevant banking market considerations relating to the financial and managerial and that competitive considerations are consistent with resourcesandfutureprospectsoftheorganizationsinvolved approval. intheproposalareconsistentwithapprovalundertheBank MergerAct. 3. 12U.S.C.§321.Thesebranchesarelistedintheappendix. CONVENIENCE AND NEEDS CONSIDERATIONS 4. 12CFR262.3(b). 5. Asset data are as of March 31, 2007. Deposit data and state In acting on a proposal under the Bank Merger Act, the rankings are as ofJune 30, 2006. In this context,the term "insured Boardalsomustconsideritseffectsontheconvenienceand depository institutions"includes insured commercial banks, savings banks,andsavingsassociations. needs of the communities to be served and take into 6. 12U.S.C.§1828(c)(5). account the records of the relevant insured depository

C148 Federal Reserve Bulletin0 December 2007 institutions under the Community Reinvestment Act 2005 ("2005 Evaluation").EastWestBank'scurrentCRA ("CRA").?TheCRArequiresthefederal financialsupervi program will be implemented at the resulting bank after sory agencies to encourage insured depository institutions consummationofthe proposedmergerwithDesertBank. to help meet the credit needs ofthe local communities in eRA Performance of East West Bank. In the 2006 which they operate, consistent with their safe and sound evaluation, East West Bank received an "outstanding" operation, and requires the appropriate federal financial ratingonitslendingtest,a "needstoimprove"ratingonits supervisory agency to take into account an institution's investment test, and a "low satisfactory" rating on its record ofmeetingthecreditneedsofitsentirecommunity, service test.12 Examiners reported that, throughout the including low- and moderate-income ("LMI") neighbor Californiaassessmentareas, thebank'soverallgeographic hoods, inevaluatingbankexpansionaryproposals.8 and borrowerdistribution ofloans reflected excellent par The Board has considered carefully all the facts of ticipation in LMI census tracts.13 Although the examiners record, including evaluations of the CRA performance found that East West Bank's community development records ofEastWestBankand DesertBank, datareported investments were low compared to the opportunity in its by East West Bank and Desert Bank under the Home area, the examiners determined that the bank's level of Mortgage Disclosure Act ("HMDA"),9 other information community development lending in California demon provided by the banks, confidential supervisory informa strated excellentresponsiveness to the need for affordable tion,andpubliccommentreceivedontheproposal.Twenty housing in its assessment areas in the state. In addition to eightcommenters supported the proposal and commended directloansforcommunitydevelopmentprojects,thebank EastWest Bank's efforts to meet the banking needs ofits also offered $70 million in credit enhancements, such as diverse communities. Three commenters opposed or ex lettersofcredit,tosupporttheconstructionorrehabilitation pressed concerns about the proposal. One commenter ofmorethan 1,500housingunits. assertedthatEastWestBankhadnotadequatelyservedthe Examinersreportedthatthebank'sexcellentresponsive credit and investment needs of LMI communities in its ness to creditneeds withinLMIareas was a strengthinits assessmentareas. Inaddition, twocommentersallegedthat overallperformance.Theyfoundthatthepercentageofthe EastWestBankandDesertBankfailedtoprovideadequate bank'stotal mortgageloansinLMIareas wassubstantially banking services to all groups ofindividuals who histori higherthanthe percentagereported bythe aggregateofall cally have hadinsufficientaccess tobanking services. lenders ("aggregate lenders")14 to LMI areas in Southern IO California.ISInmostofEastWestBank'sNorthernCalifor A. eRA Performance Evaluations niaassessmentarea, the examinerscommendedthe bank's distribution of home purchase and refinance loans.16 Fur As provided in the CRA, the Board has evaluated the thermore, examiners determined that East West Bank's convenience and needs factor in light of the evaluations smallbusiness lending in LMI areas ofits Southern Cali by the appropriate federal supervisors ofthe CRA perfor fornia assessmentarea was strong and generally exceeded mance records of the relevant insured depository institu the performance of the aggregate lenders in those areas. tions.Aninstitution'smostrecentCRAperformanceevalu More than one-third of the bank's small business loans ation is a particularly important consideration in the were made in LMI areas, and a majority of its small applications process because it represents a detailed, on businessloanswasextendedtobusinesseswithrevenuesof siteevaluationofthe institution's overallrecord ofperfor $1 million or less in the cities of Los Angeles and Santa mance under the CRA by its appropriate federal supervi Anaand the surroundingareas.I? sor.11 East West Bank received a "satisfactory" rating at its most recent CRA performance evaluation by the Federal 12.Onecommenterexpressedconcernabouttheselattertworatings for East West Bank's assessment areas in California. Examiners ReserveBankofSanFrancisco,asofMay 15,2006("2006 concludedthatthebank'soverallrecordofCRAperformanceduring Evaluation"). Desert Bank also received a "satisfactory" the review period merited a rating of "satisfactory." Notably, the rating at its most recent CRA performance evaluation by lending test is weighted more heavily than eitherthe investment or the FederalReserve BankofSanFrancisco, as ofMay 31, servicetestindeterminingtheinstitutionalrating. 13. The Southern California assessment area is defined as Los AngelesCountyandportionsofOrangeCounty. The Northern Cali 7.12U.S.c. §290l etseq. fornia assessment area is defined as San Francisco County and 8.12U.S.C.§2903. portionsofAlameda,SanMateo,andSantaClaracounties. 9. 12U.S.c. §2801 etseq. 14.Thelendingdataoftheaggregatelendersrepresentthecumula 10.TwocommenterscriticizedEastWestBankandDesertBankfor tivelendingfor allfinancial institutionsthathave reported mortgage not providing effective banking services in languages other than lendingaspartoftheirCRAdatainaparticulararea. English and Chinese. East West Bank stated that its ATMs and 15.EastWest Banknotedthatitoffersahome loan programwith telephoneservicesareavailableinEnglish,Chinese,andSpanishand affordable interest rates for persons who would not qualify for that it provides retail banking and mortgage lending services in traditionallyunderwrittenloans. multiplelanguagesotherthanEnglish.Inaddition,EastWestBankhas 16. More than halfofthe 1-4and multifamilyloansextended by conducted first-time horne-buyer seminars in Spanish and has ex EastWestBankinitsCaliforniaassessmentareasweremadeinLMI panded its home mortgage programs, which were originally created areas in 2006, while LMI areas comprised 35.8 percent of those forChineseAmericans,toserveotherborrowers. assessmentareas. 11.SeeInteragencyQuestionsandAnswersRegardingCommunity 17.Forpurposesoftheevaluation,"smallbusinessloans"areloans Reinvestment,66FederalRegister36,620and36,639(2001). thathaveoriginalamountsof$1 millionorlessandareeithersecured

