Federal Reserve Bulletin, 2010-01

Volume 96 2010 Compilation Federal Reserve BULLETIN Board of Governors of the Federal Reserve System, Washington, D.C.

TheFederalReserveBulletinCompilation(ISSN0014-9209)ispublishedannuallybytheBoardofGovernorsofthe FederalReserveSystemunderthedirectionoftheFederalReserveBoard’sPublicationsCommittee.TheCommittee isassistedbythePublishing&CommunicationsServicesDepartmentunderthedirectionofLucretiaM.Boyer.See the Board’s website (at www.federalreserve.gov) for more information on the print- and online-based publications thattheBoardoffers. AdditionalprintcopiesoftheBulletinCompilationmaybeobtainedfromPublicationsFulfillment,MailStopN-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@frb.gov. The Federal Reserve Bulletin Compilation may also be obtained by using the publications order form available on the Board’swebsite,atwww.federalreserve.gov/pubs/order.htm. The price of the Bulletin Compilation in the United States and its commonwealths and territories is $25 per copy; elsewhere,$35percopy.RemittanceshouldbemadepayabletotheorderoftheBoardofGovernorsoftheFederal ReserveSysteminaformcollectibleatparinU.S.currency. Each of the articles found in this compilation is also published, as it becomes available, on the Board’s website, at www.federalreserve.gov/pubs/bulletin.

Table of Contents PREFACE ARTICLES Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 ................... A1 Seung Jung Lee and Jonathan D. Rose May24 The 2009 HMDA Data: The Mortgage Market in a Time of Low Interest Rates and Economic Distress ................................................................. A39 Robert B. Avery, Neil Bhutta, Kenneth P. Brevoort, and Glenn B. Canner December22 LEGAL DEVELOPMENTS Fourth Quarter, 2009 ..................................................................... B1 March3 First Quarter, 2010 ...................................................................... B7 July2 Second Quarter, 2010..................................................................... B21 September27 Third Quarter, 2010 ...................................................................... B31 November29 INDEX .................................................................................. C1

Preface The Federal Reserve Bulletin was introduced in 1914 as a vehicle to present policy issues developed by the Federal Reserve Board. Throughout the years, the Bulletin has been viewed as a journal of record, serving to providethepublicwithdataandresearchresultsgeneratedbytheBoard. Authors from the Board’s Research and Statistics, Monetary Affairs, International Finance, Banking SupervisionandRegulation,ConsumerandCommunityAffairs,ReserveBankOperations,andLegaldivisions contribute to the content published in the Bulletin, which includes topical research and analysis and quarterly “LegalDevelopments.” Starting in 2004, the Bulletin was published quarterly rather than monthly. In 2006, in response to the increaseduseoftheInternet—andinordertoreleasearticlesandreportsinamoretimelyfashion—theBoard discontinued the quarterly print version of the Bulletin and began to publish the contents of the Bulletin on its public website as the information became available. All articles, orders on banking applications, and enforcementactionsthatwerepublishedintheonlineBulletinin2010areincludedinthisprintcompilation. The tables that appeared in the Financial and Business Statistics section of the Bulletin from 1914 through 2003 were removed and published monthly as a separate print and online publication, the Statistical SupplementtotheFederalReserveBulletin,from2004to2008.EffectivewiththepublicationoftheDecember 2008issue,theFederalReserveBoarddiscontinuedboththeprintandonlineversions. The majority of data published in the Statistical Supplement are available elsewhere on the Federal Reserve Board’s website at www.federalreserve.gov. The Board has created a webpage that provides a detailed list of links to the most recent data on its site and links to other data provided by the Federal Reserve Bank of New York,theU.S.Treasury,andtheFederalFinancialInstitutionsExaminationCouncil. OnlineaccesstotheBulletinisfree.Afreee-mailnotificationservice(www.federalreserve.gov/generalinfo/ subscribe/notification.htm)isavailabletoalertsubscriberstothereleaseofarticlesandordersintheBulletin,as well as press releases, testimonies, and speeches. The notification message provides a brief description and a linktotherecentposting. FederalReserveBulletin: www.federalreserve.gov/pubs/bulletin DatasourcesforthetablesinthediscontinuedStatisticalSupplementtotheFederalReserveBulletin: www.federalreserve.gov/pubs/supplement/statsupdata/statsupdata.htm Subscribetoe-mailnotificationservice: www.federalreserve.gov/generalinfo/subscribe/notification.htm

Articles

A1 May 2010 Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 SeungJungLeeandJonathanD.Rose,oftheBoard’s banks faced in late 2008 abated over the first half of Division of Monetary Affairs, prepared this article. 2009,largelybecauseofunprecedentedinterventions Thomas C. Allard and Mary E. Chosak assisted in bytheTreasury,theFederalReserve,andtheFDIC. developing the database underlying much of the Asset quality worsened for all major loan classes analysis. Michael Levere and Robert Kurtzman pro- over2009,butrealestateloansbackedbyresidential videdresearchassistance. and by commercial properties remained at the center of banks’ credit quality problems. Conditions in the The U.S. commercial banking sector remained under realestatesectorgenerallystayedweak,especiallyin significant pressure in 2009. Bank profitability was commercial markets. House prices continued declindamped by the effects of the weak economy on asset ingsharplyinthefirsthalfoftheyearbutweremore quality and lending activity, with loan delinquency stable in the second half. The stabilization of prices andcharge-offratesrisingtohistoricalhighsinmany partly reflects stronger demand for housing that was cases and banks’ balance sheets contracting. Reflectlikely spurred in part by low mortgage rates, which ing the weak portfolios and low profitability that were fostered partly by the Federal Reserve’s purweighed on the sector as a whole, 120 smaller banks chases of agency debt and mortgage-backed securifailed during the year, and the watch list of the ties (MBS). A tax credit for first-time homebuyers Federal Deposit Insurance Corporation (FDIC) exalsohelpedsupporthousingdemand.Still,withmany pandedtoincludeabout700institutionsbyyear-end, households’mortgageobligationsexceedingthevalue thehighestlevelsforbothofthesemeasuressincethe oftheirhouses,1.4millionpropertiesenteredforecloearly 1990s. By contrast, the acute strains the largest sureovertheyear. Aggregate economic activity picked up in the Note:Thedatainthisarticlecoverinsureddomesticcommercial second half of the year after several quarters of banks and nondeposit trust companies (hereafter, banks). Except as contraction,stimulatedbymonetaryandfiscalexpanotherwise indicated, the data are from the Consolidated Reports of ConditionandIncome(CallReport).TheCallReportconsistsoftwo sions,increasedforeigngrowth,andimprovementsin formssubmittedbydomesticbankstotheFederalFinancialInstitu- financialmarketconditions.However,asistypicalin tionsExaminationCouncil:FFIEC031(forthosewithdomesticand cyclical economic recoveries, the improvement in foreignoffices)andFFIEC041(forthosewithdomesticofficesonly). The data thus consolidate information from foreign and domestic labor market conditions lagged the trends in ecooffices,andtheyhavebeenadjustedtotakeaccountofmergersandthe nomic activity, and the unemployment rate reached effects of push-down accounting. For additional information on the 10 percent at year-end before edging lower. The adjustmentstothedata,seetheappendixinWilliamB.Englishand WilliamR.Nelson(1998),‘‘ProfitsandBalanceSheetDevelopments weakness in labor markets contributed to historically atU.S.CommercialBanksin1997,’’FederalReserveBulletin,vol.84 elevated delinquency and charge-off rates on con- (June), p. 408. Size categories, based on assets at the start of each sumer credit card loans. The deterioration in credit quarter,areasfollows:the10largestbanks,largebanks(thoseranked 11 through 100), medium-sized banks (those ranked 101 through quality across all loan categories led to a further rise 1,000),andsmallbanks(thoseranked1,001andhigher).Atthestartof inalreadyelevatedratesoflossprovisioning.Consethefourthquarterof2009,theapproximateassetsizesofthebanksin quently, the profitability of the commercial banking those groups were as follows: the 10 largest banks, more than $166billion;largebanks,$7.9billionto$165billion;medium-sized industry was depressed, and return on assets (ROA) banks, $527.3 million to $7.9 billion; and small banks, less than andreturnonequity(ROE)werebothattheirlowest $527.3million. annuallevelssinceatleast1985(figure1).1 Datashowninthisarticlemaynotmatchdatapublishedinearlier yearsbecauseofrevisionsandcorrections.Thedatareflectinformation available as of April 20, 2010, unless noted otherwise. In the tables, components may not sum to totals because of rounding. Appendix tables A.1.A through A.1.E report portfolio composition, 1. Itisworthemphasizingthattheanalysisinthisarticleisbasedon interestrates,andincomeandexpenseitems,allasapercentageof CallReportsforcommercialbanks.Foracommercialbankthatisa overallaveragenetconsolidatedassets,forallbanksandforbanksin subsidiaryofabankholdingcompanyorafinancialholdingcompany, eachofthefoursizecategories.AppendixtableA.2reportsincome the Call Report does not include the assets, liabilities, income, or statementdataforallbanks. expensesoftheothersubsidiariesofthelargerorganization.Thus,the

A2 Federal Reserve BulletinhMay 2010 1. Bank profitability, 1985–2009 the first half of the year and expanded thereafter, reflectingtheimprovementinfinancialmarketprices Percent Percent and accommodative monetary and fiscal policies. 18 1.8 However, households financed the increase in con- Return on equity 16 1.6 sumeroutlaysprimarilyoutofdisposableincome.On 14 1.4 thebusinessside,commercialrealestate(CRE)activ- 12 1.2 itycontractedsharply.Businesses’spendingonequip- Return on assets 10 1.0 mentandsoftwarepickedupinthesecondhalfofthe 8 .8 year, probably owing in part to improved conditions 6 .6 in the bond market and some increase in sales pros- 4 .4 pects. Indeed, large reductions in corporate bond 2 .2 spreads spurred robust issuance of both investment- + + _0 _0 and speculative-grade bonds, and large firms reportedlypaiddownsomebankloanswiththeproceedsof 1985 1988 1991 1994 1997 2000 2003 2006 2009 suchbondissues. NOTE: The data are annual. Throughout the year, the Federal Open Market SOURCE: Here and in subsequent figures and tables except as noted, Federal Financial Institutions Examination Council, Consolidated Reports of Committee maintained a target range for the federal Condition and Income (Call Report). funds rate of 0 to 1⁄ 4 percent to foster economic recovery.TheFederalReserveextendedthroughearly Profitability diverged between the largest banking 2010mostofthespecialcreditandliquidityprograms institutions and the rest of the industry, primarily that it had established at the height of the crisis. reflectingtheabilityoflargebankstogenerateincome However, as financial market functioning improved from specialized activities in which other banks do over 2009, these facilities generally declined in size not generally participate. Indeed, large banks, taken (figure 2), and on February 1, 2010, most expired.2 together, posted a small profit last year, as trading The Term Asset-Backed Securities Loan Facility, revenue rebounded to pre-crisis levels with the imwhichwasdesignedtoincreasecreditavailabilityand provements in capital markets and income from net support economic activity by facilitating renewed servicing fees increased.Those revenues managed to issuanceofconsumerandbusinessasset-backedsecuoffsetthepressuresonearningsatthesebankscaused rities (ABS) at more-normal interest rate spreads, by the further deterioration in credit quality. In addicontinued operating into 2010. Together, the support tion, large banks experienced a substantial inflow of provided by all of these programs helped reduce core deposits at very low interest rates, which imstrains in funding markets and bolster liquidity in proved their net interest margins. In contrast, profits financialmarketsmorebroadly. at small and medium-sized banks declined further, To provide support to mortgage lending and housweighed down by higher loan losses that were not ing markets and to improve overall conditions in offsetbyotherformsofrevenue. privatecreditmarkets,theFederalReserveannounced The commercial banking sector deleveraged over large-scale asset purchases of government-sponsored 2009 as banks raised capital and nominal assets enterprise (GSE) debt and agency MBS in late 2008. postedanannualdeclineforthefirsttimesince1948. Loans outstanding declined—across all major loan In March 2009, those programs were enlarged, and categories, but especially in loans to businesses— the Federal Reserve also announced a program of consistentwithreportsofbanks’morestringentlend- purchasesofTreasurysecurities.TheFederalReserve ing posture and reduced demand for loans from concluded purchasing $1.25 trillion of agency MBS creditworthy borrowers. Borrowers such as house- andabout$175billionofagencydebtinMarch2010, holds and small businesses with more limited access tononbanksourcesofcreditwereparticularlyaffected bythetightlendingconditions. Demand for bank loans was further held down by 2. The following programs expired on February 1, 2010: Assetthe efforts of households and businesses to rebuild Backed Commercial Paper Money Market Mutual Fund Liquidity Facility;CommercialPaperFundingFacility;PrimaryDealerCredit theirbalancesheets.Consumerspendingstabilizedin Facility;Term Securities Lending Facility;Term Securities Lending FacilityOptionsProgram;andcentralbankliquidityswaps,including dollarliquidityswaplinesandforeigncurrencyliquidityswaplines. profits of the commercial banks that are subsidiaries of a larger The Money Market Investor Funding Facility separately expired on bankingorganizationmaydiffersubstantiallyfromtheprofitsofthe October30,2009.InMarch2010,theFederalReservecompletedits consolidatedinstitution. finalplannedauctionoffundsthroughtheTermAuctionFacility.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A3 2. Target federal funds rate and usage of Federal Reserve 3. Indicators for the banking industry, 2001–10 lending facilities, 2002–10 Billions of dollars Percent Stock price indexes March 2009=100 500 1,500 5 450 Target federal 400 1,200 funds rate 4 350 900 3 300 Dow Jones bank index 250 600 2 Usage of 200 Federal Reserve 300 lending facilities 1 150 + + S&P 500 100 _0 _0 2002 2004 2006 2008 2010 2002 2004 2006 2008 2010 Premium on credit default swaps on subordinated Basis points NOTE: The data are daily and extend through April 14, 2010. On December debt at selected banking institutions 280 16, 2008, the Federal Open Market Committee established a target range for the federal funds rate of 0 to ¼ percent. The black rectangle represents this 240 range. Usage data are the sum of usage amounts for primary, secondary, and seasonal credit; Term Auction Facility; dollar liquidity swaps; Primary Dealer 200 Credit Facility; Commercial Paper Funding Facility; Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; and Term 160 Asset-Backed Securities Loan Facility. 120 SOURCE: For federal funds rate, Federal Reserve Board (www. federalreserve.gov/fomc/fundsrate.htm); for usage of lending facilities, 80 Federal Reserve Board, Statistical Release H.4.1, “Factors Affecting Reserve Balances” (www.federalreserve.gov/releases/h41). 40 + in addition to the $300 billion of Treasury securities _0 that it purchased between March 2009 and October 2002 2004 2006 2008 2010 2009. NOTE: The stock price index data are monthly and extend through March TheTreasuryprovidedalargeamountofcapitalto 2010. The credit default swap (CDS) data are weekly and extend through banking institutions under the TroubledAsset Relief April 14, 2010; median spread of all available quotes. SOURCE: For stock price indexes, Standard & Poor’s and Dow Jones; for Program (TARP), and a substantial volume of that premium on CDS, Markit. capital was downstreamed by parent holding companiestotheircommercialbanksubsidiariesinthefirst improve investors’ outlook for the banking industry. half of 2009. The Treasury injected capital into TheDowJonesstockpriceindexforbanksrebounded financial institutions primarily through the Capital sharply beginning in March 2009, as market partici- Purchase Program (CPP), under which it acquired pantsbegantomarkdowntheoddsofaworseningof shares of preferred stock at the holding company the financial crisis, especially after the completion of level. In addition, the federal bank regulatory agen- the SCAP. Indeed, bank stocks have significantly cies, led by the Federal Reserve, successfully com- outperformed the broader S&P 500 index since that pleted the Supervisory Capital Assessment Program timedespitehistoricallylowprofitability,thoughthey (SCAP), which induced several large U.S. banking remainsubstantiallybelowtheirpre-crisislevels(figorganizations to raise capital in public equity mar- ure 3, top panel). Reflecting the decrease in the kets.3 Subsequently, a number of other larger banks perceived risks of failure for large banks after the also raised capital in order to repay their CPP funds conclusion of the SCAP, credit default swap spreads andincreasetheshareofcommonequityintheirtotal on banks’ subordinated debt came back to levels last capital. Meanwhile, aggregate regulatory capital ra- seeninthefirsthalfof2008(figure3,bottompanel). tios at the commercial bank level reached historical highsbytheendof2009. ASSETS The government programs to support and assess the level of capital adequacy augmented the highly Severe and widespread economic weakness during accommodative monetary and fiscal policies to help 2009impairedthehealthofbothlendersandborrowers and significantly reduced the supply of and demandforbankloans.Consequently,thetotalassets 3. For press releases and documents related to the SCAP, see www.federalreserve.gov/bankinginforeg/scap.htm. of all commercial banks contracted 31⁄ 2 percent in

A4 Federal Reserve BulletinhMay 2010 1. Changeinbalancesheetitems,allU.S.banks,2000−09 Percent Memo Dec. 2009 Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 (billions of dollars) Assets............................................ 8.76 5.11 7.19 7.18 10.78 7.73 12.36 10.81 10.22 –3.58 11,772 Interest-earningassets........................... 8.66 3.96 7.53 7.27 11.29 7.97 12.45 10.11 8.31 –2.46 10,108 Loansandleases(net)........................ 9.24 1.82 5.90 6.51 11.21 10.39 11.97 10.57 2.21 –5.96 6,221 Commercialandindustrial.................. 8.54 –6.73 –7.41 –4.56 4.35 12.53 11.81 20.27 3.48 –18.42 1,149 Realestate................................. 10.74 7.94 14.44 9.75 15.41 13.80 14.94 7.04 4.48 –.44 3,780 Bookedindomesticoffices............... 11.02 8.02 14.85 9.66 15.09 13.93 15.05 6.77 4.75 –.42 3,719 One-tofour-familyresidential......... 9.28 5.70 19.86 10.01 15.75 11.95 15.11 5.53 3.07 3.17 2,121 Otherrealestate....................... 13.31 10.95 8.81 9.19 14.20 16.61 14.96 8.39 6.89 –4.82 1,597 Bookedinforeignoffices................ –1.62 3.97 –7.41 15.74 35.59 7.19 8.79 22.76 –9.28 –1.72 62 Consumer................................. 8.04 4.16 6.55 9.31 10.16 2.30 6.19 11.67 4.23 –1.95 969 Otherloansandleases..................... 7.01 –2.02 –.03 8.31 3.57 –.18 3.17 13.01 –6.41 –7.32 537 Loanlossreservesandunearnedincome.... 7.98 13.15 5.73 –3.41 –3.72 –5.55 1.69 27.98 75.28 35.73 214 Securities.................................... 6.36 7.22 16.20 9.44 10.58 2.40 11.53 4.54 –.53 21.24 2,646 Investmentaccount......................... 2.85 8.88 13.53 8.70 6.15 1.19 6.94 –4.42 10.07 26.66 2,177 U.S.Treasury........................... –32.72 –40.27 41.92 14.14 –15.87 –17.59 –19.30 –26.93 7.96 215.48 100 U.S.governmentagency andcorporationobligations ......... 3.75 12.84 18.09 9.68 9.46 –1.83 4.71 –12.15 15.44 15.49 1,190 Other................................... 13.39 12.18 2.72 5.98 3.02 10.12 13.78 10.75 2.66 35.05 887 Tradingaccount............................ 37.16 –3.72 36.12 14.01 36.81 7.96 31.32 35.98 –26.69 1.17 469 Other........................................ 10.30 13.09 –2.93 6.76 14.25 5.81 19.31 22.35 73.68 –20.71 1,241 Noninterest-earningassets....................... 9.45 12.74 5.11 6.64 7.61 6.19 11.79 15.42 22.30 –9.89 1,664 Liabilities........................................ 8.59 4.45 7.13 7.24 9.56 7.74 12.10 10.79 11.27 –5.46 10,458 Coredeposits................................... 7.53 10.55 7.58 7.29 8.25 6.40 5.84 5.49 14.51 8.07 5,843 Transactiondeposits.......................... –1.31 10.20 –5.12 2.82 3.20 –1.18 –4.28 –1.22 20.72 6.34 892 Savingsdeposits(includingMMDAs)......... 12.51 20.68 18.46 13.71 11.72 6.93 5.53 3.34 9.98 17.78 3,879 Smalltimedeposits.......................... 7.20 –7.23 –4.92 –6.79 1.58 12.88 16.97 18.03 23.48 –15.88 1,072 Managedliabilities1............................. 8.79 –2.73 5.34 6.96 12.06 12.24 19.45 16.57 6.45 –16.61 4,038 Largetimedeposits........................... 19.37 –3.65 5.05 1.42 21.86 22.88 15.94 1.90 4.56 –16.15 897 Depositsbookedinforeignoffices............. 7.84 –10.96 4.49 12.63 16.84 6.32 29.67 25.86 2.46 –.60 1,529 Subordinatednotesanddebentures............ 13.98 9.56 –.59 5.08 10.49 11.41 22.60 16.83 4.60 –15.53 154 GrossfederalfundspurchasedandRPs........ 6.49 5.72 12.75 –8.70 8.40 15.62 9.47 7.06 5.76 –31.70 537 Othermanagedliabilities..................... 1.80 –.28 .97 22.00 1.37 6.15 18.89 28.44 14.38 –27.25 921 Revaluationlossesheldintradingaccounts...... 7.47 –17.06 33.44 14.03 –12.61 –17.86 6.89 42.66 88.60 –57.17 166 Other.......................................... 20.61 14.90 5.23 5.28 17.19 –1.60 22.33 3.21 –8.63 –3.31 410 Capitalaccount................................... 10.65 12.29 7.84 6.61 23.14 7.59 14.69 10.94 .96 14.54 1,314 Memo Commercialrealestateloans2..................... 12.16 13.10 6.82 8.99 13.93 16.87 14.91 9.21 6.74 –5.69 1,588 Mortgage-backedsecurities........................ 3.29 29.05 15.54 10.12 13.45 2.06 10.22 –1.24 11.37 11.54 1,192 FederalHomeLoanBankadvances................ n.a. n.a. 17.21 3.71 3.73 10.00 29.80 30.62 17.51 –24.87 402 Note:Dataarefromyear-endtoyear-endandareasofMarch23,2010. bymultifamilyresidentialproperties;andloanstofinancecommercialreales- 1. Measuredasthesumoflargetimedepositsindomesticoffices,deposits tate,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. LoanBankadvances,andotherborrowedmoney. RP Repurchaseagreement. 2. Measuredasthesumofconstructionandlanddevelopmentloanssecured byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor 2009, the first annual contraction since 1948 (table 1 4. Composition of assets at commercial banks, 2006–09 and figure 4). However, the decline in banks’ assets last year was even larger—about 51⁄ 4 percent—after Billions of dollars Percent accountingfortheacquisitionofseveralnonbanksby Securities Other Loans commercial banks (see box ‘‘Adjustments to the Cash and equivalents Total Balance Sheet Data for StructureActivity in 2009’’). 12,500 100 The share of industry assets in the top 100 banks fell slightly, the first annual decline since 1991 (see box 11,500 75 ‘‘BankFailuresandMeasuresofBankingConcentrationin2009’’). 10,500 50 The decline in assets on banks’ books reflected in large part a fall in gross loans of about 5 percent, or 9,500 25 7 percent when adjusted for structure activity. Relative to 2008, on an adjusted basis, loan declines in 2009 spread from closed-end residential real estate 2006 2007 2008 2009 loans to all major loan classes, as the economic NOTE: Other assets consist of loans to banks, trading assets (excluding contractionencompassedtheconsumer,business,and securities), and other assets not elsewhere classified.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A5 Adjustments to the Balance Sheet Data for Structure Activity in 2009 One consequence of the turmoil in financial markets over • Commercial bank subsidiaries of Wells Fargo & Comthe past two years has been a steady stream of acquisi- panyconsolidatedtheassetsandliabilitiesofWachovia tions and reorganizations by major financial institutions. Mortgage, F.S.B., and Wachovia Bank, F.S.B., on No- Severallargethriftinstitutionsthatwereacquiredbybank vember 1, 2009, boosting industry assets by about holding companies in 2008 were consolidated into the $85billion. commercial bank subsidiaries of those institutions during • Bank ofAmerica, N.A., consolidated the assets and li- 2009, boosting assets on banks’ books.1 In addition to abilities of Merrill Lynch Bank and Trust Co., F.S.B., these bank–nonbank structure events, a large credit card on November 2, 2009, boosting industry assets by bank completed balance sheet consolidation of its securi- about$40billion. tized assets in the fourth quarter of 2009 under the new • Alarge credit card bank consolidated securitized credit accounting requirements established by Statements of Fi- card loans onto its balance sheet as of the December nancial Accounting Standards Nos. 166 and 167; similar 2009ConsolidatedReportsofConditionandIncome(Call eventswillboostassetsonmanybanks’booksinthefirst Report),boostingindustryassetsbyabout$25billion.3 quarterof2010. These four events resulted in the net addition of more In general, the effects of these structure activities on than$265billionofnonbankassetstocommercialbanks’ bankbalancesheetdatadonotreflectnetassetcreationor balance sheets last year, bringing the total since 2006 to elimination. To better capture net asset changes, the data ninemajoreventsand$847billion.Asaconsequence,the shownintableAhavebeenadjustedtoremovetheeffects adjusted growth rates shown in table A are generally on the data series that have resulted from these structure lower than the unadjusted growth rates shown in table 1 events.Thegrowthratesofselectedbalancesheetcompoofthemaintext.Notably,afteraccountingfortheconsolinentsgiveninthetablehavebeenadjustedtoremovethe dation of assets from Countrywide and Wachovia, the estimated effects of the following events that occurred growth of residential real estate loans in the second and over 2009, as well as the five major structure events that fourth quarters was markedly lower, more clearly reflectweredetailedintheFederalReserveBulletinarticleabout ing the weakness in most residential real estate markets the2008developments:2 over that period. Overall, the adjusted data on growth in • Bank ofAmerica, N.A., consolidated the assets and li- total loans show that, after adjusting for major structure abilities of Countrywide Bank, F.S.B., on April 27, events,banklendingsteadilycontractedineachquarterof 2009,boostingindustryassetsbyabout$115billion. 2009. 1. In publishing its H.8 statistical release, ‘‘Assets and Liabilities of letin,vol.95(June),pp.A62–A63,www.federalreserve.gov/pubs/bulletin/ CommercialBanksintheUnitedStates,’’eachweek,theFederalReserve 2009/pdf/bankprofits09.pdf.Thestructure-adjustedgrowthratesshownin describesnonbankstructureactivitythataffectsbankassetsby$5.0billion thetableweregenerallybasedonthedifferencebetweentheend-of-period ormore.ForalistofsuchactivitydatingtoDecember16,2005,seethe reporteddataandthebeginning-of-perioddataadjustedforthestructure H.8 ‘‘Notes on the Data’’webpage (www.federalreserve.gov/releases/h8/ event.ToadjustforBankofAmerica,N.A.,in2009:Q2and2009:Q4,and h8notes.htm). In addition, information about structure activity involving the bank subsidiaries of Wells Fargo & Company in 2009:Q4, the anybankingorganizationisavailableintheFederalFinancialInstitutions beginning-of-periodvaluesweredeterminedbyaddingthevalueoftheas- ExaminationCouncil’scentralrepositoryofdata,theNationalInformation setsoftheacquiredthrift(s)tothereporteddataforthepreviousquarter. Center(www.ffiec.gov/nicpubweb/nicweb/nichome.aspx). Similarly, to adjust for the large credit card bank in 2009:Q4, the 2. Seebox‘‘AdjustmentstotheBalanceSheetDataforStructureActiv- beginning-of-periodvaluesweredeterminedbyaddingthevalueoftheseity’’inMortenL.BechandTaraRice(2009),‘‘ProfitsandBalanceSheet curitizedloanstothereporteddataforthepreviousquarter. DevelopmentsatU.S.CommercialBanksin2008,’’FederalReserveBul- 3. Seenote11ofthemaintext. A. Structure-adjustedchangeinselectedbalancesheetitems,allU.S.banks,2007–09 Percent,annualrate Balancesheet 2008 2009 2007 2008 2009 category Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Assets ............................. 12.38 –1.21 8.92 3.51 –8.49 –5.64 –3.56 –3.51 11.38 6.10 –5.15 Loansandleases(gross) ......... 5.05 –.70 .40 –6.64 –4.08 –6.27 –11.73 –6.49 11.39 –.43 –6.93 Commercialandindustrial...... 9.49 2.19 7.14 –6.19 –16.32 –18.47 –25.44 –20.34 20.28 3.23 –18.62 Consumer ..................... 9.27 7.76 –.23 –4.18 –3.21 –2.39 –5.55 –6.19 11.67 3.10 –4.35 One-tofour-familyresidential.. –4.36 –10.36 –4.10 –4.90 2.05 –5.01 –9.56 5.29 7.30 –5.83 –1.78 Commercialrealestateloans1... 5.95 4.97 4.17 .61 –.41 –4.37 –7.83 –11.79 9.17 3.98 –5.97 Otherloansandleases.......... 9.29 1.86 10.60 –10.49 –3.00 –2.34 –5.77 –10.74 10.06 2.77 –5.37 Securities........................ .30 –3.33 13.36 –19.15 11.97 24.18 22.81 16.17 5.31 –2.49 19.98 Mortgage-backedsecurities..... 10.74 11.50 2.44 12.60 2.59 13.17 12.67 12.06 .43 9.39 10.51 Liabilities.......................... 13.30 –1.20 10.88 4.26 –11.61 –7.17 –5.11 –4.25 11.41 7.07 –6.81 Capitalaccount..................... 4.33 .46 –7.44 –5.59 21.94 10.11 9.25 8.06 11.16 –2.07 12.88 Memo Unusedloancommitments .......... .21 –5.88 –16.43 –31.87 –29.30 –24.90 –16.08 –8.94 9.50 –12.98 –18.46 FederalHomeLoanBankadvances.. 15.96 5.22 52.64 –50.30 –49.47 –43.31 –43.92 –22.20 35.61 4.83 –34.07 Note:Dataarefromperiod-endtoperiod-endandareasofApril15,2010, properties or by multifamily residential properties; and loans to finance forbothcommercialbanksandthriftinstitutions.Foradiscussionofthe commercialrealestate,construction,andlanddevelopmentactivitiesnot structureadjustments,seetheboxtext;foranexplanationoftheadjustment securedbyrealestate. calculation,seenote2oftheboxtext. Source: Federal Financial Institutions Examination Council, Consoli- 1. Measured as the sum of construction and land development loans datedReportsofConditionandIncome(CallReport)forcommercialbanks securedbyrealestate;realestateloanssecuredbynonfarmnonresidential andthriftinstitutions;staffcalculations.

A6 Federal Reserve BulletinhMay 2010 Bank Failures and Measures of Banking Concentration in 2009 Among the major developments in the commercial bank- Theshareofassetsheldbythe10largestbanksincreased ing sector in 2009 were the failure of 120 banks with only slightly, to just under 541⁄2 percent at the end of $117.9 billion in assets (figure A). Since the middle of 2009,evenwiththeconsolidationofassetsfromacquired 2007, the health of the commercial banking sector has thrifts onto the balance sheets of the largest banks (figure been adversely affected by the economic downturn and B, bottom panel). The share of assets held by the top disruptions to financial markets caused by the financial 100banksdeclinedabitovertheyearto811⁄2percent,the crisis. The number of problem institutions, as identified firstannualdeclinesince1991. by the Federal Deposit Insurance Corporation (FDIC), The number of bank holding companies (BHCs) fell at increased greatly throughout 2009 and reached about about the same pace as in recent years to about 5,000 at 700 institutions by year-end, up from about 250 a year the end of 2009 (for multitiered BHCs, only the top-tier earlier.1 organizationiscountedinthesefigures).Whilemergerac- The FDIC sold most of the $117.9 billion in assets at tivity among BHCs slowed compared with the past two the 120 failed banks to other surviving banks. However, years, the number of newly formed BHCs decreased for giventheuncertainqualityofsomeoftheseizedassets,in the second consecutive year, and a number of BHCs exmanyinstancestheFDICenteredloss-sharingagreements ited because of the failures of their subsidiary banks.The with the purchasers of disposed assets, and in some cases number of financial holding companies also declined itretainedassetsforfutureliquidation. slightly,mainlyasaresultofmergersanddecertifications Veryfewnewcommercialbankswerecharteredduring offinancialholdingcompanystatus.2 2009. Merger activity among commercial banks slowed a bitagain,androughlytwo-fifthsofallmergersinvolveda 2. Statistics on financial holding companies include both domestic failed bank. Together, these structural developments BHCsthathaveelectedtobecomefinancialholdingcompaniesandforcausedthenumberofbankstocontinuedecliningoverthe eignbankingorganizationsoperatingintheUnitedStatesasfinancialholdyear,toabout6,900atyear-end2009fromabout7,100at ingcompaniesandsubjecttotheBankHoldingCompanyAct.Formore information,seeBoardofGovernorsoftheFederalReserveSystemand year-end2008(figureB,toppanel). U.S.DepartmentoftheTreasury(2003),ReporttotheCongressonFinan- Concentration in the banking industry was little cialHoldingCompaniesundertheGramm-Leach-BlileyAct(Washington: changed over 2009 after many years of steady increases. BoardofGovernorsandDepartmentoftheTreasury,November),available atwww.federalreserve.gov/pubs/reports_other.htm. 1. ThistotalincludesdepositoryinstitutionsinsuredbytheFDICthat B. Number of banks, and share of assets at the largest are not commercial banks. See Federal Deposit Insurance Corporation banks, 1990–2009 (2009), Quarterly Banking Profile (Washington: FDIC, December 31), availableatwww2.fdic.gov/QBP/qbpSelect.asp?menuItem=QBP. Thousands Number A. Assets at failed commercial banks, 2008–10 14 12 Billions of dollars 10 8 40 6 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 30 Percent Share of assets 100 20 80 100 largest 60 10 10 largest 40 20 2008 2009 2010 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 NOTE: The data are monthly and extend through March 2010. Assets are as of the fail date. NOTE: The data are as of year-end. For the definition of bank size, see SOURCE: Federal Deposit Insurance Corporation via SNL Financial. the general note on the first page of the main text.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A7 real estate sectors. The runoff in loans involved a 5. Change in commercial and industrial loans, 1986–2009 numberofrelatedfactors.Withlessneedforexternal Percent financing and the uncertain economic outlook, demand from businesses for bank-intermediated credit 20 declined broadly. Household loan demand similarly 15 dropped as consumers began deleveraging their bal- 10 ance sheets, in part to adjust to the declines in the 5 values of their homes and equity holdings. Weak + balance sheets of both businesses and households _0 likely also reduced the number of creditworthy bor- 5 rowers. In addition, banks tightened their lending 10 policies substantially over 2008 and 2009, partly in 15 response to a less favorable or more uncertain eco- 20 nomicoutlook.Reportedly,bankswerealsoresponding to a range of other factors, including the poor 1988 1991 1994 1997 2000 2003 2006 2009 quality of assets on their balance sheets, the adverse NOTE: The data are quarterly; changes are from four quarters earlier. implications of that situation for their own capital, anddisruptionsinsecuritizationmarkets. ference between capital expenditures and internally The credit quality of existing loans in all major generated funds—fell sharply in the second half of classes continued to deteriorate significantly, on bal- 2009 and ended the year below zero (figure 6). ance, over the year, resulting in historically high Anecdotal reports associated with the weekly data charge-offrates.Banks’overallloandelinquencyrate collectedbytheFederalReserveindicatethatorigina- (that is, the proportion of loans whose payments are tions of large loans were sparse last year, and there 30 days or more past due or not accruing interest) were broad-based paydowns of existing C&I loans rose to 71⁄ 4 percent at year-end, the highest level across banks and industries. The contraction in C&I postedsinceatleast1985.Creditqualitydeteriorated loans was especially steep at large banks last year, most sharply for real estate loans. For 2009 as a whichisconsistentwithreportsthatsomelargefirms whole,bankscumulativelychargedoff21⁄ 2 percentof with access to capital markets paid down bank loans the loans that were outstanding at year-end 2008, with the proceeds of bond issues. Indeed, bond directlycontributingtothedeclineinloansoutstandissuance was robust after the first quarter amid ing. increasingly attractive conditions in the corporate Incontrasttothedropinloans,banks’holdingsof securities expanded about 20 percent over 2009 (adjusted for structure activity), with growth particu- 6. Financing gap and net equity retirement at nonfarm larly strong in holdings of Treasury securities and nonfinancial corporations, 1990–2009 agency debt securities (excluding MBS). In addition, Billions of dollars as the Federal Reserve ramped up its purchases of Treasuryandagencysecuritiesoverthecourseofthe 1,000 year,reservebalancesgrewasashareofbanks’total assets. Indeed, at the end of 2009, such balances Net equity retirement 800 accountedfor5percentofbanks’totalassets;reserve 600 balances had accounted for just 1⁄ 4 percent of assets beforethefinancialturmoilofthefallof2008. Financing gap 400 200 Business Loans + _0 Commercial and industrial (C&I) loans on banks’ 200 books plummeted 181⁄ 2 percent in 2009, the steepest annual decline since at least 1985, and the pace of 1991199319951997199920012003200520072009 contraction gained momentum over the year (fig- NOTE: The data are four-quarter moving averages. The financing gap is the ure5). difference between capital expenditures and internally generated funds. Net equity retirement consists of funds used to repurchase equity less funds raised Demand for C&I loans decreased as nonfinancial in equity markets. firms’ need for external finance dropped off. The SOURCE: Federal Reserve Board, Statistical Release Z.1, “Flow of Funds Accounts of the United States,” table F.102 (www.federalreserve.gov/ financing gap at nonfinancial corporations—the dif- releases/z1).