Legal Developments: Third Quarter; 2007 C149 Examiners concluded that East West Bank's perfor them an inadequate basis, absent other information, for mance under the service test throughoutCalifornia assess concludingthataninstitutionhasengagedinillegallending mentareaswasadequate.Ingeneral,retailbankingservices discrimination. werereasonablyaccessibletoallportionsoftheassessment TheBoardis neverthelessconcerned when HMDAdata areas. foraninstitutionindicatedisparitiesinlendingandbelieves eRA Peiformance of Desert Bank. As noted, Desert thatalllendinginstitutionsareobligatedtoensurethattheir Bank received an overall "satisfactory" rating in its May lending practices are basedoncriteriathatensure notonly 2005 examination.Although DesertBankfocuses oncom safe and sound lending but also equal access to credit by mercial lending, itoffers a full range ofbanking products creditworthyapplicantsregardlessoftheirraceorethnicity. and services. Examiners concluded that the bank's overall Because of the limitations ofHMDAdata, the Board has lendinglevelsreflectedgoodresponsivenesstocommunity consideredthesedatacarefullyandtakenintoaccountother credit needs. In particular, they noted that the bank's information, including examination reports that provide distributionofsmallbusiness loans was excellentand that on-siteevaluationsofcompliancewithfairlendinglawsby such lending was strongest in LMI census tracts. In addi EastWestBank. tion,morethanhalfofthebank'ssmallbusinessloanswere The record, including confidential supervisory informa extendedto businesseswithrevenuesof$1 millionorless. tion, indicates that East West Bank has taken steps and Business loans in small-dollar amounts made by the bank developed programs to ensure compliance with all fair helped meet an important credit need ofits communities. lending and other consumer protection laws and regula Examiners found community development lending and tions. These efforts include bankwide fair lending training investmentsto beadequate, and they rated DesertBankas for all employees. The bank also has a second review "highsatisfactory"foritsservices. processforallloans recommendedfordenialtoensurethat all applicants are evaluated properly, and it performs fair B. HMDA and Fair Lending Record and Other lending audits and examinations. Examiners found no Issues evidence ofdiscriminatory lending practices at EastWest Bank. TheBoardhascarefullyconsideredthefairlendingrecords TheBoard also hasconsidered the HMDAdata in light and HMDAdata reported by East West Bank and Desert of other information, including the overall performance Bank in 2005 in light ofpublic comments receivedonthe recordofEastWestBankunderthe CRA.Theinstitution's proposal. Two commenters expressed concern that East record of performance demonstrates that it is active in WestBankfocuseditsservicestoonarrowlyontheChinese helping to meet the credit needs ofall the communities it American population in its assessment areas and did not serves. effectively serve other populations of historically under served minority communities. In addition, onecommenter C. Conclusion on Convenience and Needs questionedthebank'slendingrecordandassertedthatEast Considerations West Bank made a disproportionately small number of home mortgage loans to Latinos, African Americans, and TheBoardhasconsideredcarefully theCRAperformance, SoutheastAsianAmericans. fair lending records, and HMDA data ofEast West Bank Although the HMDAdata might reflectcertain dispari and Desert Bank in light ofpublic comments received on ties in the rates of loan applications, originations, and theproposal.TheBoardalsohasconsideredcarefullyallof denialsamongmembersofdifferentracialorethnicgroups thefacts ofrecord, includingreports ofexaminationofthe incertain local areas, they provide an insufficientbasis by CRA records of the institutions involved, information themselvesonwhichtoconcludewhetherornotEastWest provided by East West Bank, comments received on the Bank is excluding or imposing higher costs on any group proposal, and confidential supervisory information. The on a prohibited basis. The Board recognizes that HMDA Boardnotes that the proposal would provide customers of data alone, even with the recent addition ofpricing infor DesertBankwithabroaderarrayofproductsandservices, mation,provideonlylimitedinformationaboutthecovered including expanded options for affordable mortgage loans loans.18HMDAdata, therefore, have limitationsthatmake andATM networks. Basedonareviewoftheentirerecord, and for the reasons discussed above, the Board concludes that considerations relating to the convenience and needs bynonfarmornonresidential real estateorare classifiedas commer factor and the eRA performance records of the relevant cialandindustrialloans.OnecommentercriticizedEastWestBankfor depository institutions areconsistentwithapproval. not makingasufficientnumberofloans under$100,000. The Board has previously noted that the eRAdoes not require an institutionto OTHER CONSIDERATIONS provideanyspecifictypeofproductsorservicesinitsassessmentarea. 18.Thedata,forexample,donotaccountforthepossibilitythatan institution'soutreacheffortsmayattractalargerproportionofmargin EastWestBankalsohasappliedundersection9oftheFRA ally qualified applicants than other institutions attract and do not to establish and operate branches at Desert Bank's locaprovideabasisforanindependentassessmentofwhetheranapplicant who was denied creditwas, in fact, creditworthy. Inaddition, credit history problems,excessivedebt levels relative to income, and high mostfrequently citedforacreditdenialorhighercreditcost)arenot loanamountsrelativetothevalueoftherealestatecollateral(reasons availablefromHMDAdata.

e150 Federal Reserve Bulletin0 December 2007 tions listed in the appendix. The Board has assessed the Appendix factors it is required to considerwhen reviewing an appli cationundersection9oftheFRAandfindsthosefactorsto BRANCHES IN CALIFORNIA TO BE beconsistentwithapprovaLI9 ESTABLISHED BY EAST WEST BANK CONCLUSION Adelanto 10474RanchoRoad Based on the foregoing and all facts ofrecord, the Board hasdeterminedthatthe applications shouldbe, andhereby Apple Valley are, approved.20 In reaching its conclusion, the Board has 16003QuanticoRoad consideredallthefacts ofrecordinlightofthefactors that it is required to consider under the Bank Merger Act and Barstow the FRA. The Board'sapproval is specifically conditioned 945E.Armory Road on compliance by East West Bank with the conditions imposedinthisorder, thecommitmentsmadetotheBoard Hesperia inconnectionwiththe applications,andreceiptofallother 15479MainStreet regulatory approvals. For purposes of this action, the Victorville conditions and commitments are deemed to be conditions 12022DuniaRoad imposed in writing by the Board in connection with its 12470HesperiaRoad findings anddecisionhereinand, assuch, may beenforced 12530HesperiaRoad inproceedingsunderapplicable law. 14800LapazDrive The proposed transactions may not be consummated beforethe 15thcalendarday aftertheeffectivedateofthis Wrightwood order, orlaterthanthree months afterthe effectivedate of 1261 Highway2 thisorder, unlesssuchperiodisextendedforgoodcauseby the Board or the Federal Reserve Bank of San Francisco, Phelan actingpursuantto delegatedauthority. 48895 PhelanRoad By order ofthe Board ofGovernors, effective July 16, 2007. ORDERS ISSUED UNDER Voting for this action: ChairmanBernanke,ViceChairman Kohn, INTERNATIONAL BANKING ACT andGovernorsWarsh,Kroszner,andMishkin. ROBERT DEY. FRIERSON Deputy Secretary ofthe Board Caixa Economica Federal Brasilia, Brazil Order Approving Establishment of a Representative Office Caixa Econ6mica Federal ("Bank"), Brasilia, Brazil, a foreignbankwithinthemeaningoftheInternationalBank ing Act ("IBA"), has applied under section lO(a) of the IBA1 to establish a representative office in Jersey City, 19. 12U.S.c. §322; 12CFR208.6(b). New Jersey. The Foreign Bank Supervision Enhancement 20. Three commenters requested that the Board hold a public Act of 1991, which amended the IBA, provides that a meetingorhearingontheproposal. NeithertheBankMergerActnor theFRArequirestheBoardtoholdapublicmeetingorhearing.Under foreign bank must obtain the approval of the Board to its rules, the Board may, in its discretion, hold a public meeting or establish arepresentativeofficein theUnited States. hearingonanapplicationtoacquireabankifameetingorhearingis Noticeoftheapplication,affordinginterestedpersonsan necessary or appropriate to clarify factual issues related to the opportunity to submit comments, has been published in a application and to provide an opportunity for testimony (12 CFR 262.3(e) and 262.25(d». The Board has considered carefully the newspaper of general circulation in New Jersey (The comrnenters'requestsinlightofallthefactsofrecord.IntheBoard's New York Times, January 28, 2007). The time for filing view, the commenters have had ample opportunity to submit their comments has expired, and all comments received have views and, in fact, submitted written comments that the Board has beenconsidered. considered carefully in acting on the proposal. The requests by the Bank,astate-ownedentitywithtotalconsolidatedassets commenters fail to demonstrate why the written comments do not presenttheirviewsadequatelyorwhyameetingorhearingotherwise ofapproximately $98billion,2isthesecondlargestbankin wouldbenecessaryorappropriate.Forthesereasons,andbasedonall thefactsofrecord,theBoardhasdeterminedthatapublicmeetingor hearing is not required or warranted in this case. Accordingly, the l. 12U.S.C. §3107(a). requestsforapublicmeetingorhearingontheproposalaredenied. 2. DataareasofDecember31,2006.

Legal Developments: Third Quarter, 2007 C151 BraziJ.3 The Federative Republic of Brazil, including the theBoardwithinformationnecessarytoassesstheapplica states and the municipalities, owns all the capital ofBank, tion throughsubmissionsthataddressthe relevantissues. but Bank has its own equity and management autonomy. With respect to home-country supervision ofBank, the Bank currently has operations only in Brazil, where it Board has considered the following information. Bank is providescommercialandretailbankingservicesandinvest subject to the regulatory and supervisory authority ofthe mentbanking services throughoutthe country.Throughits Central Bank of Brazil ("Central Bank"), which has subsidiaries, Bank manages a developmentfund, adminis primary responsibility for the regulation offinancial insti tersBrazilianlotteries,andoffersinsuranceproducts.Bank tutionsinBrazil.TheBoardpreviouslyhasdeterminedthat also is the main fiscal agentfor the Brazilian government, the CentralBankexercises asignificantdegree ofsupervi and it provides financing for the government's housing, sion over the activities of four other Brazilian banks. In education, andinfrastructureprojects. each case, the supervision exercised by the Central Bank The proposed representative office would market prod was found to be sufficient to allow for the approval of a ucts ofBankin the United States, actas a liaison between representativeofficein the UnitedStatesbythe applicant.? Bank'sheadofficeinBrazilanditsprospectiveU.S.-based Basedonallthefactsofrecord, ithasbeendeterminedthat customers, and develop relationships with international Bankis subjectto asupervisory framework that isconsis organizations. tentwiththeactivitiesoftheproposedrepresentativeoffice, Inactingonaforeign bank's applicationunderthe IBA taking intoaccountthenatureofsuchactivities. and Regulation K to establish a representative office, the The additional standards set forth in section 7 of the Boardtakes intoaccountwhetherthe foreign bank: (1)en IBA and Regulation K have also been taken into ac gages directly in the business of banking outside of the count.8 The Central Bank has no objection to the estab United States; (2) has furnished to the Board the informa lishment of the proposed representative office. With re tionitneedstoassesstheapplicationadequately;and(3)is spect to the financial and managerial resources of Bank, subject to comprehensive supervision on a consolidated taking into consideration its record of operations in its basis by its home-country supervisor.4 The Board also home country, its overall financial resources, and its considers additional standards set forth in the IBA and standing with its home-country supervisor, financial and Regulation K.5 The Board will consider that the supervi managerial factors are consistent with approval. Bank sion standard has been met where it determines that the appears to have the experience and capacity to support applicantbankissubjecttoasupervisoryframework thatis the proposal and has established controls and procedures consistentwiththeactivitiesoftheproposedrepresentative for the proposed representative office to ensure compli office,takingintoaccountthenatureofsuchactivities.This ance with U.S. law and for its operations in general. is a lesser standard than the comprehensive, consolidated Brazil is a member ofthe FinancialAction Task Force supervisionstandardapplicable to applications to establish and subscribes to its recommendations on measures to branch or agency offices of a foreign bank. The Board combatmoneylaundering.Inaccordancewiththoserecom considers the lesser standard sufficient for approval of mendations Brazilhasenactedlawsandcreatedlegislative representative office applications because representative andregulatorystandardstodetermoneylaundering.Money officesmay notengageinbankingactivities.6 laundering is a criminal offense in Brazil, and financial Asnotedabove,Bankengagesdirectlyinthebusinessof institutions are required to establish internal policies, probanking outsidethe United States. Bankalso has provided 7. SeeBancoBandeirantes. SA., 81 FederalReserveBulletin742 (1995); Unibanco-Uniiio de Bancos Brasileiros. SA, 82 Federal ReserveBulletin 1148(1996);BancoBBA-CreditanstaltSA.,85Fed 3. The Bank'sboard ofdirectors consists ofseven members. The eralReserveBulletin518(1999);BancoItauS.A.,86FederalResen'e MinisterofEconomyappointsfive members,includingthechairman; Bulletin 851 (2000). The Board later determined that two privately the Minister of Planning, Budget and Management appoints one ownedcommercialbanksinBrazil,BancoItauandBancoBradesco, member; and the Bank's president occupies the remaining seat and weresubjectto comprehensiveconsolidatedsupervisionbythe Cen servesasvicechairmanoftheboard. tral Bank inconnection witheach bank'selectionto betreated as a 4. 12U.S.c. §3107(a)(2); 12 CFR211.24(d)(2). Inassessingthis financial holdingcompany.BancoItau'selectionwas declaredeffec standard,theBoardconsiders,amongotherfactors,theextenttowhich tive in February 2002, and Banco Bradesco's election was declared the home-country supervisors: (i)ensure that the bankhas adequate effectivein January 2004. Bankisagovernment-ownedbank witha proceduresformonitoringandcontrollingitsactivitiesworldwide;(ii) mandatetocarryoutcertainpolicyinitiativesoftheBraziliangovern obtain information on the conditionofthe bank and its subsidiaries ment. As such, some ofits activities differ from those ofprivately and offices through regular examination reports, audit reports, or ownedBrazilianbanks. otherwise;(iii)obtaininformationon the dealings withandrelation 8. See12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2)-(3).These shipbetweenthebankanditsaffiliates,bothforeignanddomestic;(iv) standards include: whether the bank's home-country supervisor has receive from the bank financial reports that are consolidated on a consentedtotheestablishmentoftheoffice;thefinancialandmanage worldwide basis orcomparable information that permits analysis of rialresourcesofthebank;whetherthebankhasprocedurestocombat thebank'sfinancial conditiononaworldwideconsolidatedbasis;(v) moneylaundering,whetherthereisalegalregimeinplaceinthehome evaluateprudentialstandards,suchascapitaladequacyandriskasset countrytoaddressmoneylaundering,andwhetherthehomecountryis exposure,onaworldwidebasis.Theseareindiciaofcomprehensive, participating in multilateral efforts to combat money laundering; consolidated supervision. No single factor is essential, and other whether the appropriate supervisors in the home country may share elementsmayinformtheBoard'sdetermination. informationonthebank'soperationswiththeBoard;whetherthebank 5. 12U.S.c. §3105(d)(3)-(4);12CPR211.24(c)(2). anditsU.S.affiliatesareincompliancewithU.S.law;theneedsofthe 6. 12CFR211.24(d)(2). community;andthebank'srecordofoperation.