A8 Federal Reserve BulletinhMay 2010 7. Selected components of net financing for nonfinancial 8. Changes in demand and supply conditions at selected businesses, 2005–09 banks for commercial and industrial loans to large and middle-market firms, 1990–2009 Billions of dollars, monthly rate Percent 60 Net percentage of banks reporting stronger demand1 60 40 40 20 20 + + _0 _0 Commercial paper 20 20 Bonds C&I loans 40 40 Commercial mortgages 60 60 Total 80 2005 2006 2007 2008 2009 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 NOTE: C&I is commercial and industrial. Percent SOURCE: Federal Reserve Board, Statistical Release Z.1, “Flow of Funds Accounts of the United States” (www.federalreserve.gov/releases/z1). Net percentage of banks reporting tighter standards2 100 80 60 bondmarket(figure7).Overall,accordingtodomes- 40 tic banks responding to the Federal Reserve’s Senior 20 LoanOfficerOpinionSurveyonBankLendingPrac- + tices(SLOOS),themostimportantfactorsexplaining _0 the decline in C&I loans last year were lower loan 20 demandfromcreditworthyborrowersandadeteriora- 40 tioninthecreditqualityofpotentialborrowers. On the supply side, results from the SLOOS indi- 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 catedthatunprecedentedfractionsofbankstightened NOTE: The data are drawn from a survey generally conducted four times standards and a wide range of terms on C&I loans per year; the last observation is from the January 2010 survey, which covers 2009:Q4. Net percentage is the percentage of banks reporting an increase in throughthefirsthalfof2009(figure8).Resultsfrom demand or a tightening of standards less, in each case, the percentage the Federal Reserve’s quarterly Survey of Terms of reporting the opposite. The definition for firm size suggested for, and generally used by, survey respondents is that large and middle-market firms Business Lending also pointed to a tightening in have annual sales of $50 million or more. credit conditions, indicating that the spreads of C&I 1. Series begins with the November 1991 survey. 2. Series begins with the May 1990 survey. loanratesoverbanks’costoffundsincreasedsharply SOURCE: Federal Reserve Board, Senior Loan Officer Opinion Survey on last year. Even after adjusting for changes in the Bank Lending Practices (www.federalreserve.gov/boarddocs/snloansurvey). riskiness of loans and other nonprice loan characteristics, significant increases in C&I loan rate spreads segment of the C&I loan market, issuance was weak were reported on loans of all sizes and on loans throughmostoflastyeardespiteconsistentimproveoriginatedbybothlargeandsmallbanks. ment in loan prices and trading liquidity in the Anumberofdevelopmentscontributedimportantly secondary market for such loans. In the fourth quarto last year’s decline in C&I loans. As financial marketconditionsimprovedin2009,thedropinC&I ter, however, issuance of syndicated leveraged loans loans may have been exacerbated by repayments of picked up somewhat, and the terms on such loans draws on existing credit lines; firms had reportedly reportedlyeasedabit. drawnheavilyontheselinesforprecautionaryliquid- Policymakers have expressed concern about the ityduringtheextremedisruptionsincreditmarketsin difficultiesthatcreditworthybusinessborrowerswiththefallof2008.Inaddition,strainedconditionsinthe out access to capital markets—typically small syndicated loan market may also have contributed to businesses—are experiencing in obtaining credit in the sharp decline in C&I loans at large banks, as the current lending environment. Gauging the degree banks, to complete syndicated deals, had relied to which small businesses’ access to credit has tightheavilyonsometypesofstructuredvehiclesthathave ened is difficult, as only sparse and imperfect meanotregainedacceptancebyinvestors.Intheleveraged sures of small business lending by banks are avail-

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A9 able.4 A survey by the National Federation of 9. Delinquency and charge-off rates for loans to Independent Business found that slightly larger net businesses, by type of loan, 1990–2009 fractions of small businesses in 2009 reported that Percent they faced tightening credit conditions than had so Delinquencies reported during the period of banking strains in the 15 early 1990s, and that approval rates for business ownersattemptingtoborrowweresignificantlylower 12 than in the mid-2000s. That said, only 8 percent of Commercial real estate surveyed business owners indicated that access to 9 credit was their principal economic problem, with 6 slowsalesandanuncertaineconomicsituationbeing C&I morecommonlycited.5Inpart,thetightcreditcondi- 3 tions reported by small businesses may reflect the + reduced credit quality of such firms. Banks reported _0 in the SLOOS that delinquency rates in the fourth quarterwerehigherforC&Iloanstosmallbusinesses 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Percent than for such loans to larger businesses, and more Net charge-offs banks expected improvement over 2010 in the credit 3.0 qualityofC&IloanstolargerfirmsthanofC&Iloans 2.5 tosmallerfirms. Federal and state regulators issued guidance in Commercial real estate 2.0 February 2010 stating that banks should strive to 1.5 makeprudentloanstocreditworthysmallbusinesses, C&I 1.0 andtheregulatorsdirectedexaminerstoconducttheir reviews in a way that would not discourage such .5 activities.6 In addition, the availability of loans to + _0 small businesses was supported by the Term Asset- Backed Securities Loan Facility, which helped revi- 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 talize the market for securities guaranteed by the NOTE: The data are quarterly and seasonally adjusted; the data for SmallBusinessAdministration. commercial real estate begin in 1991. Delinquent loans are loans that are not Delinquency and charge-off rates on C&I loans accruing interest and those that are accruing interest but are more than 30 days past due. The delinquency rate is the end-of-period level of delinquent increased through 2009, and while these rates were loans divided by the end-of-period level of outstanding loans. The net not as high as those in other loan categories, their charge-off rate is the annualized amount of charge-offs over the period, net of recoveries, divided by the average level of outstanding loans over the period. levels at year-end were roughly comparable with For the computation of these rates, commercial real estate loans exclude loans those from the early 1990s (figure 9). Most SLOOS not secured by real estate (see table 1, note 2). C&I is commercial and industrial. respondents indicated that they expected the credit quality of C&I loans to stabilize or improve in 2010, 4. Forexample,eachyearthesecond-quarterCallReportrecords the amount of C&I loans outstanding that were made originally in although banks’ outlook regarding credit quality was small amounts; these amounts are often used as a proxy for small more sanguine for loans to larger businesses than for businesslendingbutalsomaycaptureotherlending,suchasbusiness loanstosmallerbusinesses.Inaddition,somesignsof creditcardloansandloanstolargefirmsthatwereissuedbymultiple banks. In addition, realized flows of credit generally reflect both stabilizationinC&Iloanqualitywereapparentinthe demand and supply conditions, and so a fall in loans may not fourth quarter of 2009, as the delinquency rate on necessarilybeduetosupplyfactors.Withthosecaveats,smallC&I C&I loans increased only slightly further and the loansatbanksdeclinedabout41⁄2percentfromthesecondquarterof 2008tothesecondquarterof2009,whileallotherC&Iloansdeclined charge-offratedeclinedabit. about9percent. ThefundamentalsofCREwerepoorin2009,with 5. WilliamJ.Dennis,Jr.(2010),SmallBusinessCreditinaDeep prices of commercial properties dropping, rents de- Recession(Washington:NFIBResearchFoundation,February). 6. See Interagency Statement on Meeting the Credit Needs of clining, and vacancy rates rising. Financing condi- Creditworthy Small Business Borrowers, an attachment to Board of tionsforCREwerestrainedovertheyear:Almostno GovernorsoftheFederalReserveSystem,FederalDepositInsurance issuance of commercial mortgage-backed securities Corporation, National Credit Union Administration, Office of the ComptrolleroftheCurrency,OfficeofThriftSupervision,andCon- occurred (figure 10), and large net fractions of banks ference of State Bank Supervisors (2010), ‘‘Regulators Issue State- reported tighter standards for CRE loans in the ment on Lending to Creditworthy Small Businesses,’’ joint press SLOOS (figure 11). The pace of the runoff in CRE release,February5,www.federalreserve.gov/newsevents/press/bcreg/ 20100205a.htm. loans increased over the year, while delinquency and

A10 Federal Reserve BulletinhMay 2010 10. Gross issuance of selected mortgage- and asset-backed 12. Delinquency and charge-off rates for construction securities, 2003–09 and land development loans, by type of loan, 2007–09 Billions of dollars, annual rate Percent CMBS Delinquencies Consumer ABS 30 500 25 400 Residential 20 300 15 200 10 Other H1 H2 100 5 2003 2004 2005 2006 2007 2008 2009 2007 2008 2009 Percent NOTE: CMBS are commercial mortgage-backed securities; consumer ABS Net charge-offs (asset-backed securities) are securities backed by credit card loans, nonrevolving consumer loans, and auto loans. 10 SOURCE: For CMBS, Commercial Mortgage Alert; for ABS, Inside MBS & ABS and Merrill Lynch. Residential 8 6 11. Changes in demand and supply conditions at selected banks for commercial real estate loans, 4 1996–2009 Other 2 Percent Net percentage of banks reporting stronger demand 60 2007 2008 2009 40 NOTE: The data are quarterly and are available since the series began in 2007:Q1. For definitions of delinquencies and net charge-offs, see the note 20 for figure 9. Other consists of other construction loans and all other land development and other land loans. + _0 20 charge-off rates reached historically high levels. In 40 particular, the delinquency rate on construction and 60 landdevelopmentloanssurgedto181⁄ 2 percentbythe end of 2009, and the delinquency rate was 281⁄ 2 percent for loans that financed the construction of 1997 1999 2001 2003 2005 2007 2009 Percent one- to four-family residential properties (figure 12). Net percentage of banks reporting tighter standards Meanwhile, the charge-off rate on construction and 100 land development loans reached 8 percent in the 80 fourth quarter. The credit quality of other CRE lend- 60 ing categories deteriorated to a lesser degree but 40 nevertheless appeared to still be worsening at year- 20 end. Indeed, in the January 2010 SLOOS, banks + reported expectations of further deterioration in the _0 creditqualityofCREloansover2010,anoutlookthat 20 maybeseenasaparticularconcernforsmallerbanks 40 becausetheirassetsaremoreheavilyconcentratedin CRE lending. Smaller banks increased their concen- 1997 1999 2001 2003 2005 2007 2009 trationoflendinginCREloansovermuchofthepast NOTE: See figure 8, general note and source note. decade; at the end of 2009, CRE loans accounted for

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A11 13. Change in commercial real estate loans, by major 14. Indicators of household financial stress, 1993–2009 components, 1990–2009 Percent Percent Financial obligations ratio 19.0 40 Construction and land 18.5 development 30 Multifamily 18.0 residential 20 10 17.5 + _0 17.0 Nonfarm 10 16.5 nonresidential 20 16.0 30 1993 1995 1997 1999 2001 2003 2005 2007 2009 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Per 100,000 persons Household bankruptcy filings NOTE: The data are annual and adjusted for major structure events. 1,000 900 about 46 percent of total loans at such banks, com- 800 paredwithabout17percentofloansatthe100largest 700 banks. 600 Banks’ holdings of CRE loans fell 6 percent 500 (adjusted for structure activity) in 2009, pulled down 400 by a precipitous drop in loans to fund construction 300 and land development, particularly of one- to four- 200 family residential homes (figure 13).7 In contrast, 100 loans secured by nonfarm nonresidential properties expanded modestly last year despite the worsening 1993 1995 1997 1999 2001 2003 2005 2007 2009 fundamentals in commercial property markets. Some NOTE: The data are quarterly. The financial obligations ratio is an estimate of debt payments and recurring obligations as a percentage of disposable of this relative strength may reflect a substitution personal income; debt payments and recurring obligations consist of required away from C&I loans: Given the substantial deterio- payments on outstanding mortgage debt, consumer debt, auto leases, rent, homeowner’s insurance, and property taxes. The series shown for bankruptcy ration in the credit quality of banks’ business loan filings begins in 1995:Q1 and is seasonally adjusted. portfolios, some banks reportedly sought stronger SOURCE: For financial obligations ratio, Federal Reserve Board (www.federalreserve.gov/releases/housedebt); for bankruptcy filings, staff collateral for business loans, which may have incalculations based on data from Lundquist Consulting. cluded forms of real estate. In such cases, the loans would have shifted from the C&I category to loans hold financial obligations ratio—an estimate of debt secured by nonfarm nonresidential real estate. Nonepaymentsandrecurringobligationsasapercentageof theless, even growth of nonfarm nonresidential loans disposableincome—fellover2009toendtheyearat slowedoverthesecondhalfoftheyear.InotherCRE its lowest level since 2000; this movement is consislending,loansbackedbymultifamilypropertiesgrew tent in part with households paying down debt to mildly over most of 2009 but dropped in the fourth reducetheirinterestandprincipalburdens(figure14). quarter. In addition, the personal saving rate increased markedlysincethebeginningof2008. Household Loans However,thecombinationoflowmortgagerates,a tax credit for first-time homebuyers, and improved Banks’holdingsofloanstohouseholdsalsodeclined home affordability likely contributed to the strengthbroadly in 2009.Adjusted for structure activity, resiened demand for prime mortgages reported in the dential real estate loans on banks’ books decreased SLOOS over the first three quarters of 2009 (fig- 13⁄ 4 percentandconsumerloansfell41⁄ 4 percent. ure 15). Compared with 2008, originations of first- Following the financial crisis, households took lien residential mortgages by commercial banks as a steps to strengthen their balance sheets. The housewholerosein2009. The decrease in banks’ holdings of residential real 7. Outstandingloanstofundtheconstructionofone-tofour-family estateloanslastyearwasattributabletotheirsubstanresidential homes totaled only $86 billion at year-end, less than one-halfoftheirpeakduringthefirstquarterof2008. tialsalesofsuchloanstotheGSEs,theirtightlending

A12 Federal Reserve BulletinhMay 2010 15. Change in prices of existing single-family homes, 16. Delinquency and charge-off rates for residential real 1990–2009 estate loans at commercial banks, by type of loan, 1991–2009 Percent Percent 20 LP price index Delinquencies 15 14 10 12 FHFA 5 10 index + _0 8 5 6 10 4 15 Closed-end mortgages 2 20 + Revolving home equity _0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 NOTE: The data are quarterly and extend through 2009:Q4; changes are Percent from one year earlier. The LP price index includes purchase transactions only. For 1990, the FHFA index (formerly calculated by the Office of Federal Net charge-offs 3.5 Housing Enterprise Oversight) includes appraisals associated with mortgage refinancings; beginning in 1991, it includes purchase transactions only. 3.0 SOURCE: For LP, LoanPerformance, a division of First American CoreLogic; for FHFA, Federal Housing Finance Agency. 2.5 2.0 standardsinanenvironmentofdeclininghomevalues 1.5 and high unemployment, and few originations of nontraditionalorsubprimeloansbybanks. 1.0 The deterioration in the credit quality of banks’ Revolving home equity .5 closed-end residential real estate loans showed little, + if any, sign of abating in 2009 (figure 16). National Closed-end mortgages _0 dataonratesofseriousdelinquencyworsenedconsid- 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 erably for all classes of borrowers and types of NOTE: The data are quarterly and seasonally adjusted. For definitions of mortgages. Delinquency rates on variable-rate mort- delinquencies and net charge-offs, see the note for figure 9. gages in particular continued to increase more than those on fixed-rate loans, especially for subprime borrowers (figure 17). Of all major loan classes, 17. Rate of serious delinquency on residential mortgages, banks recorded the highest delinquency rate for resi- by type of mortgage and type of interest rate, 2000–10 dentialrealestateloans,andthecharge-offrateinthis Percent category was also very elevated. Banks’ holdings of foreclosed real estate rose in 2009 but remained low 45 relative to delinquency rates; such holdings equaled 40 about 1⁄ 2 percent of the value of outstanding closed- 35 endresidentialmortgagesbyyear-end. 30 The credit quality of first- and junior-lien closed- Subprime, variable rate 25 end residential mortgages diverged last year. Delin- 20 quency and charge-off rates for first liens worsened Subprime, fixed rate 15 throughout the year, but the delinquency rate for 10 junior liens stabilized in the second half of the year. Prime, variable rate 5 Thelatterdevelopmentmaybeexplainedbythevery + Prime, fixed rate _0 sharpincreaseinthecharge-offrateonjuniorliens,as these loans are associated with lower recovery rates 2000 2002 2004 2006 2008 2010 and tend to be charged off sooner after becoming NOTE: The data are monthly and extend through January 2010. Seriously delinquent loans are 90 days or more past due or in foreclosure. The prime delinquent than first liens. In contrast, delinquency mortgage data are representative of all residential mortgages, not just those and charge-off rates for revolving, open-end home held by commercial banks. The subprime mortgage data cover only securitized loans. equity loans were about flat for most of the year, SOURCE: For prime mortgages, McDash Analytics; for subprime likely reflecting banks’ tightening of standards on mortgages, LoanPerformance, a division of First American CoreLogic.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A13 18. Delinquency and charge-off rates for loans 19. Changes in supply conditions at selected banks for to households, by type of loan, 1990–2009 consumer lending and for consumer installment loans, 1996–2009 Percent Percent Delinquencies 7 Net percentage of banks reporting tighter standards for consumer lending 80 6 Credit card 5 Credit card loans 60 4 40 Other consumer Other consumer loans 3 20 2 + _0 1 20 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 1997 1999 2001 2003 2005 2007 2009 Net charge-offs Percent Percent 10 Net percentage of banks reporting increased willingness to make consumer installment loans 40 8 20 Credit card 6 + _0 4 20 2 Other consumer + 40 _0 60 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 1997 1999 2001 2003 2005 2007 2009 NOTE: The data are quarterly and seasonally adjusted; data for delinquencies begin in 1991. For definitions of delinquencies and net NOTE: See figure 8, general note and source note. charge-offs, see the note for figure 9. suchloansoverthepastseveralyearsandtheirability terms on consumer loans (figure 19), partly in anticito reduce credit lines for borrowers with impaired pationofnewregulations.Householdsmayalsohave homevalues. Non-credit-card consumer loans expanded some- reduced their use of credit cards in part to shore up what in the second half of 2009, perhaps in part as a their financial condition, a move that would be conresult of frictions in the student loan securitization sistent with the reduced demand for consumer loans market, which caused banks to retain more of such thatwasreportedbynotablenetfractionsofbanksin loans on their books. In addition, this category of theSLOOSduring2009. lendingmayhavebenefitedfromapickupinpersonal By year-end 2009, the credit quality of consumer consumption expenditures on durable goods during loans appeared to have begun to stabilize.The delinthesecondhalfoftheyear. quency and charge-off rates on consumer loans de- Incontrast,creditcardloansdeclinedsubstantially clined slightly in the second half of the year but over the same period, likely for several reasons. remained at historically high levels, particularly for These loans incurred the highest charge-off rates of creditcardloans.IntheJanuary2010SLOOS,banks any major loan category, directly reducing outstand- reportedexpectingnofurtherdeterioration,onnet,in ings(figure18).8Also,bankstightenedstandardsand the credit quality of consumer credit card loans over 2010, assuming that economic activity progressed in line with consensus forecasts; moderate net fractions 8. For a discussion of the change in bankruptcy law that was implementedin2005anditseffectoncreditcardloans,seethebox of banks expected credit quality to improve for other ‘‘TheNewBankruptcyLawandItsEffectonCreditCardLoans,’’in consumerloans.Thelargestbanks—whicharerespon- ElizabethKleeandGretchenWeinbach(2006),‘‘ProfitsandBalance sible for the bulk of credit card lending—may have Sheet Developments at U.S. Commercial Banks in 2005,’’Federal ReserveBulletin,vol.92(June),p.A89. begun to benefit from the stabilization in credit

A14 Federal Reserve BulletinhMay 2010 quality on credit card loans, as evidenced by their particularly the non-agency MBS at the center of the reductionsinloanlossprovisioningduringthefourth crisis as well as the perpetual preferred securities quarter. issuedbytheGSEs,haddeclinedconsiderably.However, the substantial decline in the general level of Other Loans interest rates since the onset of the crisis has caused the market value of longer-duration assets with little Allotherloansandleasesonbanks’books,avolatile creditrisktoincrease. category, dropped 71⁄ 4 percent over 2009, about the Over 2009, the difference between reported fair same rate of decline as in 2008. Loans to other valuemeasurementsandbookvaluesofavailable-fordepository institutions were about flat for the year. salesecuritiesininvestmentaccountsnarrowed,sug- Leases, which are made primarily to businesses for gesting that banks have substantially lower revaluafinancing equipment or to households for financing tion losses on their current securities holdings than automobiles,havebeendecliningformostofthepast they did a year ago. At the end of 2008, banks decade and continued to do so in 2009, albeit at a reported net unrealized losses on investment account somewhat faster rate. Bank lending to state and local securities of about $60 billion, led by losses on governments grew during 2009 but not as rapidly as non-agencyMBSandABS,whichwereoffsetabitby in recent years. Farm loans were about flat for the gainsinothersecuritiescategories,particularlyagency year, as farm banks have been less affected by the MBS. These net unrealized losses waned over 2009, financial crisis, but growth of these loans weakened as improving financial conditions and lower interest compared with past years given the wider macroeco- ratescontributedtoarecoveryinthemarketpricesof nomicdownturn.Thecreditqualityoffarmloansalso many securities. At the end of the fourth quarter, deteriorated in 2009 but was not notably worse than banks reported net unrealized gains of about $9 bilthe average quality of these loans over the past two lion on their investment account securities as a decades. whole.9 Finally, banks sold some securities at a loss, which was reflected in the $1.7 billion of total net Securities realizedlossesonsecuritiesholdingsover2009. The decline in total loans over 2009 was partially Cash Assets offset by growth in banks’ securities holdings of about 20 percent (adjusted for structure activity). Cash assets, including reserve balances with Federal While the expansion in securities was shared by ReserveBanks,expandedconsiderablyinlate2008,a banks of all sizes, it was strongest at the 100 largest patternconsistentwiththeconsiderablegrowthofthe banks.Amid heavy inflows of core deposits over the FederalReserve’sbalancesheet.Usageofthespecial course of the year (discussed later in the article) and liquidity facilities established at the height of the weakloandemand,banksincreasedtheirholdingsof financial crisis gradually fell over the first half of Treasurysecuritiesandagencynon-MBSissuesmost 2009, and reserve balances declined over the same rapidly, suggesting a preference for liquid, low-risk period.However,astheFederalReservecontinuedits assets.Atotalofabout$154billionofthesesecurities large-scale asset purchases, reserve balances rose was added to commercial banks’ balance sheets over sharply in the third quarter.At year-end, the level of 2009,anincreaseofroughly67percentoveryear-end reservebalanceswasatarecordhigh,accountingfor 2008. The run-up occurred mostly at the 100 largest 5 percent of industry assets.The interest rate paid on banks, which traditionally have held fewer of these securities as a share of total securities than smaller banks. Agency MBS, which accounted for roughly 9. InearlyApril2009,theFinancialAccountingStandardsBoard 37 percent of banks’ securities holdings at year-end issuedguidancerelatedtoother-than-temporaryimpairments(OTTI), 2009,alsogrewstronglyatthe100largestbanks. orFASBStaffPosition(FSP)FAS115-2,whichrequiredimpairment write-downsthroughearningsonlyforthecredit-relatedportionofa In general, banks report both the book value (or debtsecurity’sfairvalueimpairment,whileothercomponentswould amortized cost of acquisition) of their securities and affectothercomprehensiveincome,whichincludesunrealizedgains thesecurities’currentmarketvalue.Themarketvalue andlossesonavailable-for-salesecurities.(Formoreinformationon the guidance, see Financial Accounting Standards Board (2009), ofthesecuritiesisaffectedbythecreditqualityofthe ‘‘Summary of Board Decisions,’’webpage, April 2, www.fasb.org/ issuersoroftheassetsthatbackthesecuritiesaswell action/sbd040209.shtml.) However, banks reported that the cumulaasbychangesinthegenerallevelofinterestrates.At tiveeffectoftheinitialapplicationofFSPFAS115-2onOTTIwas only about $1.3 billion in 2009, having only a marginal effect on the height of the credit market turmoil in the fall of earnings relative to total unrealized gains and losses and fair value 2008,themarketvalueofmanybank-heldsecurities, adjustmentsonsecurities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A15 excess reserves held by banks remained at 25 basis 20. Change in unused bank loan commitments to pointsovertheyear. businesses and households, 1990–2009 Percent, annual rate Off-Balance-Sheet Items Commercial real estate, construction, and 60 For the second consecutive year, banks’ off-balance- land development loans sheet unused commitments to fund loans contracted Total 40 steeply, and the runoff was widespread across all 20 + major commitment categories (figure 20). Responses _0 totheSLOOSsuggestthatbanksreducedcreditlines 20 for both new and existing customers and that those reductions were more prevalent for lower-quality 40 borrowers. In addition, the cuts in lines likely re- 60 flected disproportionately the tightened lending stan- 80 dardsbybanks,asborrowersarepresumablyunlikely to request reductions in their line size since the 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 marginal cost to borrowers of maintaining unused NOTE: The data, which are quarterly, begin in 1990:Q2 and are not linesistypicallysmall,especiallyforhouseholds. seasonally adjusted. The total consists of unused commitments relating to credit card lines; revolving, open-end lines secured by one- to four-family Securitized loans, which are not held on banks’ residential properties; commercial real estate, construction, and land books, contracted 5 percent over 2009.10 Since the development loans; securities underwriting; and “other.” databegantobecollectedin2002,theonlyprevious annual decline occurred in 2003, with a drop of DERIVATIVES 1⁄ 2 percent.Lastyear’sdeclinewaslikelyinresponse In 2009, the notional principal amount of derivatives to the impairment of many securitization markets for all or part of the period, as well as the weak lending contracts held by banks grew a moderate 33⁄ 4 percent to reach $220 trillion (table 2).12 Notional values are environment.Securitizedmortgageshadrisenconsidboosted substantially by a few of the largest banks, erably over 2007 and 2008 and still accounted for which enter into offsetting positions in their capacitwo-thirds of securitized loans at the end of 2009. tiesasdealersinderivativesmarkets.Thefairmarket However, with the market for non-agency MBS value of those derivatives contracts held by banks remaining shut last year, balances of securitized reflects the contracts’ replacement costs and is far mortgages declined about 33⁄ 4 percent in 2009. The smaller than the notional principal amount.13 The GSEs, though, continued to purchase large quantities aggregate fair market value for all bank contracts ofclosed-endresidentialmortgagesfrombanks. withapositivevaluein2009wasabout$4.1trillion; Securitized credit card loans, which account for a for all bank contracts with a negative value, the further 20 percent of securitized loans, declined aggregate fair market value was roughly negative 83⁄ 4 percent in 2009. Most of this decline was due to $3.9 trillion. These fair values were considerably the consolidation of securitized credit card assets in smaller relative to their notional values at the end of the fourth quarter by one large bank that adopted the 2009 than they were at the end of 2008, due to the newFAS166and167accountingrulesatthattime.11 partialrecoveryinfinancialmarketsfromtheunprecedented market dislocations that occurred in the fall 10. Loans that banks sold or securitized with servicing rights of 2008. Both the positive and negative fair values retained or with recourse or other seller-provided enhancements are hereafter referred to, for simplicity, as ‘‘securitized’’ loans. The analysisexcludesloansthatweresoldto,andsecuritizedby,athird Liabilities of Commercial Banks in the United States’’ (April 9), party(forexample,theFederalNationalMortgageAssociationorthe www.federalreserve.gov/releases/h8/current/default.htm. FederalHomeLoanMortgageCorporation). 12. Notional amounts are amounts from which contractual pay- 11. TheFinancialAccountingStandardsBoard(FASB)announced mentswillbederivedand,inmostinstances,aremuchlargerthanthe inJune2009thepublicationofFAS166,AccountingforTransfersof amounts at risk; thus, they do not accurately represent the scope of FinancialAssets,andFAS167,AmendmentstoFASBInterpretation economicinvolvementofbankswithderivatives. No. 46(R) (Consolidation of Variable Interest Entities), which will 13. The total of all contracts with a positive fair value is a change the way companies account for securitizations and special measurementofcreditexposure,ortheamountthatabankcouldlose purposeentities.FAS166and167mustbeimplementedwithfirms’ if its counterparties did not fulfill their contracts. The total of all firstfinancialreportingperiodendingafterNovember15,2009,which contractswithanegativefairvalueatabankrepresentsameasurement forcommercialbankseffectivelymeansthattheimplementationwill ofexposurethatthebankposestoitscounterparties.Eventhesefair bereflectedintheir2010:Q1CallReports.Formoreinformation,see value amounts can overstate exposure, as counterparties often enter theFASB’swebsiteatwww.fasb.org.Formoreinformationaboutthe into bilateral ‘‘netting’’agreements, which allow aggregation of all balancesheetsofcommercialbanks,seeBoardofGovernorsofthe bilateralexposureintotheequivalentofasingletradeintheeventof FederalReserveSystem(2010),StatisticalReleaseH.8,‘‘Assetsand defaultofeitherparty.

A16 Federal Reserve BulletinhMay 2010 2. Changeinnotionalvalueandfairvalueofderivatives,allU.S.banks,2004–09 Percent Memo Dec.2009 Item 2004 2005 2006 2007 2008 2009 (billionsof dollars) Totalderivatives Notionalamount................. 23.69 15.38 29.75 25.68 27.70 3.80 220,146 Fairvalue Positive....................... 13.71 –6.46 –4.50 68.18 250.24 –42.86 4,057 Negative...................... 13.75 –5.78 –4.27 65.77 249.26 –43.26 3,919 Interestratederivatives Notionalamount.............. 22.07 11.92 27.11 20.54 35.85 2.09 179,548 Fairvalue Positive.................... 13.14 –5.52 –14.55 56.19 290.52 –39.06 3,121 Negative................... 12.94 –5.15 –15.06 58.19 286.45 –39.41 3,023 Exchangeratederivatives Notionalamount.............. 21.03 7.69 29.27 36.69 –1.46 2.22 17,298 Fairvalue Positive.................... 14.86 –35.84 22.86 43.59 149.12 –45.05 354 Negative................... 12.74 –37.36 21.39 43.40 163.80 –47.91 345 Creditderivatives Notionalamount.............. 134.52 148.09 54.93 75.87 1.05 28.76 20,639 Guarantor.................. 139.07 137.87 67.69 73.94 –1.27 31.37 10,143 Beneficiary................. 130.46 157.53 44.03 77.79 3.30 26.33 10,496 Fairvalue Guarantor.................. 69.92 81.43 92.96 295.25 282.68 –61.31 406 Positive.................. 74.56 –5.62 201.40 –38.79 19.41 230.90 122 Negative................. 38.37 827.98 –1.59 1187.41 316.11 –71.96 284 Beneficiary................. 51.28 83.50 90.26 301.20 260.40 –60.12 448 Positive.................. 2.64 505.51 3.98 1086.95 306.28 –70.62 319 Negative................. 66.36 2.79 187.44 –18.95 –13.35 233.57 129 Otherderivatives1 Notionalamount.............. 32.66 29.43 75.17 13.44 –9.00 –18.48 2,661 Fairvalue Positive.................... 8.55 58.51 18.99 41.22 33.70 –33.53 142 Negative................... 19.73 74.29 24.15 15.66 39.27 –32.75 139 Note:Dataarefromyear-endtoyear-endandareasofMarch23,2010. 1. Otherderivativesconsistofequityandcommodityderivatives andothercontracts. contracted substantially over the first half of 2009, averageofabout70percentperyearsince2000.After and each declined about 43 percent for the year as a apausein2008,creditderivativesresumedgrowthin whole. 2009.14 The notional amount of these derivatives Interest rate products continued to account for grew 29 percent for the year, and at year-end 2009, morethan80percentofthenotionalvalueofderiva- credit derivatives accounted for 91⁄ 2 percent of the tives products held by banks and about 77 percent of notional principal value of all derivatives contracts positive and negative fair values. Interest rate swaps, held by banks. By contrast, the fair value of credit whichaccountformostoftheinterestratederivatives derivatives contracts fell 60 percent in 2009, and on banks’ books, are an important way for banks to these products constituted about 11 percent of posihedge interest rate risk, including that related to tive and negative fair values at banks at year-end. interest-sensitiveassetssuchasmortgagesandMBS. These fair values started to decline in the spring of The notional amount of interest rate swaps declined 2009 but remained high relative to historical norms 13⁄ 4 percent over 2009. In addition, both positive and duetotheelevatedspreadsonmanyoftheunderlying negative fair values dropped substantially, likely in reference entities. Over the course of the year, as partbecauseofthedevelopmentofstablelowinterest spreads on underlying reference entities receded and rates over the year. Other interest rate derivatives overall market functioning improved, the value of include options, futures, and forwards, and the no- such credit protection (the fair values of the credit tional value of these other derivatives contracts grew derivatives)declined.Creditdefaultswapsaccounted 16percentover2009,inlinewiththepaceinthepast fewyears. One of the fastest growing components of banks’ 14. Theflatteninginnotionalvaluesofcreditdefaultswapsduring 2008,however,appearstohavebeendueinparttoorganizedeffortsto derivatives portfolios in recent years has been credit compress offsetting trades and not simply to a reduction in trading derivatives,which,priortolastyear,hadexpandedan activity.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A17 for 98 percent of the notional value of credit deriva- banks by assets, held 96 percent of all derivatives by tives held by banks throughout the year (total return notionalamounts.15 swaps and credit options are two other common types). Banks are beneficiaries of protection when LIABILITIES theybuycreditderivativescontractsandprovidersof Total liabilities on banks’ books declined about protection (guarantors) when they sell them. Banks are typically net beneficiaries of protection; as of 51⁄ 2 percent in 2009. Adjusting for major structure year-end,contractsinwhichbankswerebeneficiaries events, liabilities contracted 63⁄ 4 percent.As was true ofthedecreaseinassets,thedeclineinliabilitieswas of protection totaled $10.5 trillion in notional value, concentrated at the 100 largest banks. The runoff in and contracts in which they were guarantors totaled liabilitiestookplaceinthecontextofdeleveragingby $10.1trillion(figure21). banking institutions amid weak loan demand and Banks also use derivatives related to foreign extight credit standards; banks reduced assets, raised change,equities,andcommodities.Collectively,those capital, and pared back relatively more expensive instruments accounted for about 9 percent of the sources of funding. Thus, banks did not compete notional value of the derivatives contracts held by strongly for managed liabilities or small time deposbanksatyear-end.Banks’notionalholdingsofforeignits, and declines in those components accounted for exchange-related derivatives grew 21⁄ 4 percent in the contraction of overall liabilities. Indeed, small 2009.Theirnotionalholdingsofequityandcommodtime deposits shrank substantially over 2009, reversity derivatives together fell 181⁄ 2 percent, a second ing a steep run-up during the height of the financial consecutiveannualdecline. crisis in late 2008, after which the spreads between The share of industry derivatives contracts (in ratesontimeandsavingsdepositsdeclinedmarkedly. terms of notional value) at the 10 largest banks (in While overall liabilities contracted, total core determsofassets)hadforyearsbeenmorethan97per- posits grew about 8 percent in 2009, well above the cent, a concentration ratio that reflected the role that averagepaceduringyearspriortothefinancialcrisis. some of the largest banks play as dealers in deriva- As a result, for the second consecutive year, core tives markets. However, since the end of 2008, that depositsroseasashareofbankfunding.16Amidlow sharehasdeclinedtoabout80percent,asthereorga- market interest rates, the opportunity cost of holding nization of a prominent derivatives dealer involved liquid deposits remained low in 2009, and consebooking these derivatives at one of its commercial quentlysavingsandtransactiondepositsgrewsizably banksubsidiariesthatremainedoutsideofthe10larg- (figure 22). With money market rates unusually low, estbanksattheendof2009.Still,banks’derivatives money market mutual funds experienced large outholdings were highly concentrated over the past two flows,someofwhichmayhaveendedupatbanksas years:The 5 banks with the most derivatives activity the public sought the safety and liquidity of insured in 2009, including 1 bank not among the 10 largest deposits (figure 23). Reinforcing this trend was the extension through 2013 of the temporary increase in the Federal Deposit Insurance Corporation’s maxi- 21. Notional amounts of credit derivatives for which mum deposit insurance amount to $250,000, which banks were beneficiaries or guarantors, 2000–09 previously had been in place only through the end of 2009.17TheFDICalsoextended,untiltheendofJune Trillions of dollars 2010, its program providing unlimited guarantees of transactionaccounts,althoughthenewhigherannual 10 assessmentratesforparticipatingbankscausedmany largeinstitutionstooptoutoftheprogramatyear-end 8 2009. 6 Managed liabilities contracted 161⁄ 2 percent over 2009. Given strong growth of core deposits and 4 Beneficiary Guarantor 2 15. Office of the Comptroller of the Currency, OCC’s Quarterly Report on Bank Trading and Derivatives Activities, Third Quarter + _0 2009 (Washington: OCC), available at www.occ.treas.gov/deriv/ deriv.htm. 16. Core deposits consist of savings deposits (including money 2001 2003 2005 2007 2009 market deposit accounts), small-denomination time deposits, and transactiondeposits. NOTE: The data are quarterly. 17. ThisextensionbecameeffectiveonMay20,2009.

A18 Federal Reserve BulletinhMay 2010 22. Selected domestic liabilities at banks as a proportion 23. Net flows into money market mutual funds of their total domestic liabilities, 1990–2009 and deposits at commercial banks, 2007–09 Percent Billions of dollars 500 40 Savings deposits 400 30 300 200 20 Small time deposits 100 + Transaction deposits 10 _0 + 100 _0 Money market mutual funds Deposits 200 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2007 2008 2009 NOTE: The data are quarterly. Savings deposits include money market NOTE: The data are aggregated from weekly to quarterly frequency. deposit accounts. SOURCE: For money market mutual funds, iMoneyNet; for deposits, Federal Reserve Board, Statistical Release H.8, “Assets and Liabilities of Commercial Banks in the United States” (www.federalreserve.gov/ shrinking assets, banks were able to continue reduc- releases/h8). ing their reliance on these generally more expensive and established a new, limited emergency guarantee and less stable sources of funds. Large time deposits facility in order to promote the transition of banking ran off appreciably, while deposits booked in foreign institutionsawayfromsuchsupport. offices were about flat for the year. In addition to paring back advances from the Federal Home Loan Banksoverthecourseoftheyear,commercialbanks CAPITAL decreasedtheirborrowingsfromtheFederalReserve Thebankingindustryshoredupitscapitalpositionin liquidity facilities introduced during the crisis.18 Net 2009.Theequitycapitalofcommercialbanksroseto borrowings in the federal funds market declined in lightofbanks’heftyreserveholdings. about 111⁄ 4 percent of assets by the end of 2009, up Banking institutions issued about $300 billion of considerably from about 91⁄ 2 percent at the end of 2008. The increase was due largely to substantial debt under the debt guarantee portion of the FDIC’s infusionsofcapitalfromparentBHCsthroughoutthe Temporary Liquidity Guarantee Program (TLGP), year. Total capital transfers in 2009 amounted to which was established in October 2008. The TLGP $113 billion. These additions augmented the large guarantees,inexchangeforafee,short-andmediumtransfers that occurred in the fourth quarter of 2008 termdebtmaturingonorbeforeDecember31,2012. (figure 24). In many cases, the transfers reflected the About five-sixths of this debt was issued by bank holding companies (BHCs) and so does not appear 24. Capital transfers to commercial banks from directly as long-term debt at the bank level. The parent bank holding companies, 1990–2009 programwasusedmostheavilybeforethesummerof 2009. After the results of the Supervisory Capital Billions of dollars Assessment Program were released in May, many 70 banks were able to issue sufficient amounts of debt without the guarantee. In October, the FDIC ended 60 theDebtGuaranteeProgramcomponentoftheTLGP 50 40 18. The Federal Home Loan Banks (FHLBs) were established in 30 1932 as GSEs chartered to provide a low-cost source of funds, 20 primarilyformortgagelending.Theyarecooperativelyownedbytheir memberfinancialinstitutions,agroupthatoriginallywaslimitedto 10 savings and loan associations, savings banks, and insurance compa- + nies.CommercialbankswerefirstabletojoinFHLBsin1989,and _0 since then FHLB advances have become a significant source of fundingforthem,particularlyformedium-sizedandsmallbanks.The 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 FHLBsarecooperatives,andthepurchaseofstockisrequiredinorder toborrow. NOTE: The data are quarterly.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A19 downstreaming of capital raised by the parent BHC 25. Regulatory capital ratios, 1990–2009 through theTroubledAsset Relief Program’s Capital Percent Purchase Program (CPP). Although many BHCs repaid CPP funds during the second half of 2009, mostofthatequitywasreplacedbysecondaryequity Total 13 issuance by large BHCs that had been evaluated under the SCAP.As public equity markets improved 11 further in the second half of 2009, other banks were Tier 1 alsoabletoissuenewsharestobuildcapitalorrepay CPP investments. (For more information, see box 9 Leverage ‘‘The Capital Purchase Program and the Supervisory CapitalAssessmentProgram.’’) 7 Retainedearningsasashareoftotalequitydropped from about 27 percent at the end of 2008 to about 22 percent at the end of 2009. That component was 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 reduced by declared dividends that exceeded profits NOTE: The data are quarterly. For the components of the ratios, see text for the second consecutive year, even though such notes 20 and 21. payouts as a percentage of average assets were at tions in risk-weighted assets and average tangible historically low levels. A large majority of the diviassets as well as increased capital contributed to dends were declared by banks in the top five BHCs. higherregulatorycapitalratiosin2009.Thereduction These relatively more profitable institutions repaid in risk-weighted assets was partly attributable to a their CPPfunds in the second half of 2009 and were shift in the composition of assets from loans to cash notsubjecttotherestrictionsondividendsattheBHC and securities, while total assets shrank as loans level that are associated with the receipt of TARP outstandingonbanks’booksranoffsteeplylastyear. funds.19 For the entire year, dividends at profitable Several factors likely contributed to banking instibanks amounted to 0.55 percent of average assets, tutions’ efforts to boost capital. First, some of the while dividends at the other banks amounted to only largest banking organizations were required to aug- 0.04percent. ment their capital as a result of the SCAP process. On balance, all three regulatory capital ratios Second, a few banks faced substantial increases in increased to record levels (figure 25). The leverage both risk-weighted and total assets associated with ratio increased by 1 percentage point to about 81⁄ 2 the large amounts of off-balance-sheet assets that percent by the end of 2009.20 The tier 1 and total are required to be consolidated on banks’ balance risk-based capital ratios, measured relative to risksheets by the end of the first quarter of 2010 in weighted assets, each increased substantially—from conjunction with the adoption of Statements of Fiabout 93⁄ 4 percent to 111⁄ 2 percent and from about nancial Accounting Standards Nos. 166 and 167. 123⁄ 4 percent to 141⁄ 4 percent, respectively.21 Reduc- Those consolidations may have led some institutions to add to their capital prior to the accounting 19. The top five BHCs are ranked by the combined assets of change.22 Third, capital is generally considered a commercial bank subsidiaries for a given BHC. As of the fourth buffer to protect uninsured depositors and other quarterof2009,thetopfiveBHCshad28commercialbanksubsidiaries,whichaccountedforabout52percentoftotalcommercialbank assets. For more information on the dividend restrictions, see the bank’smeasureformarketrisk.Totalregulatorycapitalisthesumof public term sheet for the CPP, which is an attachment to U.S. tier1,tier2,andtier3capital.Risk-weightedassetsarecalculatedby Department of the Treasury (2008), ‘‘Treasury Announces TARP multiplyingtheamountofassetsandthecredit-equivalentamountof Capital Purchase Program Description,’’ press release, October 14, off-balance-sheet items (an estimate of the potential credit exposure www.ustreas.gov/press/releases/hp1207.htm. posed by the items) by the risk weight for each category. The risk 20. The leverage ratio is the ratio of tier 1 capital to average weightsrisefrom0to1asthecreditriskoftheassetsincreases.The tangibleassets.Tangibleassetsareequaltototalaverageconsolidated tier1ratioistheratiooftier1capitaltorisk-weightedassets;thetotal assetslessassetsexcludedfromcommonequityinthecalculationof ratio is the ratio of the sum of tier 1, tier 2, and tier 3 capital to tier1capital. risk-weightedassets. 21. Tier1,tier2,andtier3capitalareregulatorymeasures.Tier1 22. Bankshaveanoptiontophaseintheeffectsoftheimplemencapital consists primarily of common equity (excluding intangible tationofFAS166and167onrisk-weightedassetsandtier2capital assetssuchasgoodwillandexcludingnetunrealizedgainsoninvest- over four quarters. See Board of Governors of the Federal Reserve ment account securities classified as available for sale) and certain System,FederalDepositInsuranceCorporation,OfficeoftheCompperpetualpreferredstock.Tier2capitalconsistsprimarilyofsubordi- troller of the Currency, and Office of Thrift Supervision (2010), nateddebt,preferredstocknotincludedintier1capital,andloanloss ‘‘AgenciesIssueFinalRuleforRegulatoryCapitalStandardsRelated reserves up to a cap of 1.25 percent of risk-weighted assets.Tier 3 toStatementsofFinancialAccountingStandardsNos.166and167,’’ capital is short-term subordinated debt with certain restrictions on pressrelease,January21,www.federalreserve.gov/newsevents/press/ repaymentprovisionsandislimitedtoapproximately70percentofa bcreg/20100121a.htm.