Cl52 Federal Reserve Bulletin0 December 2007 cedures, and systems for the detection and prevention of The State Export-Import Bank ofUkraine, money laundering throughout their worldwide operations. Inc. Bank has policies and procedures to comply with these Kiev, Ukraine laws and regulations that are monitored by governmental entitiesresponsibleforanti-money-Iaunderingcompliance. Order Approving Establishment of a With respect to access to information about Bank's operations, the Board has reviewed the restrictions on Representative Office disclosure in relevantjurisdictionsin whichBankoperates and has communicated with relevant government authori The State Export-ImportBankofUkraine, Inc. ("Bank"), ties regarding access to information. Bank has committed Kiev, Ukraine, a foreign bank within the meaning of the to make available to the Board such information on the International Banking Act ("IBA"), has applied under operations ofBank and any ofits affiliates that the Board section lO(a)oftheIBN toestablisharepresentativeoffice deemsnecessarytodetermineandenforcecompliancewith in New York, New York. The Foreign Bank Supervision the IBA, the Bank Holding Company Act, and other EnhancementAct of 1991, which amended the IBA, pro applicable federal law. To the extent that the provision of vides that a foreign bank must obtain the approval ofthe suchinformationto theBoardmay beprohibitedbylawor Board to establish a representative office in the United otherwise, Bank has committed to cooperate with the States. Board to obtain any necessary consents or waivers that Noticeoftheapplication,affordinginterestedpersonsan mightbe required from thirdpartiesfor disclosure ofsuch opportunity to submit comments, has been published in a information. In addition, subject to certain conditions, the newspaper ofgeneral circulation in New York, New York CentralBankmay shareinformationonBank'soperations (New York Post, August 18, 2006). The time for filing with other supervisors, including the Board. In light of comments has expired, and all comments received have thesecommitmentsandotherfactsofrecord, andsubjectto beenconsidered. the conditiondescribed below, it has beendetermined that Bank, with total consolidated assets of approximately Bank has provided adequate assurances of access to any $3.7 billion,2 is the sixth largest commercial bank in necessaryinformationthat theBoard mayrequest. Ukraineandprovideswholesaleandretailbankingservices Based on the foregoing and all the facts ofrecord, and through anetworkofdomestic branches.3 subjecttothecommitmentsmadebyBankandthetermsand Theproposedrepresentativeofficeisintendedtoactasa conditions set forth in this order, Bank's application to liaisonbetweenBank'sheadofficein Ukraine, otherfinan establish the representative office is hereby approved.9 cialinstitutions,anditsexisting and prospectivecustomers Should any restrictions on access to information on the in Ukraineandthe UnitedStates.Theoffice wouldengage operations or activities of Bank and its affiliates subse inrepresentativefunctions inconnectionwiththe activities quentlyinterferewiththeBoard'sabilitytoobtaininforma of Bank, solicit new business, provide information to tion to determine and enforce compliance by Bank or its customers concerning their accounts, promote business affiliates with applicable federal statutes, the Board may investment in and trading opportunities with Ukraine, require termination of any of Bank's direct or indirect conductresearch,andreceiveapplicationsforextensionsof activitiesin the UnitedStates.Approvalofthis application creditandotherbankingserviceson behalfofBank. alsoisspecificallyconditionedoncompliancebyBankwith Under the IBA and Regulation K, in acting on an the conditions imposedin this orderand the commitments application by a foreign bank to establish a representative madetotheBoardinconnectionwiththisapplication.10For office, the Board must consider whether the foreign bank: purposesofthis action, these commitmentsandconditions (1) engages directly in the business ofbanking outside of aredeemedtobeconditionsimposedbytheBoardinwriting the United States; (2) has furnished to the Board the in connection with its findings and decision and, as such, information it needs to assess the application adequately; may beenforcedinproceedingsunderapplicablelaw. and (3) is subject to comprehensive supervision on a By order, approved pursuant to authority delegated by consolidated basis by its home-country supervisor.4 The the Board,effectiveAugust7,2007. 1. 12U.S.c. §3107(a). ROBERT DEY. FRIERSON 2. Unlessotherwiseindicated,dataareasofDecember31,2006. Deputy Secretary ofthe Board 3. Bank is wholly owned by the government of Ukraine and operatesasacommercialbankinadditiontopromotingtradebyand withUkrainiancompanies. 9. Approved bythe Directorofthe DivisionofBanking Supervi 4. 12 U.S.c. §3107(a)(2); 12CFR 211.24(d)(2). In assessing this sion and Regulation, with the concurrence ofthe General Counsel, standard,theBoardconsiders,amongotherindiciaofcomprehensive, pursuanttoauthoritydelegatedbytheBoard.See12CFR265.7(d)(12). consolidatedsupervision,theextenttowhichthehome-countrysuper 10. The Board's authority to approve the establishment of the visors(i)ensurethatthebankhasadequateproceduresformonitoring proposedrepresentativeofficeparallelsthecontinuingauthorityofthe andcontrollingitsactivitiesworldwide;(ii)obtaininformationonthe stateofNewJerseytolicenseofficesofaforeignbank.TheBoard's conditionofthebankand itssubsidiariesand officesthroughregular approvalofthisapplicationdoesnotsupplanttheauthorityofthestate examinationreports, auditreports, orotherwise;(iii)obtaininforma ofNewJerseyoritsagent,theNewJerseyDepartmentofBankingand tion on the dealings with and relationship between the bank and its Insurance, tolicensetheproposedofficeofBankinaccordance with affiliates, both foreign and domestic; (iv) receive from the bank anytermsorconditionsthatitmayimpose. 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 proposedoffice,ithasbeendeterminedthatBankissubject IBAand Regulation K.5The Board considers the supervi to a supervisory framework that is consistent with the sionstandardtohavebeenmet when itdetermines that the activities ofthe proposed representative office, taking into applicantbankissubjecttoasupervisoryframeworkthatis accountthe natureofsuchactivities. consistentwiththeactivitiesoftheproposedrepresentative Theadditionalstandardssetforthinsection7oftheIBA office, taking into account the nature of such activities.6 and Regulation K have also beentaken into account.8 The This is a lesser standard than the comprehensive, consoli NBUhasnoobjectiontotheestablishmentofthe proposed dated supervision standard applicable to applications to representativeoffice. establish branch or agency offices ofa foreign bank. The Withrespecttothefinancialandmanagerialresourcesof Board considers the lesser standard sufficientfor approval Bank, taking into consideration its record ofoperations in ofrepresentative-officeapplications becauserepresentative its home country, its overall financial resources, and its offices may notengageinbanking activities.7 standing with its home-country supervisor, financial and In connection with this application, Bank has provided managerial factors are consistent with approval. Bank certain commitments that limit the activities ofthe repre appears to have the experience and capacity to supportthe sentative office. It has committed that the representative proposedrepresentativeofficeandhas establishedcontrols officewouldengageonlyincertain specifiedactivitiesand and procedures for the proposed representative office to wouldnotmakecreditdecisions; solicitoracceptdeposits; ensurecompliancewith U.S. law. process or initiate transactions on behalf of Bank; or Although Ukraine is not a member of the Financial engage in activities related to securities trading, foreign Action Task Force ("FATF"), Ukraine has enacted laws exchange,ormoney transmission. basedonthe general recommendationsofthe FATF.Addi Asnotedabove,Bankengagesdirectlyinthebusinessof tionally, Ukraine participates in international fora that banking outsidethe UnitedStates. Bankalso has provided addressthepreventionofmoney laundering.9Money laun theBoardwithinformationnecessaryto assesstheapplica dering is a criminal offense in Ukraine, and banks are tionthrough submissionsthataddress the relevantissues. required to establish internal policies and procedures for Withrespecttosupervisionbyhome-countryauthorities, thedetectionandpreventionofmoney laundering.10Legis the Boardhasconsideredthe following information. Bank lation and regulations require banks to adopt know-your is supervised by the National Bank ofUkraine ("NBU"), customerpolicies,reportsuspicioustransactions,andmain which is responsible for the regulation and supervision of tain records. Bank has established anti-money-Iaundering financial institutions operating in Ukraine and is in the policiesandprocedures, whichincludetheimplementation processofenhancingitssupervisoryframework. TheNBU ofknow-your-customerpolicies, suspiciousactivityreport issuesrulesandimplementsregulationsconcerningaccount ingprocedures,andrelatedtrainingprogramsandmanuals. ing requirements, asset quality, management, operations, capitaladequacy, loanclassification, and loan-loss-reserve requirements. In addition, the NBU has authority to order 8.See 12U.S.c.§3105(d)(3)--(4); 12CFR211.24(c)(2)--(3).These corrective measures, impose sanctions, and assume man standards include: whether the bank's home-country supervisor has agementofafinancial institutionorliquidateit. consentedtotheestablishmentoftheoffice;thefinancialandmanage The NBU supervises and regulates Bank in Ukraine rialresourcesofthebank;whetherthebankhasprocedurestocombat moneylaundering,whetherthereisalegalregimeinplaceinthehorne through acombinationofon-siteexaminationsandoff-site countrytoaddressmoneylaundering,andwhetherthehomecountryis monitoring. On-siteexaminationsare conductedbiennially participating in multilateral efforts to combat money laundering; and cover capital adequacy, asset quality, profitability, whetherthe appropriate supervisors in the home country may share liquidity, and compliance with the law. If necessary, the informationonthebank'soperationswiththeBoard;whetherthebank anditsU.S.affiliatesareincompliancewithU.S.law;theneedsofthe NBU can also conduct special on-site examinations. The community;andthebank'srecordofoperation. NBU conducts off-site monitoring of Bank through the 9. Ukraineispartytothe 1988UnitedNationsConventionAgainst reviewofrequireddaily,monthly,andquarterlyreports.An thelIIicitTrafficofNarcoticsandPsychotropicSubstances,theUnited external audit is also part of the supervisory process and Nations International Convention Against Transnational Organized must be conductedatleastannually. Crime,the United Nations InternationalConventionforthe Suppres sion of the Financing of Terrorism, and the Council of Europe Based on all the facts ofrecord, including the commit Convention on Laundering, Search, Seizure, and Confiscation of ments provided by Bank limiting the activities of the ProceedsfromCrime. 10. In 2001 and 2002, Ukraine was designated by the FATFas a non-cooperative country. In response, Ukraineenacted legislation to comparableinfonnation that permits analysis ofthe bank's financial strengthenitsanti-money-launderingregimein2002and2003.Among condition ona worldwideconsolidated basis;(v)evaluateprudential other measures, the legislation expanded the definition of money standards, such as capital adequacy and risk asset exposure, on a laundering, strengthened enforcement, and established a financial worldwidebasis.Nosinglefactorisessential,andotherelementsmay intelligenceunit,theStateCommitteeforFinancialMonitoring.Asa informtheBoard'sdetermination. consequenceoftheseimprovements, Ukraine was removed fromthe 5. 12U.S.C.§3105(d)(3)--(4); 12CFR211.24(c)(2)--(3). listofnon-cooperativecountriesbytheFATFonFebruary27,2004.In 6. See. e.g., VictoriaMutualBuildingSociety, 93 FederalReserve light of these and other actions taken by Ukraine to strengthen its BulletinC106, footnote 6(2007);Banco Financiera ComereialHon anti-money-launderingpoliciesandprocedures,includingidentifying durena, 91 Federal Reserve Bulletin 444 (2005); Jamaica National terroristfinancingasaseparatecrime,theBoardbelievesthatfactors BuildingSociety,88FederalReserveBulletin59(2002). related to anti-money-laundering are consistent with approval ofthe 7. 12CFR211.24(d)(2). applicationtoestablisharepresentativeoffice.