A20 Federal Reserve BulletinhMay 2010 The Capital Purchase Program and the Supervisory Capital Assessment Program In 2009, parent bank holding companies (BHCs) trans- oftheSCAPwastoconductacomprehensive,consistent, ferred a record level of capital to commercial banks and simultaneous assessment of capital needs across the within their organizational structures. Such transfers re- 19 largest BHCs using a common set of macroeconomic sulted in significantly higher regulatory capital ratios for scenarios and a common forward-looking framework.3 those subsidiary banks. The capital transfers themselves More specifically, the SCAP estimated losses, revenues, wereinitiallysupportedbylargeinjectionsofgovernment and loss reserve needs for the next two years under two capital at the BHC level through the Troubled Asset Re- macroeconomic scenarios.4The program was designed to lief Program (TARP), launched in October 2008, and pri- assesstheneedforaBHCtoraiseorimprovethequality marily through the TARP Capital Purchase Program ofcapitalinordertohavesufficientcapitalbufferstosus- (CPP).1TheCPPinitiallywasallotted$250billiontopur- tain lending even in a more adverse economic scenario. chase senior preferred shares of financial institutions in The SCAP results identified 10 BHCs as requiring addiorder to stabilize the financial system by increasing the tionalcapitalorhigher-qualitycapital.Thedetailedpublicapital base of financial institutions and to support their cationoftheSCAPresultsalsohelpedclarifythefinancial capacity to make loans to businesses and households. Fi- conditions of the largest BHCs and provided investors nancial institutions participating in the program agreed to with greater assurance about the health of these institupay the Treasury a 5 percent dividend on the preferred tions. The resulting improvement in market sentiment reshares per year for the first five years and 9 percent per garding banking institutions, reinforced by the stabilizayear thereafter. At the end of 2008, the CPP had almost tion of the economic outlook at the time, allowed the $180 billion invested in more than 200 financial institu- BHCstotapcapitalmarketsforsubstantialfunds.Mostof tions. Most of the capital was committed to the largest the19BHCsincludedintheSCAPissuedequity,someto U.S.financialinstitutions(figureC,toppanel).Bytheend raise their required SCAP buffer and some to repay the of 2009, more than 650 institutions had received CPPinvestments. CPP balances peaked at close to $200 billion in the second quarter, but afterward many banks began to 3. Thefollowing19BHCswereintheSCAP:AmericanExpressComrepay those investments. As of year-end, CPP balances pany;BankofAmericaCorporation;TheBankofNewYorkMellonCorhadfallentolessthan$85billion. poration; BB&T Corporation; Capital One Financial Corporation; Citi- Aturning point in the outstanding balances of the CPP group, Inc.; Fifth Third Bancorp; GMAC LLC; The Goldman Sachs program was the Supervisory Capital Assessment Pro- Group, Inc.; JPMorgan Chase & Co.; KeyCorp; MetLife, Inc.; Morgan Stanley;PNCFinancialServicesGroup,Inc.;RegionsFinancialCorporagram (SCAP), otherwise known as the bank stress tests. tion; State Street Corporation; SunTrust Banks, Inc.; U.S. Bancorp; and Led by the Federal Reserve, the U.S. federal banking su- WellsFargo&CompanyBankHoldingCompany. pervisoryagenciesconductedtheSCAPfromFebruaryto 4. Thetwoscenariosconsistedofa‘‘baselinescenario’’anda‘‘more April2009andreleasedtheresultsinMay.2Theobjective adversescenario.’’Thebaselinescenarioreliedonaconsensusviewabout thedepthanddurationoftherecession,assumingrealGDPgrowthandthe unemploymentratefor2009and2010equaltotheaverageoftheprojections published by Consensus Forecasts, the Blue Chip survey, and the SurveyofProfessionalForecastersasofFebruary2009.Inaddition,house 1. TheTreasuryalsopurchasedpreferredstockatCitigroup,Inc.,and priceswereassumedtobeinlinewithfuturespricesfortheS&P/Case- BankofAmericaCorporationthroughtheTARPTargetedInvestmentPro- Shiller10-citycompositeindexinlateFebruaryandwiththeaverageregram(TIP).BothinstitutionsfullyrepaidtheirTIPbalancesinthefourth sponsetoaspecialquestiononhousepricesintheBlueChipsurvey.The quarterof2009. moreadversescenariowasdesignedtocharacterizearecessionlongerand 2. For an overview of the results, see www.federalreserve.gov/ moreseverethantheconsensusexpectation,withhousepricesassumedto bankinginforeg/scap.htm. besignificantlylowerbytheendof2010thaninthebaselinescenario. senior stakeholders against unexpected losses that a includesnetunrealizedgainsandlossesonavailablebank may potentially incur beyond what it has set for-sale securities and accumulated net gains and aside in reserves. In the current uncertain economic losses on cash flow hedges, continued to play an environment, banks may want a larger than usual important role as a component of equity last year. buffer. Moreover, banks’ loan loss reserves—which Particularlyduringtheperiodofgreateststressonthe are intended to cover estimated likely credit losses— bankingsysteminlate2008andthefirsthalfof2009, have fallen to very low levels relative to their market participants focused on various measures of delinquent loans and charge-offs, even as certain tangiblecommonequity(TCE)relativetotangibleor sectors of the economy to which many banks have risk-weightedassetsasimportantindicatorsofbanks’ significant exposures, such as commercial real es- financial condition. These measures usually incorpotate, remain fragile. Finally, both national and inter- ratedAOCIinthecalculationoftangiblecapital.The national authorities are considering tightening capi- increase in AOCI, which was largely due to the tal requirements in light of the crisis. notable reduction in unrealized losses on available- Although not part of regulatory capital, accumu- for-sale securities, helped improve industry TCE lated other comprehensive income (AOCI), which ratiosin2009.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A21 Treasury investments through the CPP and, eventually, C. Outstanding balance in the Capital Purchase Program, other TARP programs (figure C, bottom panel). Other and cumulative gross secondary equity issuance, banksalsoissuedequityinthesecondhalfof2009tobol- October 2008–February 2010 ster their capital or repay CPPinvestments.The preferred shares owned by the government were replaced primarily Billions of dollars with common stock held by private investors. Reflecting Outstanding CPP balance the inflow of both government and private capital to 250 BHCs, capital transfers by the BHCs to their commercial Total banksubsidiarieswerestrongthroughout2009. 200 WhiletheCPPandSCAPhelpedreducetheuncertainty about the capital adequacy of large financial institutions 150 and contributed to improved market functioning, it is difficult to assess the extent to which the CPP and SCAP 100 succeeded in fostering lending to creditworthy businesses SCAP banks and households. Banks’ lending activity, as measured by 50 thesumoftotalloansandunusedloancommitmentsout- + standing,fellsubstantiallylastyear,andlendingstandards _0 and terms continued to tighten according to the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank 2008 2009 2010 Lending Practices. However, some of the fall in credit waslikelyduetoweakerdemandbyhouseholdsandbusi- Cumulative gross secondary equity issuance nesses as the economy remained fragile. In addition, at leastsometighteningofcreditstandardsandtermsisalso 150 to be expected when economic growth is weak or uncertain,andsoatighteningmaynotreflectpressuresoncapi- Financial companies 100 tal.Indeed,creditmighthavebeenevenweakerandlendingstandardseventighterwithouttheprograms. One can say, however, that the cumulative magnitude SCAP banks 50 of the capital transfers that were stimulated by the CPP and SCAP was substantial. Without the capital transfers + from parent BHCs since the fourth quarter of 2008, the _0 regulatory capital ratios of commercial banks would have been11⁄2to2percentagepointslowerattheendof2009. Although some of that difference in regulatory capital ra- 2008 2009 2010 tios in the absence of the CPP likely would have been NOTE: The data are daily and extend from October 28, 2008, to made up through other means, such as stock sales and February 24, 2010. CPP is the Capital Purchase Program; SCAP is the conversions,afurtherdecreaseinrisk-weightedassetsand Supervisory Capital Assessment Program. averagetangibleassetsmayalsohaveresulted. SOURCE: For outstanding CPP balance, Department of the Treasury; for cumulative gross secondary equity issuance, Securities Data Corporation New Issues Database. TRENDS IN PROFITABILITY evated loss provisioning amid the deterioration in credit quality. Banks increased provisioning to Total annual net income of the commercial banking 1.95 percent of industry average consolidated assets industry as a percentage of average assets remained in 2009, up from 1.48 percent in 2008. At the same depressed in 2009, as profits were weighed down by time, charge-offs surged to 1.47 percent of industry high levels of loss provisioning. Elevated provisions assets—compared with 0.83 percent in 2008— wereoffsetbyhighernoninterestincome,particularly limitingtheriseinthestockofloanlossreserves,and income from capital-market-related activities. Net delinquency rates increased dramatically throughout interest margins remained basically unchanged, and 2009.Although the rate of provisioning edged down noninterest expense edged down despite significant in the final quarter of last year, consistent with increases in FDIC assessments. Notably, large banks reduced charge-offs in some loan categories, some posted a small profit, on balance, while other banks measuresofreserveadequacyremainedverylow. endedtheyearwithanaggregateloss. Despitethehighlevelsofprovisioning,theROAat Return on assets for the banking industry as a large banks increased from 0.04 percent in 2008 to whole stayed very low by historical standards at 0.12 percent in 2009.The improvement in profitabil- 0.04 percent, and return on equity was 0.42 percent, ity was due mainly to a rebound in these banks’ with both profitability measures depressed by el-

A22 Federal Reserve BulletinhMay 2010 noninterest income. In particular, trading revenue at medium-sized banks. ROA for such banks fell to largebankswasboostedbysignificantimprovements negative 0.29 percent in 2009 from 0.10 percent in in financial markets throughout the year, including the previous year. The modest leftward shift in the higherequitypricesandlowerinterestratesoncorpo- distributionofROAforsuchbanksin2009reflectsa ratebondsandothersecurities.Inaddition,relativeto deterioration in profitability for the group as a whole 2008, less noninterest expense, smaller losses on (figure 26, bottom panel). The fraction of small and securities held in investment accounts, and improve- medium-sized banks that incurred annual losses inments in net interest income supported earnings for creased to about 30 percent in 2009, up from 23 perthe 100 largest banks. The improvement in net inter- cent in 2008. These institutions accounted for about est income was attributable to significant inflows of 36 percent of assets at all small and medium-sized relatively low-cost core deposits, allowing banks to banks. run off their more expensive managed liabilities. Several factors contributed to the weaker perfor- However,theimprovementinprofitabilityamongthe mance of smaller banks relative to larger ones. largest institutions was not uniform (figure 26, top Smaller banks are not active in the capital market panel).Forty-threeofthetop100banks—accounting activities that provided a substantial source of revfor about 35 percent of the assets of such banks— enue for large banks. In addition, smaller banks are incurred losses, compared with 35 of the top 100 relatively more exposed to the deterioration in loan banksin2008. quality,asloanscomposeahigherpercentageoftheir In contrast, the fourth quarter of 2009 marked the assets. On the cost side, smaller banks could not sixth consecutive quarter of losses at small and substituteadditionalcoredepositsformanagedliabilities to the same degree as large banks, as smaller 26. Distribution of return on assets at commercial banks, banks already relied significantly on low-cost deposby size of bank and by percentage of assets at all itsforfunding. banks in each size category, 2008–09 Interest Income and Expense 100 largest banks Percentage of assets at top 100 banks Overall, banks earned an average of 4.62 percent on 2008 50 their interest-earning assets in 2009, down from 5.72percentinthepreviousyear.Thedeclinewasdue 2009 40 partly to large compositional shifts in banks’ assets from loans to securities, an asset class that typically 30 carries lower average interest rates. Indeed, the average effective interest rate on loans last year was 20 5.54 percent, while the rate on securities was significantly lower at 4.15 percent. However, the effective 10 interest rate earned on loans net of provisioning fell sharply to just 2.10 percent, an unusually low rate of -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 return by historical standards. The deterioration in loanqualityalsosignificantlyreducedbanks’interest Small and medium-sized banks Percentage of assets at all other banks income, as large fractions of loans that had yet to be 2008 50 chargedoffmovedtononaccrualstatus. 2009 Meanwhile,consistentwiththeextendedperiodof 40 accommodativemonetarypolicy,theaverageinterest ratethatbankspaidontheirinterest-bearingliabilities 30 fell steeply again, from 2.53 percent in 2008 to 1.30percentin2009.However,banks’useofsubstan- 20 tialinflowsofcoredepositstopaydownmorecostly 10 managedliabilitieswasalsoanimportantfactorinthe decline. Core deposits are an attractive source of funding for banks because they tend to be fairly -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 stable, as well as carry relatively low interest costs Return on assets (percent) compared with managed liabilities. Most of the NOTE: Assets are deflated by a gross domestic product price deflator. For increaseincoredepositslastyearcameintheformof the definition of bank size, see the general note on the first page of the main text. savings deposits, for which the effective interest rate

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A23 27. Net interest margin and core deposits as a percentage top five BHCs jumped from less than 33 percent of of total assets, by size of bank, 1990–2009 averageconsolidatedassetsin2008toalmost39percent in 2009 (figure 27, bottom panel). In addition, Percent the substantial increase in equity capital at large Net interest margin 5.00 organizations,thoughaccountingforasmallpercentage of assets, also boosted net interest margins, as 4.75 Small and medium-sized neithercommonnorpreferreddividendsareincluded 4.50 inbanks’interestexpense. 4.25 In contrast, core deposits at small and medium- 100 largest 4.00 sized banks have been relatively stable over the past few years, averaging just above 60 percent of assets 3.75 since 2006. The net interest margins at small and 3.50 medium-sized banks decreased from 3.80 percent in Banks in top 5 BHCs 3.25 2008to3.61percentin2009,asthedropintheirasset yields exceeded the decline in the rates they paid on 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Percent theirliabilities. Core deposits as a percentage of total assets 75 Noninterest Income and Expense 65 Total noninterest income rebounded in 2009 to Small and medium-sized 2.07 percent of average assets. Most of the improve- 55 ment was due to trading revenue at large banks 100 largest 45 returning to pre-crisis levels (figure 28, top panel). However, large banks’ noninterest income was also 35 boosted by a significant increase in income from net servicingfeesandasubstantialriseinthefairvalueof Banks in top 5 BHCs 25 financialinstrumentsaccountedforunderafairvalue optionasconditionsinfinancialmarketsimproved.23 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Theseimprovementsatlargebankswereoffsetsome- NOTE: The data are annual. Net interest margin is net interest income whatbyasizabledropinnetsecuritizationincomeand divided by average interest-earning assets. Core deposits consist of transaction deposits, savings deposits, and small time deposits. For the a small decline in income from deposit fees. Income definition of bank size, see the general note on the first page of the main text; from fiduciary activities also decreased, largely befor the definition of the top five bank holding companies (BHCs), see text note 19. cause of a sharp drop in the first quarter of 2009 as assetsundermanagementandthenumberofaccounts paid in 2009, measured by interest paid on such atbanktrustdepartmentsfellinthewakeofthedecline accounts relative to their average balances, was his- instockprices.Incontrast,noninterestincomeatsmall torically low at about 0.50 percent, down from and medium-sized banks inched down last year to 1.24percentin2008. 1.34percentofaverageassets,primarilybecausethey On balance, the industry-wide net interest margin also suffered from the decrease in income from fiduwas little changed in 2009 despite the reported wid- ciaryactivities(figure28,middlepanel). ening of spreads for many types of new loans over The divergent pattern of noninterest income bebanks’ cost of funds, as noted in the SLOOS, and tween the large and the other banks mostly reflected evidence of wider spreads on newly originated com- the different composition of their financial intermemercialandindustrialloansfromtheSurveyofTerms diationactivities.Tradingrevenue,netservicingfees, of Business Lending, possibly due to a large fraction card interchange fees, and net securitization income of loans moving to nonaccrual status. However, the composedlessthan13percentofsmallandmediumnet interest margin for the largest banks improved sized banks’ noninterest income in 2009, compared noticeably over the past two years: For banks in the top five BHCs, net interest margins increased from 23. Someoftheincreaseinthefairvalueoffinancialinstruments 3.13 percent in 2007 to 3.55 percent in 2009 (figmayhavebeenrelatedtothenewfairvalueguidancethatwasissued ure 27, top panel). These institutions benefited the by the FinancialAccounting Standards Board inApril 2009 (FASB most from the decrease in funding costs associated Staff Position FAS 157–e), which reduced the emphasis on ‘‘last transaction price’’when markets are not active and transactions are withsheddinghigher-costmanagedliabilitiesinfavor likelytobeforcedordistressed.Generally,largerbankshavetendedto ofcoredeposits.Indeed,coredepositsatbanksinthe adoptthefairvalueoptionmorewidelythansmallerbanks.

A24 Federal Reserve BulletinhMay 2010 with about 35 percent for large banks. For large institutions into the banking sector in the second and banks, trading revenue was boosted to pre-crisis fourth quarters of 2009. Further, large banks reportlevels by significant improvements in income from edly sold sizable amounts of seasoned residential interest rate and credit exposures as conditions in mortgage loans to the government-sponsored enterfinancialmarketsimproved(figure28,bottompanel). prises last year, and some may have retained servic- The increase in net servicing fees—which include ing rights to those loans. While bankcard and credit income from servicing mortgages, credit cards, and card interchange fees continued to be an important other off-balance-sheet assets, as well as changes in source of noninterest income for large banks, net the fair value of such servicing rights—was partly a securitization income fell rapidly for the second consequenceoftheconsolidationofsomelargethrift consecutive year because of relatively subdued securitization activity.24 Other noninterest income items 28. Noninterest income, and selected components, as a not mentioned separately already made up about proportion of total assets, by size of bank, 2002–09 35percentofnoninterestincomefortheindustryasa whole.25 Percent Banks’ noninterest expense edged down to 3 per- Noninterest income cent of average assets in 2009 (figure 29, top panel). 3.0 Salaries, wages, and employee benefits composed 2.8 100 largest about43percentofnoninterestexpense,afigurethat 2.6 continues to be fairly low by historical standards. 2.4 Amongothernoninterestexpenseitems,netexpenses 2.2 Small and medium-sized of premises and fixed assets (excluding mortgage 2.0 interest)continuedtoaccountforabout12percentof 1.8 noninterest expense. Goodwill impairment charges 1.6 decreasedfrommorethan$26billionin2008toabout 1.4 $10 billion in 2009.26 That improvement was offset, 1.2 however, by rising FDIC assessment fees, which 2002 2003 2004 2005 2006 2007 2008 2009 jumpedtoabout$17billionin2009fromslightlymore Percent than$1billionin2008(figure29,bottompanel);those All banks feeswereexceptionallyelevatedinthesecondquarter .45 of 2009, when the FDIC levied a special assessment Deposit fees .40 fee in order to replenish the Deposit Insurance Fund (DIF)becauseofthegrowingnumberofbankfailures. .35 In the second half of 2009, the FDIC raised its estimated cost of bank failures and required banks to .30 prepayregularassessmentsthrough2012,withhigher Fiduciary income .25 assessmentratesappliedfor2011and2012,inorderto .20 24. Suchincomeiscomposedofnetgainsandlossesonassetssold inthebank’sownsecuritizationtransactionsnetoftransactioncosts— 2002 2003 2004 2005 2006 2007 2008 2009 Percent thisincludesunrealizedlosses(andrecoveriesofunrealizedlosses)on loans and leases held for sale in the bank’s own securitization 100 largest banks transactionsandfeeincomefromsecuritizations,securitizationcon- .4 duits,andstructuredfinancevehicles. Net securitization income 25. Theseotheritemsincludefeesandcommissionsfromsecurities brokerage, investment banking, advisory services, securities under- .3 writing,andannuitysales;underwritingincomefrominsuranceand reinsuranceactivities;venturecapitalrevenue;netgainsandlosseson .2 salesofassetsexcludingsecurities;andothernoninterestitems.Items reportedseparatelyalreadyaredepositfees,netservicingfees,fiduciaryincome,tradingrevenue,cardinterchangefees,thenetchangein Net servicing fees .1 thefairvalueoffinancialinstruments,andnetsecuritizationincome. 26. Banksincurgoodwillimpairmentlosseswhenthemarketvalue + _0 of their business segments (or reporting units) drops below the fair valuerecordedbythecompany.Companiesmusttestforimpairment Trading income ofgoodwillannuallyorwheneventsoccurthatwouldlikelyreduce the fair value of a business segment (or reporting unit) below the 2002 2003 2004 2005 2006 2007 2008 2009 carryingvalue.Assetsarewrittendownwhenconsideredovervalued NOTE: The data are annual. For the definition of bank size, see the general comparedwiththemarketvalue—thatis,theamountthatapotential note on the first page of the main text. (oractual)acquirerwouldbewillingtopay(orhadpaid)fortheassets.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A25 29. Noninterest expense and selected components, and tionsin2009,thoughlosseswerereportedondomesother selected components of noninterest expense, tic operations for the first time since at least 1985. as a proportion of total assets, 2002–09 However, profits at foreign offices would have been negativeandthoseatdomesticofficespositive,aswas Percent thecasein2008,hadtherenotbeenalargereduction Noninterest expense and selected components 4.0 in internal allocations of income and expense appli- Noninterest expense 3.5 cabletoforeignofficesatonelargebank.Beforesuch 3.0 allocations and restructuring activity for the industry as a whole, net income from foreign offices as a 2.5 percentageofaverageassetsbookedinforeignoffices 2.0 Salaries and benefits remained about the same as in 2008. More specifi- 1.5 cally, large increases in provisioning for loans and 1.0 leases held at banks’ foreign offices and a fall in Occupancy .5 noninterestincomewereoffsetbysignificantlysmaller + _0 noninterest expense and a return to positive realized gainsininvestmentaccountsecurities. 2002 2003 2004 2005 2006 2007 2008 2009 Percent Banks’ total exposures to foreign economies Other selected components of noninterest expense throughlendingandderivativesactivitiesincreasedin .25 2009, as two investment banks with large foreign exposures became BHCs and were added to the .20 Federal Financial Institutions Examination Council’s Advertising and data processing .15 CountryExposureLendingSurvey(table3).Without the change in the sample of banks, such foreign Goodwill impairment .10 exposures would have continued to decline.The vast losses majority of U.S. banks’ cross-border lending and .05 derivatives outstanding—in dollar terms—remained + _0 in the advanced foreign economies at the end of FDIC assessments 2009.28 Lending and derivatives activities outstand- 2002 2003 2004 2005 2006 2007 2008 2009 ing in Asia were about 12 percent of total foreign exposure, or 35 percent of total tier 1 capital of the NOTE: The data are annual. For the definition of goodwill impairment losses, see text note 26. FDIC is the Federal Deposit Insurance Corporation. banks in the survey. Lending and derivatives exposurestotheLatinAmericanandtheCaribbeanregions shoreuptheDIF.Thisprepaymentwasnotconsidered and such exposures to a selected group of European to be noninterest expense for 2009, but rather was Unioncountries(Greece,Ireland,Italy,Portugal,and booked as a prepaid asset to be expensed smoothly Spain) were both about 25 percent of total tier 1 overthenextthreeyears.AccordingtotheFDIC,these capital. prepayments totaled $46 billion for all FDIC-insured institutions. Banks were able to reduce expenses in DEVELOPMENTS IN EARLY 2010 other noninterest categories, which include data processing expenses, advertising and marketing costs, U.S. economic activity continued to recover in the andotheritems.27 first quarter of 2010, and financial market conditions remainedbroadlysupportiveofeconomicrecovery.29 INTERNATIONAL OPERATIONS In particular, household spending expanded moder- OF U.S. COMMERCIAL BANKS ately, while business spending on equipment and software rose significantly. The equity and bond The share of U.S. bank assets booked in foreign markets continued to be an important source of offices edged down from about 121⁄ 2 percent at yearfundingforlargecorporations.Treasuryyields,interend 2008 to just less than 121⁄ 4 percent at year-end est rates on business loans, and mortgage rates 2009.Assetsbookedabroadremainedhighlyconcentrated among the largest banks. Commercial banks returned to profitability on their international opera- 28. The advanced foreign economies include Australia, Austria, Belgium,Canada,Denmark,Finland,France,Germany,Greece,Iceland, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, 27. Other items include amortization expense and impairment NewZealand,Norway,Portugal,SouthAfrica,Spain,Sweden,Switlossesforintangibleassetsbesidesgoodwill,aswellasothernoninter- zerland,Turkey,andtheUnitedKingdom. estexpenseitems. 29. Thissectionreflectsinformationavailablethroughmid-April.

A26 Federal Reserve BulletinhMay 2010 3. ExposureofU.S.bankstoselectedeconomiesatyear-endrelativetotier1capital,1998−2009 Percent Memo Asia LatinAmericaandtheCaribbean Non-G-10 Eastern G-10and Selected Year All China India Korea All Mexico Brazil Europe Switzerland1 d co ev u e n l t o ri p e e s d 2 Total cou E nt U ries3 1998.......... 28.2 1.0 2.2 7.1 42.9 9.9 11.3 3.5 182.5 37.1 294.3 29.7 2000.......... 24.0 .8 2.6 6.4 37.9 9.1 11.2 4.4 174.6 32.8 273.7 26.9 2002.......... 21.9 .9 2.7 5.8 38.9 20.8 8.4 5.5 172.1 21.3 259.8 23.9 2004.......... 32.2 1.4 4.2 15.0 31.8 16.6 6.5 6.1 198.2 37.2 305.4 25.7 2006.......... 34.7 4.1 6.1 13.6 30.8 16.8 5.7 6.5 174.7 38.5 285.1 23.2 2007.......... 44.6 4.5 9.8 14.4 35.6 17.2 8.2 9.0 219.3 48.3 356.6 27.0 2008.......... 30.8 3.4 6.1 10.7 25.5 12.9 5.0 5.4 166.3 35.3 263.3 20.0 2009.......... 35.2 6.4 6.1 11.3 25.0 12.0 7.0 4.6 198.1 39.9 302.8 25.4 Memo Totalexposure (billionsof dollars) 1998.......... 69.1 2.3 5.4 17.3 105.0 24.1 27.6 8.5 446.3 90.8 719.6 72.5 2000.......... 68.0 2.2 7.5 18.1 107.3 25.7 31.6 12.3 494.6 93.0 775.3 76.3 2002.......... 69.5 2.7 8.7 18.4 123.5 66.2 26.6 17.5 546.5 67.7 824.7 75.9 2004.......... 125.8 5.3 16.3 58.7 124.4 65.2 25.5 23.8 775.7 145.5 1,195.4 100.6 2006.......... 190.5 22.7 33.6 74.8 168.9 92.5 31.5 35.5 959.1 211.2 1,565.2 127.1 2007.......... 249.8 25.5 54.9 80.8 199.3 96.1 46.2 50.2 1,229.0 270.5 1,998.8 151.6 2008.......... 217.4 24.3 43.1 75.3 179.7 90.7 35.6 37.9 1,172.9 248.6 1,856.5 141.0 2009.......... 328.4 59.5 56.8 105.2 233.2 111.4 65.6 42.6 1,846.2 371.9 2,822.3 236.8 Note: Exposures consist of lending and derivatives exposures for cross- 2. Thenon-G-10developedcountriesincludeAustralia,Austria,Denmark, border and local-office operations. Respondents may file information on one Finland, Greece, Iceland, Ireland, Israel, New Zealand, Norway, Portugal, bankoronthebankholdingcompanyasawhole.Forthedefinitionoftier1 SouthAfrica,Spain,andTurkey. capital,seetextnote21. 3.TheselectedEuropeanUnion(EU)countriesconsistofGreece,Ireland, The2009datacover69banks(whichincludetwolarge,newlyformedbank Italy,Portugal,andSpain. holdingcompanies)withatotalof$932.1billionintier1capital.The2008 Source: FederalFinancialInstitutionsExaminationCouncil,StatisticalRedatacovered68bankswithatotalof$705.1billionintier1capital. leaseE.16,“CountryExposureLendingSurvey”(www.ffiec.gov/E16.htm). 1. TheG-10(GroupofTen)countriesareBelgium,Canada,France,Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, and the United Kingdom. remained low by historical standards, partly due to dential real estate loans also ran off, likely owing accommodative monetary policy. The Federal Open importantlytogreatersecuritizationsofmortgagesto Market Committee continued to maintain a target the government-sponsored enterprises and sluggish range for the federal funds rate of 0 to 1⁄ 4 percent. home sales, while credit card balances continued to Financialmarketsshowedlittleeffectfromtheendof fall,perhapspartlyinresponsetofurtherincreasesin theFederalReserve’spurchasesofagencymortgage- interestratesoncreditcards. backed securities and agency debt and the expiration Bank profitability improved significantly in the of most of the Federal Reserve’s emergency credit firstquarterof2010asmanybanksreportedtentative facilities.However,unemploymentremainedelevated, improvementsincreditquality.Inparticular,thefour investment in nonresidential structures declined fur- largest bank holding companies recorded profits in ther,andhomesalesgenerallyremainedlow. thefirstquarterof2010,astradingrevenueandlower Amid tight credit conditions and reportedly weak lossprovisioningboostedearnings.Indeed,thefairly demand, loans to both businesses and households broad-baseddeclineinlossprovisioningalsocontribcontinued to decline during the first three months of uted to improved earnings at many regional banks. 2010. Commercial and industrial loans contracted Nevertheless, regional and smaller banks continued furtherasspreadsofinterestratesonsuchloansover to struggle with profitability as credit losses on core comparable-maturity market instruments climbed lendingoperationsremainedhigh.Moreover,failures againinthefirstquarter.Commercialrealestateloans ofsmallerbankscontinuedin2010ataboutthesame also posted a substantial decline, which reflected pace as 2009, driven largely by credit losses on weak investment in nonresidential structures. Resi- commercialrealestatelending. Appendixtablesstartonp.A27

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A27 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09 A.Allbanks Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interest-earningassets1......................... 87.13 86.49 86.42 86.08 86.90 86.82 86.86 86.94 85.28 85.71 Loansandleases(net)........................ 60.48 58.95 57.83 56.88 56.98 57.88 58.26 58.37 56.73 53.96 Commercialandindustrial................. 17.16 16.08 14.07 12.18 11.06 11.17 11.42 11.84 12.08 10.77 U.S.addressees......................... 14.67 13.69 12.04 10.48 9.52 9.64 9.73 9.86 10.12 9.20 Foreignaddressees...................... 2.49 2.39 2.04 1.70 1.54 1.53 1.70 1.98 1.96 1.57 Consumer................................. 9.38 9.23 9.35 9.06 9.18 9.12 8.53 8.43 8.33 8.06 Creditcard.............................. 3.52 3.69 3.78 3.55 3.87 4.06 3.73 3.72 3.68 3.59 Installmentandother.................... 5.87 5.55 5.57 5.51 5.31 5.06 4.80 4.71 4.65 4.47 Realestate................................ 27.04 27.10 28.39 29.91 30.77 32.40 33.19 33.37 31.96 32.02 Indomesticoffices...................... 26.49 26.60 27.91 29.45 30.24 31.84 32.61 32.76 31.35 31.50 Constructionandlanddevelopment.... 2.51 2.85 2.98 2.99 3.26 3.90 4.73 5.05 4.73 3.99 Farmland............................. .56 .55 .56 .54 .54 .54 .53 .53 .52 .55 One-tofour-familyresidential......... 14.96 14.67 15.40 16.96 17.42 18.26 18.23 18.31 17.29 17.59 Homeequity....................... 1.96 2.18 2.80 3.40 4.34 4.95 4.71 4.49 4.60 5.07 Other.............................. 13.00 12.49 12.60 13.57 13.08 13.31 13.51 13.82 12.70 12.52 Multifamilyresidential................ .99 .97 1.02 1.05 1.06 1.08 1.06 1.04 1.10 1.30 Nonfarmnonresidential............... 7.48 7.56 7.95 7.91 7.97 8.06 8.07 7.84 7.70 8.07 Inforeignoffices........................ .54 .50 .48 .46 .53 .56 .58 .60 .61 .53 Todepositoryinstitutionsand acceptancesofotherbanks ........... 1.87 1.83 1.87 1.98 2.11 1.73 1.65 1.21 1.19 1.01 Foreigngovernments...................... .12 .10 .09 .08 .08 .06 .04 .03 .02 .02 Agriculturalproduction.................... .78 .75 .70 .63 .59 .56 .55 .52 .49 .49 Otherloans................................ 2.58 2.34 2.06 2.00 2.35 2.09 2.19 2.48 2.64 2.26 Lease-financingreceivables................ 2.63 2.58 2.44 2.11 1.79 1.58 1.43 1.23 1.07 .94 Less:Unearnedincomeonloans........... –.05 –.04 –.05 –.04 –.04 –.03 –.03 –.02 –.02 –.02 Less:Lossreserves2....................... –1.02 –1.04 –1.11 –1.03 –.91 –.79 –.71 –.70 –1.03 –1.58 Securities.................................... 20.02 19.53 21.27 21.90 22.57 22.04 21.32 20.77 19.27 20.39 Investmentaccount........................ 17.59 16.82 18.30 18.97 18.99 17.87 16.89 15.41 14.13 16.62 Debt.................................... 16.93 16.48 17.99 18.72 18.79 17.71 16.73 15.23 13.95 16.36 U.S.Treasury......................... 1.66 .85 .78 .90 .89 .62 .47 .32 .24 .52 U.S.governmentagencyand corporationobligations........... 10.31 10.08 11.46 12.26 12.37 11.51 10.65 9.32 8.14 9.32 Government-backedmortgagepools. 4.75 5.13 6.09 6.75 7.13 6.78 6.43 5.82 5.47 6.14 Collateralizedmortgageobligations.. 1.92 1.95 2.35 2.34 2.01 1.80 1.58 1.34 1.27 1.52 Other.............................. 3.63 2.99 3.02 3.17 3.22 2.93 2.65 2.16 1.40 1.66 Stateandlocalgovernment............ 1.52 1.49 1.49 1.48 1.41 1.36 1.34 1.34 1.20 1.27 Privatemortgage-backedsecurities..... .95 1.09 1.25 1.30 1.41 1.76 1.89 2.15 2.10 1.88 Other................................. 2.48 2.98 3.01 2.78 2.72 2.47 2.37 2.10 2.28 3.36 Equity.................................. .66 .34 .31 .25 .20 .16 .16 .18 .18 .26 Tradingaccount........................... 2.43 2.72 2.97 2.93 3.59 4.17 4.43 5.36 5.13 3.77 GrossfederalfundssoldandreverseRPs..... 4.12 5.11 4.81 4.85 4.58 4.75 5.30 5.49 6.03 4.54 Balancesatdepositories1..................... 2.52 2.90 2.52 2.46 2.76 2.14 1.98 2.30 3.25 6.82 Noninterest-earningassets1..................... 12.87 13.51 13.58 13.92 13.10 13.18 13.14 13.06 14.72 14.29 Revaluationgainsheldintradingaccounts.... 2.28 2.37 2.42 2.70 2.19 1.82 1.64 1.73 2.83 2.78 Other........................................ 10.58 11.14 11.16 11.22 10.91 11.36 11.51 11.33 11.90 11.51 Liabilities...................................... 91.58 91.25 90.85 90.96 90.57 89.91 89.84 89.78 90.07 89.50 Coredeposits................................ 46.52 47.07 48.98 49.18 48.56 47.52 45.56 43.89 42.72 46.92 Transactiondeposits....................... 11.07 10.36 10.06 9.73 9.10 8.46 7.45 6.43 6.16 6.90 Demanddeposits........................ 8.61 8.00 7.67 7.26 6.58 6.16 5.41 4.66 4.53 5.06 Othercheckabledeposits................ 2.46 2.36 2.39 2.47 2.52 2.30 2.04 1.77 1.63 1.84 Savingsdeposits(includingMMDAs)...... 22.43 24.53 28.13 30.12 31.19 30.83 29.49 28.21 27.04 29.98 Smalltimedeposits........................ 13.01 12.18 10.80 9.33 8.27 8.23 8.62 9.26 9.51 10.04 Managedliabilities3.......................... 38.83 37.42 35.05 34.61 35.69 36.25 38.29 39.85 41.08 37.09 Largetimedeposits........................ 8.77 8.89 8.30 8.09 8.00 9.11 10.07 9.13 9.13 8.32 Depositsbookedinforeignoffices.......... 11.43 10.66 9.42 9.38 10.25 10.39 11.18 12.81 13.09 12.56 Subordinatednotesanddebentures......... 1.37 1.43 1.40 1.33 1.30 1.34 1.40 1.55 1.51 1.39 GrossfederalfundspurchasedandRPs..... 7.83 7.95 7.77 7.75 7.24 7.05 7.53 7.06 6.98 6.05 Othermanagedliabilities................... 9.44 8.49 8.16 8.06 8.91 8.37 8.11 9.31 10.38 8.77 Revaluationlossesheldintradingaccounts.... 2.29 2.21 2.09 2.30 1.95 1.67 1.51 1.59 2.27 1.98 Other........................................ 3.94 4.54 4.73 4.87 4.36 4.47 4.47 4.44 4.01 3.51 Capitalaccount................................ 8.42 8.75 9.15 9.04 9.43 10.09 10.16 10.22 9.93 10.50 Memo Commercialrealestateloans4................... 11.58 12.09 12.57 12.47 12.78 13.52 14.35 14.47 14.10 13.91 Otherrealestateowned5........................ .05 .05 .06 .06 .06 .04 .05 .07 .13 .28 Mortgage-backedsecurities..................... 7.63 8.17 9.69 10.39 10.56 10.33 9.89 9.31 8.84 9.55 FederalHomeLoanBankadvances............. n.a. 2.89 3.17 3.19 3.07 3.04 3.07 3.66 4.45 3.77 BalancesattheFederalReserve1 ............... .42 .40 .38 .40 .35 .29 .24 .20 3.44 4.14 Interest-earning.............................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3.00 4.14 Noninterest-earning.......................... .42 .40 .38 .40 .35 .29 .24 .20 .44 n.a. Interest-earningbalancesatdepositories otherthantheFederalReserve............. 2.52 2.90 2.52 2.46 2.76 2.14 1.98 2.30 2.69 2.68 Averagenetconsolidatedassets (billionsofdollars)........................ 5,907 6,334 6,635 7,249 7,879 8,592 9,427 10,396 11,578 11,869

A28 Federal Reserve BulletinhMay 2010 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09—Continued A.Allbanks—Continued Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Effectiveinterestrate(percent)6 Ratesearned Interest-earningassets.......................... 8.20 7.37 6.10 5.29 5.08 5.70 6.65 6.78 5.72 4.62 Taxableequivalent...................... 8.26 7.42 6.15 5.33 5.12 5.73 6.69 6.82 5.74 4.64 Loansandleases,gross...................... 9.00 8.15 6.89 6.15 5.91 6.52 7.55 7.54 6.39 5.54 Netoflossprovisions................... 8.33 7.15 5.84 5.47 5.47 6.09 7.18 6.69 3.90 2.10 Securities.................................... 6.47 6.04 4.95 3.96 3.86 4.18 4.71 5.02 4.86 4.15 Taxableequivalent...................... 6.65 6.22 5.10 4.10 3.99 4.30 4.83 5.14 4.94 4.23 Investmentaccount........................ 6.45 6.05 5.04 4.00 3.96 4.29 4.86 5.13 4.93 4.31 U.S.TreasurysecuritiesandU.S. governmentagencyobligations (excludingMBS)..................... n.a. 5.76 4.42 3.29 3.11 3.46 4.19 4.71 4.23 2.78 Mortgage-backedsecurities.............. n.a. 6.45 5.44 4.24 4.38 4.60 5.10 5.29 5.21 4.86 Other................................... n.a. 5.60 4.74 4.08 3.76 4.23 4.76 5.02 4.58 3.94 Tradingaccount........................... 6.63 6.01 4.38 3.71 3.35 3.72 4.16 4.70 4.64 3.44 GrossfederalfundssoldandreverseRPs..... 5.56 3.86 1.93 1.40 1.40 2.66 4.31 5.07 2.50 .64 Interest-bearingbalancesatdepositories1 ..... 6.48 4.01 2.79 2.09 1.98 3.70 5.10 5.13 3.23 .68 Ratespaid Interest-bearingliabilities....................... 4.94 3.93 2.38 1.72 1.63 2.47 3.59 3.82 2.53 1.30 Interest-bearingdeposits...................... 4.45 3.61 2.11 1.47 1.36 2.06 3.05 3.39 2.26 1.14 Inforeignoffices.......................... 5.61 3.94 2.38 1.62 1.72 2.77 3.92 4.23 2.47 .69 Indomesticoffices......................... 4.17 3.54 2.06 1.44 1.29 1.91 2.85 3.18 2.20 1.25 Othercheckabledeposits................ 2.34 1.96 1.06 .75 .77 1.41 1.88 2.04 1.16 .60 Savingsdeposits(includingMMDAs).... 2.86 2.19 1.13 .74 .72 1.24 2.01 2.22 1.24 .50 Largetimedeposits...................... 5.78 5.04 3.37 2.59 2.35 3.19 4.39 4.71 3.48 2.22 Othertimedeposits...................... 5.69 5.43 3.70 2.88 2.56 3.14 4.11 4.72 3.83 2.79 GrossfederalfundspurchasedandRPs....... 5.77 3.83 1.88 1.30 1.49 3.07 4.57 4.97 2.39 .62 Otherinterest-bearingliabilities............... 6.97 5.91 4.49 3.69 3.34 4.58 6.29 5.46 4.05 2.74 Incomeandexpenseasapercentageofaveragenetconsolidatedassets Grossinterestincome........................... 7.18 6.38 5.27 4.54 4.43 4.97 5.85 5.94 4.88 4.05 Taxableequivalent......................... 7.22 6.42 5.31 4.58 4.46 5.00 5.88 5.97 4.91 4.07 Loans....................................... 5.53 4.92 4.06 3.55 3.42 3.82 4.48 4.47 3.68 3.10 Securities.................................... 1.15 1.00 .89 .74 .74 .77 .84 .80 .70 .72 GrossfederalfundssoldandreverseRPs..... .23 .20 .09 .07 .07 .13 .23 .28 .14 .03 Other........................................ .27 .27 .22 .18 .20 .25 .31 .39 .35 .20 Grossinterestexpense.......................... 3.76 2.98 1.79 1.30 1.25 1.89 2.79 2.99 1.96 1.03 Deposits..................................... 2.56 2.09 1.23 .86 .81 1.23 1.84 2.05 1.33 .71 GrossfederalfundspurchasedandRPs....... .45 .31 .15 .10 .11 .22 .36 .36 .17 .04 Other........................................ .75 .58 .41 .33 .33 .44 .59 .58 .45 .28 Netinterestincome............................. 3.41 3.40 3.48 3.24 3.17 3.07 3.05 2.95 2.93 3.02 Taxableequivalent......................... 3.46 3.44 3.52 3.28 3.21 3.11 3.09 2.98 2.95 3.05 Lossprovisions7............................... .50 .68 .68 .45 .30 .30 .27 .55 1.48 1.95 Noninterestincome............................. 2.59 2.54 2.54 2.54 2.40 2.35 2.36 2.10 1.81 2.07 Servicechargesondeposits................... .40 .42 .45 .44 .42 .39 .38 .38 .37 .35 Fiduciaryactivities........................... .38 .35 .32 .31 .32 .31 .30 .32 .28 .23 Tradingrevenue............................. .21 .20 .16 .16 .13 .17 .20 .05 –.01 .20 Interestrateexposures..................... .08 .09 .08 .07 .03 .05 .05 .04 –.01 .12 Foreignexchangerateexposures........... .08 .07 .07 .07 .07 .07 .08 .07 .09 .04 Othercommodityandequityexposures..... .04 .03 .01 .02 .03 .04 .07 .03 .01 .02 Creditexposures........................... n.a. n.a. n.a. n.a. n.a. n.a. n.a. –.09 –.11 .01 Other........................................ 1.61 1.57 1.60 1.63 1.53 1.48 1.48 1.36 1.16 1.30 Noninterestexpense............................ 3.66 3.57 3.47 3.36 3.34 3.19 3.13 3.09 3.09 3.00 Salaries,wages,andemployeebenefits........ 1.51 1.49 1.51 1.50 1.46 1.44 1.44 1.39 1.27 1.28 Occupancy.................................. .45 .44 .44 .43 .42 .41 .39 .37 .35 .35 Other........................................ 1.70 1.64 1.51 1.43 1.46 1.34 1.30 1.33 1.46 1.37 Netnoninterestexpense........................ 1.07 1.03 .93 .82 .94 .84 .76 .99 1.28 .93 Gainsoninvestmentaccountsecurities.......... –.04 .07 .10 .08 .04 * –.01 –.01 –.14 –.01 Incomebeforetaxesandextraordinaryitems..... 1.81 1.77 1.96 2.05 1.97 1.93 2.00 1.41 .03 .12 Taxes........................................ .63 .59 .65 .67 .64 .62 .65 .43 .02 .04 Extraordinaryitems,netofincometaxes...... * –.01 * .01 * * .03 –.02 .05 –.03 Netincome.................................... 1.18 1.17 1.32 1.39 1.33 1.31 1.39 .97 .05 .04 Cashdividendsdeclared...................... .89 .87 1.01 1.07 .76 .75 .87 .82 .37 .37 Retainedincome............................. .29 .31 .30 .31 .58 .56 .51 .15 –.32 –.32 Memo:Returnonequity........................ 13.97 13.41 14.38 15.34 14.14 12.99 13.65 9.45 .54 .42 Note:DataareasofMarch23,2010. bymultifamilyresidentialproperties;andloanstofinancecommercialreales- 1. EffectiveOctober1,2008,theFederalReservebeganpayingintereston tate,construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. depositoryinstitutions’requiredandexcessreservebalances.Beginningwith 5. Other real estate owned is a component of other noninterest-earning the2008:Q4CallReport,balancesduefromFederalReserveBanksarenow assets. reportedunder“Interest-earningassets”ratherthan“Noninterest-earningassets.” 6. Whenpossible,basedontheaverageofquarterlybalancesheetdatare- 2. Includesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCallReport. 3. Measuredasthesumoflargetimedepositsindomesticoffices,deposits 7. Includesprovisionsforallocatedtransferrisk. booked in foreign offices, subordinated notes and debentures, federal funds * Inabsolutevalue,lessthan0.005percent. purchased and securities sold under repurchase agreements, Federal Home n.a. Notavailable. LoanBankadvances,andotherborrowedmoney. MMDA Moneymarketdepositaccount. 4. Measuredasthesumofconstructionandlanddevelopmentloanssecured RP Repurchaseagreement. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MBS Mortgage-backedsecurities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A29 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09 B.Tenlargestbanksbyassets Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interest-earningassets1......................... 82.23 81.74 81.68 81.39 83.54 83.96 84.68 85.03 83.05 83.54 Loansandleases(net)........................ 55.22 53.86 53.61 52.20 51.29 51.35 52.03 53.21 50.66 46.99 Commercialandindustrial................. 19.87 18.82 16.16 12.98 10.54 10.61 11.20 11.58 11.85 10.21 U.S.addressees......................... 13.95 13.42 11.69 9.40 7.49 7.74 8.08 8.05 8.45 7.52 Foreignaddressees...................... 5.92 5.41 4.47 3.59 3.06 2.87 3.12 3.53 3.40 2.69 Consumer................................. 5.43 6.17 7.82 7.96 8.49 8.80 8.17 8.98 8.43 6.83 Creditcard.............................. 1.34 1.69 2.90 2.81 3.19 3.60 3.05 3.87 3.54 2.16 Installmentandother.................... 4.09 4.48 4.92 5.15 5.30 5.21 5.13 5.11 4.89 4.67 Realestate................................ 19.82 19.23 20.78 22.68 23.21 24.55 25.51 27.04 25.26 26.23 Indomesticoffices...................... 18.48 18.05 19.70 21.74 22.21 23.52 24.50 26.00 24.29 25.39 Constructionandlanddevelopment.... .98 1.27 1.42 1.36 1.40 1.70 2.01 2.01 1.86 1.87 Farmland............................. .11 .11 .12 .10 .10 .10 .10 .09 .09 .09 One-tofour-familyresidential......... 13.37 12.41 13.51 16.03 16.71 17.73 18.30 19.86 18.40 18.95 Homeequity....................... 1.61 1.78 2.35 2.96 4.04 5.22 5.40 5.46 5.59 6.26 Other.............................. 11.76 10.63 11.17 13.07 12.67 12.52 12.90 14.40 12.81 12.69 Multifamilyresidential................ .60 .51 .55 .47 .45 .44 .44 .55 .69 1.00 Nonfarmnonresidential............... 3.42 3.76 4.09 3.78 3.55 3.55 3.65 3.49 3.25 3.48 Inforeignoffices........................ 1.34 1.18 1.08 .94 1.00 1.03 1.01 1.03 .97 .84 Todepositoryinstitutionsand acceptancesofotherbanks ........... 3.78 3.23 3.20 3.54 4.10 3.15 2.97 1.71 1.67 1.27 Foreigngovernments...................... .28 .20 .20 .17 .16 .12 .07 .05 .02 .03 Agriculturalproduction.................... .23 .28 .23 .19 .22 .20 .20 .17 .15 .16 Otherloans................................ 3.75 3.51 2.94 2.87 3.32 2.81 2.88 3.08 3.21 2.78 Lease-financingreceivables................ 3.07 3.43 3.44 2.87 2.08 1.78 1.60 1.22 1.06 .93 Less:Unearnedincomeonloans........... –.04 –.04 –.08 –.06 –.04 –.04 –.02 –.02 –.02 –.02 Less:Lossreserves2....................... –.97 –.97 –1.12 –1.00 –.79 –.65 –.56 –.60 –.98 –1.45 Securities.................................... 18.98 17.81 20.54 21.22 22.95 23.37 23.05 21.97 20.97 22.27 Investmentaccount........................ 13.71 12.14 14.35 15.31 15.99 15.58 15.12 12.81 12.44 16.56 Debt.................................... 13.03 11.88 14.13 15.11 15.83 15.44 14.97 12.66 12.32 16.40 U.S.Treasury......................... 1.96 .68 .59 .82 .86 .56 .43 .24 .16 .51 U.S.governmentagencyand corporationobligations........... 6.59 6.84 8.69 9.20 9.92 9.69 9.48 8.02 6.95 8.67 Government-backedmortgagepools. 4.88 4.99 6.38 7.59 8.64 8.65 8.64 7.53 6.48 7.25 Collateralizedmortgageobligations.. .93 1.11 1.52 .91 .70 .54 .53 .33 .38 .66 Other.............................. .78 .74 .79 .70 .58 .50 .32 .16 .09 .75 Stateandlocalgovernment............ .51 .55 .59 .59 .57 .58 .64 .65 .55 .68 Privatemortgage-backedsecurities..... .51 .58 .92 1.10 .96 1.18 1.09 1.45 2.01 2.35 Other................................. 3.47 3.22 3.34 3.40 3.52 3.43 3.33 2.30 2.66 4.19 Equity.................................. .68 .26 .22 .20 .16 .14 .15 .16 .12 .16 Tradingaccount........................... 5.26 5.67 6.18 5.91 6.96 7.79 7.94 9.16 8.52 5.70 GrossfederalfundssoldandreverseRPs..... 5.02 6.38 5.26 5.79 6.37 6.96 7.60 7.47 8.13 6.53 Balancesatdepositories1..................... 3.01 3.69 2.28 2.18 2.93 2.28 1.99 2.38 3.28 7.76 Noninterest-earningassets1..................... 17.77 18.26 18.32 18.61 16.46 16.04 15.32 14.97 16.95 16.46 Revaluationgainsheldintradingaccounts.... 5.66 5.48 5.40 5.79 4.45 3.50 3.07 3.03 4.77 4.47 Other........................................ 12.11 12.78 12.93 12.83 12.01 12.54 12.25 11.93 12.18 11.98 Liabilities...................................... 92.36 92.14 91.52 91.94 91.64 90.81 91.10 90.82 91.34 90.78 Coredeposits................................ 33.28 36.38 40.61 41.07 42.02 40.18 38.03 35.08 34.49 39.62 Transactiondeposits....................... 8.01 8.40 8.34 7.74 6.65 6.05 5.41 4.69 4.73 5.80 Demanddeposits........................ 7.28 7.50 7.40 6.72 5.43 4.90 4.32 3.80 3.91 4.84 Othercheckabledeposits................ .74 .90 .95 1.02 1.22 1.15 1.09 .89 .81 .96 Savingsdeposits(includingMMDAs)...... 19.24 22.21 26.82 28.99 31.54 30.11 28.11 25.55 24.59 28.41 Smalltimedeposits........................ 6.03 5.77 5.44 4.34 3.83 4.02 4.52 4.84 5.18 5.41 Managedliabilities3.......................... 46.84 43.41 38.89 38.60 39.33 40.83 43.75 46.83 47.69 43.51 Largetimedeposits........................ 5.55 5.46 5.13 5.53 5.21 6.28 6.85 6.13 6.72 6.11 Depositsbookedinforeignoffices.......... 22.76 20.28 17.31 16.62 17.20 17.51 18.50 19.86 20.16 20.25 Subordinatednotesanddebentures......... 2.10 2.16 2.11 1.92 1.78 1.89 1.99 2.17 2.09 1.87 GrossfederalfundspurchasedandRPs..... 8.89 9.04 8.83 8.62 7.79 8.39 9.51 8.42 8.18 6.79 Othermanagedliabilities................... 7.55 6.47 5.53 5.90 7.35 6.76 6.89 10.26 10.54 8.48 Revaluationlossesheldintradingaccounts.... 5.69 5.10 4.63 4.88 3.95 3.21 2.83 2.79 3.77 3.12 Other........................................ 6.55 7.26 7.39 7.40 6.34 6.60 6.47 6.12 5.39 4.53 Capitalaccount................................ 7.64 7.86 8.48 8.06 8.36 9.19 8.90 9.18 8.66 9.22 Memo Commercialrealestateloans4................... 5.87 6.68 6.92 6.31 5.99 6.33 6.73 6.64 6.37 6.92 Otherrealestateowned5........................ .04 .04 .03 .03 .03 .02 .03 .05 .09 .19 Mortgage-backedsecurities..................... 6.32 6.68 8.82 9.60 10.30 10.36 10.25 9.31 8.87 10.27 FederalHomeLoanBankadvances............. n.a. .82 .82 .84 .79 .63 .75 2.33 2.81 2.64 BalancesattheFederalReserve1 ............... .20 .27 .23 .23 .25 .21 .17 .15 3.92 4.29 Interest-earning.............................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3.61 4.29 Noninterest-earning.......................... .20 .27 .23 .23 .25 .21 .17 .15 .32 n.a. Interest-earningbalancesatdepositories otherthantheFederalReserve............. 3.01 3.69 2.28 2.18 2.93 2.28 1.99 2.38 2.69 3.46 Averagenetconsolidatedassets ................ (billionsofdollars) ....................... 2,234 2,527 2,785 3,148 3,654 4,232 4,759 5,469 6,241 6,379