C154 Federal Reserve Bulletin0 December 2007 Bank's internal and external auditors review compliance FINAL ENFORCEMENT DECISION withrequirementstopreventmoney laundering. ISSUED BY THE BOARD With respect to access to information onBank's opera tions, therestrictionsondisclosure inrelevantjurisdictions in which Bank operates have been reviewed and relevant IN THE MATTER OF government authorities have been communicated with re gardingaccesstoinformation.Bankhascommittedtomake availabletotheBoardsuchinformationontheoperationsof Michelle M. Moore, Former Institution Bankandany ofitsaffiliatesastheBoarddeems necessary Affiliated Party ofRBC Centura Bank, todetermineandenforcecompliancewiththelBA,theBank Rocky Mount, North Carolina, Respondent Holding Company Act of 1956, as amended, and other applicable federal law. To the extent that the provision of Docket Nos. 06-035-E-l A, 06-035-B-l suchinformationtotheBoardmay beprohibitedbylawor otherwise,BankhascommittedtocooperatewiththeBoard to obtain any necessary consents or waivers that might be FINAL DECISION required from third parties for disclosure ofsuch informa This is an administrative proceeding pursuant to the Fed tion.Inaddition,subjecttocertainconditions,theNBUmay eral Deposit Insurance Act ("the PDIAct") in which the shareinformationonBank'soperationswithothersupervi BoardEnforcement Counsel seeks to prohibit the Respon sors,includingtheBoard.Inlightofthesecommitmentsand dent, Michelle M. Moore ("Respondent"), from further otherfactsofrecord, andsubjecttotheconditiondescribed participationintheaffairsofanyfinancialinstitutionandto below, it has been determined that Bank has provided require her to pay restitution based on actions she took adequateassurancesofaccesstoanynecessaryinformation while employed at RBC Centura Bank, Rocky Mount, thattheBoardmayrequest. NorthCarolina (the "Bank"). Based onthe foregoing and all the facts ofrecord, and Upon review of the administrative record, the Board subject to the commitments made by Bank and the terms issues this Final Decision adopting the Recommended andconditionssetforth inthisorder,Bank'sapplication to Decision ("Recommended Decision") of Administrative establishtherepresentativeofficeisherebyapprovedbythe Law Judge Ann Z. Cook (the "AU"), and orders the Director of the Division of Banking Supervision and issuance ofthe attachedOrderofProhibition andto Cease Regulation, with the concurrence ofthe General Counsel, andDesist. pursuanttoauthoritydelegatedbytheBoard.11 Shouldany restrictions on access to information on the operations or 1. STATEMENT OF THE CASE activities of Bank or any of its affiliates subsequently interfere with the Board's ability to obtain information to A. Statutory and Regulatory Framework determineandenforcecompliance byBankorits affiliates with applicable federal statutes, the Board may require or UnderthePDIActandtheBoard'sregulations, theAU is recommend termination ofany ofBank's direct and indi responsible for conducting proceedings on a notice of rect activities in the United States. Approvalofthis appli charges relating to a proposed order requiring paymentof cation also is specifically conditioned on compliance by restitution or prohibition from banking (12 U.S.C. Bank with the conditions imposed in this order and the §§1818(b), 1818(e)(4)). The AU issues a recommended commitments made to the Board in connection with this decision that is referred to the Board together with any application.12 For purposes of this action, these commit exceptions to those recommendations filed by the parties. mentsandconditionsaredeemedtobeconditionsimposed The Board makes the final findings offact, conclusions of in writing by the Board in connectionwith its finding and law, and determination whether to issue the requested decision and may be enforced in proceedings under orders (12CPR263.38). 12U.S.c. §1818againstBankanditsaffiliates. ThePDIActsetsforth thesubstantivebasisuponwhich By order, approved pursuant to authority delegated by afederal bankingagency may issue againstabankofficial the Board, effective August 17,2007. oremployeeanorderofprohibitionfrom furtherparticipa ROBERT DEY. FRIERSON tion in banking. To issue such an order, the Board must Deputy Secretary ofthe Board 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 II. See 12CFR265.7(d)(I2). 12. The Board's authority to approve the establishment of the breach of fiduciary duty; (2) that the conduct had a proposedrepresentativeofficeparallelsthecontinuingauthorityofthe specifiedeffect,includingfinancial losstotheinstitutionor state ofNew York to license officesofa foreign bank. The Board's gain to the respondent; and (3) that the respondent's approvalofthisapplicationdoesnotsupplanttheauthorityofthestate conductinvolvedeitherpersonaldishonesty orawillful or ofNewYorkoritsagent,theNewYorkStateBankingDepartment,to license the proposedofficeofBankinaccordance withany tenns or continuing disregard for the safety or soundness of the conditionsthatitmayimpose. institution(12U.S.c. §1818(e)(l)(AHC)).

Legal Developments: Third Quarter, 2007 C155 TheFDIActalsospellsouttherequirementsforanorder ingthebalancingofothertellers' cashsupplyandaccount requiring restitution, which is a type of cease-and-desist ingforcashatthebranchatwhichsheworked.Byvirtueof order under the Act. Specifically, a cease-and-desist order her position, she had access to the cash drawers and cash may beimposed when the agency has reasonable cause to vaultofthe branch. By using that access, Respondent was believe that the respondent has engaged or is about to able makeunauthorized withdrawalsofover$66,000from engage inan unsafe orunsoundpracticeinconducting the anaccountofonecustomer,usingtheproceedsforherown business ofadepository institution, orthat the respondent purposes. She concealed her activity by changing the has violatedorisaboutto violate alaw, rule, orregulation addressfieldforstatementssothatthestatementsnolonger orcondition imposed in writing by the agency (12 U.S.C. were sent to the customer's home. When the customer §1818(b)(1)). Suchanordermay require therespondentto noticed she was no longerreceiving statements, she spoke makerestitutioniftherespondentwas "unjustlyenriched" to Respondent about the problem. Respondent subse inconnectionwiththeviolationorpractice,ortheviolation quently sent a letter on Bank letterhead falsely informing or practice in involved "reckless disregard" ofthe law or the customer that the account contained over $107,000, applicable regulations or a prior agency order (12 U.S.c. when in fact its funds were reduced by the amounts that §1818(b)(6)(A)). Respondent had stolen. Shortly thereafter, Respondent An