A30 Federal Reserve BulletinhMay 2010 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09—Continued B.Tenlargestbanksbyassets—Continued Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Effectiveinterestrate(percent)6 Ratesearned Interest-earningassets.......................... 7.76 6.83 5.82 4.99 4.71 5.29 6.32 6.52 5.44 4.08 Taxableequivalent...................... 7.78 6.86 5.85 5.01 4.73 5.31 6.34 6.54 5.45 4.10 Loansandleases,gross...................... 8.46 7.50 6.52 5.76 5.52 6.15 7.36 7.33 6.14 5.00 Netoflossprovisions................... 7.92 6.55 5.30 5.19 5.29 5.84 7.02 6.29 3.23 1.55 Securities.................................... 6.48 6.23 5.04 4.15 4.04 4.27 4.69 4.99 4.93 4.20 Taxableequivalent...................... 6.55 6.31 5.11 4.21 4.10 4.32 4.75 5.04 4.95 4.24 Investmentaccount........................ 6.40 6.23 5.30 4.26 4.37 4.63 5.11 5.29 5.14 4.50 U.S.TreasurysecuritiesandU.S. governmentagencyobligations (excludingMBS)..................... n.a. 5.01 3.74 2.62 2.92 3.29 4.15 4.15 3.02 2.61 Mortgage-backedsecurities.............. n.a. 6.42 5.55 4.51 4.83 4.92 5.30 5.41 5.34 4.94 Other................................... n.a. 6.34 5.30 4.28 3.76 4.26 4.81 5.08 4.77 4.09 Tradingaccount........................... 6.70 6.24 4.46 3.87 3.32 3.57 3.90 4.57 4.59 3.36 GrossfederalfundssoldandreverseRPs..... 4.93 3.86 2.20 1.60 1.43 2.46 4.07 5.06 2.59 .72 Interest-bearingbalancesatdepositories1 ..... 7.43 3.73 3.40 2.49 1.80 4.06 5.59 5.36 3.46 .72 Ratespaid Interest-bearingliabilities....................... 5.03 3.78 2.33 1.67 1.62 2.52 3.74 3.87 2.47 1.04 Interest-bearingdeposits...................... 4.40 3.27 1.94 1.34 1.29 2.01 2.96 3.30 2.08 .79 Inforeignoffices.......................... 5.67 4.02 2.59 1.74 1.81 2.77 3.88 4.28 2.52 .74 Indomesticoffices......................... 3.51 2.84 1.67 1.18 1.08 1.70 2.55 2.80 1.85 .82 Othercheckabledeposits................ 1.61 1.67 .93 .80 .97 2.27 2.46 2.36 1.13 .47 Savingsdeposits(includingMMDAs).... 2.43 1.92 1.02 .73 .71 1.15 1.87 1.98 1.10 .36 Largetimedeposits...................... 5.32 4.40 3.26 2.36 2.14 3.06 4.32 4.72 3.33 1.60 Othertimedeposits...................... 5.53 5.11 3.44 2.70 2.61 3.40 4.05 4.55 3.48 2.41 GrossfederalfundspurchasedandRPs....... 5.47 3.81 2.02 1.39 1.59 3.11 4.63 5.15 2.54 .54 Otherinterest-bearingliabilities............... 8.07 6.84 5.57 4.42 3.83 5.40 7.78 5.61 4.32 2.80 Incomeandexpenseasapercentageofaveragenetconsolidatedassets Grossinterestincome........................... 6.39 5.55 4.77 4.05 3.94 4.47 5.46 5.61 4.52 3.53 Taxableequivalent......................... 6.41 5.57 4.79 4.07 3.96 4.48 5.48 5.63 4.53 3.54 Loans....................................... 4.74 4.13 3.57 3.04 2.86 3.19 3.91 3.98 3.15 2.45 Securities.................................... .88 .72 .73 .63 .69 .72 .80 .69 .65 .75 GrossfederalfundssoldandreverseRPs..... .25 .25 .12 .10 .10 .18 .31 .38 .20 .05 Other........................................ .51 .44 .35 .28 .30 .38 .45 .56 .51 .27 Grossinterestexpense.......................... 3.60 2.69 1.65 1.19 1.20 1.89 2.88 3.00 1.88 .82 Deposits..................................... 2.33 1.74 1.05 .74 .74 1.17 1.72 1.87 1.17 .48 GrossfederalfundspurchasedandRPs....... .49 .35 .18 .13 .13 .27 .47 .46 .21 .04 Other........................................ .78 .59 .41 .33 .33 .45 .69 .68 .50 .29 Netinterestincome............................. 2.78 2.87 3.12 2.86 2.74 2.58 2.58 2.61 2.63 2.71 Taxableequivalent......................... 2.80 2.89 3.14 2.88 2.76 2.59 2.60 2.63 2.65 2.73 Lossprovisions7............................... .38 .59 .73 .35 .16 .20 .22 .60 1.52 1.71 Noninterestincome............................. 2.54 2.26 2.31 2.32 2.21 2.37 2.35 1.95 1.66 2.17 Servicechargesondeposits................... .40 .44 .48 .46 .45 .42 .41 .40 .40 .37 Fiduciaryactivities........................... .27 .29 .25 .26 .24 .27 .23 .20 .21 .21 Tradingrevenue............................. .48 .43 .32 .30 .23 .31 .37 .05 –.01 .23 Interestrateexposures..................... .20 .20 .15 .12 .07 .11 .09 .08 –.01 .13 Foreignexchangerateexposures........... .18 .14 .14 .14 .12 .12 .14 .09 .13 .09 Othercommodityandequityexposures..... .11 .08 .03 .04 .04 .07 .13 .06 .03 .04 Creditexposures........................... n.a. n.a. n.a. n.a. n.a. n.a. n.a. –.18 –.17 –.03 Other........................................ 1.39 1.10 1.26 1.30 1.28 1.38 1.35 1.31 1.07 1.36 Noninterestexpense............................ 3.31 3.13 3.16 3.02 3.11 2.99 2.89 2.80 2.71 2.71 Salaries,wages,andemployeebenefits........ 1.46 1.38 1.41 1.39 1.34 1.38 1.39 1.32 1.20 1.28 Occupancy.................................. .47 .45 .46 .45 .43 .43 .40 .37 .35 .36 Other........................................ 1.39 1.30 1.28 1.18 1.33 1.19 1.09 1.12 1.17 1.08 Netnoninterestexpense........................ .77 .87 .85 .70 .91 .62 .54 .85 1.05 .55 Gainsoninvestmentaccountsecurities.......... –.03 .08 .13 .11 .07 * –.01 .02 –.05 –.03 Incomebeforetaxesandextraordinaryitems..... 1.60 1.48 1.67 1.92 1.74 1.75 1.82 1.18 * .42 Taxes........................................ .60 .49 .56 .63 .56 .57 .59 .33 –.07 .06 Extraordinaryitems,netofincometaxes...... * –.01 * * * * .02 * .09 * Netincome.................................... 1.00 .99 1.11 1.29 1.18 1.18 1.25 .85 .16 .35 Cashdividendsdeclared...................... .86 .66 1.05 .99 .65 .59 .64 .60 .28 .47 Retainedincome............................. .13 .32 .06 .30 .53 .59 .62 .25 –.11 –.11 Memo:Returnonequity........................ 13.04 12.55 13.14 16.06 14.07 12.86 14.08 9.23 1.89 3.81 Note: DataareasofMarch23,2010. bymultifamilyresidentialproperties;andloanstofinancecommercialreales- 1. EffectiveOctober1,2008,theFederalReservebeganpayingintereston tate,construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. depositoryinstitutions’requiredandexcessreservebalances.Beginningwith 5. Other real estate owned is a component of other noninterest-earning the2008:Q4CallReport,balancesduefromFederalReserveBanksarenow assets. reportedunder“Interest-earningassets”ratherthan“Noninterest-earningassets.” 6. Whenpossible,basedontheaverageofquarterlybalancesheetdatare- 2. Includesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCallReport. 3. Measuredasthesumoflargetimedepositsindomesticoffices,deposits 7. Includesprovisionsforallocatedtransferrisk. booked in foreign offices, subordinated notes and debentures, federal funds * Inabsolutevalue,lessthan0.005percent. purchased and securities sold under repurchase agreements, Federal Home n.a. Notavailable. LoanBankadvances,andotherborrowedmoney. MMDA Moneymarketdepositaccount. 4. Measuredasthesumofconstructionandlanddevelopmentloanssecured RP Repurchaseagreement. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MBS Mortgage-backedsecurities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A31 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09 C.Banksranked11through100byassets Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interest-earningassets1......................... 88.67 88.09 88.34 88.10 88.18 87.87 87.05 87.01 85.34 85.84 Loansandleases(net)........................ 64.88 62.14 60.00 59.48 60.63 63.37 62.77 60.99 60.04 58.58 Commercialandindustrial................. 18.19 15.84 13.27 11.96 11.90 12.17 12.13 12.74 12.79 11.88 U.S.addressees......................... 17.64 15.36 12.94 11.66 11.64 11.91 11.81 12.41 12.46 11.53 Foreignaddressees...................... .55 .48 .33 .30 .26 .27 .32 .33 .34 .35 Consumer................................. 13.79 13.20 12.79 12.57 12.74 12.84 11.94 9.99 10.61 12.96 Creditcard.............................. 6.97 7.05 6.56 6.35 6.90 7.45 7.12 5.29 5.67 8.20 Installmentandother.................... 6.82 6.15 6.22 6.21 5.83 5.39 4.82 4.70 4.94 4.76 Realestate................................ 26.21 27.29 28.94 30.67 32.16 34.89 35.23 33.53 32.50 31.21 Indomesticoffices...................... 26.12 27.21 28.88 30.54 31.96 34.73 35.03 33.35 32.19 30.93 Constructionandlanddevelopment.... 3.00 3.31 3.36 3.22 3.51 4.21 5.27 5.95 5.65 4.45 Farmland............................. .22 .23 .22 .20 .19 .19 .17 .21 .26 .28 One-tofour-familyresidential......... 14.51 15.51 17.05 18.79 19.52 21.05 20.27 17.80 16.57 16.19 Homeequity....................... 2.49 2.90 3.92 4.74 5.90 6.04 5.01 4.01 3.90 4.17 Other.............................. 12.02 12.60 13.13 14.05 13.62 15.01 15.26 13.79 12.67 12.02 Multifamilyresidential................ 1.11 1.16 1.20 1.32 1.34 1.45 1.45 1.27 1.25 1.31 Nonfarmnonresidential............... 7.28 6.99 7.05 7.00 7.41 7.83 7.86 8.13 8.47 8.71 Inforeignoffices........................ .09 .09 .06 .13 .20 .16 .21 .18 .31 .28 Todepositoryinstitutionsand acceptancesofotherbanks ........... 1.05 1.40 1.44 1.21 .54 .56 .45 1.05 .94 1.07 Foreigngovernments...................... .03 .03 .02 .02 .01 .02 .01 .01 .03 .01 Agriculturalproduction.................... .37 .32 .27 .23 .19 .19 .18 .21 .23 .22 Otherloans................................ 2.57 2.03 1.80 1.59 1.87 1.62 1.88 2.43 2.56 1.98 Lease-financingreceivables................ 3.82 3.18 2.65 2.35 2.30 2.07 1.83 1.80 1.50 1.31 Less:Unearnedincomeonloans........... –.03 –.02 –.02 –.02 –.02 –.01 –.01 –.01 –.01 –.01 Less:Lossreserves2....................... –1.12 –1.13 –1.17 –1.10 –1.06 –.97 –.87 –.75 –1.12 –2.05 Securities.................................... 17.32 19.00 20.30 21.16 21.28 19.96 19.22 19.89 16.88 18.31 Investmentaccount........................ 16.10 17.71 19.17 20.09 20.12 18.80 17.72 17.99 14.99 15.80 Debt.................................... 15.50 17.32 18.82 19.88 19.96 18.69 17.60 17.88 14.84 15.41 U.S.Treasury......................... 1.12 .67 .74 .95 .89 .60 .44 .38 .31 .58 U.S.governmentagencyand corporationobligations........... 9.70 10.09 11.45 12.99 12.80 11.62 10.07 9.06 7.72 8.66 Government-backedmortgagepools. 4.31 5.19 6.00 6.08 5.74 4.83 4.04 3.73 3.76 4.56 Collateralizedmortgageobligations.. 2.55 2.42 2.79 3.72 3.42 3.39 2.94 2.68 2.43 2.59 Other.............................. 2.84 2.48 2.65 3.19 3.64 3.40 3.10 2.65 1.54 1.51 Stateandlocalgovernment............ .96 .99 .97 .95 .96 .98 1.01 1.16 1.03 .89 Privatemortgage-backedsecurities..... 1.66 2.01 2.13 2.14 2.65 3.58 4.29 4.60 3.23 1.78 Other................................. 2.06 3.56 3.53 2.85 2.66 1.90 1.78 2.67 2.54 3.50 Equity.................................. .60 .39 .34 .21 .16 .11 .12 .12 .14 .39 Tradingaccount........................... 1.22 1.29 1.13 1.07 1.16 1.16 1.50 1.90 1.89 2.52 GrossfederalfundssoldandreverseRPs..... 3.76 4.06 4.71 4.20 2.98 2.30 2.84 3.41 4.27 2.46 Balancesatdepositories1..................... 2.71 2.88 3.33 3.26 3.29 2.24 2.22 2.72 4.16 6.48 Noninterest-earningassets1..................... 11.33 11.91 11.66 11.90 11.82 12.13 12.95 12.99 14.66 14.16 Revaluationgainsheldintradingaccounts.... .40 .55 .47 .60 .42 .33 .30 .48 .91 1.36 Other........................................ 10.92 11.37 11.19 11.30 11.40 11.80 12.65 12.51 13.75 12.80 Liabilities...................................... 91.57 91.15 90.79 90.65 89.87 88.86 88.08 88.40 88.17 87.01 Coredeposits................................ 46.28 46.28 47.07 47.93 46.55 48.18 46.84 47.44 46.35 50.91 Transactiondeposits....................... 9.93 8.37 7.49 7.29 7.06 6.64 5.74 5.15 5.13 5.44 Demanddeposits........................ 8.61 7.17 6.32 5.96 5.65 5.35 4.54 3.90 3.89 3.98 Othercheckabledeposits................ 1.32 1.20 1.17 1.33 1.41 1.29 1.20 1.25 1.24 1.46 Savingsdeposits(includingMMDAs)...... 24.02 26.62 30.07 32.34 31.75 33.33 32.66 32.99 31.50 34.24 Smalltimedeposits........................ 12.33 11.28 9.51 8.30 7.74 8.20 8.44 9.30 9.71 11.23 Managedliabilities3.......................... 41.98 40.81 39.48 38.12 39.29 37.04 37.60 37.02 37.82 32.01 Largetimedeposits........................ 9.54 9.72 8.99 8.20 8.76 10.10 11.44 10.20 9.76 7.28 Depositsbookedinforeignoffices.......... 7.56 7.05 6.28 6.54 7.21 6.02 6.43 8.52 7.80 5.78 Subordinatednotesanddebentures......... 1.54 1.53 1.44 1.38 1.39 1.31 1.32 1.40 1.31 1.32 GrossfederalfundspurchasedandRPs..... 9.28 9.71 9.66 9.69 8.95 7.17 6.74 6.79 6.72 6.63 Othermanagedliabilities................... 14.07 12.79 13.11 12.30 12.97 12.44 11.66 10.10 12.23 11.00 Revaluationlossesheldintradingaccounts.... .41 .52 .44 .56 .40 .34 .29 .47 .85 1.10 Other........................................ 2.91 3.54 3.80 4.05 3.64 3.30 3.35 3.48 3.16 2.98 Capitalaccount................................ 8.43 8.85 9.21 9.35 10.13 11.14 11.92 11.60 11.83 12.99 Memo Commercialrealestateloans4................... 12.06 12.06 12.24 12.10 12.85 13.93 15.05 15.95 16.01 15.04 Otherrealestateowned5........................ .03 .04 .05 .06 .05 .04 .05 .06 .10 .21 Mortgage-backedsecurities..................... 8.52 9.63 10.93 11.93 11.81 11.81 11.27 11.01 9.42 8.93 FederalHomeLoanBankadvances............. n.a. 4.07 4.85 4.75 4.65 5.19 5.54 5.35 6.45 4.82 BalancesattheFederalReserve1 ............... .43 .36 .37 .37 .28 .21 .18 .19 3.89 4.73 Interest-earning.............................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3.18 4.73 Noninterest-earning.......................... .43 .36 .37 .37 .28 .21 .18 .19 .72 n.a. Interest-earningbalancesatdepositories otherthantheFederalReserve............. 2.71 2.88 3.33 3.26 3.29 2.24 2.22 2.72 3.43 1.75 Averagenetconsolidatedassets (billionsofdollars) ....................... 2,031 2,130 2,124 2,287 2,376 2,403 2,579 2,798 3,177 3,281

A32 Federal Reserve BulletinhMay 2010 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09—Continued C.Banksranked11through100byassets—Continued Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Effectiveinterestrate(percent)6 Ratesearned Interest-earningassets.......................... 8.44 7.54 6.03 5.30 5.21 5.98 6.93 6.87 5.83 5.14 Taxableequivalent...................... 8.48 7.58 6.07 5.33 5.24 6.02 6.97 6.91 5.85 5.16 Loansandleases,gross...................... 9.14 8.26 6.80 6.11 5.98 6.61 7.58 7.45 6.43 6.03 Netoflossprovisions................... 8.25 6.96 5.59 5.11 5.19 5.89 7.04 6.64 3.75 1.64 Securities.................................... 6.64 5.96 4.79 3.80 3.63 4.18 4.99 5.25 4.78 4.01 Taxableequivalent...................... 6.77 6.08 4.91 3.90 3.73 4.29 5.10 5.37 4.86 4.06 Investmentaccount........................ 6.66 6.04 4.86 3.87 3.64 4.11 4.84 5.18 4.74 4.03 U.S.TreasurysecuritiesandU.S. governmentagencyobligations (excludingMBS)..................... n.a. 5.83 4.28 3.17 2.94 3.47 4.28 4.85 3.92 1.95 Mortgage-backedsecurities.............. n.a. 6.60 5.34 4.20 4.02 4.34 5.02 5.23 5.02 4.76 Other................................... n.a. 5.13 4.22 3.61 3.29 4.06 4.87 5.28 4.42 3.56 Tradingaccount........................... 6.25 4.83 3.59 2.56 3.39 5.30 6.74 5.94 5.06 3.87 GrossfederalfundssoldandreverseRPs..... 6.06 3.86 1.68 1.14 1.25 3.24 4.95 5.16 2.29 .38 Interest-bearingbalancesatdepositories1...... 5.49 4.38 2.46 1.93 2.27 3.20 4.24 4.84 2.97 .54 Ratespaid Interest-bearingliabilities....................... 4.97 3.94 2.22 1.61 1.56 2.44 3.48 3.72 2.38 1.34 Interest-bearingdeposits...................... 4.42 3.60 1.96 1.35 1.29 2.03 3.07 3.33 2.14 1.19 Inforeignoffices.......................... 5.38 3.67 1.70 1.23 1.42 2.76 4.10 4.01 2.21 .38 Indomesticoffices......................... 4.26 3.60 1.99 1.36 1.27 1.95 2.95 3.22 2.12 1.27 Othercheckabledeposits................ 2.57 2.32 .94 .64 .72 1.29 2.12 2.60 1.32 .45 Savingsdeposits(includingMMDAs).... 2.94 2.30 1.08 .66 .65 1.30 2.14 2.44 1.32 .55 Largetimedeposits...................... 5.88 5.11 3.37 2.70 2.49 3.31 4.45 4.46 3.14 2.38 Othertimedeposits...................... 5.73 5.42 3.68 2.95 2.58 3.03 4.09 4.74 3.85 2.90 GrossfederalfundspurchasedandRPs....... 6.02 3.86 1.73 1.20 1.37 3.04 4.46 4.71 2.07 .64 Otherinterest-bearingliabilities............... 6.25 5.29 3.65 3.04 2.77 3.81 4.90 5.25 3.66 2.42 Incomeandexpenseasapercentageofaveragenetconsolidatedassets Grossinterestincome........................... 7.54 6.70 5.31 4.67 4.63 5.28 6.08 5.99 4.99 4.49 Taxableequivalent......................... 7.57 6.73 5.34 4.70 4.65 5.31 6.11 6.02 5.01 4.50 Loans....................................... 6.05 5.28 4.15 3.72 3.71 4.27 4.85 4.60 3.94 3.67 Securities.................................... 1.09 1.06 .90 .75 .73 .77 .87 .93 .71 .65 GrossfederalfundssoldandreverseRPs..... .22 .15 .08 .04 .03 .06 .13 .17 .09 .01 Other........................................ .18 .21 .18 .15 .15 .18 .23 .29 .24 .16 Grossinterestexpense.......................... 3.96 3.14 1.77 1.30 1.26 1.94 2.78 2.96 1.88 1.06 Deposits..................................... 2.41 2.01 1.09 .77 .74 1.18 1.84 2.04 1.26 .72 GrossfederalfundspurchasedandRPs....... .56 .38 .17 .12 .13 .23 .30 .32 .14 .04 Other........................................ .99 .75 .51 .41 .40 .53 .63 .59 .48 .30 Netinterestincome............................. 3.58 3.56 3.54 3.37 3.36 3.34 3.30 3.03 3.11 3.43 Taxableequivalent......................... 3.61 3.59 3.57 3.40 3.39 3.37 3.33 3.06 3.13 3.45 Lossprovisions7............................... .68 .91 .80 .67 .55 .52 .41 .55 1.69 2.71 Noninterestincome............................. 3.18 3.35 3.30 3.29 3.09 2.81 2.91 2.73 2.38 2.35 Servicechargesondeposits................... .42 .42 .42 .42 .40 .37 .35 .33 .32 .30 Fiduciaryactivities........................... .52 .42 .42 .37 .42 .35 .41 .54 .41 .24 Tradingrevenue............................. .07 .08 .08 .09 .07 .06 .07 .09 –.01 .26 Interestrateexposures..................... .02 .04 .04 .04 –.01 –.01 .02 * –.02 .18 Foreignexchangerateexposures........... .04 .03 .04 .04 .05 .04 .05 .08 .08 –.03 Othercommodityandequityexposures..... * * * .01 .03 .02 * * * * Creditexposures........................... n.a. n.a. n.a. n.a. n.a. n.a. n.a. .01 –.06 .11 Other........................................ 2.18 2.43 2.37 2.41 2.20 2.03 2.09 1.77 1.65 1.56 Noninterestexpense............................ 4.00 3.95 3.73 3.64 3.55 3.36 3.34 3.45 3.56 3.29 Salaries,wages,andemployeebenefits........ 1.44 1.47 1.49 1.47 1.45 1.37 1.34 1.32 1.22 1.14 Occupancy.................................. .43 .42 .40 .41 .39 .37 .33 .34 .32 .31 Other........................................ 2.14 2.07 1.84 1.76 1.70 1.62 1.68 1.79 2.02 1.85 Netnoninterestexpense........................ .82 .60 .43 .35 .45 .55 .43 .72 1.18 .94 Gainsoninvestmentaccountsecurities.......... –.05 .09 .10 .06 .03 * –.03 –.05 –.30 .01 Incomebeforetaxesandextraordinaryitems..... 2.02 2.14 2.41 2.42 2.39 2.27 2.43 1.71 –.06 –.21 Taxes........................................ .70 .74 .82 .82 .82 .77 .83 .59 .13 * Extraordinaryitems,netofincometaxes...... * * * * * .01 .07 –.05 –.01 –.12 Netincome.................................... 1.32 1.39 1.59 1.59 1.57 1.50 1.67 1.06 –.20 –.33 Cashdividendsdeclared...................... .94 .96 .99 1.05 .95 1.00 1.37 1.26 .44 .18 Retainedincome............................. .38 .43 .60 .54 .62 .50 .30 –.20 –.63 –.52 Memo:Returnonequity........................ 15.72 15.74 17.24 17.03 15.54 13.48 14.05 9.16 –1.67 –2.55 Note:DataareasofMarch23,2010. bymultifamilyresidentialproperties;andloanstofinancecommercialreales- 1.EffectiveOctober1,2008,theFederalReservebeganpayingintereston tate,construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. depositoryinstitutions’requiredandexcessreservebalances.Beginningwith 5. Other real estate owned is a component of other noninterest-earning the2008:Q4CallReport,balancesduefromFederalReserveBanksarenow assets. reportedunder“Interest-earningassets”ratherthan“Noninterest-earningassets.” 6.Whenpossible,basedontheaverageofquarterlybalancesheetdatare- 2.Includesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCallReport. 3.Measuredasthesumoflargetimedepositsindomesticoffices,deposits 7.Includesprovisionsforallocatedtransferrisk. booked in foreign offices, subordinated notes and debentures, federal funds *Inabsolutevalue,lessthan0.005percent. purchased and securities sold under repurchase agreements, Federal Home n.a. Notavailable. LoanBankadvances,andotherborrowedmoney. MMDA Moneymarketdepositaccount. 4.Measuredasthesumofconstructionandlanddevelopmentloanssecured RP Repurchaseagreement. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MBS Mortgage-backedsecurities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A33 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09 D.Banksranked101through1,000byassets Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interest-earningassets1......................... 91.50 91.16 91.36 91.34 91.56 91.32 91.07 91.28 91.28 91.30 Loansandleases(net)........................ 62.15 62.46 61.46 61.32 63.33 65.15 67.04 68.85 70.52 67.68 Commercialandindustrial................. 12.95 13.03 12.38 11.50 11.52 11.78 11.68 12.07 12.58 11.38 U.S.addressees......................... 12.60 12.65 12.06 11.20 11.21 11.48 11.45 11.80 12.31 11.17 Foreignaddressees...................... .36 .38 .31 .31 .31 .30 .23 .27 .27 .21 Consumer................................. 10.19 9.76 8.13 6.80 6.33 5.42 5.50 5.35 5.15 4.73 Creditcard.............................. 3.27 3.65 2.63 1.82 1.91 1.24 1.63 1.88 1.76 1.23 Installmentandother.................... 6.92 6.11 5.50 4.98 4.42 4.18 3.87 3.46 3.39 3.50 Realestate................................ 36.93 37.64 38.92 40.95 43.38 45.86 47.88 49.50 50.78 50.00 Indomesticoffices...................... 36.91 37.62 38.89 40.90 43.32 45.78 47.78 49.41 50.77 49.99 Constructionandlanddevelopment.... 4.15 4.90 5.40 5.89 7.01 8.86 11.01 12.85 13.04 10.59 Farmland............................. .65 .66 .73 .80 .91 .99 1.07 1.16 1.22 1.30 One-tofour-familyresidential......... 17.17 16.18 15.39 15.71 15.33 15.17 14.76 14.08 14.16 14.64 Homeequity....................... 2.10 2.21 2.51 2.92 3.46 3.60 3.25 3.01 3.19 3.39 Other.............................. 15.06 13.97 12.88 12.79 11.87 11.57 11.51 11.07 10.97 11.24 Multifamilyresidential................ 1.58 1.69 1.83 2.00 2.24 2.37 2.32 2.33 2.41 2.48 Nonfarmnonresidential............... 13.36 14.18 15.55 16.51 17.82 18.39 18.63 18.99 19.95 21.00 Inforeignoffices........................ .02 .02 .03 .05 .06 .08 .10 .09 * * Todepositoryinstitutionsand acceptancesofotherbanks ........... .37 .38 .37 .37 .25 .13 .14 .14 .27 .19 Foreigngovernments...................... .03 .03 .02 .02 .01 * * * * * Agriculturalproduction.................... .82 .85 .86 .83 .82 .81 .84 .88 .90 .92 Otherloans................................ 1.22 1.22 1.18 1.25 1.32 1.36 1.20 1.22 1.37 1.47 Lease-financingreceivables................ .75 .74 .75 .67 .75 .75 .75 .65 .65 .49 Less:Unearnedincomeonloans........... –.08 –.07 –.06 –.06 –.06 –.06 –.06 –.06 –.06 –.07 Less:Lossreserves2....................... –1.04 –1.12 –1.10 –1.02 –.98 –.90 –.88 –.91 –1.12 –1.43 Securities.................................... 24.34 22.81 23.86 24.36 23.59 21.57 19.55 18.30 16.96 17.28 Investmentaccount........................ 24.25 22.70 23.80 24.23 23.54 21.50 19.47 18.10 16.80 17.19 Debt.................................... 23.46 22.28 23.30 23.79 23.18 21.21 19.20 17.69 16.27 16.72 U.S.Treasury......................... 1.81 1.32 1.22 1.00 1.02 .83 .59 .47 .36 .48 U.S.governmentagencyand corporationobligations........... 15.56 14.70 15.85 16.96 16.70 15.05 13.55 12.32 11.32 11.53 Government-backedmortgagepools. 6.22 6.27 6.55 7.03 6.80 5.73 4.83 4.57 5.24 5.34 Collateralizedmortgageobligations.. 3.04 3.08 3.69 3.69 3.41 3.16 2.81 2.60 2.42 2.81 Other.............................. 6.30 5.35 5.60 6.24 6.49 6.16 5.90 5.15 3.66 3.39 Stateandlocalgovernment............ 2.91 2.90 2.89 2.95 2.92 2.78 2.74 2.77 2.73 2.90 Privatemortgage-backedsecurities..... .99 .94 .99 .87 1.08 1.17 1.08 1.01 .86 .83 Other................................. 2.19 2.42 2.34 2.01 1.46 1.37 1.24 1.12 1.00 .98 Equity.................................. .79 .43 .50 .43 .36 .29 .27 .41 .53 .47 Tradingaccount........................... .09 .11 .06 .14 .05 .08 .07 .20 .17 .09 GrossfederalfundssoldandreverseRPs..... 3.40 4.20 4.15 3.85 2.95 2.83 2.81 2.57 2.01 1.46 Balancesatdepositories1..................... 1.60 1.68 1.89 1.81 1.69 1.76 1.67 1.57 1.78 4.88 Noninterest-earningassets1..................... 8.50 8.84 8.64 8.66 8.44 8.68 8.93 8.72 8.72 8.70 Revaluationgainsheldintradingaccounts.... .02 .01 .01 * * * .03 .04 .06 .03 Other........................................ 8.49 8.84 8.64 8.66 8.44 8.68 8.90 8.67 8.66 8.67 Liabilities...................................... 90.95 90.32 89.93 89.68 89.18 89.10 89.01 88.87 89.24 89.52 Coredeposits................................ 60.80 60.33 61.26 61.30 60.39 59.03 58.04 59.68 58.94 60.49 Transactiondeposits....................... 12.29 11.48 11.37 11.50 11.77 11.15 9.82 8.43 7.74 8.27 Demanddeposits........................ 8.97 8.23 8.05 7.96 8.12 7.87 6.99 5.94 5.32 5.51 Othercheckabledeposits................ 3.32 3.25 3.32 3.54 3.64 3.28 2.83 2.49 2.42 2.76 Savingsdeposits(includingMMDAs)...... 28.55 29.40 32.34 34.00 34.42 33.75 32.82 32.89 31.04 31.67 Smalltimedeposits........................ 19.96 19.46 17.55 15.80 14.21 14.13 15.41 18.36 20.15 20.55 Managedliabilities3.......................... 28.01 27.75 26.57 26.40 26.98 28.38 29.32 27.51 28.72 27.21 Largetimedeposits........................ 11.98 12.60 12.17 11.92 12.12 13.64 15.21 14.42 14.13 15.21 Depositsbookedinforeignoffices.......... 1.28 1.24 .88 .64 .65 .57 .52 .57 .72 .60 Subordinatednotesanddebentures......... .30 .31 .34 .35 .35 .27 .24 .22 .21 .16 GrossfederalfundspurchasedandRPs..... 6.30 5.77 5.27 5.35 5.52 5.54 5.40 5.33 5.26 4.06 Othermanagedliabilities................... 8.15 7.84 7.90 8.13 8.34 8.35 7.94 6.97 8.39 7.18 Revaluationlossesheldintradingaccounts.... * .01 .01 * * * .01 .01 .02 .02 Other........................................ 2.13 2.23 2.08 1.98 1.81 1.69 1.64 1.66 1.57 1.80 Capitalaccount................................ 9.05 9.68 10.07 10.32 10.82 10.90 10.99 11.13 10.76 10.48 Memo Commercialrealestateloans4................... 19.32 21.03 23.05 24.62 27.28 29.84 32.22 34.52 35.86 34.51 Otherrealestateowned5........................ 0.07 0.08 0.10 0.11 0.10 0.08 0.08 0.11 0.27 0.62 Mortgage-backedsecurities..................... 10.25 10.29 11.24 11.59 11.29 10.06 8.72 8.18 8.52 8.97 FederalHomeLoanBankadvances............. n.a. 5.27 5.71 6.29 6.46 6.42 6.11 5.53 7.04 5.97 BalancesattheFederalReserve1 ............... 0.57 0.54 0.52 0.59 0.55 0.47 0.36 0.29 1.46 3.34 Interest-earning.............................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1.15 3.34 Noninterest-earning.......................... 0.57 0.54 0.52 0.59 0.55 0.47 0.36 0.29 0.31 n.a. Interest-earningbalancesatdepositories otherthantheFederalReserve............. 1.60 1.68 1.89 1.81 1.69 1.76 1.67 1.57 1.54 1.53 Averagenetconsolidatedassets (billionsofdollars) ....................... 986 1,002 1,022 1,072 1,080 1,152 1,249 1,267 1,278 1,312

A34 Federal Reserve BulletinhMay 2010 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09—Continued D.Banksranked101through1,000byassets—Continued Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Effectiveinterestrate(percent)6 Ratesearned Interest-earningassets.......................... 8.48 7.85 6.42 5.59 5.46 6.12 7.01 7.31 6.24 5.22 Taxableequivalent...................... 8.56 7.94 6.50 5.67 5.53 6.19 7.08 7.38 6.30 5.28 Loansandleases,gross...................... 9.42 8.76 7.31 6.56 6.25 6.90 7.79 8.02 6.72 5.81 Netoflossprovisions................... 8.75 7.87 6.55 6.01 5.87 6.64 7.55 7.44 5.04 3.15 Securities.................................... 6.45 5.96 4.95 3.81 3.79 4.03 4.53 4.86 4.76 4.20 Taxableequivalent...................... 6.71 6.24 5.21 4.06 4.04 4.28 4.80 5.14 5.01 4.43 Investmentaccount........................ 6.45 5.95 4.93 3.82 3.78 4.02 4.53 4.85 4.76 4.20 U.S.TreasurysecuritiesandU.S. governmentagencyobligations (excludingMBS)..................... n.a. 5.85 4.54 3.42 3.15 3.47 4.19 4.74 4.45 3.19 Mortgage-backedsecurities.............. n.a. 6.33 5.38 3.95 4.01 4.23 4.64 4.96 5.09 4.75 Other................................... n.a. 5.40 4.51 4.07 4.21 4.42 4.81 4.81 4.42 3.97 Tradingaccount........................... 9.30 6.60 14.05 3.07 10.30 6.59 4.92 5.25 4.44 4.17 GrossfederalfundssoldandreverseRPs..... 6.15 3.91 1.73 1.27 1.57 3.31 4.94 4.87 2.12 .50 Interest-bearingbalancesatdepositories1...... 5.76 3.93 1.79 1.26 1.47 3.29 4.60 4.56 2.21 .44 Ratespaid Interest-bearingliabilities....................... 4.79 3.97 2.45 1.80 1.65 2.36 3.38 3.78 2.79 1.92 Interest-bearingdeposits...................... 4.46 3.81 2.28 1.61 1.44 2.09 3.11 3.59 2.72 1.85 Inforeignoffices.......................... 6.13 4.27 2.14 1.43 1.43 3.05 4.50 4.63 2.29 .59 Indomesticoffices......................... 4.43 3.81 2.28 1.61 1.44 2.08 3.10 3.58 2.72 1.86 Othercheckabledeposits................ 2.27 1.81 1.06 .74 .72 1.18 1.74 1.89 1.17 .71 Savingsdeposits(includingMMDAs).... 3.07 2.22 1.17 .75 .74 1.27 2.06 2.38 1.39 .78 Largetimedeposits...................... 6.00 5.27 3.32 2.58 2.33 3.21 4.42 4.90 3.91 2.71 Othertimedeposits...................... 5.74 5.51 3.77 2.86 2.51 3.10 4.19 4.83 4.03 2.97 GrossfederalfundspurchasedandRPs....... 5.95 3.82 1.83 1.29 1.45 2.94 4.52 4.49 2.30 1.15 Otherinterest-bearingliabilities............... 6.46 5.32 4.22 3.57 3.37 4.02 4.75 5.04 3.65 3.11 Incomeandexpenseasapercentageofaveragenetconsolidatedassets Grossinterestincome........................... 7.79 7.16 5.84 5.07 4.99 5.57 6.40 6.67 5.71 4.78 Taxableequivalent......................... 7.86 7.23 5.91 5.15 5.06 5.64 6.46 6.74 5.76 4.82 Loans....................................... 5.96 5.59 4.56 4.07 4.01 4.55 5.29 5.58 4.80 4.01 Securities.................................... 1.58 1.33 1.15 .91 .88 .86 .89 .88 .80 .72 GrossfederalfundssoldandreverseRPs..... .21 .16 .07 .05 .05 .09 .14 .12 .04 .01 Other........................................ .04 .08 .06 .05 .05 .07 .09 .09 .06 .04 Grossinterestexpense.......................... 3.79 3.14 1.92 1.41 1.29 1.84 2.67 3.00 2.24 1.55 Deposits..................................... 2.87 2.48 1.49 1.04 .92 1.34 2.04 2.41 1.81 1.28 GrossfederalfundspurchasedandRPs....... .38 .22 .09 .07 .08 .16 .24 .24 .12 .05 Other........................................ .54 .44 .34 .30 .29 .34 .39 .36 .31 .23 Netinterestincome............................. 4.00 4.02 3.92 3.67 3.70 3.73 3.73 3.67 3.47 3.22 Taxableequivalent......................... 4.07 4.10 3.99 3.74 3.77 3.79 3.79 3.73 3.52 3.27 Lossprovisions7............................... .52 .65 .54 .40 .30 .24 .23 .47 1.25 1.88 Noninterestincome............................. 2.35 2.37 2.36 2.30 2.26 2.02 1.98 1.88 1.52 1.57 Servicechargesondeposits................... .36 .39 .41 .41 .39 .36 .35 .36 .36 .34 Fiduciaryactivities........................... .44 .40 .35 .34 .37 .35 .30 .31 .31 .27 Tradingrevenue............................. .01 * * .01 .01 .01 .01 .01 –.01 .02 Interestrateexposures..................... .01 –.01 * .01 .01 .01 * * * * Foreignexchangerateexposures........... * * * * * * * * * * Othercommodityandequityexposures..... * * * * * * * * –.01 * Creditexposures........................... n.a. n.a. n.a. n.a. n.a. n.a. n.a. * * .01 Other........................................ 1.55 1.58 1.60 1.54 1.49 1.30 1.32 1.20 .85 .94 Noninterestexpense............................ 3.84 3.88 3.72 3.59 3.54 3.37 3.35 3.26 3.42 3.36 Salaries,wages,andemployeebenefits........ 1.59 1.61 1.64 1.64 1.64 1.61 1.59 1.57 1.46 1.42 Occupancy.................................. .47 .46 .45 .43 .43 .41 .40 .40 .39 .39 Other........................................ 1.78 1.81 1.63 1.53 1.48 1.36 1.35 1.28 1.58 1.55 Netnoninterestexpense........................ 1.48 1.52 1.35 1.29 1.29 1.35 1.36 1.38 1.90 1.79 Gainsoninvestmentaccountsecurities.......... –.04 .05 .04 .05 .02 –.01 –.01 –.01 –.22 –.02 Incomebeforetaxesandextraordinaryitems..... 1.96 1.90 2.07 2.02 2.13 2.13 2.13 1.81 .09 –.47 Taxes........................................ .67 .66 .67 .66 .68 .68 .69 .57 .14 * Extraordinaryitems,netofincometaxes...... * .01 * .03 * * * * * * Netincome.................................... 1.29 1.25 1.39 1.39 1.45 1.45 1.43 1.23 –.05 –.47 Cashdividendsdeclared...................... .92 1.33 1.19 1.64 .78 .87 .90 .91 .57 .34 Retainedincome............................. .37 –.08 .20 –.25 .68 .58 .54 .32 –.62 –.80 Memo:Returnonequity........................ 14.21 12.93 13.83 13.46 13.42 13.33 13.05 11.08 –.50 –4.48 Note:DataareasofMarch23,2010. bymultifamilyresidentialproperties;andloanstofinancecommercialreales- 1.EffectiveOctober1,2008,theFederalReservebeganpayingintereston tate,construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. depositoryinstitutions’requiredandexcessreservebalances.Beginningwith 5. Other real estate owned is a component of other noninterest-earning the2008:Q4CallReport,balancesduefromFederalReserveBanksarenow assets. reportedunder“Interest-earningassets”ratherthan“Noninterest-earningassets.” 6.Whenpossible,basedontheaverageofquarterlybalancesheetdatare- 2.Includesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCallReport. 3.Measuredasthesumoflargetimedepositsindomesticoffices,deposits 7.Includesprovisionsforallocatedtransferrisk. booked in foreign offices, subordinated notes and debentures, federal funds *Inabsolutevalue,lessthan0.005percent. purchased and securities sold under repurchase agreements, Federal Home n.a.Notavailable. LoanBankadvances,andotherborrowedmoney. MMDA Moneymarketdepositaccount. 4.Measuredasthesumofconstructionandlanddevelopmentloanssecured RP Repurchaseagreement. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MBS Mortgage-backedsecurities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A35 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09 E.Banksnotrankedamongthe1,000largestbyassets Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Balancesheetitemsasapercentageofaveragenetconsolidatedassets Interest-earningassets1......................... 92.52 92.30 92.27 92.16 92.34 92.29 92.36 92.39 92.15 92.42 Loansandleases(net)........................ 62.31 62.67 62.72 62.32 63.80 65.43 66.65 67.29 67.82 66.55 Commercialandindustrial................. 11.09 11.10 10.71 10.42 10.29 10.21 10.17 10.25 10.34 9.72 U.S.addressees......................... 11.02 11.02 10.65 10.37 10.25 10.15 10.12 10.21 10.30 9.68 Foreignaddressees...................... .07 .07 .06 .05 .04 .05 .04 .04 .04 .05 Consumer................................. 7.98 7.42 6.77 6.16 5.45 4.97 4.63 4.36 4.07 3.77 Creditcard.............................. .59 .59 .49 .51 .40 .36 .37 .37 .35 .31 Installmentandother.................... 7.39 6.83 6.28 5.64 5.05 4.61 4.25 3.99 3.72 3.46 Realestate................................ 39.29 40.30 41.52 42.30 44.75 46.97 48.54 49.28 50.10 49.93 Indomesticoffices...................... 39.29 40.30 41.52 42.30 44.74 46.97 48.53 49.28 50.10 49.93 Constructionandlanddevelopment.... 3.70 4.23 4.51 4.99 6.01 7.46 9.10 10.01 9.64 7.80 Farmland............................. 3.06 3.04 3.08 3.13 3.22 3.25 3.26 3.38 3.49 3.64 One-tofour-familyresidential......... 18.43 18.24 17.91 17.08 17.17 17.12 16.69 16.31 16.64 17.29 Homeequity....................... 1.28 1.37 1.62 1.79 2.11 2.20 2.06 2.01 2.11 2.29 Other.............................. 17.15 16.87 16.29 15.29 15.06 14.93 14.63 14.30 14.52 15.01 Multifamilyresidential................ 1.04 1.06 1.16 1.28 1.41 1.48 1.47 1.50 1.61 1.76 Nonfarmnonresidential............... 13.06 13.71 14.86 15.82 16.94 17.66 18.01 18.09 18.73 19.43 Inforeignoffices........................ * * * * * * * * * * Todepositoryinstitutionsand acceptancesofotherbanks ........... .12 .12 .10 .09 .07 .05 .05 .06 .06 .06 Foreigngovernments...................... .01 * * * * * * * * * Agriculturalproduction.................... 3.85 3.76 3.64 3.40 3.26 3.21 3.22 3.26 3.24 3.20 Otherloans................................ .69 .67 .65 .66 .68 .70 .70 .70 .73 .75 Lease-financingreceivables................ .27 .27 .31 .26 .25 .24 .26 .27 .26 .24 Less:Unearnedincomeonloans........... –.11 –.09 –.07 –.06 –.06 –.05 –.05 –.04 –.04 –.04 Less:Lossreserves2....................... –.88 –.88 –.90 –.92 –.89 –.87 –.87 –.87 –.93 –1.09 Securities.................................... 25.40 22.80 23.34 23.47 23.34 21.92 20.54 19.65 19.20 19.22 Investmentaccount........................ 25.38 22.79 23.33 23.43 23.34 21.91 20.52 19.58 19.16 19.18 Debt.................................... 24.82 22.49 23.05 23.12 23.07 21.70 20.35 19.41 18.97 19.00 U.S.Treasury......................... 2.12 1.33 1.04 .90 .81 .71 .61 .47 .33 .37 U.S.governmentagencyand corporationobligations........... 16.95 15.27 16.07 16.23 16.57 15.64 14.73 14.01 13.44 13.12 Government-backedmortgagepools. 3.47 3.78 4.54 4.84 4.76 4.23 3.62 3.55 4.80 5.15 Collateralizedmortgageobligations.. 1.70 1.94 2.30 2.20 1.96 1.71 1.50 1.55 1.76 1.88 Other.............................. 11.78 9.56 9.23 9.19 9.85 9.70 9.61 8.92 6.88 6.09 Stateandlocalgovernment............ 4.64 4.51 4.56 4.73 4.67 4.49 4.30 4.20 4.24 4.52 Privatemortgage-backedsecurities..... .23 .27 .26 .21 .19 .22 .24 .29 .47 .48 Other................................. .88 1.11 1.12 1.05 .83 .65 .48 .43 .49 .51 Equity.................................. .56 .30 .27 .31 .26 .20 .17 .17 .19 .18 Tradingaccount........................... .02 .01 .01 .04 .01 .02 .02 .07 .04 .03 GrossfederalfundssoldandreverseRPs..... 3.22 5.01 4.26 4.27 3.33 3.24 3.53 3.92 3.29 2.44 Balancesatdepositories1..................... 1.59 1.82 1.95 2.11 1.86 1.69 1.64 1.54 1.84 4.21 Noninterest-earningassets1..................... 7.48 7.70 7.73 7.84 7.66 7.71 7.64 7.61 7.85 7.58 Revaluationgainsheldintradingaccounts.... * * * * * * * * * * Other........................................ 7.48 7.70 7.73 7.84 7.66 7.71 7.64 7.61 7.85 7.58 Liabilities...................................... 89.88 89.59 89.73 89.58 89.55 89.49 89.35 88.95 89.12 89.53 Coredeposits................................ 70.87 69.92 70.04 69.96 69.24 67.68 65.74 65.12 64.28 64.35 Transactiondeposits....................... 23.20 22.35 22.66 23.18 23.36 22.72 20.81 18.66 17.75 17.99 Demanddeposits........................ 12.64 12.16 12.24 12.58 12.77 12.77 11.97 10.73 10.07 9.87 Othercheckabledeposits................ 10.57 10.19 10.42 10.60 10.59 9.95 8.84 7.93 7.68 8.12 Savingsdeposits(includingMMDAs)...... 19.19 19.38 21.32 22.43 23.24 22.98 22.66 22.68 22.56 23.08 Smalltimedeposits........................ 28.48 28.20 26.05 24.36 22.64 21.98 22.28 23.78 23.97 23.28 Managedliabilities3.......................... 18.08 18.67 18.79 18.78 19.57 21.04 22.76 22.92 24.02 24.42 Largetimedeposits........................ 12.51 13.55 13.21 13.07 13.15 14.53 16.49 16.91 16.64 17.79 Depositsbookedinforeignoffices.......... .05 .06 .07 .06 .07 .06 .06 .05 .06 .05 Subordinatednotesanddebentures......... .02 .02 .04 .03 .04 .03 .03 .03 .03 .03 GrossfederalfundspurchasedandRPs..... 2.06 1.55 1.51 1.52 1.76 1.74 1.82 1.82 1.87 1.49 Othermanagedliabilities................... 3.44 3.49 3.96 4.09 4.54 4.68 4.36 4.11 5.41 5.06 Revaluationlossesheldintradingaccounts.... * * * * * * * * * * Other........................................ .93 1.00 .90 .84 .74 .77 .84 .91 .82 .76 Capitalaccount................................ 10.12 10.41 10.27 10.42 10.45 10.51 10.65 11.05 10.88 10.47 Memo Commercialrealestateloans4................... 17.91 19.15 20.67 22.23 24.50 26.77 28.81 29.88 30.34 29.28 Otherrealestateowned5........................ .11 .12 .14 .15 .14 .13 .12 .16 .35 .70 Mortgage-backedsecurities..................... 5.39 5.99 7.10 7.25 6.91 6.16 5.36 5.39 7.03 7.51 FederalHomeLoanBankadvances............. n.a. 3.34 3.71 3.87 4.32 4.46 4.14 3.93 5.20 4.78 BalancesattheFederalReserve1 ............... .93 .76 .79 .87 .78 .70 .57 .45 1.26 2.09 Interest-earning.............................. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. .82 2.09 Noninterest-earning.......................... .93 .76 .79 .87 .78 .70 .57 .45 .45 n.a. Interest-earningbalancesatdepositories otherthantheFederalReserve............. 1.59 1.82 1.95 2.11 1.86 1.69 1.64 1.54 1.71 2.12 Averagenetconsolidatedassets (billionsofdollars) ....................... 655 675 704 742 768 805 840 862 882 897

A36 Federal Reserve BulletinhMay 2010 A.1. Portfoliocomposition,interestrates,andincomeandexpense,U.S.banks,2000–09—Continued E.Banksnotrankedamongthe1,000largestbyassets—Continued Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Effectiveinterestrate(percent)6 Ratesearned Interest-earningassets.......................... 8.44 7.92 6.79 5.94 5.73 6.23 7.01 7.26 6.34 5.53 Taxableequivalent...................... 8.56 8.03 6.90 6.05 5.84 6.33 7.10 7.35 6.42 5.61 Loansandleases,gross...................... 9.51 9.01 7.83 7.08 6.72 7.17 7.94 8.13 7.03 6.32 Netoflossprovisions................... 9.14 8.60 7.39 6.72 6.45 6.94 7.74 7.81 6.12 4.87 Securities.................................... 6.15 5.86 5.03 3.87 3.74 3.87 4.28 4.68 4.70 4.17 Taxableequivalent...................... 6.54 6.27 5.43 4.26 4.11 4.24 4.65 5.05 5.04 4.51 Investmentaccount........................ 6.15 5.86 5.02 3.87 3.73 3.86 4.28 4.68 4.70 4.16 U.S.TreasurysecuritiesandU.S. governmentagencyobligations (excludingMBS)..................... n.a. 5.97 4.80 3.74 3.38 3.53 4.12 4.69 4.62 3.65 Mortgage-backedsecurities.............. n.a. 6.20 5.47 3.58 3.90 4.17 4.59 4.96 5.08 4.67 Other................................... n.a. 5.29 4.87 4.43 4.18 4.16 4.25 4.33 4.28 4.07 Tradingaccount........................... 4.01 6.43 15.38 2.89 18.95 7.52 7.50 4.74 4.33 5.49 GrossfederalfundssoldandreverseRPs..... 6.24 3.82 1.63 1.08 1.32 3.21 4.95 5.05 2.17 .31 Interest-bearingbalancesatdepositories1...... 6.38 4.56 2.68 1.97 2.02 3.21 4.64 5.06 3.03 1.15 Ratespaid Interest-bearingliabilities....................... 4.84 4.43 2.93 2.14 1.88 2.44 3.42 3.91 3.06 2.16 Interest-bearingdeposits...................... 4.67 4.31 2.78 2.02 1.75 2.29 3.28 3.81 2.99 2.07 Inforeignoffices.......................... 5.13 3.97 1.67 .85 1.04 2.86 4.27 4.66 2.28 .19 Indomesticoffices......................... 4.67 4.31 2.78 2.02 1.75 2.29 3.28 3.80 2.99 2.07 Othercheckabledeposits................ 2.47 1.97 1.16 .78 .69 .99 1.45 1.62 1.11 .74 Savingsdeposits(includingMMDAs).... 3.56 2.81 1.72 1.13 1.04 1.53 2.34 2.67 1.65 1.01 Largetimedeposits...................... 5.89 5.52 3.61 2.79 2.47 3.21 4.37 4.90 4.03 2.84 Othertimedeposits...................... 5.70 5.60 3.88 2.96 2.55 3.04 4.12 4.79 4.06 2.99 GrossfederalfundspurchasedandRPs....... 5.69 3.92 1.85 1.31 1.45 2.89 4.37 4.46 2.35 1.10 Otherinterest-bearingliabilities............... 9.13 8.08 6.82 5.31 4.59 5.01 5.70 5.81 4.49 3.89 Incomeandexpenseasapercentageofaveragenetconsolidatedassets Grossinterestincome........................... 7.83 7.33 6.31 5.46 5.32 5.78 6.49 6.73 5.87 5.12 Taxableequivalent......................... 7.95 7.44 6.41 5.56 5.41 5.87 6.58 6.82 5.94 5.19 Loans....................................... 5.99 5.73 5.01 4.47 4.35 4.76 5.35 5.53 4.83 4.27 Securities.................................... 1.57 1.32 1.16 .89 .87 .85 .88 .92 .90 .79 GrossfederalfundssoldandreverseRPs..... .21 .20 .07 .05 .05 .11 .18 .20 .08 .01 Other........................................ .05 .08 .06 .06 .05 .06 .08 .08 .07 .05 Grossinterestexpense.......................... 3.64 3.33 2.22 1.60 1.41 1.82 2.56 2.95 2.33 1.67 Deposits..................................... 3.30 3.07 1.98 1.41 1.22 1.58 2.27 2.67 2.08 1.48 GrossfederalfundspurchasedandRPs....... .12 .06 .03 .02 .02 .05 .08 .08 .04 .02 Other........................................ .21 .20 .21 .17 .17 .19 .21 .20 .21 .17 Netinterestincome............................. 4.20 4.00 4.08 3.86 3.91 3.96 3.94 3.79 3.54 3.45 Taxableequivalent......................... 4.31 4.10 4.19 3.96 4.00 4.05 4.03 3.87 3.62 3.52 Lossprovisions7............................... .32 .33 .35 .29 .23 .21 .20 .28 .68 1.03 Noninterestincome............................. 1.31 1.30 1.39 1.47 1.38 1.33 1.31 1.33 1.18 1.01 Servicechargesondeposits................... .43 .44 .45 .43 .43 .40 .38 .37 .36 .33 Fiduciaryactivities........................... .20 .25 .27 .28 .31 .33 .36 .38 .33 .24 Tradingrevenue............................. * * * * * * * * * * Interestrateexposures..................... * * * * * * * * * * Foreignexchangerateexposures........... * * * * * * * * * * Othercommodityandequityexposures..... * * * * * * * * * * Creditexposures........................... n.a. n.a. n.a. n.a. n.a. n.a. n.a. * * * Other........................................ .67 .61 .67 .76 .64 .61 .57 .58 .50 .44 Noninterestexpense............................ 3.57 3.54 3.57 3.55 3.52 3.48 3.49 3.53 3.52 3.44 Salaries,wages,andemployeebenefits........ 1.78 1.79 1.82 1.82 1.81 1.79 1.82 1.84 1.76 1.64 Occupancy.................................. .47 .47 .46 .45 .45 .44 .44 .44 .44 .42 Other........................................ 1.31 1.28 1.28 1.28 1.26 1.25 1.24 1.25 1.32 1.38 Netnoninterestexpense........................ 2.26 2.24 2.18 2.09 2.14 2.15 2.18 2.19 2.33 2.42 Gainsoninvestmentaccountsecurities.......... –.01 .04 .05 .04 .01 * –.01 * –.10 .02 Incomebeforetaxesandextraordinaryitems..... 1.61 1.46 1.60 1.53 1.55 1.60 1.55 1.31 .42 .02 Taxes........................................ .45 .39 .41 .38 .37 .38 .36 .30 .09 .04 Extraordinaryitems,netofincometaxes...... * * –.01 * * * * * * * Netincome.................................... 1.17 1.07 1.18 1.14 1.18 1.21 1.19 1.01 .33 –.02 Cashdividendsdeclared...................... .79 .64 .68 .67 .64 .67 .65 .67 .57 .36 Retainedincome............................. .38 .43 .50 .47 .54 .54 .53 .35 –.24 –.38 Memo:Returnonequity........................ 11.52 10.28 11.49 10.97 11.25 11.54 11.14 9.18 3.03 –.19 Note:DataareasofMarch23,2010. bymultifamilyresidentialproperties;andloanstofinancecommercialreales- 1.EffectiveOctober1,2008,theFederalReservebeganpayingintereston tate,construction,andlanddevelopmentactivitiesnotsecuredbyrealestate. depositoryinstitutions’requiredandexcessreservebalances.Beginningwith 5. Other real estate owned is a component of other noninterest-earning the2008:Q4CallReport,balancesduefromFederalReserveBanksarenow assets. reportedunder“Interest-earningassets”ratherthan“Noninterest-earningassets.” 6.Whenpossible,basedontheaverageofquarterlybalancesheetdatare- 2.Includesallocatedtransferriskreserve. portedonscheduleRC-KofthequarterlyCallReport. 3.Measuredasthesumoflargetimedepositsindomesticoffices,deposits 7.Includesprovisionsforallocatedtransferrisk. booked in foreign offices, subordinated notes and debentures, federal funds *Inabsolutevalue,lessthan0.005percent. purchased and securities sold under repurchase agreements, Federal Home n.a. Notavailable. LoanBankadvances,andotherborrowedmoney. MMDA Moneymarketdepositaccount. 4.Measuredasthesumofconstructionandlanddevelopmentloanssecured RP Repurchaseagreement. byrealestate;realestateloanssecuredbynonfarmnonresidentialpropertiesor MBS Mortgage-backedsecurities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009 A37 A.2. Reportofincome,allU.S.banks,2000–09 Millionsofdollars Item 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Grossinterestincome...................... 423,845 404,251 349,603 329,218 348,667 426,600 551,085 616,994 565,232 480,744 Taxableequivalent.................... 426,479 406,937 352,351 332,000 351,651 429,556 554,341 620,456 567,906 483,511 Loans................................... 326,804 311,539 269,397 257,697 269,408 328,088 421,922 464,878 426,025 367,691 Securities............................... 67,666 63,061 59,311 53,316 58,577 65,864 78,913 82,710 81,547 85,803 Grossfederalfundssoldandreverse repurchaseagreements................ 13,546 12,647 6,221 5,015 5,142 11,045 21,288 28,682 16,642 3,565 Other................................... 15,829 17,006 14,672 13,189 15,538 21,602 28,960 40,723 41,019 23,687 Grossinterestexpense..................... 222,161 188,746 118,741 94,123 98,541 162,501 263,393 310,412 226,557 122,065 Deposits................................ 151,147 132,311 81,701 62,400 63,639 105,922 173,898 212,783 154,312 84,179 Grossfederalfundspurchasedand repurchaseagreements................ 26,860 19,583 9,920 7,590 8,842 19,161 33,776 37,715 19,755 4,846 Other................................... 44,155 36,852 27,122 24,133 26,058 37,418 55,721 59,914 52,489 33,041 Netinterestincome........................ 201,684 215,505 230,862 235,095 250,126 264,099 287,692 306,582 338,675 358,679 Taxableequivalent.................... 204,318 218,191 233,610 237,877 253,110 267,055 290,948 310,044 341,349 361,446 Lossprovisions............................ 29,386 43,084 45,206 32,742 23,894 25,579 25,386 56,749 170,777 231,927 Noninterestincome........................ 153,101 160,902 168,236 183,792 188,999 201,768 222,901 218,554 209,052 245,173 Servicechargesondeposits.............. 23,720 26,872 29,629 31,692 33,454 33,830 36,194 39,187 42,542 41,000 Fiduciaryactivities...................... 22,202 21,988 21,404 22,453 25,088 26,381 28,312 32,962 32,909 26,958 Tradingrevenue......................... 12,235 12,382 10,794 11,605 10,303 14,375 19,170 5,289 –1,235 23,265 Other................................... 94,945 99,658 106,410 118,042 120,154 127,180 139,226 141,116 134,839 153,952 Noninterestexpense....................... 216,375 225,979 230,128 243,214 263,304 274,136 294,891 321,406 357,254 356,135 Salaries,wages,andemployeebenefits... 89,016 94,196 100,447 108,446 115,254 124,038 135,869 144,700 147,502 152,289 Occupancy.............................. 26,762 27,939 29,311 31,314 33,253 35,051 36,393 38,531 40,896 41,622 Other................................... 100,598 103,846 100,368 103,453 114,797 115,048 122,630 138,177 168,855 162,224 Netnoninterestexpense.................... 63,274 65,077 61,892 59,422 74,305 72,368 71,990 102,852 148,202 110,962 Gainsoninvestmentaccountsecurities..... –2,280 4,630 6,411 5,633 3,393 –220 –1,320 –648 –16,432 –1,651 Incomebeforetaxes....................... 106,741 111,971 130,176 148,563 155,322 165,933 188,995 146,334 3,264 14,141 Taxes................................... 37,249 37,284 42,816 48,498 50,264 53,568 60,969 44,230 2,469 4,283 Extraordinaryitems,netofincometaxes. –31 –324 –68 427 59 241 2,647 –1,672 5,382 –3,845 Netincome............................... 69,461 74,363 87,291 100,494 105,115 112,604 130,674 100,431 6,178 5,220 Cashdividendsdeclared................. 52,547 54,844 67,230 77,757 59,523 64,624 82,360 85,266 43,327 43,445 Retainedincome........................ 16,915 19,519 20,062 22,738 45,591 47,981 48,312 15,166 –37,150 –38,226 Note:DataareasofMarch23,2010.

A39 December2010 The 2009 HMDA Data: The Mortgage Market in a Time of Low Interest Rates and Economic Distress Robert B. Avery, Neil Bhutta, Kenneth P. Brevoort, September, the FFIEC releases summary tables perand Glenn B. Canner, of the Board’s Division of tainingtolendingactivityfromthepreviouscalendar Research and Statistics, prepared this article. Christa year for each reporting lender and aggregations of Gibbs and Nicholas W. Henning provided research home-lendingactivityforeachmetropolitanstatistical assistance. area(MSA)andforthenationasawhole.5TheFFIEC alsomakesavailabletothepublicanapplication-level Data made available annually pursuant to the Home datafilecontainingvirtuallyallof thereportedinfor- MortgageDisclosureActof1975(HMDA)providean mationforeachlendinginstitution.6 opportunity to explore changes in mortgage market The 2009 HMDA data consist of information reactivityalongahostof dimensions.1HMDArequires portedbymorethan8,100homelenders,includingthe mostmortgagelendinginstitutionswithofficesinmet- nation’s largest mortgage originators, and thus are ropolitanareastopubliclydiscloseinformationabout broadlyrepresentativeofallsuchlendingintheUnited theirhome-lendingactivityeachyear.Thedatainclude States. The regulations that implement HMDA have thedispositionofeachapplicationformortgagecredit; been essentially unchanged since 2002, with one nothetype,purpose,lienstatus,andcharacteristicsofthe table exception. The rules related to the reporting of home mortgages that lenders originate or purchase pricingdataunderHMDAwererevisedin2008.The duringthecalendaryear;loanpricinginformation;the newproceduresaffectwhetherornotaloanisclassicensus-tract designation of the properties related to fied as higher priced starting with applications taken theseloans;personaldemographicandotherinforma- onOctober1,2009.Thus,the2009HMDAdatareflect tionabouttheborrowers;andinformationaboutloan twodifferentloanpricingclassificationrules,although, sales.2Thedisclosuresareusedtohelpthepublicdeter- forthemajorityof theyearandformostloansorigiminewhetherinstitutionsareadequatelyservingtheir natedin2009,theolderrulesapplied.Theeffectsofthe communities’ housing finance needs, to facilitate en- rulechangeonreportedhigher-pricedlendingareexforcement of the nation’s fair lending laws, and to ploredinsomedepthinthisarticle. informinvestmentinboththepublicandprivatesectors. The data have also proven to be valuable as a research tool, providing insights in many fields of interest. The Federal Reserve Board currently implements the provisions of HMDA through regulation.3 The agenciesresponsiblefortheexaminationandsupervisionoffinan- Federal Financial Institutions Examination Council cialinstitutions.ThememberagenciesaretheBoardofGovernors (FFIEC)isresponsibleforcollectingtheHMDAdata oftheFederalReserveSystem,theFederalDepositInsuranceCorporation,theNationalCreditUnionAdministration,theOfficeof and facilitating public access to the information.4 In theComptrolleroftheCurrency,theOfficeofThriftSupervision, andrepresentativesfromstatebanksupervisoryagencies. 1. A brief history of HMDA is available at Federal Financial 5. Forthe2009data,theFFIECpreparedandmadeavailableto InstitutionsExaminationCouncil,“HistoryofHMDA,”webpage, thepublic48,563MSA-specificHMDAreportsonbehalfofreportwww.ffiec.gov/hmda/history2.htm. ing institutions. The FFIEC also makes available to the public 2. AlistoftheitemsreportedunderHMDAisprovidedinappen- reports about private mortgage insurance (PMI) activity. All the dixA. HMDA and PMI reports are available on the FFIEC’s reports 3. HMDAisimplementedbyRegulationC(12C.F.R.pt.203)of websiteatwww.ffiec.gov/reports.htm. the Federal Reserve Board. Information about the regulation is 6. Theonlyreporteditemsnotincludedinthedatamadeavailavailableatwww.federalreserve.gov. abletothepublicaretheloanapplicationnumber,thedateof the 4. TheFFIEC(www.ffiec.gov)wasestablishedbyfederallawin application,andthedateonwhichactionwastakenontheapplica- 1979asaninteragencybodytoprescribeuniformexaminationpro- tion.Thoseitemsarewithheldtohelpensurethattheindividuals cedures, and to promote uniform supervision, among the federal involvedintheapplicationcannotbeidentified.

A40 FederalReserveBulletin□December2010 SUMMARYOFFINDINGS v Thesubstantialgrowthintheportionof newhome mortgages that were backed by the FHA, VA, or Thisarticleoffersasummaryandpreliminaryanalysis federal farm programs during 2008 continued in of the2009HMDAdata.Theresultsof ouranalysis 2009,withsuchloansaccountingfor54percentofall revealthefollowingaboutmortgagelendingin2009: home-purchaselending.Onefactorlikelyplayinga roleinthisgrowthisthepullbackbythegovernmentv Aftersubstantialdeclinesinloanvolumein2007and sponsored enterprises (GSEs)—Fannie Mae and 2008,overallloanvolumereboundedin2009,though Freddie Mac—and private mortgage insurers from it remained well below the levels observed in the thehighloan-to-value(LTV)ratiomarket. middleof thedecade.Thisincreaseobscuresdiver- v An analysis of the HMDA pricing data in 2009 is gent trends. While refinance activity increased complicated by the steepening yield curve and the sharply,likelyasaresultof historicallylowinterest transitiontonewHMDAreportingrulesforpricing. rates,home-purchaselendingcontinuedtodeclinein Comparisonsof pricingoutcomesacrossracialand 2009. ethnic groups are particularly problematic for this v Theincreaseinrefinancingactivityin2009appears reason.Nevertheless,thedataappeartoindicatethat tohavebeensomewhatsubduedcomparedwithwhat high-risklendingactivityremainedatverylowlevels hashistoricallybeenobservedwhenmortgagerates during2009,withnoindicationofarebound. sharply decline. Evidence presented in this article v Lending activity in census tracts with high foreclosuggests that the more muted growth stems from sureactivityhasdeclinedmorethaninotherneighseveralfactors,includingeconomicdistressandlow borhoods.Thisdeclinehasbeenparticularlysevere or negative equity among many households that for refinance lending. Declines in home-purchase couldhavebenefitedfromlowerrates. lendinginhigh-foreclosuretractshavebeensimilar v The decline in home-purchase lending could have tothoseobservedforothertractsinthesameMSAs. beenmoredramaticwereitnotforfirst-timehomev Denialratedifferencesacrossracialandethnicgroups buyers.Thosehomebuyersbenefitednotonlyfrom persist, although the HMDA data do not include certain market conditions such as historically low sufficient information to determine the extent to interestratesandfallinghouseprices,butalsofroma whichthesedifferencesstemfromillegaldiscriminafederaltaxcreditof$8,000andthefactthattheydid tion. not need to sell a house in a depressed economic environment. v Thepercentageof home-purchaseborrowersclassi- ANOVERVIEWOFTHE2009HMDADATA fied as lower-income under HMDA rose significantlyin2009butdidnotriseintherefinancemarket. HMDA covers most mortgage lending institutions, Lower-income home-purchase borrowers were also includingallof thelargestlenders.Fromtheinception disproportionately likely to take out Federal Housof HMDA, depository institutions have constituted ingAdministration(FHA)orDepartmentof VeteransAffairs(VA)loans. 1. Distributionof reporterscoveredbytheHomeMortgageDisclosureAct,bytypeof institution,2000–09 Number Depositoryinstitution Mortgagecompany Year Allinstitutions Commercial Savings Creditunion All Independent Affiliated1 All bank institution 2000........... 3,609 1,112 1,691 6,412 981 332 1,313 7,725 2001........... 3,578 1,108 1,714 6,400 962 290 1,252 7,652 2002........... 3,628 1,070 1,799 6,497 986 310 1,296 7,793 2003........... 3,642 1,033 1,903 6,578 1,171 382 1,553 8,131 2004........... 3,945 1,017 2,030 6,992 1,317 544 1,861 8,853 2005........... 3,904 974 2,047 6,925 1,341 582 1,923 8,848 2006........... 3,900 946 2,037 6,883 1,334 685 2,019 8,902 2007........... 3,918 929 2,019 6,866 1,132 638 1,770 8,636 2008........... 3,942 913 2,026 6,881 957 550 1,507 8,388 2009........... 3,925 879 2,017 6,821 914 389 1,303 8,124 NOTE:Hereandinallsubsequenttables,componentsmaynotsumtototalsbecauseofrounding. 1.Subsidiaryofadepositoryinstitutionoranaffiliateofabankholdingcompany. SOURCE:Hereandinsubsequenttablesandfiguresexceptasnoted,FederalFinancialInstitutionsExaminationCouncil,datareportedundertheHome MortgageDisclosureAct(www.ffiec.gov/hmda).

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A41 2. Homeloanactivityof lendinginstitutionscoveredundertheHomeMortgageDisclosureAct,2000–09 A.Applications,requestsforpreapproval,andpurchasedloans Number Applicationsreceivedforhomeloans,bytypeofproperty 1−4family Requestsfor Year preapproval1 Purchasedloans Total Multifamily Home Homepurchase Refinance improvement 2000............. 8,278,219 6,543,665 1,991,686 37,765 n.a. 2,398,292 19,249,627 2001............. 7,692,870 14,284,988 1,849,489 48,416 n.a. 3,767,331 27,643,094 2002............. 7,406,374 17,491,627 1,529,347 53,231 n.a. 4,829,706 31,310,285 2003............. 8,179,633 24,602,536 1,508,387 58,940 n.a. 7,229,635 41,579,131 2004............. 9,792,324 16,072,102 2,202,744 61,895 332,054 5,146,617 33,607,736 2005............. 11,672,852 15,898,346 2,539,158 57,668 396,686 5,874,447 36,439,157 2006............. 10,928,866 14,045,961 2,480,827 52,220 411,134 6,236,352 34,155,360 2007............. 7,609,143 11,566,182 2,218,224 54,230 432,883 4,821,430 26,702,092 2008............. 5,017,998 7,729,143 1,404,008 42,792 275,808 2,921,821 17,391,570 2009............. 4,201,057 9,935,678 826,916 26,257 209,055 4,294,528 19,493,491 NOTE:Hereandinsubsequenttables,exceptasnoted,dataincludefirstandjuniorliens,site-builtandmanufacturedhomes,andowner-andnon-owneroccupiedloans. 1.Consistsofrequestsforpreapprovalthatweredeniedbythelenderorwereacceptedbythelenderbutnotacteduponbytheborrower.Inthisarticle, applicationsaredefinedasbeingforaloanonaspecificproperty;theyarethusdistinctfromrequestsforpreapproval,whicharenotrelatedtoaspecificproperty. Informationonpreapprovalrequestswasnotrequiredtobereportedbefore2004. n.a.Notavailable. thebulkofthereportingentities.For2009,8,124insti- continuingadownwardtrendsince2006.Independent tutionsreportedontheirhome-lendingactivityunder mortgage companies experienced the largest percent- HMDA:3,925commercialbanks;879savingsinstitu- age decline in 2009, falling nearly 14 percent. Since tions (savings and loans and savings banks); 2,017 2006,thenumberofmortgagecompanieshasfallenby creditunions;and1,303mortgagecompanies,914of morethanone-third. which were not affiliated with a banking institution Reportinglenderssubmittedinformationon15mil- (table 1).7 The number of reporting institutions has lion applications for home loans of all types in 2009 fluctuatedovertheyears,inpartreflectingchangesin (excluding requests for preapprovals and purchased reportingrequirements,includingincreasesinthemini- loans),upabout6percentfrom2008butstillfarbelow mumassetlevelusedtodeterminecoverage.8Changes the 27.5 million applications reached in 2006, just inthenumberandgeographicfootprintof metropoli- beforethehousingmarketbeganunraveling(datadetanareasalsoinfluencereportingovertime,asHMDA’s rived from table 2.A). The majority of loan applicacoveragefocusesoninstitutionswithatleastoneoffice tions are approved by lenders, and most of these inametropolitanarea.9Finally,mergersandacquisiapprovalsresultinextensionsof credit.Someapplications,alongwithchangesineconomicconditionsthat tions are approved, but the applicant decides not to at times have resulted in more bank failures or new takeouttheloan;forexample,in2009nearly6percent start-ups, have affected the number of reporters. For of allapplicationswereapprovedbutnotacceptedby 2009,thenumberofreportersfell3percentfrom2008, theapplicant(datanotshownintables).Overall,ofthe nearly 15 million applications submitted in 2009, 60 percent resulted in an extension of credit (data derivedfromtables2.Aand2.B). 7. Thedatausedinthisarticlefortheyears1990to2007arebased TheHMDAdataalsoincludeinformationonloan onrevisedHMDAfilings,whichincludecorrectionstotheinitial publicrelease.Consequently,figuresfortheseyearsmaynotcorre- purchases by lenders, although the purchased loans spondexactlytofiguresintablesofearlierarticles.Thedatafor2008 may have been originated at any point in time. For and2009reflecttheinitialpublicrelease. 8. Forthe2010reportingyearcoveringthe2009data,themini- 2009,lendersreportedinformationonnearly4.3milmumassetsizeforpurposesofcoveragewas$39million.Themini- lionloansthattheyhadpurchasedfromotherinstitumum asset size changes from year to year with changes in the tions, a sharp rebound from the nearly decade-low ConsumerPriceIndexforUrbanWageEarnersandClericalWorkers.SeetheFFIEC’sguidetoHMDAreportingatwww.ffiec.gov/ volumereportedin2008.Finally,lendersreportedon hmda/guide.htm. roughly 209,000 requests for preapprovals of home- 9. From time to time, the Office of Management and Budget purchaseloansthatdidnotresultinaloanorigination updatesthelistandgeographicscopeofmetropolitanandmicropolitanstatisticalareas.SeeOfficeofManagementandBudget,“Sta- (table 2.A); preapprovals that resulted in a loan are tistical Programs and Standards,” webpage, www.whitehouse.gov/ includedinthecountofloanextensionsnotedearlier. omb/inforeg_statpolicy.

A42 FederalReserveBulletin□December2010 2. Homeloanactivityof lendinginstitutionscoveredundertheHomeMortgageDisclosureAct,2000–09 B.Loans Number Loans,bytypeofproperty Year 1−4family Total Multifamily Homepurchase Refinance Homeimprovement 2000.................... 4,787,356 2,435,420 892,587 27,305 8,142,668 2001.................... 4,938,809 7,889,186 828,820 35,557 13,692,372 2002.................... 5,124,767 10,309,971 712,123 41,480 16,188,341 2003.................... 5,596,292 15,124,761 678,507 48,437 21,447,997 2004.................... 6,429,988 7,583,928 966,484 48,150 15,028,550 2005.................... 7,382,012 7,101,649 1,093,191 45,091 15,621,943 2006.................... 6,740,322 6,091,242 1,139,731 39,967 14,011,262 2007.................... 4,663,267 4,817,875 957,912 41,053 10,480,107 2008.................... 3,119,692 3,457,774 568,287 31,509 7,177,262 2009.................... 2,784,956 5,758,875 387,970 19,135 8,950,936 LendingforHomePurchaseorRefinancing purchase lending that year, about 698,000 homepurchase loans were extended, compared with only A monthly count of home-purchase and refinance 308,000 such loans in the peak month of 2008 and loanoriginationsforone-tofour-familyhomesinthe 285,000 at the monthly high point for 2009. Overall, HMDA data shows a downward trend in home- thenumberof home-purchaseloansreportedbylenders covered by HMDA was down about 11 percent 1. Volume of home-purchase and refinance originations and from 2008 and was nearly 60 percent lower than in annual percentage rate, by month, 2006–09 2006(dataderivedfromtable2.B). The volume of refinance lending tends to be more Thousands of loans Percentage points closelyalignedwithchangesininterestratesthanthat of home-purchaselending,expandingwhenmortgage 750 APR Refinance 7 ratesfallandretrenchingwhenratesrise.Theinterest (right scale) (left scale) rateenvironmentin2009wasquitefavorableforbor- 600 6 rowers, and the number of reported refinance loans 450 increased 67 percent from 2008 to 2009 (table 2.B). 5 However,factorssuchaselevatedunemployment,de- 300 pressedhomeprices,andtighterunderwritingappear 150 Home purchase 4 to have hampered refinance activity, as discussed in (left scale) moredetaillater. 2006 2007 2008 2009 Non-Owner-OccupiedLending NOTE: The data are monthly. Loans are first- and second-lien mortgages excluding multifamily housing. Annual percentage rate (APR) is the average Individuals buying homes either for investment purmonthly rate for a 30-year fixed-rate mortgage from the Freddie Mac Primary Mortgage Market Survey, as reported by the Federal Financial Institutions poses or as second or vacation homes have been an Examination Council, www.ffiec.gov/ratespread/newcalc.aspx. important segment of the housing market for many years.UnderHMDA,housingunitsusedinsuchways purchase lending from 2006 to 2009 (figure 1).10 For are collectively described and reported as non-owner instance, in June 2006, the peak month for homeoccupied.11Between2000and2005,theshareof nonowner-occupiedlendingusedtopurchaseone-tofour- 10. Lendersreportthedateonwhichactiononanapplicationis family homes rose, increasing over this period to taken.Fororiginations,the“actiontaken”dateistheclosingdateor 16 percent from about 9 percent (data derived from dateofloanoriginationfortheloan.Thisdateistheoneweuseto compiledataatthemonthlylevel.Tohelpensuretheanonymityof thedata,thedatesofapplicationandactiontakenarenotreleasedin theHMDAdatafilesmadeavailabletothepublic. The estimated annual percentage rates (APRs) in figure 1 are 11. An investment property is a non-owner-occupied dwelling derivedfrominformationoncontractratesandpointsfromFreddie thatisintendedtoberentedorresoldforaprofit.Somenon-owner- Mac’sPrimaryMortgageMarketSurvey.Loancountsareaggre- occupied units—vacation homes and second homes—are for the gated to the monthly level using the date of loan origination, as primaryuseoftheownersandthuswouldnotbeconsideredinvestopposedtothepotentiallyearlierdatewhentheinterestrateforthe ment properties. The HMDA data do not, however, distinguish loanwasset,whichisnotreportedunderHMDA. betweenthesetwotypesofnon-owner-occupieddwellings.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A43 3. Homeloanapplicationsandhomeloansforone-tofour-familyproperties,byoccupancystatusof homeandtypeof loan,2000–09 Number Applications Loans Owneroccupied Non-owneroccupied Owneroccupied Non-owneroccupied Year Non- Non- Non- Non- Conventional conventional1 Conventional conventional1 Conventional conventional1 Conventional conventional1 A.Homepurchase 2000........... 6,350,643 1,311,101 604,919 12,524 3,411,887 963,345 404,133 8,378 2001........... 5,776,767 1,268,885 627,598 19,688 3,480,441 1,003,795 440,498 14,128 2002........... 5,511,048 1,133,770 747,758 13,923 3,967,834 870,599 547,963 8,474 2003........... 6,212,915 1,014,865 943,248 8,623 4,162,412 761,716 667,613 4,560 2004........... 7,651,113 799,131 1,335,241 6,839 4,946,423 574,841 906,014 2,710 2005........... 9,208,214 610,650 1,850,174 3,814 5,742,377 438,419 1,199,509 1,707 2006........... 8,695,877 576,043 1,653,154 3,792 5,281,485 416,744 1,040,668 1,425 2007........... 5,960,571 599,637 1,044,112 4,823 3,582,949 423,506 655,916 896 2008........... 2,940,059 1,424,483 647,340 6,116 1,727,692 972,605 415,930 3,465 2009........... 1,883,278 1,884,136 427,338 6,305 1,171,033 1,320,412 289,796 3,715 B.Refinance 2000........... 6,051,484 110,380 379,299 2,502 2,170,162 64,882 198,695 1,293 2001........... 12,737,863 705,784 823,748 17,592 6,836,106 524,228 516,616 12,181 2002........... 15,623,327 742,208 1,111,588 14,504 9,058,654 535,370 706,570 9,377 2003........... 21,779,329 1,236,467 1,563,430 23,310 13,205,472 895,735 1,007,674 15,871 2004........... 14,476,350 497,700 1,084,536 13,516 6,649,588 304,591 621,667 8,082 2005........... 14,494,441 262,438 1,135,929 5,538 6,336,004 158,474 603,914 3,257 2006........... 12,722,112 208,405 1,112,891 2,553 5,382,950 122,134 585,142 1,016 2007........... 10,173,282 375,860 1,012,827 4,213 4,123,507 196,897 496,577 894 2008........... 5,829,633 1,240,472 650,042 8,996 2,593,793 522,243 337,914 3,824 2009........... 7,251,066 2,051,766 617,707 15,139 4,404,215 998,585 348,599 7,476 C.Homeimprovement 2000........... 1,833,277 91,575 65,286 1,548 843,884 10,896 37,047 760 2001........... 1,771,472 16,276 60,598 1,143 788,560 6,722 32,990 548 2002........... 1,459,049 11,582 58,080 636 676,515 4,878 30,533 197 2003........... 1,430,380 13,876 63,806 325 642,065 5,226 31,113 103 2004........... 2,081,528 11,887 109,105 224 904,492 5,557 56,341 94 2005........... 2,401,030 10,053 127,857 218 1,026,340 4,483 62,298 70 2006........... 2,335,338 12,645 132,694 150 1,067,730 6,115 65,842 44 2007........... 2,072,688 16,717 128,700 119 887,123 9,409 61,321 59 2008........... 1,294,162 26,544 83,036 266 516,612 12,347 39,170 158 2009........... 740,061 28,437 58,171 247 348,409 11,212 28,183 166 1.LoansinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theFarmServiceAgency,orthe RuralHousingService. table 3, panel A). Since 2005, the share has fallen, Nonconventionallendinghasalsogarneredalarger droppingtoabout11percentin2009. share of the refinance market since 2007, although conventionalloansusedforrefinancingstilloutnum- Typesof Loans bernonconventionalloans(table3,panelB).In2006, therewere44conventionalloansusedfortherefinanc- Whilethetotalnumberofloanstopurchasehomeshas ing of loans secured by owner-occupied homes for fallensharplysincenearthemiddleof thedecade,the everynonconventionalloan;in2009,theratiowas5to volume of nonconventional home-purchase loans— 1.Wediscussthesedevelopmentsinmoredetailinthe including loans backed by FHA insurance, VA loan later section “The Changing Role of Government in guarantees,and,toalesserextent,RuralHousingSer- theMortgageMarket.” vice(RHS)guaranteesandguaranteedanddirectloans The sharp increase in nonconventional lending for fromtheFarmServiceAgency(FSA)—hasincreased home purchase relates almost exclusively to site-built markedly, particularly since 2007 (table 3, panel A). homes.Infact,thevolumeof loans,whethernoncon- From 2006 to 2009, the total number of reported ventionalorconventional,topurchasemanufactured home-purchase loans for owner-occupied homes fell homeshasfalleneveryyearsince2006,andsuchlend- 56 percent, while the number of nonconventional ing represents a small fraction (less than 3 percent in home-purchaseloansofthissortmorethantripled.