enforcement proceeding is initiated by filing and madeanunauthorizedwithdrawalfrom anothercustomer's serving on the respondent a notice of intent to prohibit. accountanddeposited theproceedsinto theaccountofthe Underthe Board'sregulations, therespondent mustfile an first customer. Within a few weeks, however, the defalca answer within 20 days of service of the notice (12 CFR tion in the first customer's account was discovered by 263.19(a)).Failuretofile ananswerconstitutesawaiverof anotherBankemployee,andRespondentabruptlyresigned. the respondent's right to contest the allegations in the TheBankrestoreditscustomers' accountsforthe amounts notice, andafinal ordermay beenteredunless goodcause embezzled by Respondent, and froze Respondent's per is shown for failure to file a timely answer (12 CFR sonal accountatBank.Asaresultofthese actions, Bank's 263.19(c)(1)). total loss wasapproximately $59,823.53. B. Procedural History II. DISCUSSION OnJanuary5, 2007, theBoard issuedaNoticeofIntentto The Board Rules of Practice and Procedure set forth the ProhibitandNoticeofChargesandofHearing ("Notice") requirements of an answer and the consequences of a that sought an order of prohibition against Respondent failure to file an answer to a Notice. Under the Rules, based on herconduct whileemployed at the Bank, and an failure to file a timely answer "constitutes a waiver of [a orderrequiringhertomakerestitutiontotheBank.ABoard respondent's] rightto appearandcontestthe allegationsin investigator, under the direction ofEnforcement Counsel, the notice" (12 CFR 263.19(c)). Ifthe ALJ finds that no personallyservedtheNoticeonRespondentonJanuary 19, goodcausehasbeenshownforthe failure tofile, thejudge 2007. Respondent acknowledged thatshehadreceived the "shall file ... a recommended decision containing the Noticein two subsequentvoice mail messages to Enforce findings and the reliefsought in the notice." Id. An order ment Counsel. The Notice directed Respondent to file a based on a failure to file a timely answer is deemed to be writtenanswerwithin 20days ofthe date ofserviceofthe issued byconsent. [d. Noticeinaccordancewith 12CFR263.19,andwarnedthat In this case, Respondent failed to file an answer to the failure to do so would constitute a waiver of her right to Notice despite notice to her of the consequences of such appear and contest the allegations. Nonetheless, Respon failure, and also failed to respond to the AU's Order to dent failed to file an answer within the 20-day period or ShowCause.Respondent'sfailure tofile an answerconsti thereafter. tutes adefault. OnMarch29,2007,EnforcementCounselfiledaMotion Respondent's default requires the Boardto considerthe for Entry ofan Order ofDefault against Respondent. On allegations inthe Notice asuncontested.Theallegationsin April 12, 2007, the AU issued an Order to Show Cause, the Notice, described above, meet all the criteria for entry providingRespondentuntil May 1, 2007, to file an answer ofanorderofprohibitionunder 12U.S.C. §18l8(e).Itwas to the Notice and to show goodcause for having failed to a breach of fiduciary duty, unsafe and unsound practice, do so previously. The Order was delivered by overnight andviolationoflaworregulation, forRespondentto make deliverytoRespondent's address. Todate, Respondenthas unauthorizedwithdrawalsfrom customers' accountsandto notfiledanyreplytotheOrdertoShowCauseoranswered use Bank systems to conceal her actions. Respondent's theNotice. actionsresultedinlosstotheBankandfinancial gaintothe Respondent, in that the Respondentused the proceeds for C. Respondent's Actions her own purposes and the Bank was forced to repay its The Notice alleges that Respondent was employed as a customers for the amounts embezzled by Respondent. teller and then a Customer Service Officer for Bank from Finally, such actions also exhibit personal dishonesty and May2001 throughMay2004.Herdutiesincludedoversee- willfuldisregardfor thesafety andsoundnessoftheBank.

C156 Federal Reserve Bulletin0 December 2007 Forthe samereasons, the allegationsin the Notice meet 1. In the absence of prior written approval by the Board, allthecriteriafortheentryofanorderrequiringrestitution. andby any otherFederal financial institutionregulatory agency where necessary pursuant to section 8(e)(7)(B) Respondentengagedinanunsafeorunsoundpracticeanda of the FDI Act (12 U.S.C. §1818(e)(7)(B)), Moore is violationoflaw when she made unauthorized withdrawals hereby prohibited: from customers' accounts, and she was unjustly enriched (a) from participatingin any manner in the conduct of by her actions in that she used the proceeds of her the affairs ofany institution oragency specified in defalcation forherown purposes. section 8(e)(7)(A) of the FDI Act (12 U.S.c. Accordingly, the requirements for an order of prohibi §1818(e)(7)(A)), including, butnot liInited to, any tion andfor an orderfor restitution have been metand the insured depository institution, any insured deposi toryinstitutionholdingcompanyoranyU.S.branch Boardhereby issuessuch an order. oragencyofaforeignbankingorganization; (b) from soliciting, procuring, transferring, attempting CONCLUSION to transfer, voting orattempting to vote any proxy, consent orauthorization with respectto any voting For these reasons, the Board orders the issuance of the rights in any institution described in subsec tion 8(e)(7)(A) of the FOI Act (12 U.S.c. attached Order of Prohibition and Order to Cease and §l818(e)(7)(A)); Desist. (c) from violating any voting agreement previously By Order ofthe Board ofGovernors, this ninth day of approvedbyany Federalbanking agency; or July, 2007. (d) from votingforadirector,orfromservingoracting as an institution-affiliated party as defined in sec BOARD OF GOVERNORS OFTHE tion3(u)oftheFDIAct(12U.S.c. §1813(u)),such FEDERALRESERVE SYSTEM asanofficer,director,oremployeeinanyinstitution described in section 8(e)(7)(A) of the FDI Act (12U.S.c. §18l8(e)(7)(A)). JENNIFER J. JOHNSON 2. OnorbeforetheeffectivedateofthisOrder,Mooreshall Secretary ofthe Board make restitution to the Bankin the sum of$59,823.53 for its loss as a resultofMoore's violations and unsafe orunsound practices. ORDER OF PROHIBITION AND TO CEASE AND 3. Any violation of this Order shall separately subject DESIST Moore to appropriate civiIorcriminalpenalties orboth undersection8oftheFDIAct(12U.S.C. §1818). WHEREAS, pursuant to sections 8(b) and 8(e) of the 4. ThisOrder, andeachandevery provisionhereof, is and Federal Deposit Insurance Act, as amended, (the "FDI shall remain fully effective and enforceable until ex pressly stayed, modified, tenninated or suspended in Act") (12 U.S.C. §18l8(b) and (e)), the Board ofGover writingbythe Board. norsoftheFederalReserveSystem("theBoard")isofthe ThisOrdershallbecomeeffectiveattheexpirationof30 opinion,forthereasonssetforthintheaccompanyingFinal days afterservice is made. Decision,thatafinal OrderofProhibitionandtoCeaseand Desist should issue against MICHELLE M. MOORE By Order ofthe Board of Governors, this ninth day of ("Moore"), a fonner employee and institution-affiliated July, 2007. party, asdefinedin Section3(u)oftheFDIAct(12U.S.c. §1813(u»), of RBC Centura Bank, Rocky Mount, North BOARD OFGOVERNORS OFTHE Carolina. FEDERALRESERVE SYSTEM NOW,THEREFORE,ITISHEREBYORDERED,pur suant to section 8(e) ofthe FDI Act, 12 U.S.C. §l818(e), JENNIFER J. JOHNSON that: Secretary ofthe Board