A44 FederalReserveBulletin□December2010 4. Loansonmanufacturedhomes,byoccupancystatusof homeandtypeof loan,2004–09 Number Owneroccupied Non-owneroccupied Year Conventional Nonconventional1 Conventional Nonconventional1 A.Homepurchase 2004......................... 107,686 23,974 16,243 125 2005......................... 101,539 27,229 17,927 56 2006......................... 102,458 30,530 19,105 257 2007......................... 95,584 28,554 13,963 92 2008......................... 68,821 27,615 11,392 93 2009......................... 43,253 20,558 7,895 29 B.Refinance 2004......................... 79,838 6,922 6,507 57 2005......................... 73,520 7,727 6,331 26 2006......................... 64,969 11,750 6,240 68 2007......................... 59,591 16,174 6,332 74 2008......................... 44,342 21,926 6,817 177 2009......................... 36,765 21,765 5,922 59 C.Homeimprovement 2004......................... 17,119 128 1,269 5 2005......................... 20,239 219 1,372 3 2006......................... 20,886 490 1,425 2 2007......................... 19,428 889 1,494 2 2008......................... 12,621 681 1,324 36 2009......................... 9,710 439 1,110 1 1.Seenotetotable3. 2009) of total home-purchase lending (data derived 2008. In 2009, only about 44,000 such loans were fromtables2.Band4). extendedbyHMDAreporters. Junior-LienLending LoanSales InformationonlienstatusreportedintheHMDAdata The HMDA data include information on the type of differentiates among loans secured by a first lien, se- purchaserforloansthatareoriginatedandsoldduring curedbyasubordinate(junior)lien,andnotsecured. theyear.Thedataareoneof thefewsourcesof infor- (The latter arises only among home-improvement mation that provide a fairly comprehensive record of loans,forwhichasecurityinterestinapropertymayor whereloansareplacedafterorigination.Becausesome maynotbetaken).Homeequitylinesof credit(both loansoriginatedduringacalendaryeararesoldafter firstandjuniorliens)aregenerallynotreportedunder theendoftheyear,theHMDAdatatendtounderstate HMDA. Other junior liens are reported only if they theproportionoforiginationsthatareeventuallysold, areusedforhomepurchase,homeimprovement,ora anissuewedealwithinmoredetailinthelatersection refinancingof apreviousloan,whichmeans,inprac- “TheChangingRoleof GovernmentintheMortgage tice,thatonlyjuniorliensusedforhomepurchaseare Market.” comprehensively reported in HMDA. In the recent RegulationCidentifiesninetypesofpurchasersthat past,oneimportantpurposeofhomepurchasejunior- lendersmayusewhenreportingtheirloansaleactivity. lienloanswastoavoidpayingforeitherprivatemort- Broadly, these purchaser types can be broken into gage insurance (PMI) or government mortgage thosethataregovernmentrelated—GinnieMae,Faninsurance when purchasing a home. By taking out a nie Mae, Freddie Mac, and Farmer Mac—and those junior-lien loan (often referred to as a “piggyback” that are not.12 Ginnie Mae and Farmer Mac are foloan)toaccompanytheprimarymortgage,homebuyers were able to finance the down payment. In 2006, 12. Technically,GinnieMaedoesnotbuyorsellloans;rather,it HMDA reporters extended nearly 1.3 million junior- guarantees that investors receive timely payment of interest and lienloansforthepurposeofbuyinganowner-occupied principal for mortgage-backed securities backed by FHA or VA loans. However, the HMDA rules direct lenders to report loans home(table5,panelA).Thenumberofsuchloansfell coveredbyGinnieMaeguaranteesassalestoGinnieMae.(Seethe bymorethanone-halfin2007andfellsharplyagainin GinnieMaewebsiteatwww.ginniemae.gov.)FarmerMacpurchases

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A45 5. Homeloansforone-tofour-familyproperties,byoccupancystatusof home,typeof loan,andlienstatus,2004–09 Number Owneroccupied Non-owneroccupied Year Conventional Nonconventional1 Conventional Nonconventional1 Firstlien Juniorlien Unsecured Firstlien Juniorlien Unsecured Firstlien Juniorlien Unsecured Firstlien Juniorlien Unsecured A.Homepurchase 2004...... 4,209,787 736,636 n.a. 573,606 1,235 n.a. 853,490 52,524 n.a. 2,703 7 n.a. 2005...... 4,520,378 1,221,999 n.a. 437,552 867 n.a. 1,049,555 149,954 n.a. 1,685 22 n.a. 2006...... 4,013,196 1,268,289 n.a. 416,143 601 n.a. 878,325 162,343 n.a. 1,407 18 n.a. 2007...... 3,031,606 551,343 n.a. 422,450 1,056 n.a. 605,714 50,202 n.a. 888 8 n.a. 2008...... 1,636,194 91,498 n.a. 971,528 1,077 n.a. 410,377 5,553 n.a. 3,461 4 n.a. 2009...... 1,128,950 42,083 n.a. 1,318,940 1,472 n.a. 287,760 2,036 n.a. 3,706 9 n.a. B.Refinance 2004...... 6,185,418 464,170 n.a. 304,298 293 n.a. 608,956 12,711 n.a. 8,069 13 n.a. 2005...... 5,607,642 728,362 n.a. 158,198 276 n.a. 578,491 25,423 n.a. 3,236 21 n.a. 2006...... 4,347,348 1,035,602 n.a. 121,761 373 n.a. 546,430 38,712 n.a. 989 27 n.a. 2007...... 3,462,944 660,563 n.a. 196,544 353 n.a. 473,336 23,241 n.a. 879 15 n.a. 2008...... 2,374,781 219,012 n.a. 521,863 380 n.a. 328,844 9,070 n.a. 3,814 10 n.a. 2009...... 4,290,072 114,143 n.a. 998,089 496 n.a. 341,852 6,747 n.a. 7,460 16 n.a. C.Homeimprovement 2004...... 357,618 395,582 151,292 2,697 2,243 617 40,028 8,153 8,160 30 54 10 2005...... 409,947 468,375 148,018 2,197 1,873 413 42,544 10,756 8,998 17 49 4 2006...... 360,321 553,152 154,257 3,957 1,735 423 43,913 13,739 8,190 18 20 6 2007...... 301,078 435,187 150,858 7,510 1,579 320 41,670 11,508 8,143 35 18 6 2008...... 179,506 181,402 155,704 10,477 1,610 260 26,482 5,473 7,215 135 13 10 2009...... 165,620 84,332 98,457 8,147 2,416 649 19,598 3,174 5,411 101 29 36 1.Seenotetotable3. n.a.Notavailable. cusedonnonconventionalloans(FHA,VA,FSA,and sold is notably smaller than that for owner-occupied RHS). Fannie Mae and Freddie Mac are focused on loans. conventional loans, within the size limits set by the Congressthatmeettheunderwritingstandardsestab- ApplicationDisposition,LoanPricing,and lishedbytheseentities. StatusundertheHomeOwnershipand TheHMDAdatadocumenttheimportanceof the EquityProtectionAct secondarymarketforhomeloans.Overall,82percent ofthefirst-lienhome-purchaseandrefinanceloansfor Forpurposesof analysis,loanapplicationsandloans one-tofour-familypropertiesoriginatedin2009were reportedunderHMDAcanbegroupedinmanyways. soldduringtheyear(datanotshownintables).13The Everyloanapplicationreportedin2009canbeorgashare of originations that are sold varies a bit from nizedinto25distinctproductcategoriescharacterized year to year and by type and purpose of the loan bytypeofloanandproperty,purposeoftheloan,and (table6,panelA).Forexample,about70percentofthe lienandowner-occupancystatus(tables7.A,7.B,8.A, conventionalloansforthepurchaseofowner-occupied and8.B).Eachproductcategorycontainsinformation one- to four-family dwellings that were originated in onthenumberof totalandpreapprovalapplications, 2009weresoldthatyear.Incontrast,about92percent applicationdenials,originatedloans,loanswithprices ofthenonconventionalloansusedtopurchaseownerabovethereportingthresholdsestablishedbyHMDA occupiedhomesweresoldin2009.Theshareof conreporting rules for identifying higher-priced loans, ventionalloansmadetonon-owneroccupantsthatare loans covered by the Home Ownership and Equity ProtectionActof 1994(HOEPA),andthemeanand certain types of agriculture-related loans. (See a description of Farmer Mac programs at www.farmermac.com/lenders/ medianannualpercentagerate(APR)spreadsforloans fmacprograms/farmermacprograms.aspx.) reportedashigherpriced.Table7.Aincludesallappli- 13. Loansthataresoldinadifferentcalendaryearthantheyear cations filed prior to October 1, 2009; table 7.B inoforiginationarerecordedintheHMDAdataasbeingheldinthe lender’sportfolio.Insomecases,theseloansaresoldinsubsequent cludes applications filed over the remainder of the years,butthoseactionsarenotreported.Also,someloansrecorded year.ThisdivisioncorrespondstothechangeinpriceassoldintheHMDAdataaresoldtoaffiliatedinstitutionsandthus reporting rules noted earlier and discussed in more arenottruesecondary-marketsales.In2009,6.5percentoftheloans recordedassoldintheHMDAdataweresalestoaffiliates. detailinthelatersection“The2009HMDADataon

A46 FederalReserveBulletin□December2010 6. Distributionof homeloansalesforone-tofour-familyproperties,byoccupancystatusof homeandtypeof loan, 2000–09 Percent Owneroccupied Non-owneroccupied Conventional Nonconventional1 Conventional Nonconventional1 Year Sharesold M sol E d M to O: G S S h E ar s e 2 Sharesold M sol E d M to O: G S S h E ar s e 2 Sharesold M sol E d M to O: G S S h E ar s e 2 Sharesold M sol E d M to O: G S S h E ar s e 2 A.Homepurchase 2000........... 64.8 31.3 89.1 46.0 53.7 29.3 81.4 22.9 2001........... 66.8 34.6 86.1 46.2 57.9 34.0 92.2 23.0 2002........... 71.0 36.7 88.7 43.7 62.5 36.4 87.9 29.7 2003........... 72.3 33.1 91.2 40.7 63.1 31.8 80.8 21.6 2004........... 74.2 25.5 92.2 40.5 63.5 23.6 63.7 11.5 2005........... 75.9 18.7 89.9 32.6 69.7 18.0 49.7 16.3 2006........... 74.8 19.0 88.6 31.7 69.3 19.0 61.3 15.0 2007........... 70.1 29.1 87.6 32.5 61.4 26.9 74.9 27.6 2008........... 71.6 40.1 90.0 36.5 60.3 36.3 95.1 21.6 2009........... 70.4 39.7 91.7 34.5 57.4 34.1 88.7 35.6 B.Refinance 2000........... 47.4 18.0 84.5 50.0 47.3 21.7 86.3 42.8 2001........... 61.3 37.2 85.0 51.5 61.2 38.4 92.1 33.2 2002........... 66.8 40.4 85.7 45.0 65.9 43.2 81.3 45.4 2003........... 74.2 44.8 93.8 48.0 69.8 40.4 87.4 50.7 2004........... 69.0 27.6 93.2 44.2 62.2 22.6 88.0 35.9 2005........... 69.9 19.7 89.3 33.5 64.7 16.6 85.7 40.1 2006........... 65.7 15.2 86.8 31.8 64.9 15.7 79.0 29.6 2007........... 61.7 21.9 85.1 34.5 61.1 23.9 86.9 23.9 2008........... 65.3 38.0 88.8 35.4 56.8 33.0 95.7 20.4 2009........... 79.8 51.7 90.4 36.4 61.8 39.6 93.8 35.9 C.Homeimprovement 2000........... 6.3 1.1 15.6 4.7 4.4 .4 52.9 .5 2001........... 6.4 1.5 22.3 7.6 3.9 .8 73.7 1.1 2002........... 5.9 1.4 28.4 7.1 4.0 .9 55.3 3.6 2003........... 10.5 .8 43.8 6.7 6.5 .7 35.0 3.9 2004........... 23.6 6.0 48.7 23.5 23.1 7.5 20.2 7.4 2005........... 27.2 7.0 46.2 25.3 30.2 8.8 27.1 8.6 2006........... 22.0 5.3 60.4 31.8 29.4 8.9 29.5 15.9 2007........... 19.1 6.4 70.6 30.8 26.4 12.1 39.0 11.9 2008........... 14.7 8.7 80.0 49.2 20.0 14.5 74.7 6.3 2009........... 25.0 17.4 63.8 37.3 18.2 13.3 55.4 9.6 1.Seenotetotable3. 2.Loanssoldtogovernment-sponsoredenterprises(GSEs)includethosewithapurchasertypeofFannieMae,FreddieMac,GinnieMae,orFarmerMac. LoanPricing.”Thischangemakesitinappropriateto cations for home-purchase loans are notably lower present the pricing information in one consolidated than those observed on applications for either refitable.Tables8.Aand8.Bprovideinformationonpre- nance or home-improvement loans. Denial rates on approvalsoverthecorrespondingtimeperiods. applications backed by manufactured housing are much higher than those on applications backed by Dispositionof Applications years,includingdenialrates,canbemadebyconsultingthefollowing articles: Robert B. Avery, Neil Bhutta, Kenneth P. Brevoort, Asnoted,the2009HMDAdataincludeinformation GlennB.Canner,andChristaN.Gibbs(2010),“The2008HMDA on nearly 15 million loan applications, about 85 per- Data: The Mortgage Market during a Turbulent Year,” Federal cent of which were acted upon by the lender (data Reserve Bulletin, vol. 95, pp. A169–A211; Robert B. Avery, Kenneth P.Brevoort,andGlennB.Canner(2008),“The2007HMDA derivedfromcombiningtables7.Aand7.B).Patterns Data,”FederalReserveBulletin,vol.94,pp.A107–A146;RobertB. of denial rates are largely consistent with what has Avery, Kenneth P. Brevoort, and Glenn B. Canner (2007), “The beenobservedinearlieryears.14Denialratesonappli- 2006 HMDA Data,” Federal Reserve Bulletin, vol. 93, pp. A73– A109;RobertB.Avery,KennethP.Brevoort,andGlennB.Canner (2006),“Higher-PricedHomeLendingandthe2005HMDAData,” 14. The information provided in the tables is identical to that Federal Reserve Bulletin, vol. 92, pp. A123–A166; and Robert B. providedinanalysesofearlieryearsofHMDAdataexceptforthe Avery,GlennB.Canner,andRobertE.Cook(2005),“NewInfordivisionofthedatabythedateofapplication.Comparisonsofthe mationReportedunderHMDAandItsApplicationinFairLendnumbers in these two tables with those in the tables from earlier ingEnforcement,”FederalReserveBulletin,vol.91,pp.344–94.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A47 site-builthomes.Forexample,thedenialrateforfirst- orfeesabovespecifiedlevelsrequireadditionaldisclolienconventionalhome-purchaseloanapplicationsfor surestoconsumersandaresubjecttovariousrestricowner-occupiedsite-builtpropertieswas15.7percent tionsonloanterms.16For2009,1,153lendersreported in2009,comparedwithadenialrateof59.0percentfor extending6,500loanscoveredbyHOEPA(tables7.A first-lien conventional home-purchase loan applica- and 7.B). In comparison, lenders reported on about tions for owner-occupied manufactured homes (data 8,600loanscoveredbyHOEPAin2008(dataregardderivedfromtables7.Aand7.B). ing lenders not shown in tables). In the aggregate, Inadditiontotheapplicationdataprovidedunder HOEPA-relatedlendingmadeuplessthan0.1percent HMDA,nearly560,000requestsforpreapprovalwere of all the originations of home-secured refinancing reportedunderHMDAasactedonbythelender(data loansandhome-improvementloansreportedfor2009 derivedfromtables8.Aand8.B).Aboutone-fourthof (dataderivedfromtables).17 these requests for preapproval were denied by the lender. Not surprisingly, the number of requests for THE2009HMDADATAONLOANPRICING preapproval is down substantially from the levels recorded at the height of the housing boom. In 2006, Asnoted,therulesgoverningwhetherornotaloanis coveredinstitutionsreportedthattheyreceivednearly classifiedashigherpricedunderHMDAwerechanged 1.2millionrequestsforpreapprovaluponwhichthey in2008,withimplementationaffectingloanclassificatookaction(datanotshownintables). tionsforthe2009data.Thepurposeoftherulechange was to address concerns that had arisen about the distortiveeffectsofchangesintheinterestrateenviron- LoanPricing mentonthereportingof higher-pricedlendingunder The collapse of the subprime and near-prime credit the original methodology.18 Because of changes in markets in 2007 resulted in a sharp curtailment of underlying market rates of interest, two loans of lending at relatively high interest rates, a market out- equivalentcreditorprepaymentriskcouldbeclassified come reflected in the 2007 and 2008 HMDA data, differentlyatdifferentpointsintime,anoutcomethat whichshowamarkeddeclineinthenumberof loans wasunintended. thatwereclassifiedforpurposesofreportingashigher The rules for reporting loan pricing information priced.Areviewofthe2008HMDAdataalsorevealed underHMDAwereoriginallyadoptedin2002,coverthat a substantial fraction of loans extended in 2008 inglendingbeginningin2004.Undertheserules(the thatwerereportedashigherpricedweresoclassified “old rules”), lenders were required to compare the becauseofatypicalchangesintheinterestrateenviron- APRonaloantotheyieldonaTreasurysecuritywith ment rather than because the loans represented rela- acomparabletermtomaturitytodeterminewhether tivelyhighcreditrisk.15 the loan should be considered higher priced: If the The 2009 HMDA data continue to show that the differenceexceeded3percentagepointsforafirst-lien level of higher-priced lending is greatly diminished loanor5percentagepointsforajunior-lienloan,the from the levels reached in 2006. The data also show loanwasclassifiedashigherpricedandtheratespread that the incidence of higher-priced lending across all (theamountofthedifference)wasreported. productsin2009(about5.5percent;dataderivedfrom Analysisof theHMDAdatarevealedthattheorigitables 7.A and 7.B) is not only much lower than the nal loan pricing classification methodology created 28.7percentratefoundin2006(2006datanotshownin unintendeddistortionsinreporting.Sincemostmorttables)butalsoaboutone-half of the11.6percentrate gages prepay well before the stated term of the loan, found in 2008 (2008 data not shown in tables). The lenders typically use relatively shorter-term interest loan pricing information within the HMDA data is rates when setting the price of mortgage loans. For explored more fully in the later section “The 2009 example, lenders often price 30-year fixed-rate mort- HMDADataonLoanPricing.” 16. TherequirementtoreportHOEPAloansintheHMDAdata relatestowhethertheloanissubjecttotheoriginalprotectionsof HOEPALoans HOEPA,asdeterminedbythecoveragetestintheFederalReserve Board’sRegulationZ,12C.F.R.pt.226.32(a).Therequiredreportingisnottriggeredbythemorerecentlyadoptedprotectionsfor TheHMDAdataindicatewhichloansarecoveredby “higher-pricedmortgageloans”underRegulationZ,notwithstandtheprotectionsaffordedbyHOEPA.UnderHOEPA, ingthatthoseprotectionswereadoptedunderauthoritygiventothe BoardbyHOEPA.See73Fed.Reg.44522(July30,2008). certaintypesofmortgageloansthathaveinterestrates 17. HOEPAdoesnotapplytohome-purchaseloans. 18. The potential for such distortions is discussed in prior re- 15. SeeAveryandothers,“The2008HMDAData:TheMort- search; for example, see Avery, Brevoort, and Canner, “HighergageMarketduringaTurbulentYear,”innote14. PricedHomeLendingandthe2005HMDAData,”innote14.

A48 FederalReserveBulletin□December2010 7. Dispositionof applicationsforhomeloans,andoriginationandpricingof loans,bytypeof homeandtypeof loan, 2009 A.LoanswithapplicationdatesbeforeOctober1,2009,thresholdchange Applications Loansoriginated LoanswithAPRspreadabovethethreshold1 Typeofhomeandloan Number Acteduponbylender byp D er i c st e r n ib ta u g t e io p n o , ints A (p P e R rce s n p t r a e g a e d Number submitted Number ofAPRspread points) of Number Percent HOEPAcovered Number Number Percent 3- 4- 5- 7- 9or Mean Median loans2 denied denied 3.99 4.99 6.99 8.99 more 1–4FAMILY NONBUSINESSRELATED3 Owneroccupied Sitebuilt Homepurchase Conventional Firstlien............ 1,415,449 1,229,153 189,822 15.4 944,844 45,160 4.8 47.9 23.4 24.0 3.8 .9 4.4 4.1 ... Juniorlien.......... 51,521 45,929 7,302 15.9 34,828 7,063 20.3 ... ... 91.8 7.1 1.2 5.9 5.7 ... Governmentbacked Firstlien............ 1,588,919 1,403,515 208,478 14.9 1,125,063 56,504 5.0 88.5 7.6 3.7 .1 .1 3.5 3.3 ... Juniorlien.......... 1,581 1,379 98 7.1 1,247 4 .3 ... ... 50.0 25.0 25.0 8.3 6.4 ... Refinance Conventional Firstlien............ 6,218,103 5,309,600 1,144,080 21.5 3,806,948 120,408 3.2 48.9 21.3 20.0 9.0 .8 4.5 4.0 1,885 Juniorlien.......... 166,847 148,366 44,552 30.0 95,851 20,522 21.4 ... ... 79.3 15.2 5.5 6.3 5.9 397 Governmentbacked Firstlien............ 1,757,425 1,381,014 425,250 30.8 854,630 61,060 7.1 92.6 5.5 1.8 .1 .0 3.4 3.2 284 Juniorlien.......... 813 607 149 24.5 420 7 1.7 ... ... 71.4 28.6 .0 6.1 5.4 ... Homeimprovement Conventional Firstlien............ 267,265 227,387 70,564 31.0 142,781 28,122 19.7 37.0 25.2 24.3 11.7 1.9 4.9 4.5 840 Juniorlien.......... 164,257 140,543 62,187 44.2 71,000 12,010 16.9 ... ... 73.6 17.8 8.5 6.6 6.0 465 Governmentbacked Firstlien............ 16,073 12,716 4,817 37.9 6,868 818 11.9 70.4 10.4 14.2 5.0 .0 4.0 3.4 5 Juniorlien.......... 5,171 4,447 1,783 40.1 2,103 1,659 78.9 ... ... 32.5 51.8 15.7 7.6 7.5 12 Unsecured (conventionalor government backed)........... 181,904 177,263 78,924 44.5 77,557 ... ... ... ... ... ... ... ... ... ... Manufactured Conventional,firstlien Homepurchase........ 166,420 159,732 92,937 58.2 37,065 28,261 76.2 15.6 18.3 34.2 17.7 14.2 6.4 5.9 ... Refinance............. 70,219 60,693 23,879 39.3 31,150 15,956 51.2 17.0 17.7 36.2 24.0 5.1 6.0 5.8 1,298 Other.................... 108,369 95,393 36,314 38.1 48,872 9,719 19.9 44.1 15.5 26.1 10.5 3.8 5.0 4.3 449 Non-owneroccupied4 Conventional,firstlien Homepurchase........ 338,882 297,621 53,181 17.9 221,421 19,405 8.8 56.5 21.7 16.2 3.9 1.6 4.3 3.8 ... Refinance............. 504,929 426,480 123,753 29.0 275,839 14,449 5.2 49.1 21.6 22.7 5.2 1.4 4.5 4.0 105 Other.................... 72,823 62,448 23,500 37.6 36,035 4,466 12.4 25.4 14.8 44.1 12.0 3.7 5.5 5.4 54 BUSINESSRELATED3 Conventional,firstlien Homepurchase........ 30,659 29,666 1,095 3.7 27,915 1,152 4.1 30.1 31.7 31.6 4.7 1.9 4.9 4.6 ... Refinance............. 31,974 30,888 1,828 5.9 28,455 1,064 3.7 32.0 30.6 33.0 4.0 .6 4.8 4.6 6 Other.................... 14,483 12,435 1,604 12.9 10,516 419 4.0 49.2 13.8 28.6 5.7 2.6 4.7 4.0 9 MULTIFAMILY5 Conventional,firstlien Homepurchase........ 7,161 6,504 956 14.7 5,229 215 4.1 47.0 31.6 18.1 2.3 .9 4.3 4.1 ... Refinance............. 12,067 11,118 1,886 17.0 8,704 449 5.2 48.3 29.8 19.2 2.5 .2 4.3 4.0 ... Other.................... 4,085 3,683 573 15.6 2,994 114 3.8 43.0 23.7 29.8 3.5 .0 4.4 4.0 1 Total...................... 13,197,399 11,278,580 2,599,512 23.0 7,898,335 449,006 5.7 51.2 15.5 23.3 7.7 2.3 4.6 3.9 5,810 1.Annualpercentagerate(APR)spreadisthedifferencebetweentheAPRontheloanandtheyieldonacomparable-maturityTreasurysecurity.Thethreshold forfirst-lienloansisaspreadof3percentagepoints;forjunior-lienloans,itisaspreadof5percentagepoints. 2.LoanscoveredbytheHomeOwnershipandEquityProtectionActof1994(HOEPA),whichdoesnotapplytohome-purchaseloans. 3.Business-relatedapplicationsandloansarethoseforwhichthelenderreportedthattherace,ethnicity,andsexoftheapplicantorco-applicantare“not applicable”;allotherapplicationsandloansarenonbusinessrelated. 4.Includesapplicationsandloansforwhichoccupancystatuswasmissing. 5.Includesbusiness-relatedandnonbusiness-relatedapplicationsandloansforowner-occupiedandnon-owner-occupiedproperties. ...Notapplicable. gagesbasedontheyieldsonsecuritieswithmaturities theyieldsonsecuritieswithmuchshorterterms.Thus, of fewerthan10years,andtheytypicallysetinterest a change in the relationship between shorter- and ratesonadjustable-ratemortgages(ARMs)basedon longer-term yields affected the reported incidence of

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A49 7. Dispositionof applicationsforhomeloans,andoriginationandpricingof loans,bytypeof homeandtypeof loan, 2009 B.LoanswithapplicationdatesonorafterOctober1,2009,thresholdchange Applications Loansoriginated LoanswithAPRspreadabovethethreshold1 Actedupon Typeofhomeandloan Number bylender byp D er i c st e r n ib ta u g t e io p n o , ints A (p P e R rce s n p t r a e g a e d Number submitted Number ofAPRspread points) of Number Percent HOEPAcovered Number Number Percent 1.5- 2- 2.5- 3- 4- 5or Mean Median loans2 denied denied 1.99 2.49 2.99 3.99 4.99 more 1–4FAMILY NONBUSINESSRELATED3 Owneroccupied Sitebuilt Homepurchase Conventional Firstlien............ 202,357 178,384 31,573 17.7 139,640 4,867 3.5 37.9 22.6 16.5 14.1 4.7 4.2 2.6 2.2 ... Juniorlien.......... 9,810 8,879 1,575 17.7 6,887 1,058 15.4 ... ... ... 33.7 53.6 12.7 4.8 4.2 ... Governmentbacked Firstlien............ 239,838 214,617 37,866 17.6 170,716 2,447 1.4 78.6 11.4 4.3 .8 .3 4.7 2.0 1.7 ... Juniorlien.......... 266 226 26 11.5 194 5 2.6 ... ... ... 40.0 60.0 .0 4.2 4.3 ... Refinance Conventional Firstlien............ 747,592 630,921 158,935 25.2 442,401 9,982 2.3 32.7 19.6 13.6 15.3 6.7 12.1 3.0 2.4 188 Juniorlien.......... 27,587 25,102 8,773 34.9 15,242 1,589 10.4 ... ... ... 30.7 37.3 32.1 4.9 4.4 63 Governmentbacked Firstlien............ 244,580 192,941 62,850 32.6 120,499 3,938 3.3 38.3 39.5 14.1 5.6 1.2 1.3 2.2 2.1 26 Juniorlien.......... 110 87 21 24.1 64 4 6.3 ... ... ... 100.0 .0 .0 3.6 3.6 4 Homeimprovement Conventional Firstlien............ 37,213 32,246 12,870 39.9 17,868 3,026 16.9 24.3 19.6 15.9 16.5 7.6 16.1 3.3 2.7 111 Juniorlien.......... 31,575 28,179 14,818 52.6 12,283 1,052 8.6 ... ... ... 30.4 29.3 40.3 5.4 4.6 48 Governmentbacked Firstlien............ 2,120 1,507 558 37.0 868 149 17.2 20.1 36.2 14.1 5.4 16.1 8.1 2.9 2.4 1 Juniorlien.......... 1,898 1,597 1,234 77.3 306 235 76.8 ... ... ... 3.4 18.3 78.3 6.3 6.6 0 Unsecured (conventionalor government backed)........... 35,729 34,787 16,783 48.2 17,100 ... ... ... ... ... ... ... ... ... ... ... Manufactured Conventional,firstlien Homepurchase........ 34,721 33,794 21,150 62.6 5,856 4,358 74.4 5.8 5.8 8.4 21.5 19.0 39.6 4.9 4.4 ... Refinance............. 9,928 8,994 4,100 45.6 4,367 2,023 46.3 12.5 11.1 15.0 24.2 15.8 21.5 3.9 3.5 180 Other.................... 14,052 12,238 5,812 47.5 5,065 870 17.2 20.9 15.2 12.1 23.0 9.1 19.8 3.8 3.1 56 Non-owneroccupied4 Conventional,firstlien Homepurchase........ 51,440 45,689 8,571 18.8 35,126 1,928 5.5 37.6 19.4 14.3 16.1 6.5 6.2 2.7 2.3 ... Refinance............. 71,950 59,462 19,284 32.4 37,897 1,584 4.2 36.1 21.3 15.7 14.5 6.1 6.3 2.7 2.3 11 Other.................... 13,935 12,273 5,357 43.6 6,545 515 7.9 18.1 13.0 12.6 23.3 15.5 17.5 3.6 3.2 4 BUSINESSRELATED3 Conventional,firstlien Homepurchase........ 5,251 5,120 217 4.2 4,843 188 3.9 19.7 30.3 21.8 20.7 3.2 4.3 2.7 2.5 ... Refinance............. 5,328 5,195 291 5.6 4,867 216 4.4 25.9 27.3 21.3 16.7 6.0 2.8 2.6 2.4 0 Other.................... 2,285 2,093 307 14.7 1,759 27 1.5 11.1 33.3 11.1 18.5 14.8 11.1 3.2 2.7 0 MULTIFAMILY5 Conventional,firstlien Homepurchase........ 985 910 151 16.6 733 57 7.8 49.1 22.8 12.3 12.3 1.8 1.8 2.3 2.0 ... Refinance............. 1,425 1,336 228 17.1 1,073 64 6.0 23.4 40.6 15.6 10.9 1.6 7.8 2.6 2.2 0 Other.................... 534 515 105 20.4 402 5 1.2 40.0 20.0 .0 40.0 .0 .0 2.4 2.1 0 Total...................... 1,792,509 1,537,092 413,455 26.9 1,052,601 40,187 3.8 28.7 17.7 11.9 16.2 10.6 14.9 3.3 2.6 692 NOTE:Seenotestotable7.A. higher-priced lending. For example, when short-term For ARMs, this effect was further exacerbated by interestratesfellrelativetolong-termrates,thenum- themannerinwhichAPRsarecalculated.Theinterest berandproportionof loansreportedashigherpriced ratesonmostARMloans,aftertheinitialinterestrate fell even when other factors, such as lenders’ under- resetdate,aresetbasedontheinterestrateforone-year writing practices or borrowers’ credit risk or prepay- securities.Asaresult,theAPRsforARMs,whichtake mentcharacteristics,remainedunchanged. into account the expected interest rates on a loan

A50 FederalReserveBulletin□December2010 8. Home-purchaselendingthatbeganwitharequestforpreapproval:Dispositionandpricing,bytypeof home,2009 A.LoanswithapplicationdatesbeforeOctober1,2009,thresholdchange Applicationspreceded Loanoriginationswhoseapplicationswerepreceded Requestsforpreapproval byrequestsforpreapproval1 byrequestsforpreapproval Actedupon LoanswithAPRspreadabovethethreshold2 bylender Typeofhome Number Distribution, APRspread acted Number Percent Number Number bypercentagepoints (percentage uponby denied denied submitted lender Number Number Number Percent ofAPRspread points) denied 3- 4- 5- 7- 9or Mean Median 3.99 4.99 6.99 8.99 more spread spread 1–4FAMILY NONBUSINESS RELATED3 Owneroccupied Sitebuilt Conventional Firstlien............ 264,145 70,550 26.7 154,432 23,986 17,069 104,841 2,303 2.2 66.4 19.8 11.5 2.0 .4 3.9 3.5 Juniorlien........... 5,928 1,075 18.1 4,134 309 127 3,486 922 26.4 ... ... 93.8 5.5 .7 5.9 5.8 Governmentbacked Firstlien............ 184,995 47,817 25.8 124,553 12,744 10,544 96,314 4,789 5.0 85.6 10.5 3.6 .2 .1 3.6 3.3 Juniorlien........... 114 12 10.5 96 14 15 65 1 1.5 ... ... 100.0 .0 .0 5.0 5.0 Manufactured Conventional,firstlien. 5,618 1,400 24.9 3,829 361 918 2,117 1,340 63.3 14.4 19.9 24.8 14.9 26.1 7.5 6.2 Other.................. 2,733 709 25.9 1,969 606 266 1,006 93 9.2 85.0 12.9 2.0 .0 .0 3.5 3.4 Non-owneroccupied4 Conventional,firstlien. 33,198 8,109 24.4 21,047 3,020 2,057 14,767 800 5.4 62.3 21.6 12.6 2.3 1.3 4.1 3.7 Other.................. 1,646 216 13.1 1,393 179 136 1,064 14 1.3 14.3 .0 95.7 .0 .0 5.4 5.5 BUSINESSRELATED3 Conventional,firstlien.. 573 13 2.3 550 59 85 385 36 9.4 33.3 30.6 33.3 2.8 .0 4.8 4.5 Other................... 123 8 6.5 114 14 21 74 2 2.7 100.0 .0 .0 .0 .0 3.3 3.3 MULTIFAMILY5 Conventional,firstlien.. 98 6 6.1 85 15 4 63 6 9.5 50.0 33.3 16.7 .0 .0 4.1 4.1 Other................... 35 0 .0 33 13 4 16 2 12.5 50.0 50.0 .0 .0 .0 4.0 4.0 Total.................... 499,206 129,915 26.0 312,235 41,320 31,246 224,198 10,308 4.6 62.3 13.8 17.1 3.1 3.7 4.4 3.6 1.Theseapplicationsareincludedinthetotalreportedintable7.A. 2.Seetable7.A,note1. 3.Seetable7.A,note3. 4.Seetable7.A,note4. 5.Seetable7.A,note5. ...Notapplicable. assuming that the loan does not prepay and that the (PMMS).19If thedifferenceismorethan1.5percentindexratesusedtoestablishinterestratesafterthereset agepointsforafirst-lienloanormorethan3.5percentdonotchange,willbeparticularlysensitivetochanges age points for a junior-lien loan, then the loan is in one-year interest rates. Consequently, the share of classified as higher priced and the rate spread is re- ARMs reported as higher priced fell when one-year ported.20SinceAPORsmovewithchangesinmarket ratesdeclinedrelativetootherrateseveniftherelation- ratesandareproductspecific,itisanticipatedthatthe ship between long- and intermediate-term rates re- distortions that existed under the old rules will be mainedconstant. greatlyreduced. Toaddressthesedistortions,theprice-reportingrules under HMDA were modified (the “new rules”). For applicationstakenbeginningOctober1,2009(andfor 19. TheweeklyFreddieMacPrimaryMortgageMarketSurvey reportstheaveragecontractratesandpointsforallloansandthe allloansthatcloseonorafterJanuary1,2010),lenders marginforadjustable-rateloansforloansofferedtoprimeborrowcomparetheAPRontheloanwiththeestimatedAPR ers (those that pose the lowest credit risk). The survey currently (termedthe“averageprimeofferrate”(APOR))thata reportsinformationfortwofixed-ratemortgageproducts(30-year and15-yearterms)andtwoARMproducts(1-yearadjustablerate high-quality prime borrower would receive on a loan and 5-year adjustable rate). See Freddie Mac, “Weekly Primary of a similar type (for example, a 30-year fixed-rate Mortgage Market Survey,” webpage, www.freddiemac.com/dlink/ mortgage).TheAPORisestimatedusingtheinterest html/PMMS/display/PMMSOutputYr.jsp. 20. Formoredetails,seeFederalFinancialInstitutionsExaminaratesandpoints(andmarginforARMs)reportedby tion Council, “FFIEC Rate Spread Calculator,” webpage, FreddieMacinitsPrimaryMortgageMarketSurvey www.ffiec.gov/ratespread/default.aspx.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A51 8. Home-purchaselendingthatbeganwitharequestforpreapproval:Dispositionandpricing,bytypeof home,2009 B.LoanswithapplicationdatesonorafterOctober1,2009,thresholdchange Applicationspreceded Loanoriginationswhoseapplicationswerepreceded Requestsforpreapproval byrequestsforpreapproval1 byrequestsforpreapproval Actedupon LoanswithAPRspreadabovethethreshold2 bylender Typeofhome Number acted APRspread NumberPercent Number Distribution,bypercentagepoints upon Number (percentage denied denied submitted ofAPRspread by Number points) lender Number denied NumberPercent 1.5- 2- 2.5- 3- 4- 5or MeanMedian 1.99 2.49 2.99 3.99 4.99 morespread spread 1–4FAMILY NONBUSINESS RELATED3 Owneroccupied Sitebuilt Conventional Firstlien............ 27,846 9,514 34.2 16,333 2,102 2,950 10,808 50 .5 .0 .0 .0 58.0 18.0 24.0 4.3 3.6 Juniorlien........... 1,072 243 22.7 751 53 20 650 219 33.7 ... ... ... 32.4 63.5 4.1 4.3 4.2 Governmentbacked Firstlien............ 22,587 7,905 35.0 13,922 1,023 1,652 10,968 4 .0 .0 .0 .0 50.0 .0 50.0 5.9 4.2 Juniorlien........... 19 2 10.5 17 2 4 11 1 9.1 ... ... ... .0 100.0 .0 4.9 4.9 Manufactured Conventional,firstlien. 2,310 289 12.5 2,011 160 820 736 326 44.3 .0 .0 .0 20.6 20.3 59.2 6.8 5.8 Other.................. 264 101 38.3 162 24 24 110 0 .0 ... ... ... ... ... ... ... ... Non-owneroccupied4 Conventional,firstlien. 3,651 948 26.0 2,524 287 334 1,829 22 1.2 .0 .0 .0 59.1 22.7 18.2 4.6 3.7 Other.................. 187 44 23.5 140 19 23 96 0 .0 ... ... ... ... ... ... ... ... BUSINESSRELATED3 Conventional,firstlien.. 79 4 5.1 74 3 10 61 3 4.9 .0 .0 .0 66.7 33.3 .0 3.6 3.1 Other................... 13 1 7.7 12 2 4 6 0 .0 ... ... ... ... ... ... ... ... MULTIFAMILY5 Conventional,firstlien.. 15 0 .0 13 2 3 6 0 .0 ... ... ... ... ... ... ... ... Other................... 3 0 .0 3 0 1 1 0 .0 ... ... ... ... ... ... ... ... Total.................... 58,046 19,051 32.8 35,962 3,677 5,845 25,282 625 2.5 .0 .0 .0 29.4 35.4 35.2 5.7 4.6 1.Theseapplicationsareincludedinthetotalreportedintable7.B. 2.Seetable7.A,note1. 3.Seetable7.A,note3. 4.Seetable7.A,note4. 5.Seetable7.A,note5. ...Notapplicable. Sincethenewreportingrulesappliedonlytoloans the reported incidence of higher-priced lending. The with application dates on or after October 1, both relationshipbetweenshorter-andlonger-terminterest reportingruleswereineffectduringthefourthquarter ratescanbeseenintheyieldcurveforTreasurysecuriof2009.Forloansthatoriginatedinthefourthquarter, ties, which displays how the yields on these securities theoldthresholdwasusediftheirapplicationdatewas varywiththetermtomaturity.Theslopeof theyield before October 1, and the new threshold was used curve,whichwasalreadysteepatthebeginningof2009 otherwise.Sincethereportedspreadsfortheoldand relativetopatternsobservedinpreviousyears,continnewrulesarerelativetodifferentreportingthresholds, uedtosteepen.Thedifferencebetweentheyieldona the data are not directly comparable.21 Therefore, we 30-year Treasury security and that on a 1-year Treaconductouranalysisofthepricingdataforeachreport- surysecurityincreasedsharplyintheearlyportionof ingregimeseparately. the year and remained well above the levels observed from2006through2008(figure2).Whilethedifference TheOldPriceReportingRules betweentheyieldsonthe30-yearand5-yearTreasury securitiesdidnotincreaseassharply,in2009thisdiffer- Asmentioned,undertherulesthatgovernedHMDA ence remained consistently above the levels generally atthebeginningof 2009,achangeintherelationship observed in the previous three years. As discussed between shorter- and longer-term yields could affect above,thischangewouldbeexpectedtodecreasethe incidence of reported higher-priced lending, particu- 21. The 2009 public HMDA data release contains a variable larlyforARMs,evenintheabsenceof anychangesin indicatingwhethertheloanorapplicationwassubjecttotheoldor newpricingrules. high-risklendingactivity.

A52 FederalReserveBulletin□December2010 2. Spreads on Treasury bonds, 2006–09 andbymidyearthespreadsbetweentheHMDAreportingthresholdandtheAPRsonthe30-yearfixed-rate Percentage points and 5-year ARM from the PMMS had increased to levelswellabovethoseobservedinthepreviousthree 4 years. 1-year Thehistoricallyhighspreadsbetweenmortgagerates 3 for prime-quality borrowers (reflected by the APRs calculatedfromthePMMS)andtheHMDAreporting 2 threshold imply that the incidence of higher-priced lending in 2009 would be below the levels for earlier 1 5-year years,evenif high-risklendingactivityhadremained + the same. Furthermore, the increasing spreads over _0 2009suggestthatloansof agivencreditriskthatmay havebeenreportedashigherpricedearlierintheyear 2006 2007 2008 2009 maynothavebeensoreportedlaterintheyear.This NOTE: The data are weekly, and the spreads are over 30-year Treasury possibilitymakesdrawinginferencesaboutchangesin bonds. Prior to mid-February 2006, the 30-year Treasury bond was not available, and the data are missing. high-credit-risk lending based upon changes in the SOURCE: Federal Reserve Board, Statistical Release H.15, incidenceofreportedhigher-pricedlendingmuchmore www.federalreserve.gov/releases/h15/current/h15.htm. complicated. In 2008, the decrease in the incidence of higher- In analyzing HMDA data from previous years in pricedlendingthatwouldbeexpectedtofollowasteep- whichtheyieldcurvechangedsubstantially,werelied eningyieldcurvewasmitigatedbythe“flighttoquality” onamethodologythatusedadifferentdefinitionof a andliquidityconcernsthatwerecausedbythefinan- “higher-pricedloan”thatislesssensitivetoyieldcurve cialcrisisinlate2008.Thisdevelopmentresultedinthe changes and, therefore, more fully reflective of highyieldsonTreasurysecuritiesfallingrelativetorateson risk lending activity. This methodology defines the othersecurities,includingmortgageloans.Asaresult, credit risk component of a loan as the difference bethe spread between the HMDA reporting threshold tweentheAPRonthatloanandtheAPRavailableto andtheAPRona30-yearfixed-rateprimeloan,based the lowest-risk prime borrowers at that time. This on the rates reported by Freddie Mac’s PMMS, fell creditriskcomponentisassumedtobeconstantover during most of 2008 (figure 3). This pattern carried time.Inotherwords,weassumethatanonprimeborinto2009butbegantoreverseitself earlyintheyear, rower who received a loan with an APR that was 1.25 percentage points above the APR available to prime borrowers at that time would receive, if the 3. HMDA price-reporting threshold, interest rates for fixednonprime borrower’s characteristics remained conand adjustable-rate loans, and spreads between the threshold and such rates, 2006–09 stant,aloanthatwas1.25percentagepointsabovethe available rate for prime borrowers at all other times, Percentage points regardlessof anychangesintheinterestrateenviron- APR, HMDA threshold ment.Wethenexaminetheshareof loanswithcredit 8 risk components that are above specific thresholds. 7 Theapproachofcreatingathresholdthatissetrelative 6 APR, 30-year fixed to the mortgage rates that are available to prime- 5 qualityborrowersissimilartothenewHMDAreport- APR, 5-year adjustable 4 ingrulesandshouldprovideamoreaccuratedepiction 3 of theextenttowhichhigh-risklendinghaschanged; Spread, 30-year fixed 2 forinstance,thelendingdataunderthenewrulesare 1 relativelyfreeof thedistortionsintroducedintheinci- + Spread, 5-year adjustable _0 denceof reportedhigher-pricedlendingbychangesin theinterestrateenvironment. 2006 2007 2008 2009 Inestimatingthecreditriskcomponentof loansin NOTE: For explanation of Home Mortgage Disclosure Act (HMDA) the HMDA data, we use, as the measure of the rate price-reporting threshold, see text. The threshold and annual percentage rates available to prime borrowers, the APR derived from (APRs) are for conventional first-lien 30-year prime loans. SOURCE: APRs from the Freddie Mac Primary Mortgage Market Survey; the information reported in the Freddie Mac PMMS see note to figure 1.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A53 fora30-yearfixed-rateloan.22Asanapproximationof 4. Higher-priced share of lending, by annual percentage rate threshold, 2006–09 the APR on loans in the HMDA data, we add the reportedspread(forhigher-pricedloans)totheappro- Percent priateHMDAreportingthresholdfora30-yearloan. Home purchase We refer to the resulting estimate of the credit risk HMDA (old rules) 25 component as the “PMMS spread.” Because of the large spreads in 2009 between the HMDA reporting 20 threshold and the APRs on prime-quality 30-year fixed-rateloans,onlythoseloanswithaPMMSspread 15 in excess of 2.59 percentage points would have been PMMS + 2.59 reported as higher priced under HMDA at all points HMDA 10 (new rules) during 2009. Therefore, this spread is the minimum 5 PMMSspreadthatcanbeusedasathreshold.Werefer to loans with a PMMS spread of 2.59 percentage pointsorhigheras“adjustedhigherpriced”loans. 2006 2007 2008 2009 Percent Theshareof loansreportedashigherpricedunder Refinance the old HMDA reporting rules in 2009 (taken as a HMDA (old rules) 35 whole)waslow.Amongfirst-lienloanssecuredbyone- 30 tofour-familyproperties,4.7percentwerehigherpriced 25 in2009,downsignificantlyfromthehistorichighpoint of 27.2percentin2006andfrom10.7percentin2008. 20 The decline in the incidence of higher-priced lending 15 PMMS + 2.59 wasobservedforalltypesoflenders. HMDA 10 Lookingexclusivelyatchangesintheannualratesof (new rules) higher-priced lending can obscure the information 5 about how the mortgage market is developing over 2006 2007 2008 2009 time.Tobetterillustratehowchangesinhigher-priced lendinghaveplayedoutinrecentyears,weexamined NOTE: The data are monthly. Loans are first-lien mortgages for site-built properties and exclude business loans. Annual percentage rates are for monthlypatternsinhigher-pricedlendingactivity.The conventional 30-year fixed-rate prime mortgages. For explanations of old and monthly data show that the incidence of reported new pricing rules, see text. PMMS Freddie Mac Primary Mortgage Market Survey. higher-priced home-purchase lending fell over the HMDA Home Mortgage Disclosure Act. course of 2009 (figure 4, top panel; see line labeled “HMDA(oldrules)”).Asimilardeclineisobservedfor intheinterestrateenvironment.Theshareofrefinance refinance loans, though the incidence of reported loans that were considered adjusted higher priced in higher-priced refinance lending ticked up slightly in 2009alsoremainedathistoricallylowlevels.Thesmall thelatterportionoftheyear(figure4,bottompanel). increase observed in the incidence of higher-priced Asdiscussed,thisdeclineinreportedhigher-priced lendingin2009appearstoreflectanactualincreasein lendingisexpectedgiventheincreasingspreadbetween high-risk lending, though the increase was small and mortgage rates and the HMDA reporting threshold. shortlived.Thesefiguressuggestthatlendingtohigher- Using our methodology to correct for distortions risk borrowers, which declined sharply beginning in causedbychangesintheinterestrateenvironment,we 2007,remainedatlowlevelsduringtheyear,withlittle find that the share of adjusted higher-priced loans indicationthatlendingtosuchborrowershasbegunto (shown in figure 4) was relatively flat for home- rebound. However, it is important to note that the purchaselendingin2009,suggestingthatthedeclinein PMMS spread that we use in this analysis is signifitheincidenceof reportedhigher-pricedlendinginthe cantly higher than the PMMS spreads we have em- HMDAdataforthatperiodlargelyreflectedchanges ployed in previous years, and this threshold may not capture a considerable share of lending to high-risk borrowers. 22. ByusingtheAPRforthe30-yearfixed-ratemortgage,weare TheNewPriceReportingRules implicitlytreatingallloansintheHMDAdataasthoughtheywere 30-yearfixed-rateloans.DatafromlargemortgageservicersprovidedbyLenderProcessingServices,Inc.,showthatlessthan1per- The new price reporting rules, which apply to loans cent of first-lien mortgages in 2009 were ARMs. Because of the originated during 2009 with application dates from rarity of ARMs and the prevalence of 30-year loans, we do not expectourassumptiontosubstantiallydistorttheanalysis. October to December, use reporting thresholds that

A54 FederalReserveBulletin□December2010 arebasedontheprevailingmortgageinterestratesat THECHANGINGROLEOFGOVERNMENT thetimealoan’sinterestrateislocked.Thethresholdis INTHEMORTGAGEMARKET similartotheoneusedearliertoadjustforchangesin theinterestrateenvironment,thoughithastwomajor The share of new mortgage loans either explicitly or advantages over our measure. First, the new-rule implicitly guaranteed by the federal government has threshold varies with the initial period over which a risendramaticallysince2006.Weestimatethatbythe loan’sinterestratedoesnotchange,whichmeansthat endof 2009,almost6outof 10newowner-occupied thereportingthresholdforARMscanbesetlower(or home-purchase loans were originated through the higher)thanthethresholdfor30-yearfixed-rateloans. FHA, VA, and, to a much lesser extent, the FSA or Intheprecedinganalysis,becausewecouldnotdistin- RHSprograms,withasimilarpercentageof newrefiguishfixed-ratefromARMloans(orbetweentypesof nancemortgageseitherownedoutrightorinmortgage ARMs), we had to assume that all loans originated poolsguaranteedbyFannieMaeorFreddieMac.This during 2009 were fixed rate. Analyses of the data re- sectionwilldiscusstheunderlyingcausesofthistrend. Tofacilitateouranalysis,weemployareviseddataset portedusingthenewrulesdonotneedtorelyonsuch designed to correct for one of the limitations in the anassumption.Thesecondadvantageisthatbecause HMDAreportingsystem. lendersknowtheAPRontheloanwhencomparingit UnderHMDAreportingrules,allloansoriginated with the threshold, whereas we could only approxiundertheFHA,VA,FSA,orRHSprogramsmustbe mate a loan’s APR when it was reported as higher identified as such.23 However, loans placed in pools priced under the old rules, the reporting threshold is thatareguaranteedbyorsoldtothehousing-related notconstrainedbythemaximumPMMSspreadthat government-sponsored enterprises, Fannie Mae and wasineffectovertheperiodbeingexamined.Conse- Freddie Mac, are identified only if they are sold diquently,thespreadthatgovernsreportingislowerthan rectlytotheGSEsordirectlyplacedinapoolduring wecoulduseinourattempttocorrecttheoldreporting the same year of the loan origination. The HMDA rulesforchangesintheinterestrateenvironment.The data therefore tend to undercount loans sold to the resultshouldbeamoreaccuratedepictionofsubprime GSEsfortworeasons.First,salescantakeplaceina lendingactivitythatislesssensitivetochangesinthe yearsubsequenttoorigination,especiallyamongloans interestrateenvironment. originatedduringthefourthquarter.Second,lenders Asdiscussed,thenewrulesappliedonlytoafraction maynotsellloansdirectlytotheGSEsbutinsteadmay of originatedloansreportedduringtheyear.Thenew sellthemtootherfinancialinstitutionsthatformmortrulesappliedtolessthan15percentofloansoriginated gage pools for which investors subsequently obtain inOctober,62percentof thoseoriginatedinNovem- GSEcreditguarantees. ber, and 85 percent of those originated in December Fortheanalysisinthissection,weadjusttheHMDA (data not shown in tables). The shares of these loans datatoattempttocorrectfortheundercountof GSE thatwerereportedashigherpricedduringthisperiod loans.First,financialinstitutionsarerequiredtoreport are shown in the two panels of figure 4. The higher under HMDA their loan purchases as well as their incidencesobservedunderthenewreportingrulesprioriginations.Usinginformationonloansize,location, marilyappeartoreflectthelargespreadsineffectdur- dateoforigination,anddateofpurchase,wewereable ing2009betweenmortgageratesforprimeborrowers tomatchmorethan50percentof theloansthatwere andtheoldHMDAreportingthresholdthatreduced originatedfrom2006to2009andthensoldtoanother reportingundertheoldrules.Beyondthat,itisdifficult financialinstitutiontotherecordforthesameloanin tocomparethetwonumbers,astheyarespreadsrela- the loan purchase file. From those matched, we are tive to two different thresholds. Since we observe the thenabletoobtaintheultimateloandispositionfrom incidences for such a short period, we are unable to the filing of loan purchases. Of the portion we were make any inferences about the volume of subprime unabletomatch,mostwereoriginated(andpurchased) lendingactivityotherthanthatitseemstohavebeen byonelargeorganization,whichsupplieduswiththe relatively stable over this three-month period. How- aggregatedispositionofthepurchasedloans.Forthose ever,beginningwiththe2010HMDAdata,whenthe sold loans that we were still unable to match, we asnewreportingruleswillapplytoalloriginatedloans, weexpecttheserulestoprovideamoreaccurateand consistent depiction of lending activity to high-risk 23. Forthe2009reportingyear,77.3percentofthenonconvenborrowers. tionalhome-purchaseloanswereFHAloans,13.9percentwereVA guaranteed,and8.8percentwerecoveredundertheFSAorRHS programs.Fornonconventionalrefinanceloans,83.7percentwere FHA,15.9percentVA,and0.4percentFSAorRHS.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A55 sumedthatthedistributionoftheultimatedisposition 5. Share of lending, by purpose of loan and occupancy status of home and by type of loan, 2006–09 matchedthedistributionofloansthatwecouldmatch. Second, to address the undercount of GSE loans Percent originatedinOctoberthroughDecemberofeachyear, A. Home purchase, owner occupied weusedanimputationformulabasedontheallocation 60 ofloansoriginatedintheprecedingSeptemberandthe followingJanuarytoassigntheultimatedispositionof 50 conventional loans.24 The imputation was conducted Nonconventional 40 separatelyforthe14largestmortgageoriginatorsand tookaccountofthecharacteristicsoftheloan,includ- GSE 30 ingsizeandlocation. 20 The changing structure of the mortgage market Portfolio between 2006 and 2009 may be illustrated using our 10 Other adjusted data for the four major loan types reported under HMDA (figure 5). The figure groups first-lien 2006 2007 2008 2009 Percent site-built mortgages into four distinct categories: B. Refinance, owner occupied (1) loans insured by the FHA, backed by the VA, or 60 issued or guaranteed by the FSA or RHS (“nonconventional”);(2)conventionalloanssoldtoFannieMae Portfolio orFreddieMacorplacedinpoolsguaranteedbythem 45 (“GSE”);(3)conventionalloanssoldtoanaffiliateor heldintheportfoliooftheoriginatinglender(“portfo- GSE 30 lio”); and (4) all other conventional loans, including thosesoldintotheprivatesecuritizationmarketorto Other 15 unaffiliatedinstitutions(“other”).Panels5.A,5.B,and Nonconventional 5.Cshowpatternsforowner-occupiedhome-purchase, 2006 2007 2008 2009 refinance, and home-improvement loans; panel 5.D Percent shows patterns for all non-owner-occupied loans re- C. Home improvement, owner occupied gardlessofpurpose.25 75 OuradjusteddatashowagreaterrolefortheGSEs than that implied by the raw HMDA data. The raw Portfolio 60 datareportedintable6showthat41percentofowner- 45 occupied refinance loans originated in 2009 were reported as sold directly to the GSEs; our revised data 30 GSE imply that ultimately over 57 percent of such loans were either purchased by the GSEs or placed in a Other 15 mortgagepoolguaranteedbythem.Thedatainfigure5 Nonconventional alsoshowthatthesubprime-basedprivatesecuritiza- 2006 2007 2008 2009 Percent tionmarketdeclinedattheendof 2006andthrough- D. All loans, non-owner occupied out2007,whiletheGSEsgainedmarketshare.Portfolio and nonconventional market shares remained rela- 80 tively constant until the end of 2007. The years 2008 GSE 60 24. For2009,onlytheSeptemberdatawereused. 25. Thehome-improvementandnon-owner-occupiedloancategories are more heterogeneous than the other two. The home- Portfolio 40 improvementcategorymayincludesome“cash-out”refinanceloans, whichwouldbetreatedasrefinancingsexceptthatsomeofthefunds areusedforhomeimprovements,aswellassmallernewloanson Other Nonconventional 20 homesthatpreviouslyhadnomortgage.Thenon-owner-occupied categorypresentedhereisheterogeneousbyconstructionsinceit includesalltypesofloans.Asaconsequenceofthisheterogeneity, 2006 2007 2008 2009 thedispositionofliensinthesetwocategoriesislikelymoresensitive tomarketchangesthantherefinanceandhome-purchasecategories. NOTE: The data are monthly. Loans are first liens on one- to four-family, The huge jump in GSE share for home-improvement and non- site-built properties and exclude business loans. For definitions of loan types, owner-occupiedpropertyloansattheendof 2009,forexample,is see text. probablyoccurringbecausetherefinancecomponentofeachgroup roseaspartofthelate2009refinanceboom.

A56 FederalReserveBulletin□December2010 and2009showadifferentdynamic,withnonconven- HERA also provided tax assistance (in effect, an tional home-purchase market share rising dramati- interest-free loan) to first-time homebuyers meeting cally. The GSEs play a much more prominent role in certainincomeconditionsofupto$7,500beginningin therefinancemarket,withtheirsharerisingdramati- April2008.ARRAupdatedthisprogram,providinga callyatthebeginningof 2008,fallingthroughAugust, tax credit of up to $8,000 for first-time homebuyers andthenrisingagaininto2009. purchasingahomebetweenJanuary1,2009,andNo- These patterns reflect the actions of a number of vember 30, 2009. Finally, the Worker, Homeownerplayers.Nonconventionallendinghastraditionallyfo- ship,andBusinessAssistanceActof2009extendedthe cusedonthehigh-LTVmarket,offeringinvestorsmort- first-timehomebuyertaxcreditprogramthroughApril gage insurance protection against borrower default. 2010andallowedcertainlong-termhomeownerspur- Privatemortgageinsurancecompaniesalsooffersimi- chasing new homes to claim a tax credit of up to lar insurance for high-LTV conventional loans, with $6,500.Byprimarilytargetingfirst-timehomebuyers, PMI(orsomeothercreditenhancement)requiredby theseprogramslikelystimulateddemandforhigh-LTV statuteforloanswithLTVsabove80percentthatare home-purchase mortgages. Moreover, an FHA loan sold to the GSEs. Lenders can also choose to forgo may have had particular appeal for such borrowers PMIand(1)holdtheloandirectlyor(2)issueasecond because the FHA allowed borrowers to use the tax lien for the portion of the loan above 80 percent (a creditinadvanceaspartoftheirdownpayment. piggybackloan)andstillsellthe80percentloantothe Second, with losses mounting in 2007 and 2008, GSEs.ThechoiceamongPMI,publicmortgageinsur- PMI companies tightened underwriting and raised ance, or a piggyback loan is likely to be made by prices starting in the spring of 2008. These changes borrowers (and lenders) based on the relative pricing likely reduced the ability of the GSEs to purchase andunderwritingstandardsof thePMIandthenon- higher-LTVloans(loanswithLTVsabove80percent) conventional loan products. Prices and underwriting becauseof therequirementthatsuchloanscarryPMI establishedbypurchasersinthesecondarymarketalso inordertobeeligibleforGSEpurchase.TheGSEsalso matter.BothGSEschargefeesforloanstheypurchase altered their own underwriting and fee schedule in orguarantee,withthefeesvaryingbyLTVandcredit March2008andagaininJune.Inparticular,theGSEs quality. The GSE, FHA, and VA programs are also stopped buying loans with LTVs in excess of 95 persubjecttostatutorylimitsonloansize,whichcanand centandincreasedpricesforotherhigh-LTVloans.27 havebeenchanged.Finally,thewillingnessoffinancial The increased GSE pricing for high-LTV loans was institutionstoholdmortgagesinportfolioislikelyto slightlymodifiedinMarch2009butremainedinplace besensitivetotheircostsof funds,theircapitalposi- through the end of 2009. In contrast, the pricing of tion,andotherfactors. FHAandVAloanshasbeenlittlechangedfrom2006, Manyoftheseitemshavechangedoverthepastfour with a slight increase in pricing in September 2008.28 yearsandlikelyinfluencedthemarketoutcomes.First, the Congress authorized an increase in the loan-size explicitmaximumsizelimit.Theincreasedlimitswereallowedto limits applicable for the FHA and VA programs and remain in place through the end of 2009. Analysis in a previous GSEpurchasesaspartoftheEconomicStimulusAct, articleconcludedthattheincreaseinlimitsaccountedforlessthan 10percentofthegrowthofnonconventionallendingin2008;neverpassedinFebruary2008;itdidsoagainaspartof the theless,thelimitincreaselikelychangedthemixofborrowersusing Housing and Economic Recovery Act (HERA), en- theseprograms.SeeAveryandothers,“The2008HMDAData:The actedinJuly2008;anditdidsooncemoreaspartof MortgageMarketduringaTurbulentYear,”innote14. 27. PMIannualpremiumsforloanswithLTVsabove80percent the American Recovery and Reinvestment Act generally range from 0.30 percentage points to 1.20 percentage (ARRA),passedinFebruary2009.26 points,dependingonLTV,creditscore,andotherfactors(see,for example,thewebsiteoftheMortgageGuarantyInsuranceCorporationatwww.mgic.com).OnMarch1,2008,FannieMaeandFreddie 26. NewstandardsreleasedonMarch6,2008,raisedtheGSE Macraisedtheirone-timedeliveryfeesfor30-yearloanswithLTVs andFHAloan-sizelimitsto$729,750incertainareasdesignatedby above 70 percent to a range of 0.75 to 2.00 percentage points, the Department of Housing and Urban Development as “high dependingontheborrower’screditscore.OnMarch9,2008,both cost.”FHAloanlimitswerealsoraisedabovetheir2007levelsto GSEsaddedanadditionalfeeof0.25percentagepointfor“market newamountsinmanyotherareas.Priortothesechanges,theGSEs conditions.”InJune2008,theGSEsraisedtheirfeesagain,byan couldnotpurchasesingle-familyhomeloansabove$417,000inmost averageof0.50percentagepoint.Thesefeeshaveremainedmoreor states, while the FHA could not insure single-family home loans less unchanged since then. In the summer of 2008, many PMI above$271,050inmostareasofthecountry.(TheGSEloanlimits companiesannouncedfurtherincreasesintheirrates,particularlyin werehigherinAlaskaandHawaii;themaximumloansizeforthe markets they defined as “distressed.” In some areas, it became FHAprogramwasaslowas$200,160insomelow-costareas.)VA almostimpossibletoobtainPMIforloanswithLTVsofgreaterthan loansdonothaveasizelimit,buttheydohaveaguaranteelimitthat 90percent.Mostoftheserestrictionsremainedinplacefor2009. istiedtoGSEloanlimits.FSAloansarealsosubjecttodifferent,and 28. Forthefirsthalfof2008,theFHAchargedaflatdeliveryfee generallyhigher,limits.Onlylower-ormoderate-incomeborrowers of1.50percentagepointsandanannualpremiumof0.50percentage inruralareasareeligibleforRHSloans,buttheloansdonothavean point to insure 30-year mortgages. On July 14, 2008, the FHA

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A57 Bothprogramshavelimitedabilitytopriceonthebasis stitutionsmayhavebecomelesswillingtomakelongof risk;programvolumesaredeterminedmorebythe term investments, including holding new mortgage actionsofothermarketparticipantsthanbyproactive loans in portfolio, for a variety of reasons, including decisionmakingontheprograms’part.Towardtheend uncertainty about the economic and regulatory enviof 2009, the FHA decided to stop making loans to ronmentgoingforward. borrowers with FICO scores below 580.29 Otherwise, In the remainder of this section, we examine the other than an expansion of the FHA’s streamlined implications of these market developments in more refinancing programs, FHA underwriting did not detail,focusingontheroleof thePMIcompaniesand changesubstantiallyoverthisperiod.30 the relative pricing of the conventional and noncon- Other developments likely also affected market ventional markets (for more information about PMI, sharesoverthe2006–09period.Themarketforprivate- seebox“PrivateMortgageInsurance”). label mortgage-backed securities essentially disappearedbythebeginningof2007,takingwithitmuchof PMICompaniesunderStrain the subprime mortgage market.31 Piggyback loans, which had been a popular vehicle in the high-LTV PMIcompaniesgenerallyreportedlargenetlossesin market,alsolargelydisappeared.Finally,bankingin- 2007 and 2008. The Mortgage Insurance Companies of America(MICA)reportsthatitsmemberssuffered implemented a risk-based insurance system with upfront fees for cumulativeoperatinglossesofover$1.4billionin2007 30-yearmortgagesrangingfrom1.25to2.25percentagepointsand annualpremiumsfrom0to0.55percentagepoint,dependingonthe and $5.8 billion in 2008, compared with operating LTVandcreditscoreoftheborrower.Thepricechanges,however, incomeofjustover$2billioninboth2005and2006.32 wererolledbackbytheCongress,whichpassedlegislationprohibit- Byearly2009,thestocksofseveralofthelargestmortingtheuseofarisk-basedpricingsystemafterOctober1,2008.On thatdate,theFHAannouncedanewfeeschedulewithanupfront gage insurers had lost almost all of their value, and feeof 1.75percentagepointsandanannualpremiumof 0.55per- Standard&Poor’s,acreditratingagency,reportedin centagepointfor30-yearloanswithLTVsof95percentandhigher mid-2009thatsomemajormortgageinsurerswereat and0.50percentagepointforthosewithlowerLTVs.Theseprices prevailedfortherestof2008andthroughthespringof2010.During riskofbreachingregulatorycapitalthresholdsforwrittheperiodinwhichtheFHAchargedrisk-basedrates(andduring ing new business.33 Indeed, MICA reports that the thepost-Marchfixed-rateperiod),FHAfeeswerelowerthanthose overallrisk-to-capitalratioof itsmembersmorethan forloanspurchasedbytheGSEswithPMI(exceptforborrowers withhighcreditscores). doubledfrom9to19between2006and2008,approach- Overthescopeofourstudyperiod,theVAchargedanupfrontfee ingtheregulatorymaximumof25.34 of2.15percentagepointsandnoannualpremiumforaveteranusing Mortgage insurers tightened underwriting stantheprogramforthefirsttimewithnodownpayment(thedominant choice);thefeewasreducedto1.50percentagepointswitha5per- dards considerably in 2008 and 2009, especially in cent down payment and to 1.25 percentage points with a down company-designated “distressed areas.”35 For inpaymentof10percentormore.TheVAhasastreamlinedrefinance stance, in 2009, one major insurer began requiring a programthatallowstherefinancingofaVAloanintoanotherVA loanwithlittledocumentationandarefinancefeeof0.50percentage minimumFICOscoreof 720insomedistressedmarpoint(otherrefinanceloanshavethestandardfees).Throughoutthe kets and 700 in other areas. It also required an LTV studyperiod,theRHSchargedaflatupfrontfeeof2.00percentage ratio below 90 percent and stopped providing insurpoints. 29. FICO scores are one summary measure of the credit risk anceonARMswithaninitialfixedperiodoflessthan posedbyanindividualbasedsolelyontheinformationcontainedin fiveyearsinallgeographicareas.Anotherlargeinsurer thecreditreportsmaintainedbythethreenationalcreditreporting in2009raiseditsminimumcreditscoreto680from620 agencies.FICOscoresareproducedusingstatisticalmodelsdevelopedbyFairIsaacCorporation.AFICOscoreof660orgreateris andstoppedprovidinginsuranceonallmanufactured oftenviewedasascorerangeassociatedwithprime-qualityborrow- housing.ThiscompanyalsosetamaximumLTVratio ers;ascorelessthan620isoftenassociatedwithborrowerswith subprimecreditquality.Formoreinformation,seewww.myfico.com/ CreditEducation. 30. SeeU.S.Departmentof HousingandUrbanDevelopment (2010),“QuarterlyReporttoCongressonFHASingle-FamilyMu- 32. See Mortgage Insurance Companies of America (2009), tual Mortgage Insurance Fund Programs” (Washington: HUD, “2009–2010FactBook&MemberDirectory”(Washington:MICA), August).ThisreportshowsthatthepercentageofFHAloansissued availableatwww.privatemi.com/news/factsheets/2009-2010.pdf. toborrowerswithFICOscoresbetween580and620alsofellsharply 33. SeeStandard&Poor’s(2009),“SignificantOperatingLosses in2009,despitethefactthattheFHAdidnotchangeitsunderwrit- Continue to Pressure U.S. Mortgage Insurers’ Capital Adequacy ingstandardsforthisgroup.Thisreductionlikelyreflectstheactions Ratios,” Ratings Direct, August 21, www.standardandpoors.com/ of lenderswhoceasedmakingsuchloans.Only6percentof FHA ratingsdirect. borrowersinthefourthquarterof2009hadaFICOscorebelow620. 34. Onerelativelysmallinsurer,TriadGuaranty,wasforcedto 31. AccordingtoInsideMBS&ABS,nonewmortgage-backed stopwritingnewpoliciesin2008. securities were issued for subprime or alt-A loans or for prime- 35. Thelistofdistressedordecliningmarketsvariesbymortgage qualityjumboloans(loanswithbalancesabovetheconformingloan insurancecompanybuttypicallyincludesmetropolitanareasand limits)in2009.SeeInsideMortgageFinancePublications(2010), statesthathaveexperiencedseveredeclinesinemploymentorhome InsideMBS&ABS,June11,www.imfpubs.com. prices.

A58 FederalReserveBulletin□December2010 PrivateMortgageInsurance Historically,mortgagelendersextendingconventional theHomeMortgageDisclosureActof1975(HMDA). loansrequiredprospectiveborrowerstomakeadown However,becausethePMIcompaniesdonotreceive paymentofatleast20percentofahome’svaluebefore alltheinformationaboutaprospectiveloanfromthe theywouldextendaloantobuyahomeorrefinance lenders seeking insurance coverage, some items rean existing mortgage. Private mortgage insurance ported under HMDA are not included in the PMI (PMI) emerged in the 1950s alongside the long- data.Inparticular,loanpricinginformation,requests standingFederalHousingAdministration(FHA)and forpreapproval,andanindicatorofwhetheraloanis DepartmentofVeteransAffairs(VA)governmentloan subjecttotheHomeOwnershipandEquityProtection programstohelpbridgethegapbetweenlendersreluc- Actof1994areunavailableinthePMIdata. tant to extend mortgages with high loan-to-value Thehandfulofcompaniesthattypicallyreportdata (LTV)ratiosandconsumersinterestedinborrowing dominatethePMIindustry.Therefore,thesedatacover morethan80percentoftheunderlyinghome’svalue. thevastmajorityofmortgageinsurancewritteninthe Foraborrowerseekingahigh-LTVloan,thelender United States, allowing for meaningful analysis of canrequirethattheborrowerpurchasemortgagein- thesedataalongsidetheHMDAdata.2Still,caremust surance to protect the lender against default-related beexercisedincomparingthePMIandHMDAdata. lossesuptoacontractuallyestablishedpercentageof Specifically, because of lender coverage rules under theprincipalamount.Infact,ahigh-LTVloanmust RegulationC,theHMDAdatamaybelesscomprehavePMIcoverageinordertobeeligibleforpurchase hensivethanthePMIdata,especiallyintermsofcovbythegovernment-sponsoredenterprises(FannieMae erage of rural markets. The PMI reporting firms andFreddieMac).Overtheyears,PMI-backedloans provide information on all privately insured loans becameasignificantpartofthemortgagemarketand regardlessofpropertylocation.Incontrast,HMDA’s anevenmoreimportantsegmentof theinsuredpor- coverageismostcompleteformetropolitanareaspritionofthatmarket. marily because lenders that maintain offices exclusivelyinruralareasneednotreportHMDAdata. PMIDataReportedinConjunction For2009,eightPMIcompaniesreportedonnearly withtheHMDAData 636,000applicationsforinsuranceleadingtotheissuanceof 367,000insurancepolicies,downfromabout In 1993, the Mortgage Insurance Companies of 2millionapplicationsand1.5millionpoliciesin2007. AmericaaskedtheFederalFinancialInstitutionsEx- About58percentofthepoliciesin2009coveredhomeamination Council to process data from the largest purchaseloans,andtheremaindercoveredrefinance PMI companies on applications for mortgage insur- mortgages.About12percentofPMIinsuranceapplianceandtoproducedisclosurestatementsforthepub- cationsweredenied,aratesubstantiallyhigherthanin licbasedonthedata.1ThePMIdatalargelymirrorthe 2006 and 2007, when only about 2 percent of the typesofinformationsubmittedbylenderscoveredby requestsforinsurancewereturneddown.3 1. Founded in 1973, the Mortgage Insurance Companies of AmericaisthetradeassociationforthePMIindustry.TheFederal 2. ThePMIdatadonotcapture“poolinsurance”—thatis,insur- FinancialInstitutionsExaminationCouncil(FFIEC)preparesdisclo- ancewrittenforpoolsofloansratherthanindividualmortgageloans. surestatementsforeachofthePMIcompanies.Thecompanystate- 3. Fortheotherapplicationsthatdidnotresultinapolicy,the ments and the PMI data are available from the FFIEC at applicationwaswithdrawn,theapplicationfileclosedbecauseitwas www.ffiec.gov/reports.htm. notcompleted,ortherequestwasapprovedbutnopolicywasissued. of 90percentindistressedmarketsand95percentin tighterindesignateddistressedareasduring2009,PMI otherareasduring2009.36 volumeneverthelessfellabout80percent(derivedfrom AnanalysisofthePMIdatareportedinconjunction dataintable9)relativeto2007inbothtypesof areas. with the HMDA data documents the extent of the TheratioofPMIpoliciestoallloans(therowslabeled declineinPMIbylocation(designateddistressedareas “Market share” in table 9) fell sharply in all areas versusallotherareas)forloanstopurchasesite-built one- to four-family homes in metropolitan areas distressedordecliningmarketlistsasofearlytomid-2009forthree ofthelargestPMIcompanies—GenworthFinancial,UnitedGuar- (table 9).37 Although underwriting standards were anty,andMortgageGuarantyInsuranceCorporation.Ifacounty appearedonatleasttwoof threedistressedlists(byvirtueof its 36. These are just some of the guidelines issued by these two beinginadesignateddistressedmetropolitanareaorstate),thenwe companies.Distressedmarketlistsandunderwritingguidelinesare designateditadistressedcountyfortheanalysis.AllMSAcounties generallyavailableonthemortgageinsurancecompanies’websites. insomestates,includingArizona,California,Florida,Michigan, 37. Theanalysishereisrestrictedtometropolitanareassincethe NewJersey,andNevada,wereconsidereddistressed.Incontrast, HMDAmortgageoriginationdataaremorecompleteinmetropoli- some states such as Texas had no MSA counties marked as distanareas.WedividedallMSAcountiesintothetwogroupsusingthe tressed.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A59 9. Patternsof lendingforinsuredorguaranteedloansandforallloansinareasgroupedbydistressedstatus, 2007and2009 Percentexceptasnoted Typeofloan Insuredorguaranteed,bytypeofinsuranceorguarantee Characteristic All2 Private Government(nonconventional)1 2007 2009 Difference 2007 2009 Difference 2007 2009 Difference Designatedasdistressedareas3 Numberofloans(thousands)4 ............ 380 71 -309 91 543 452 1,588 1,134 -454 Marketshare.............................. 23.9 6.3 -17.6 5.7 47.9 42.2 100.0 100.0 .0 Non-owner-occupiedshare................ 10.1 2.4 -7.8 * * * 14.4 10.8 -3.6 LMIshare5............................... 43.6 30.5 -13.1 42.3 50.0 7.7 30.5 41.1 10.5 Meanofloanamounttoincome(ratio).... 3.3 2.9 -.4 3.2 3.2 .0 2.9 2.9 .1 Allotherareas3 Numberofloans(thousands)4............. 589 115 -474 241 619 378 1,851 1,221 -630 Marketshare.............................. 31.8 9.5 -22.4 13.0 50.7 37.7 100.0 100.0 .0 Non-owner-occupiedshare................ 9.3 1.6 -7.6 * * * 13.6 8.3 -5.4 LMIshare5............................... 48.7 29.0 -19.7 43.1 52.6 9.6 36.6 43.5 6.9 Meanofloanamounttoincome(ratio).... 2.7 2.4 -.3 2.6 2.8 .2 2.4 2.5 .2 1.Seetable3,note1. 2.Includesinsured,guaranteed,andothers. 3.Fordefinitionofdesignateddistressedareas,seetext. 4.Includesfirst-lien,home-purchaselendingforsite-built,one-tofour-familypropertieslocatedinmetropolitanstatisticalareas. 5.Low-ormoderate-income(LMI)borrowershavelowerincome,orthepropertyisinalower-incomecensustract.Borrowerincomeisthetotalincomerelied uponbythelenderintheloanunderwriting.Incomeisexpressedrelativetothemedianfamilyincomeofthemetropolitanstatisticalarea(MSA)orstatewide non-MSAinwhichthepropertybeingpurchasedislocated.“Lower”islessthan80percentofthemedian.Theincomecategoryofacensustractisthemedian familyincomeofthetractrelativetothatoftheMSAorstatewidenon-MSAinwhichthetractislocated.“Lower”islessthan80percentofthemedian. *Lessthan0.5percent. SOURCE:FederalFinancialInstitutionsExaminationCouncil,datareportedundertheHomeMortgageDisclosureActandprivatemortgageinsurancedata. (18 percentage points in distressed areas and 22 per- tressedareas,andthenonconventionalshareof mortcentagepointsinotherareas). gagessurgedfromjust6percentin2007to48percent Consistent with tightening standards, the share of in 2009 in these areas. Despite the drop in PMI issu- PMItocoverloansfornon-owner-occupiedhousing,a ance,thetotalfractionof loansinsuredorguaranteed class of loans typically considered to entail elevated througheithergovernmentorprivatesourcesswelled credit risk, fell sharply in both types of geographic from30percentto54percentindesignateddistressed areas.Moreover,thesedeclinesexceededthedeclinein areas.Thisfractionalsoroseinallotherareas,though the percentage of all loans for non-owner-occupied notasdramatically.Overall,theuseofmortgageinsurproperties(seelastcolumnof table9).Also,theshare anceof onetypeoranotherhasrisensince2007,espeof borrowers obtaining PMI with low or moderate cially in areas designated as distressed by the PMI incomes (LMI) or with property in LMI neighbor- companies. hoodsfellsubstantially.38Finally,theaverageratioof loan amount to income fell noticeably for loans cov- GSEPricingandtheExtensionof eredbyPMI. ConventionalHigh-LTVLoans WithPMIcompaniestighteningtheirunderwriting standards,manyborrowersandlendersseekingahigh- ThesimilarreductioninPMIissuanceinbothdesig- LTV loan likely turned to the FHA or other govern- nateddistressedandallotherareassuggeststhatsome ment loan programs. Nonconventional loans more factor other than PMI underwriting and pricing than offset the drop in PMI loans in designated dis- changesmayhavecontributedtothedearthofconventionalhigh-LTVloanswithPMIin2009.Oneimpor- 38. LMIneighborhoodsarecensustractswithamedianfamily tantdeterminantofPMIvolumeisGSEunderwriting incomelessthan80percentof themedianfamilyincomeof the and pricing. For instance, loans with LTVs above MSAor,forruralareas,thestatewidenon-MSAwherethetractis located.LMIborrowersarethosewithareportedincomelessthan 95percentweregenerallyineligibleforGSEpurchase 80percentof themedianfamilyincomeof theMSAorstatewide during2008and2009.Therefore,mostborrowersseeknon-MSAwherethepropertysecuringtheborrower’sloanisloing a loan with an LTV in excess of 95 percent were cated.BorrowerincomereportedintheHMDAdataisthetotal incomerelieduponbythelenderintheloanunderwriting. likelytoobtainanonconventionalloanratherthana

A60 FederalReserveBulletin□December2010 conventional loan with PMI.39 Also, for borrowers 6. Volume and share of home-purchase loans originated by the Federal Housing Administration and the withrelativelylowFICOscores,GSEpricingin2008 Department of Veterans Affairs, by loan-to-value ratio, and2009forloanswithLTVsbetween80and95per- May through December, 2009 cent,regardlessofPMIpricingandunderwritingpolicies,probablymadeFHAandVAloansmoreattractive. Count, all loans Percent However,forborrowerswithmoderatelyhighLTVs FICO scores 700 or above FHA/VA share (80 percent to 95 percent) and higher FICO scores 50,000 (right scale) 8800 (greater than or equal to 700), GSE pricing by itself Loan volume (left scale) wouldnothavediscouragedsuchborrowersfromob- 40,000 6600 taining a conventional loan with PMI during 2009. 30,000 Therefore,amongborrowerswithhigherFICOscores, 4400 PMI pricing and underwriting could have played an 20,000 importantroleindeterminingwhethertheseborrow- 2200 10,000 ersobtainedaconventionalloanwithPMI. We compiled data on individual mortgages from 65 70 75 80 85 90 95 100 LenderProcessingServices,Inc.(LPS),tocalculatethe Loan-to-value ratio (percent) FHA or VA share of first-lien home-purchase mortgage originations by LTV and borrower FICO score. Count, all loans Percent TheLPSdataaredrawnfromtherecordsof 19large FICO scores below 700 mortgage servicers, including 9 of the top 10, and 50,000 FHA/VA share 8800 thereforeprovidedetailedinformationonalargepor- (right scale) 40,000 tion of the mortgage market. We report the FHA or 6600 VAshareateachLTVfrom65to100percentinincre- 30,000 ments of 1 percent for borrowers with FICO scores 4400 greater than or equal to 700 (figure 6, top panel).40 20,000 Loan volume Consistentwiththeconjecturemadeearlier,nearlyall 10,000 (left scale) 2200 loanswithLTVsover95percentwereFHAorVA.41 Butevenintherangejustabove90percentandbelow 65 70 75 80 85 90 95 100 95percent,thevastmajorityofloanswereFHAorVA Loan-to-value ratio (percent) despite the GSEs’ favorable pricing for these loans. NOTE: The data are monthly. Loans are first liens on owner-occupied, Instead, the FHA and VA share falls precipitously single-family, site-built properties with 30-year mortgages. For definition of FICO score, see text note 29. rightat90percent(alongwithaspikeinvolume),and, FHA Federal Housing Administration. overall, only about 30 percent of loans with LTVs VA Department of Veterans Affairs. SOURCE: Lender Processing Services, Inc. between80and90percentwereFHAorVA.42Because neitherGSEnorFHAorVApricingchangessubstantively at the 90 percent threshold, PMI pricing and underwriting may become more favorable at this 39. Recall that high-LTV loans must have PMI in order to be threshold, causing the sharp shift away from governeligible for purchase by the GSEs. Lenders could of course still originateloanswithLTVsabove95percentandrequiretheborrower ment programs and into the conventional market at topurchasePMI,buttheseloanswouldnotbeeligibleforimmediate 90percent. saletotheGSEs.Thelenderwouldhavetoholdtheloansinportfolio Another downward spike in the nonconventional orsellthemontheprivatesecondarymarket—optionsthatmaynot havebeenasviablein2009astheywereearlierinthedecade. share occurs at an 85 percent LTV. Again, this spike 40. Loanswererestrictedtofirst-lien30-yearmortgagesforsingle- cannotbeexplainedbyFHA,VA,orGSEpricingand familyowner-occupiedpropertiesthatwereoriginatedbetweenMay thusmayberelatedtoPMIpolicies.Finally,theFHA andDecemberof2009.WefocusedontheMaytoDecemberperiod becausetheGSEsintroducedpricechangesinApril. andVAsharefallstoaboutzeroatLTVsof 80percent 41. FHAandVAloanswithLTVsreportedintheLPSdataas andbelow,atwhichpointsPMIisnotrequiredfora being over 97 percent likely reflect the financing of the upfront conventionalloan.43 insurancepremium. 42. ItisimportanttonotethattheLPSdataarenotrepresenta- AlsoreportedistheFHAandVAshareforborrowtiveandmayoverrepresentnonconventionalandGSElending.Also, ers with FICO scores less than 700 (figure 6, bottom alargenumberofloansintheLPSdatadonothavealoanpurpose panel).Incontrasttothetoppanel,thevastmajority (homepurchaseorrefinance)reported,andtheseloansareskewed towardtheconventionalmarket.Forthesereasons,theFHAorVA sharesreportedinfigure6maybeoverstated.AlthoughtheLPS 43. OftheloanswithLTVsbetween80and90percentinthetop datalackthebroadcoverageoftheHMDAdata,theyhaveimpor- paneloffigure6thatwerenotFHAorVA,justover94percentof tantadvantagesinthattheyprovidemuchmoredetailedunderwrit- them were reported as sold to one of the GSEs. In other words, inginformation,suchasFICOscoreandLTV,thandotheHMDA nearlyallof thenon-FHA/VAloansinthisLTV/FICOcellwould data. haveobtainedPMIbecausenearlyallweresoldtotheGSEs.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A61 of loanswithLTVsover80percentwereFHAorVA. 7.B. Lending extended to borrowers in selected low-income groups as a share of all lending, by type of low-income Asmentionedearlier,GSEpricingwasunfavorablefor group, 2006–09 borrowerswithFICOscoresinthislowerrange,soitis notsurprisingthattheseborrowersobtainednoncon- Percent ventionalloans.44 Home purchase Other CHANGESINTOTALLENDINGBY 60 BORROWERANDAREACHARACTERISTICS Asdiscussedearlier,2008and2009werecharacterized 40 bytheincreasedrolesoftheFHA,VA,FSA,andRHS Lower-income borrower programsandtheGSEs.Thissectionexamineswhether these changes played out differently across borrower Lower-income census tract 20 groups.Wedifferentiateamongborrowersbyraceand Missing income ethnicity,relativeincome(forboththeneighborhood 2006 2007 2008 2009 andtheborrower),location(state),typeoflender,and Percent indicatorsoflow-qualitylending. Refinance Other 60 44. TherelativelyhighFHAandVAshareof loanswithLTVs below80percentinthebottompanelof figure6mayreflectadditional,unobservedcreditrisksuchasahighdebt-to-incomeratio. 40 Thedownwardspikesinthegovernment-backedshareat75percent Missing income and70percentmaystemfromtheGSEpricingschedule,whichdoes Lower-income borrower changeatthesethresholdsforlower-scoreborrowersin2009. 20 7.A. Share of lending extended to minorities, by selected Lower-income census tract race and ethnicity of borrower, 2006–09 Percent 2006 2007 2008 2009 Home purchase NOTE: The data are monthly. Loans are first liens on owner-occupied, one- 75 to four-family, site-built properties and exclude business loans. Borrower income is the total income relied upon by the lender in the loan underwriting. Non-Hispanic white 70 Income is expressed relative to the median family income of the metropolitan statistical area (MSA) or statewide non-MSA in which the property being 65 purchased is located. “Lower” is less than 80 percent of the median. The income category of a census tract is the median family income of the tract 60 relative to that of the MSA or statewide non-MSA in which the tract is located. “Lower” is less than 80 percent of the median. “Missing” indicates Hispanic white Other minority or missing 15 that information for the characteristic was missing on the application. “Other” consists of all non-lower-income and non-missing-income borrowers who are 10 not in a lower-income census tract. Borrower groups are not mutually Black exclusive; therefore, sums do not add to 100 percent. 5 Asian Changes in the shares of home-purchase and refi- 2006 2007 2008 2009 Percent nancelendingfrom2006to2009fordifferentgroups Refinance areshown(figures7.Athrough7.D).Thesedataindi- 80 catedifferentpatternsforhome-purchaselendingcom- 75 paredwithrefinancelending.Forexample,theshares 70 of home-purchaseloanstoblackandHispanicwhite Non-Hispanic white 65 borrowers decreased over 2008 and 2009, but the de- 60 creaseinthesegroups’sharesof therefinancemarket Hispanic white wasmoresevere.Also,theshareof refinanceloansto 15 Other minority or missing LMI borrowers fell significantly over the sample pe- 10 riod,whiletheshareof home-purchaseloanstosuch Black Asian 5 borrowersincreasedsignificantly.Mostof thisgrowth tookplacein2008and2009,whenthefirst-timehome- 2006 2007 2008 2009 buyertaxcreditprogramwasinplace.45 NOTE: The data are monthly. Loans are first liens on owner-occupied, oneto four-family, site-built properties and exclude business loans. For definition of minority, see table 10.A, note 5; for definition of other minority and 45. The upward trend in the LMI share of borrowers could explanation of “missing,” see table 10.A, note 6. reflect,tosomeextent,inflatedmeasuresof borrowerincomere-