Index

Dl Index A Non-interestincomeandexpense A51-52 ARTICLES Securities,holdings of A46 IndustrialProductionand CapacityUtilization: Securitized loans A55-56 The2006AnnualRevision A17-35 Subprimemortgages,delinquencyrates A49-50 Profitsand BalanceSheetDevelopmentsatU.S. Syndicatedloans A42 CommercialBanksin2006 A37-71 Commercialrealestateloans A53-54 2006HMDAData,The A73-109 ConditionofU.S. bankingindustry, reports BI-12 U.S. Cross-BorderDerivativesData: AUser'sGuide AI-16 Contracts Avery, RobertB.,article A73-109 Derivatives,types of A2, A3 Credit(See Loans) B Creditquality, subprimemortgages , , A56-57 Curcuru, StephanieE., article A1-16 BALANCEofpayments,U.S A2, A4, A12 Balancesheetdevelopments, commercialbanks A39--48 D BankHoldingCompanyActof1956,ordersissued under DELINQUENCYrates, subprimemortgages A56--57 1stSourceCorporation C77-80 Derivatives AFNB Holdings, Inc CI-2 Article AI-16 BancoMercantil del Norte, S.A., NuevoLeon,Mexico ..Cl4-16 Bankholdings of A47-48 BankofAmericaCorporation C49-59, C109-17 Contracttypes A2, A3 BankofNewYorkMellonCorporation,The C8D-87 Cross-bordertransactions A1-16 BankofNovaScotia, The, Toronto,Canada C136--43 Implied valuationchange A15 BanorteUSA Corporation Cl4-16 Internationaltransactionsaccounts AI0 C-B-G, Inc , C8S-90 Reports, other A13 CapitalOneFinancialCorporation C2-9 TICform D A2, A8-12 CitizensBankingCorporation C9-13 TreasuryInternational Capital(TIC) reportingsystem Al CommunityBankshares, Inc C59-62 FirstBuseyCorporation C9D-94 E GrupoFinancieroBanorte,S.A.dec.v., NuevoLeon, ENFORCEMENTactions(SeeLitigation, final enforcement Mexico Cl4-16 decisions) Huntington BancsharesIncorporated C94-102 IBTHoldingsCorp C62-65 F IndustrialBankofTaiwanCo.,Ltd.,The,Taipei, FEDERALReserve Act,ordersissuedunder Taiwan C62-65 FirstStateBank C103-04 lnstitucionde BancaMultiple, NuevoLeon, Mexico Cl4-16 Financialholdingcompany,definition ofcomplementary MercantileBancorp,Inc C118-20 activity C133-36 NationalCityCorporation C44-48, C127-33 Foreigninvestments(See International investments) Penguin Acquisition, LLC C94-102 PNCFinancialServicesGroup, Inc., The C65-70 G RegionsBank C16--41 GILBERT,Charles, article A17-35 Regions FinancialCorporation C16--41 SkyFinancial Group, Inc. .. C42--44 H WellsFargo& Company C121-27 HEALTHinsurance,definitionofcomplementary BankMergerActof1960,ordersissued under activityfor financial holdingcompany C133-36 CountyBank CI43--46 HomeMortgage DisclosuteAct(HMDA)2006data, East West Bank Cl46-50 article , A73-109 Bankingindustry, U.S. HomeOwnershipandEquity Protection Act Profitsandbalancesheetdevelopments A49-60 (HOEPA) A79,A86--88 Reports onconditionof BI-12 Households,loansto A44-45, A54-55 Brevoort, Kenneth P.,article A73-109 I C IMPLIED valuationchange Al5 CANNER,Glenn B.,article A73-109 Industrialproductionand capacityutilization Capacityutilization(See Industrialproductionand capacity Article, 2006annualrevision A17-35 utilization) Capacityandcapacityutilization A21-22 Capital,commercialbanks A47 Industrial production A18-21 Carlson,Mark,article A37-71 Technicalaspectsofthe revision..,'" ., A22-28 Commercialand industrial(C&I)loans A53 Interestincomeandexpense,commercialbanks A5D-51 Commercialbanks InternationalBankingAct,ordersissuedunder Article , A37-71 BancoSantanderTotta, S.A.,Lisbon, Portugal C71-73 Balancesheetdevelopments A39--48 BankofNovaScotia,The,Toronto, Canada C73-74 Capital A47 CaixaEconomicaFederal,Brasilia,Brazil C15D-52 Derivatives,holdings of A47--48 Royal BankofScotlandpIc,The,Edinburgh, Interestincomeandexpense A5D-51 Scotland ClO4-06 Internationaloperations.." A58 StateExport-ImportBankofUkraine,The, Kiev, Liabilities A46--47 Ukraine C152-54 Loansandperformance A40--46, A52-56 VictoriaMutual BuildingSociety ClO6-08

D2 Federal Reserve Bulletin D 2007 o Internationalinvestmentposition, U.S A6-7, AI2-13 Internationalinvestments,cross-border A1-16 OTOO, Maria,article A17-35 Internationaloperations, U.S. commercialbanks A58 Internationaltransactionsaccounts, derivatives AI0 P PRODUCTION(See Industrial productionand capacity L utilization) LEGALdevelopments, Profitsand balance sheetdevelopmentsat U.S. (See alsoBankHoldingCompany Act,ordersissued under; commercialbanksin2006,article A37-71 FederalReserve Act,ordersissuedunder; International BankingAct, ordersissued under; Litigation, final R enforcementdecisions) REALestateloans,commercial A53-54 Firstquarter, 2007 C49-76 Regulations, BoardofGovernors Fourthquarter, 2006 CI-48 C, Home Mortgage Disclosure A73-109 Secondquarter, 2007 C77-108 Reports onthe conditionofthe U.S. bankingindustry Thirdquarter, 2007 C109-56 Firstquarter, 2006 B1---{) Liabilities,commercial banks A46-47 Secondquarter, 2006 B7-12 Litigation,final enforcementdecisions CivitasBankGroup,Inc C75-76 S Moore, MichelleM C154-56 SECURITIES,commercialbank holdings of A46 Morgan, SeresaT. C75-76 Subprimemortgages,delinquency rates A56-57 RBC CenturaBank C154-56 Loans T Business '" , A40-44 Commercialand industrial A53 TICformD A2, A8-12 Commercialrealestate A53-54 TreasuryInternationalCapital(TIC)reportingsystem AI Household A44-45, A54-55 Treasurysecurities,yieldcurve A91 Loss provisioning ".A56-58 u Mortgages, subprime A56-57 Performance " ,." ,." A52-53 U.S. balanceofpayments A2, A4, A12 Securitized A55-56 U.S. commercial banks, articleonprofitsand balance Syndicated A42 sheetdevelopments in 2006 A37-71 U.S. cross-borderderivatives data: a user's guide, M article Al-16 MORTGAGEloans U.S. international investmentposition A6-7, A12-13 HomeMortgageDisclosureAct(HMDA)2006data, article A73-109 W Subprime,delinquencyrates A56-57 WEINBACH, GretchenC.,article A37-71 WellPoint, Inc.,financial holdingcompany C133-36 N y NON-INTERESTincomeand expense,commercial banks A51-52 YIELDcurve, Treasurysecurities A91

INSPECTOR GENERAL HOTLINE (800) 827-3340 Youmayusethisnumbertoreportsuspectedinstancesofimpropri ety, wrongdoing, fraud, waste, and abuse in programsand opera tionsadministeredorfinancedbytheFederalReserveBoard.