A62 FederalReserveBulletin□December2010 7.C. Share of lending, by loan quality and occupancy status 7.D. Share of lending, by location of property securing of home, 2006–09 the loan, 2006–09 Percent Percent Home purchase Home purchase 75 20 Other 60 Non-owner occupied 15 45 10 30 Sand states High PTI ratio 5 15 Higher priced Rust states 2006 2007 2008 2009 2006 2007 2008 2009 Percent Percent Refinance Refinance 30 75 High PTI ratio 25 60 Other 20 Higher priced 45 15 Sand states 30 10 Non-owner occupied Rust states 15 5 2006 2007 2008 2009 2006 2007 2008 2009 NOTE: The data are monthly. Loans are first liens on owner-occupied NOTE: The data are monthly. Loans are first liens on owner-occupied, one- (except as noted), one- to four-family, site-built properties and exclude to four-family, site-built properties and exclude business loans. “Sand states” business loans. A payment-to-income (PTI) ratio is considered high if it consist of California, Florida, Arizona, and Nevada. “Rust states” consist of exceeds 30 percent. For definitions of higher-priced lending and PTI, see text. Illinois, Indiana, Michigan, Ohio, and Wisconsin. “Other” denotes all “Non-owner occupied” includes loans for which occupancy status was remaining states. missing. 48percentof thehome-purchaseloansbetweenApril TaxrecordscompiledbytheGovernmentAccount- 2008andNovember2009.47 abilityOffice(GAO)reinforcetheviewthatfirst-time Figure 7.C shows trends in three metrics of loan homebuyersconstitutedasizableportionof the2008 quality that can be derived from the HMDA data— and2009home-purchasepopulation.46TheGAOrethepercentageofloanswithestimatedfront-enddebtports that there were just over 1 million first-time payment-to-income(PTI)ratiosexceeding30percent homebuyer tax credit claims from April through De- (a warning level in underwriting), the percentage of cemberof 2008andjustover1.6millionclaimsfrom loans reported as higher priced in the HMDA data, JanuarythroughNovemberof2009.Tohelpputthese and the percentage of loans for non-owner-occupied numbersincontext,wecalculatedthenumberof firstproperties.Allthreemeasuresfellsignificantlyoverthe lien,owner-occupied,home-purchaseoriginationsresampleperiod,althoughmostofthisdeclinehadtaken ported in the HMDA data during these two periods placebefore2009.48 andinflatedthesenumbers25percenttoaccountfor thefactthatHMDAdoesnothaveuniversalcoverage ofthemortgagemarket.Undertheassumptionthatall 47. The LPS data shown in figure 6 are also consistent with first-timehomebuyersmakingupalargeshareofthehome-purchase first-timehomebuyerstakeoutamortgage,thesedata mortgage population. These data indicate that a large share of implythatfirst-timehomebuyersaccountedforabout home-purchaseloanshadLTVsover95percent,whichmayreflect highfirst-timehomebuyeractivitysincesuchborrowershavetraditionallyhadlessmoneyforadownpayment. portedforlow-orno-documentationloansin2006and2007,thus 48. ThemonthlymortgagepaymentusedforthePTIisestimated biasingdownwardtheLMIshareofborrowersinthoseyears. assuming all mortgages are fully amortizing 30-year fixed mort- 46. SeeU.S.GovernmentAccountabilityOffice(2010),TaxAd- gages.IftheloanpricingspreadisreportedintheHMDAdata,the ministration:UsageandSelectedAnalysesoftheFirst-TimeHome- loancontractrateisassumedtobethesameastheAPR.Otherwise, buyer Credit (Washington: GAO, September 2), www.gao.gov/ itisassumedtobeequaltothePMMSAPRlevelplus20basispoints products/GAO-10-1025R. prevailingattheloan’sestimatedlockdate.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A63 Someof thechangesshownthusfarinfigures7.A or private secondary-market loans to be classified as through7.Cmayreflectfactorsspecifictocertaingeo- low quality by our measures—high PTI or higher graphic areas rather than factors specific to certain priced.However,by2008,thislowerincidenceforhighdemographicgroups.Forinstance,adeclineinlending PTI loans had largely disappeared. The secondary in California relative to the rest of the nation would market for loans reported as higher priced in the tend to generate a relative decline in lending to His- HMDA data appears to have largely disappeared, as panic white borrowers because of the prevalence of mostof theseloansendedupinlenders’portfoliosin this group in California. As shown in figure 7.D, the 2008and2009. share of loans extended to residents of the “sand Loansoriginatedinthesandstatesin2006and2007 states”—California,Florida,Arizona,andNevada— weremuchmorelikelytobesoldintotheprivatesecdeclined,particularlyforrefinancelending.Neverthe- ondarymarketthanloansoriginatedinotherstates.By less, even after controlling for differential trends in 2008, differences in the disposition patterns between lending across markets, the racial and income trends thesandstatesandtherestof thecountryhadlargely described earlier mostly remain (data not shown in disappeared in the home-purchase market, likely in tables). part because of changes in the FHA and GSE loan Borrowersof differentdemographicgroupsshowed limits. However, in the refinance market, loans origilarge differences in their propensity to use different nated in the sand states in 2008 and 2009 were more types of loans, with significant changes from year to likelytobepurchasedbytheGSEsandlesslikelytobe year (tables 10.A and 10.B). All groups showed sub- partofthenonconventionalloanprogramsthanloans stantialincreasesintheiruseofnonconventionalloans inotherstates. from 2006 through 2009. Black and Hispanic white borrowers,however,reliedparticularlyheavilyonthese governmentprograms.In2009,morethan80percent CHANGESINTHESTRUCTUREOFTHE of home-purchaseloansandmorethan50percentof MORTGAGEINDUSTRY refinance loans to black borrowers were nonconventional. For Hispanic white borrowers in 2009, nearly Asnoted,theHMDAdatacoverthemajorityofhome three-fourthsoftheirhome-purchaseloansand30per- loansoriginatedintheUnitedStatesandincludenearly centof theirrefinanceloanswerenonconventional.In allhomelenderswithofficesinmetropolitanareas.As 2006,over40percentofhome-purchaseandrefinance aconsequenceof itsbroadcoverage,theHMDAdata loans to both black and Hispanic white borrowers canbeusedtoreliablytrackchangesinthestructureof weresoldintotheprivatesecuritiesmarketorsoldtoa the mortgage industry and the sources of different nongovernmentpurchaser.By2007,theseshareshad loanproducts. dropped considerably, and the GSE and portfolio Historically,depositoryinstitutions,particularlysavshares of loans among these groups had grown. In ings institutions, were a leading source of mortgage 2008 and 2009, the share of home-purchase loans to credit. In 1980, savings institutions extended about blackandHispanicwhiteborrowersthatweresoldto one-half of the home loans, and commercial banks the GSEs fell, while the share of refinance loans to nearly one-fourth of such loans.49 As the secondary bothgroupsthatweresoldtotheGSEsrosefrom2007 marketformortgagesevolved,andoriginatinglenders through2009. nolongerneededtoholdloansinportfolio,opportuni- Patternsof loan-typeincidenceforLMIborrowers ties became available for a wider group of lenders to andborrowerslivinginLMItractsaresimilartothose enter the market and compete with the traditional forblackandHispanicwhiteborrowersbutaremore typesof originatinginstitutions.Mortgagecompanies muted.Loanstotheseborrowerswerelesslikelytobe emerged as a major source of loans. Most mortgage soldonthenongovernmentsecondarymarketin2006, companiesareindependentof depositories,butsome and the shift toward nonconventional loans in 2008 areaffiliatesordirectsubsidiariesofdepositories.Both and2009wasnotaslarge.Theshareofborrowerswith typesof mortgagecompaniesrelyonawide-reaching incomemissingfromtheirloanapplicationsfellfrom baseof independentoraffiliatedbrokerstofindcus- 2006through2009(morethanone-half of theseloans tomersandtakeapplications.Bytheearly1990s,mortweresoldintotheprivatesecondarymarketin2006). The incidence of missing income for refinance loans actually rose in 2008 and 2009, likely the result of “streamlined”refinanceprograms. 49. SeeTheJointCenterforHousingStudies,HarvardUniversity(2002),The25thAnniversaryof theCommunityReinvestment In2006and2007,nonconventionalloansaswellas Act: Access to Capital in an Evolving Financial Services System GSEloansweresignificantlylesslikelythanportfolio (Cambridge,Mass.:JCHS,March).

A64 FederalReserveBulletin□December2010 10. Incidenceof selectedtypesof loans,bypurposeof theloanandbyvariousdefiningcharacteristics,2006–09 A.Homepurchase Percentexceptasnoted v N en o t n io co n n al - 1GSE2Other3 f P o o li r o t- 4v N en o t n io co n n al - 1GSE2Other3 f P o o li r o t- 4v N en o t n io co n n al - 1GSE2Other3 f P o o li r o t- 4v N en o t n io co n n al - 1GSE2Other3 f P o o li r o t- 4 Characteristic 2006 2007 2008 2009 Minoritystatusofborrower5 BlackorAfricanAmerican...... 13.9 16.9 43.2 26.0 21.9 34.2 15.7 28.2 64.0 19.4 5.2 11.4 81.4 9.2 2.6 6.8 Hispanicwhite.................. 7.0 18.2 46.5 28.3 12.2 37.0 17.2 33.6 51.5 29.5 6.1 13.0 73.6 15.3 4.1 6.9 Asian........................... 2.7 30.7 33.5 33.1 3.2 43.0 17.1 36.7 14.8 54.8 10.2 20.2 27.3 49.5 9.4 13.9 Non-Hispanicwhite............. 9.6 33.2 27.8 29.4 11.5 44.0 16.2 28.4 35.4 36.2 9.9 18.5 52.1 28.9 7.1 11.9 Otherminorityormissing6...... 6.2 26.5 35.3 32.0 9.4 41.9 16.9 31.8 33.4 40.4 7.8 18.4 51.3 30.4 6.1 12.3 LMIcensustractorborrower7 Censustract..................... 9.6 22.1 38.9 29.4 13.8 39.0 15.5 31.7 45.5 30.9 7.2 16.5 64.3 20.0 5.2 10.4 Borrower........................ 14.9 30.2 27.6 27.4 15.9 43.0 15.1 26.0 46.1 30.2 8.7 15.0 65.3 20.6 5.3 8.8 Other8.......................... 7.7 30.6 32.5 29.2 10.6 42.9 16.5 30.0 33.5 38.6 9.4 18.4 47.2 32.7 7.5 12.6 Missing9........................ 1.7 15.9 41.8 40.7 4.7 29.8 24.1 41.5 37.0 25.4 8.5 29.1 53.3 24.7 5.8 16.2 Loancharacteristicor occupancystatus Highpayment-to-incomeratio10. 5.4 19.3 44.8 30.6 7.5 39.9 19.4 33.3 32.8 38.4 10.9 17.9 54.8 27.3 7.7 10.1 Higherpriced11................. .1 5.2 70.9 23.8 .5 27.3 25.6 46.6 10.2 17.3 10.6 61.8 15.5 8.5 5.2 70.8 Non-owneroccupied12.......... .0 30.0 32.3 37.7 .0 42.8 15.7 41.5 .6 53.9 10.4 35.1 .3 56.2 12.0 31.4 Propertylocation13 Sandstates...................... 2.6 19.6 46.2 31.6 6.0 37.1 20.0 36.9 39.8 38.4 8.1 13.7 57.8 27.4 7.3 7.4 Ruststates...................... 9.4 35.1 26.5 29.0 11.3 46.6 13.0 29.1 35.9 35.8 8.2 20.1 50.8 30.8 5.0 13.4 Other........................... 11.1 30.8 29.4 28.7 13.5 42.6 16.1 27.8 37.2 35.1 9.5 18.2 54.0 27.2 6.7 12.1 Typeoflender Depository...................... 7.5 31.2 19.3 42.0 9.0 41.5 9.0 40.5 30.1 40.7 5.8 23.4 45.7 33.7 4.4 16.2 Affiliateofdepository........... 8.9 44.6 31.1 15.4 10.7 57.1 16.0 16.2 35.8 45.5 7.7 11.0 56.2 32.0 4.1 7.7 Independentmortgagecompany. 10.8 16.1 49.8 23.3 19.0 32.0 33.2 15.8 55.1 20.7 17.2 7.0 69.1 16.0 11.3 3.7 Total............................ 9.0 28.9 32.8 29.4 11.8 42.2 16.4 29.7 37.5 35.8 9.1 17.6 54.4 27.7 6.6 11.3 NOTE:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans. 1.Seetable3,note1. 2.Government-sponsoredenterprise(GSE)loansarealloriginationscategorizedasconventionalandsoldtoFannieMae,FreddieMac,GinnieMae,orFarmer Mac. 3.Otherloansareconventionalloanssoldtonon-government-relatedornon-affiliateinstitutions. 4.Portfolioloansareconventionalloansheldbythelenderorsoldtoanaffiliateinstitution. 5.Categoriesforraceandethnicityreflectrevisedstandardsestablishedin1997bytheOfficeofManagementandBudget.Applicantsareplacedunderonlyone categoryforraceandethnicity,generallyaccordingtotheraceandethnicityofthepersonlistedfirstontheapplication.However,underrace,theapplicationis designatedasjointifoneapplicantreportedthesingledesignationofwhiteandtheotherreportedoneormoreminorityraces.Iftheapplicationisnotjointbut morethanoneraceisreported,thefollowingdesignationsaremade:Ifatleasttwominorityracesarereported,theapplicationisdesignatedastwoormoreminority races;ifthefirstpersonlistedonanapplicationreportstworaces,andoneiswhite,theapplicationiscategorizedundertheminorityrace.Forloanswithtwoor moreapplicants,lenderscoveredundertheHomeMortgageDisclosureActreportdataononlytwo. 6.OtherminorityconsistsofAmericanIndianorAlaskanNative,andNativeHawaiianorotherPacificIslander.“Missing”indicatesthatinformationforthe characteristicwasmissingontheapplication. 7.Seetable9,note5. 8.Otherconsistsofallnon-lower-andnon-missing-incomeborrowerswhoarenotinalower-incomecensustract. 9.Incomewasnotrelieduponintheunderwritingoftheloan. 10.Highpayment-to-incomeratiois30percentormore. 11.Fordefinitionofhigher-pricedlending,seetext. 12.Includesloansforwhichoccupancystatuswasmissing. 13.“Sandstates”consistofCalifornia,Florida,Arizona,andNevada;“ruststates”consistofIllinois,Indiana,Michigan,Ohio,andWisconsin;“other”consists ofallotherstates. gagecompaniesoriginatedmorethanone-halfofhome lending to borrowers with weaker credit histories or loans.50 othercharacteristicsthatsignaledelevatedcreditrisk, During the 1980s and through the first half of the the subprime and private securitization markets ex- 1990s, mortgage companies and depositories largely panded. competedforborrowersofprimeandnear-primequal- By2006,mortgagecompanies,includingbothindeity, with a large proportion of these loans eventually pendentinstitutionsandthoseaffiliatedwithadeposibeingpurchasedorbackedbyFannieMaeorFreddie tory institution, originated about 57 percent of all Macforsaletoinvestors.Overthenextdecadeorso,as loans and 72 percent of the higher-priced loans lenders and investors became more comfortable with (table11).Asshownintables10.Aand10.B,affiliated mortgagecompaniestendedtosellloanstotheGSEs, 50. SeeU.S.Departmentof HousingandUrbanDevelopment, whileindependentmortgagecompanieswerethedomi- OfficeofPolicyDevelopmentandResearch,“U.S.HousingMarket nant suppliers of the private secondary market. The Conditions: National Data,” webpage, www.huduser.org/ collapse of the subprime market in the first half of periodicals/ushmc/fall97/nd_hf.html.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A65 10. Incidenceof selectedtypesof loans,bypurposeof theloanandbyvariousdefiningcharacteristics,2006–09 B.Refinance Percentexceptasnoted v N en o t n io co n n al - 1GSE2Other3 f P o o li r o t- 4v N en o t n io co n n al - 1GSE2Other3 f P o o li r o t- 4v N en o t n io co n n al - 1GSE2Other3 f P o o li r o t- 4v N en o t n io co n n al - 1GSE2Other3 f P o o li r o t- 4 Characteristic 2006 2007 2008 2009 Minoritystatusofborrower5 BlackorAfricanAmerican...... 4.4 16.6 41.2 37.8 10.2 29.3 16.8 43.7 38.9 30.3 4.9 25.9 52.5 31.1 4.3 12.1 Hispanicwhite.................. 1.8 19.2 43.4 35.6 3.9 34.3 18.7 43.1 19.8 47.4 7.2 25.7 30.1 48.4 7.4 14.1 Asian........................... .7 24.1 35.5 39.7 1.2 35.7 17.7 45.4 5.4 59.2 10.0 25.4 6.5 70.7 10.1 12.6 Non-Hispanicwhite............. 2.6 27.3 31.2 38.9 4.9 39.5 16.0 39.6 16.0 47.2 9.5 27.3 16.9 58.5 9.7 14.9 Otherminorityormissing6...... 1.8 21.9 42.6 33.7 4.2 36.4 20.8 38.6 18.9 50.0 7.8 23.3 19.2 58.1 7.2 15.6 LMIcensustractorborrower7 Censustract..................... 2.9 19.5 40.0 37.7 6.2 33.5 17.3 43.0 24.6 40.7 6.8 27.9 31.2 45.9 6.9 16.0 Borrower........................ 2.9 25.5 33.0 38.6 5.7 38.9 15.2 40.2 18.3 44.7 8.2 28.8 16.8 57.4 8.9 16.9 Other8.......................... 1.7 25.2 35.3 37.8 3.8 38.3 17.7 40.2 13.3 49.8 9.8 27.0 8.9 64.6 10.7 15.9 Missing9........................ 11.2 21.6 34.6 32.6 17.4 28.6 16.4 37.6 58.7 26.6 2.7 12.0 75.5 19.6 1.4 3.6 Loancharacteristicor occupancystatus Highpayment-to-incomeratio10. .9 16.4 49.5 33.2 2.4 31.9 23.1 42.6 15.7 47.9 10.5 26.0 20.2 56.5 10.6 12.8 Higherpriced11................. .1 3.7 60.1 36.1 .2 10.1 27.0 62.6 1.8 9.8 2.9 85.5 8.5 7.9 2.7 80.9 Non-owneroccupied12.......... .1 23.8 36.0 40.0 .1 38.2 17.0 44.6 .9 52.0 8.8 38.3 2.0 61.1 9.3 27.7 Propertylocation13 Sandstates...................... .7 21.5 42.4 35.4 1.6 34.8 20.6 43.0 9.3 56.7 9.7 24.3 14.0 63.3 10.3 12.4 Ruststates...................... 4.0 28.3 29.1 38.6 7.6 40.4 12.8 39.2 19.0 46.0 8.1 26.9 16.9 60.7 7.7 14.7 Other........................... 3.2 25.2 32.8 38.9 6.0 38.0 16.5 39.5 19.4 44.7 8.9 27.1 20.2 55.2 9.3 15.3 Typeoflender Depository...................... 1.8 26.1 17.4 54.7 3.6 36.2 7.4 52.8 11.4 50.3 5.4 32.9 12.2 63.1 6.5 18.2 Affiliateofdepository........... 2.1 38.4 33.3 26.2 3.2 47.3 18.7 30.8 15.5 51.4 8.1 25.0 18.2 67.7 5.1 9.0 Independentmortgagecompany. 3.6 13.1 57.8 25.4 10.1 31.2 37.7 21.1 38.0 33.7 20.0 8.4 38.6 36.0 18.9 6.5 Total............................ 2.5 24.4 35.3 37.7 5.0 37.5 17.1 40.4 17.6 46.9 8.9 26.6 18.6 57.5 9.2 14.7 NOTE:Seenotestotable10.A. 11. Distributionof reportedhigher-pricedlending,bytypeof lender,andincidenceateachtypeof lender,2006–09 Percentexceptasnoted Higher-pricedloans MEMO:Allloans Typeoflender Oldpricingrules1 Newpricingrules2 Number Distribution Incidence Number Distribution Incidence Number Distribution 2006 Independentmortgagecompany..... 1,291,245 45.7 39.2 ... ... ... 3,290,902 31.6 Depository.......................... 801,001 28.4 18.0 ... ... ... 4,459,306 42.9 Affiliateorsubsidiaryofdepository. 731,703 25.9 27.6 ... ... ... 2,649,644 25.5 Total.............................. 2,823,949 100 27.2 ... ... ... 10,399,852 100 2007 Independentmortgagecompany..... 307,933 21.1 18.3 ... ... ... 1,683,792 20.4 Depository.......................... 660,518 45.3 14.2 ... ... ... 4,649,803 56.4 Affiliateorsubsidiaryofdepository. 489,927 33.6 25.7 ... ... ... 1,905,246 23.1 Total.............................. 1,458,378 100 17.7 ... ... ... 8,238,841 100 2008 Independentmortgagecompany..... 120,605 18.2 9.1 ... ... ... 1,319,714 21.3 Depository.......................... 401,594 60.8 9.9 ... ... ... 4,044,889 65.3 Affiliateorsubsidiaryofdepository. 138,709 21.0 16.8 ... ... ... 826,848 13.4 Total.............................. 660,908 100 10.7 ... ... ... 6,191,451 100 2009 Independentmortgagecompany..... 71,679 20.8 4.1 4,088 14.7 1.5 2,026,273 24.2 Depository.......................... 243,974 70.6 5.0 21,957 79.0 3.6 5,499,235 65.8 Affiliateorsubsidiaryofdepository. 29,779 8.6 4.0 1,754 6.3 1.9 832,555 10.0 Total.............................. 345,432 100 4.7 27,799 100 2.9 8,358,063 100 NOTE:First-lienmortgagesforsite-builtproperties;excludesbusinessloans.Fordefinitionofhigher-pricedlending,seetext. 1.Higher-pricedloansdefinedpriortoOctober1,2009. 2.Higher-pricedloansdefinedonorafterOctober1,2009. ...Notapplicable.

A66 FederalReserveBulletin□December2010 2007andtheensuingfinancialcrisis,however,greatly in2009thanin1990despitetheincreaseinmortgage diminishedtheroleof mortgagecompanies.By2009, marketconcentrationatthenationallevel. mortgagecompaniesextendedonly34percentof the loans,withindependentmortgagecompaniesaccount- SUBDUEDREFINANCEACTIVITYIN2009 ingforabouttwo-thirdsof thistotal.Thedisposition of loansbyaffiliatesmuchmorecloselymirroredthat As shown earlier in figure 1, the average annual perbydepositories;independentmortgagecompanieswere centagerateforaprime-quality30-yearfixed-ratemortstillmorelikelytosellloansintotheprivatesecondary gage fell abruptly at the end of 2008 and into 2009, market and showed higher incidence of nonconven- droppingunder5percentinAprilandMay.Refinance tional lending than affiliates or depositories lendingsimultaneouslysurged,peakingatover645,000 (tables10.Aand10.B). loansinMay2009beforefallingbacktomonthlylevels Aside from changes in the broad types of lenders moresimilartothoseseenin2006and2007despitethe extendingcredit,anotherdevelopmentinthemortgage APRstayingathistoricallylowlevelsnear5percent. markethasbeenanincreaseinmarketconcentration, Comparedwithpreviousperiodswheninterestrates whichcanbedocumentedusingtheHMDAdata.For declinedsharply,thesurgeinrefinancelendingin2009 example,the10organizationsthatextendedthelargest appearstohavebeenquiteweak.Interestratesalsofell numberofhome-purchaseloansin1990accountedfor sharplyfrom2001to2003,andrefinanceloanvolume about17percentof allreportedloansof thistype;in increasedtomorethan15millionin2003(shownear- 2009,thelargest10organizationsaccountedfor35per- lierintable2.B),fargreaterthantherefinancingvolcent of the home-purchase loans (data not shown in umein2009of about5.8millionloans.Onepossible tables).51Thisconsolidationislikelydriven,atleastin reasonthatrefinanceactivitywasnotstrongerin2009 part,byeconomiesof scaleinunderwriting,loanpro- is that many of the mortgages available to be reficessing,andloanservicing.However,despitethegrow- nancedinthatyearwereoriginatedbetween2003and ing importance of a relatively few large mortgage 2005,wheninterestrateswerequitelowandtherefore originators,thevastmajorityof markets(represented refinancingtheseloansmaynothaveofferedasignifiinouranalysisbyMSAs)remainrelativelyunconcen- cantenoughbenefittoborrowerstooffsetthetransactrated,withprospectiveborrowershavingawiderange tioncosts. ofoptions. Other potential obstacles to refinance activity in One widely used metric for the degree of competi- 2009werehighunemploymentandunderemployment, tion in a local market is the Herfindahl-Hirschman aswellasseverelydepressedhomevaluesresultingin Index (HHI).52 According to merger guidelines from low or negative equity positions. From the end of theU.S.Departmentof JusticeandtheFederalTrade 2006 to the end of 2009, the national unemployment Commission,marketswithHHIvalueslessthan1,000 ratemorethandoubledto10percent,accordingtothe areconsideredunconcentrated,thosewithvaluesfrom BureauofLaborStatistics,andhousepricesfellnearly 1,000to1,800areconsideredmoderatelyconcentrated, 11percent,accordingtotheFederalHousingFinance andthosewithvaluesabove1,800areconsideredcon- Agency(FHFA)homepriceindex.Severalstatesexpecentrated.Basedonthe2009HMDAdataforhome- rienced deeper home price declines over this period, purchase lending, 81 percent of 392 MSAs would be mostnotablythesandstatesplusMichigan,wherethe consideredunconcentrated,17percentmoderatelycon- FHFAindexfellmorethan20percent.Manyhousecentrated,and2percentconcentrated(datanotshown holds may not have been able to refinance to take intables).53Bycomparison,in1990,60percentof the advantageof thelowratesbecausetheydidnothave MSAs were unconcentrated, 29 percent moderately enough home equity or they did not meet lenders’ concentrated, and 11 percent concentrated. By this incomeandemploymentrequirements. measure of competition, a larger share of local mar- We present payoff rates—a rough proxy for refikets was unconcentrated or moderately concentrated nance rates—during 2009 for 30-year fixed-rate conventionalmortgagesactiveasofDecember2008using data from LPS (table 12). The loans are divided into 51. Forpurposesofthesecalculations,affiliatedentities,whether bankinginstitutionsormortgagecompanies,wereconsolidatedinto threebroadgroups:(1)thosewitha“clean”payment asingleorganization. history (no delinquencies on the mortgage) in the 12 52. SeeU.S.DepartmentofJusticeandFederalTradeCommismonths prior to December 2008 and secured by a sion(2010),HorizontalMergerGuidelines(Washington:DOJand FTC). property outside of Arizona, California, Florida, 53. HHIvalueswerecalculatedbasedon2009HMDAdatafor Michigan,andNevada;(2)thosewithacleanpayment first-lienhome-purchaseloansforsite-builtproperties.Theanalysis historyinthe12monthspriortoDecember2008,but waslimitedtothedataforMSAsbecauseHMDAcoverageismost completeforsuchareas. inside Arizona, California, Florida, Michigan, and

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A67 12. Mortgagepayoff ratesduring2009forloansactiveasof December2008,byloan’spaymenthistory,geographic location,andyearof loanorigination Percent Statusofloan’s12-monthpaymenthistory Clean,bylocation Blemished MEMO: Yearofloanorigination1 OutsideAriz.,Calif., InsideAriz.,Calif., PMMS Fla.,Mich.,andNev. Fla.,Mich.,andNev. average rate1 Share Median Share Share Median Share Share Median Share ofall interest paidoff ofall interest paidoff ofall interest paidoff loans rate in2009 loans rate in2009 loans rate in2009 1999orearlier....................... 3.2 7.250 15.5 1.2 7.250 12.0 .8 7.625 5.4 * 2000................................ .2 8.125 10.7 .1 8.125 7.9 .1 8.375 1.4 8.1 2001................................ 1.5 6.750 19.3 .5 6.875 19.0 .4 7.250 5.8 7.0 2002................................ 4.1 6.250 23.7 1.5 6.250 18.4 .6 6.750 4.9 6.5 2003................................ 12.0 5.750 17.1 5.5 5.750 14.6 1.3 5.875 5.9 5.8 2004................................ 6.9 5.875 17.1 2.6 5.875 11.4 1.0 6.125 3.8 5.8 2005................................ 9.3 5.875 16.2 3.8 5.875 9.3 1.7 6.125 3.5 5.9 2006................................ 8.8 6.500 23.4 3.0 6.420 9.6 2.0 6.750 3.5 6.4 2007................................ 11.2 6.375 21.7 3.6 6.375 11.4 2.2 6.750 3.7 6.3 2008................................ 7.7 6.000 19.6 2.7 6.000 17.7 .4 6.500 5.3 6.0 MEMO Alloriginationyears................. 65.2 6.125 19.3 24.4 6.000 12.8 10.4 6.625 4.2 * NOTE:Loansrestrictedto30-yearfixed-rateconventionalfirst-lienmortgages,activeasofDecember2008,forowner-occupiedsingle-familyhomes. 1.Averagemortgageinterestratefor30-yearfixed-ratemortgagereportedbyFreddieMac'sPrimaryMortgageMarketSurvey(PMMS). *Averagenotcalculatedbecauseloansspanmanyoriginationyears. SOURCE:LenderProcessingServices. Nevada; and (3) those with a “blemished” payment natedintheperiodfrom2003to2005.Moreover,payhistory(atleastoneinstanceof being30daysormore offratesfortheseloanswererelativelylow.Forinstance, inarrears)inthe12monthspriortoDecember2008.54 thepayoffrateforthe2005cohort,whichhadamedian Thesecondgroupcapturesborrowersmostlikelytobe interestrateof 5.875percent,was16.2percent,comfacinglowornegativeequity,andthethirdgroupcap- paredwith23.4percentforloansoriginatedinthenext tures distressed borrowers regardless of geographic year,whichhadamedianinterestrateof6.5percent.56 location.55 The table disaggregates loans by year of Low or negative home equity and the economic originationinordertoshowdifferencesinpayoffrates recessionmayalsohavemutedrecentrefinanceactivacrossyearswithdifferinglevelsofinterestrates. ity.Consistentwiththisview,theoverallpayoffratefor Asshowninthebottomrowof thetable,65.2per- loansinthefirstgroupissubstantiallyhigher,atabout cent of loans in the sample were in the first group, 19percent,thanthatforloansinthesecondandthird 24.4percentwereinthesecondgroup,and10.4percent groups, at about 13 percent and 4 percent, respecwereinthethirdgroup.Thus,morethanone-thirdof tively.57Thesepayoffratesreflectbothrefinancingand the loans either had a blemished 12-month payment homesales.Nevertheless,thedifferenceinpayoff rates history or were in one of the five states that experi- acrossthegroupslikelyreflectsthedifficultiesof refiencedthesharpesthomepricedeclinesfromtheendof nancing for distressed borrowers and borrowers with 2006totheendof2009. lowornegativeequity.Indeed,thedifferenceinpayoff As mentioned earlier, many mortgages were origi- ratesismostpronouncedforloansoriginatedin2006 nated between 2003 and 2005 when rates were quite wheninterestrateswererelativelyhigh.Amongloans low,andthusrefinancingtheseloansin2009maynot haveofferedasignificantbenefittoborrowers.Focus- 56. Tightenedmortgagelendingstandards,asdocumentedinthe ingjustonthefirstgroupof loans,inwhichnegative Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices (www.federalreserve.gov/boarddocs/SnLoan equity and borrower distress should have been less Survey), is another reason that refinance activity may have been common, one can see that a substantial fraction of mutedin2009relativeto2003.Tighterstandardscouldhavedamped loans active as of December 2008 were in fact origi- refinanceactivityevenamongborrowersinthefirstgroup(those withacleanpaymenthistoryandoutsidethefivestateswithsteep homepricedeclines).Theinformationpresentedintable12doesnot 54. Loansintheforeclosureprocessasof December2008were shedlightontheextenttowhichunderwritingstandardsmayhave dropped from the analysis sample, which otherwise included all affectedrefinanceactivityin2009. first-lien30-yearmortgagesforsingle-familyowner-occupiedprop- 57. Asubstantialfractionofloansinthethirdgroup(thosewitha ertiesintheLPSdatabasethatwereactiveasofthatdate. blemishedpaymenthistory)enteredtheforeclosureprocessduring 55. TheLPSdatausedheredonotincludeupdatedhomevalues 2009.Loansthatterminatedthroughforeclosureduring2009are associatedwiththemortgages,soitisnotpossibletodeterminethe notcountedamongtheloansthatwerepaidoffwhencalculatingthe changesinhomevaluesforthepropertiesrelatedtothemortgages. payoffratesintable12.

A68 FederalReserveBulletin□December2010 originatedinthatyear,23.4percentofloansinthefirst Giventhepublicpolicyfocusonareasindistress,itis groupwerepaidoff during2009,comparedwithonly importanttolearnmoreabouthowthechangingeco- 9.6percentof loansinthesecondgroupand3.5per- nomicconditionshaveaffectedtheavailabilityofmortcentinthethirdgroup. gagecreditindistressedareas.TheHMDAdatacanbe usedtoidentifydifferencesintheaccesstoanduseof PATTERNSOFLENDINGINDISTRESSED credit along a number of dimensions across census NEIGHBORHOODS tractssortedbythedegreeofdistresstheyhaveexperiencedintheirlocalmortgagemarket.Fortheanalysis Thedifficulteconomiccircumstancesof thepastfew here,aggregatedcreditrecordinformationprovidedby yearshavenotfallenequallyacrossallareas.Housing, Equifax is used to measure the degree of distress a mortgage market, and employment conditions differ neighborhood faces. We identify those census tracts appreciablyacrossregionsofthecountry,submarkets, whereatleast10percentof mortgageborrowershada andneighborhoods(representedherebycensustracts) loaninforeclosureanddesignatethesetractsas“highwithin these broader areas. Some areas have experi- foreclosure tracts.”60 Over 75 percent of these tracts encedmuchmoredistressthanothers.Insomeneigh- are located in the sand states, with Florida alone acborhoods, high levels of distress have persisted for countingforalmostone-halfofthetracts. sometime;inothers,conditionshaverecentlydeterio- In2009,home-purchaselendinginhigh-foreclosure rated. tracts,derivedfromtheHMDAdata,hoveredaround Concernsaboutcreditconditionsinareasexperienc- 30percentof itsaveragelevelin2004(figure8,panel ing high levels of distress have received heightened A). While lending in non-high-foreclosure (“other”) attentionfrompolicymakersandothers.Forexample, tractswasalsodownconsiderablyfrom2004levels,the inJune2010,thefederalbankandsavingsinstitution declines have not been as severe. This difference is regulatoryagenciesproposedchangestotherulesthat particularlypronouncedgiventhatlendinginthehighimplementtheCommunityReinvestmentAct(CRA) foreclosuretractswasconsiderablyhigherin2005and tosupportthestabilizationofcommunitieshithardby 2006thanintheseotherareas. elevatedforeclosures.58Therevisedregulationswould Alargeportionof thedifferenceinhome-purchase encourage covered institutions to support the Neigh- lendingbetweenhigh-foreclosureandothertractsdeborhood Stabilization Program (NSP), administered rives from geographic location. The sand states have by the Department of Housing and Urban Develop- beenparticularlyhardhitbythedownturninthehousment.59Undertheproposal,lenderswouldbeencour- ing market, and, as a result, some of the differences aged to make loans and investments and provide between the high-foreclosure and other tracts represervicesinsupportofNSPactivitiestoindividualsand sentmarket-level(MSA)differences.Whenthedistrineighborhoods beyond the traditional focus of the bution of high-foreclosure tracts across MSAs is CRA, which is on LMI individuals and LMI areas. controlled for (shown by the line labeled “Control”), AllowingbankinginstitutionstoreceiveCRAconsid- home-purchase lending levels in the high-foreclosure erationforactivitiesconductedinNSP-targetedneigh- tractsappeartobeconsistentwiththoseinothertracts borhoods and directed to individuals in such areas inthesameMSAs. providesadditionalincentivesfortheseinstitutionsto As discussed earlier, borrowers in distressed areas leveragegovernmentfundstargetedtotheseareasand are less likely to refinance their mortgages. The refipopulations. nancelendinginthehigh-foreclosuretractswasdown substantiallyfromearlieryears(figure8,panelB).This 58. FormoreinformationabouttheCRA,seeFederalFinancial declinewasmuchmoreseverethanthatexperiencedin InstitutionsExaminationCouncil,“CommunityReinvestmentAct,” the other tracts or in the control tracts, despite the webpage,www.ffiec.gov/cra.Moreinformationabouttheproposed revisiontotheCRAisinBoardofGovernorsoftheFederalReserve System, Federal Deposit Insurance Corporation, Office of the 60. Equifaxisoneofthethreenationalconsumerreportingagen- Comptroller of the Currency, and Office of Thrift Supervision cies.Thecredit-record-baseddatausedhereincludeacountwithin (2010),“AgenciesProposetoExpandScopeof CommunityRein- eachcensustractofthenumberofindividualswhohadeitherafirst vestmentActRegulationstoEncourageDepositoryInstitutionSup- mortgage or a home equity loan and a count of the number of port for HUD Neighborhood Stabilization Program Activities,” individualswitharecordofaforeclosureactionasofDecember31, joint press release, June 17, www.federalreserve.gov/newsevents/ 2008.Thesedataincludednoindividuallyidentifyinginformation. press/bcreg/20100617c.htm. Seewww.equifax.comformoreinformationaboutEquifax. 59. TheNSPprogramallocatesfundstolocalcountiesandstates Insomecases,amortgageorrecordofaforeclosureactionmay with problems arising from the mortgage foreclosure crisis. The relatetoapropertylocatedinacensustractotherthanthecurrent fundsareintendedtoacquire,repair,andresellforeclosedandaban- residenceoftheindividual,whichishowindividualsareassignedto doned properties. See U.S. Department of Housing and Urban censustracts.Creditrecordsincludetheaddressof theindividual, Development,“NeighborhoodStabilizationProgramResourceEx- butthisaddressmaynotbetheoneofthepropertyassociatedwith change,”webpage,http://hudnsphelp.info/index.cfm. anyrecordofamortgage.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A69 8. Indexed volume of lending, by census-tract group, 9. Indexed denial rate for home-purchase loans, by census- 2004–09 tract group, 2004–09 Index Index A. Home purchase 150 200 High-foreclosure High-foreclosure 175 120 Control 150 90 Other 125 60 Other 100 30 Control 75 2004 2005 2006 2007 2008 2009 Index 2004 2005 2006 2007 2008 2009 B. Refinance NOTE: See note to figure 8. 160 SOURCE: Federal Financial Institutions Examination Council, data reported under the Home Mortgage Disclosure Act. High-foreclosure 120 Other meanhadbeenin2004.Incomesinboth“other”and controltractsalsoexperienceddeclinesandwerebelow 80 their2004levels,thoughthedeclineswerenotassevere. The average income of refinance borrowers does not 40 show a similar pattern; instead, the mean income of Control refinanceborrowershasgrownovertime,regardlessof thelevelofdistressinthetract(datanotshown). 2004 2005 2006 2007 2008 2009 Onepossibleexplanationforwhyborrowerincomes NOTE: The data are monthly. Loans are first-lien mortgages for site-built havefallenbelowtheir2004levelsforhome-purchase properties and exclude business loans. Index is normalized to 100 for average monthly lending volume in 2004. For definitions of census-tract groups, see borrowers,butnotrefinancers,maybealargershareof text. loanstofirst-timehomebuyers.Unfortunately,itisnot possible to identify first-time homebuyers in the consistently higher levels of refinance lending in the HMDAdata.However,usingasecondsourceofdata— high-foreclosuretractsfrom2005through2007. provided by Equifax and composed of individual, In spite of the similar patterns in home-purchase anonymous credit bureau records—we can calculate lendinginthehigh-foreclosureandcontroltracts,some the share of all individuals taking out a closed-end aspects of lending do appear to differ. For example, mortgage (for any purpose) during each month denialratesforhome-purchaseloans,whichhavebeen in decline since peaking in 2007, have been higher, 10. Indexed average income of borrower, by census-tract group, 2004–09 relative to their 2004 levels, in the high-foreclosure tracts(figure9).Otheraspectsofhome-purchaselend- Index ing in high-foreclosure tracts, including the share of owner-occupied properties and the share of loans to Control minorityborrowers,exhibitsimilartrendsovertimeas High-foreclosure 140 othertracts,thoughtheabsolutelevelsof activitydiffer(datanotshown). A notable difference between the high-foreclosure 120 andcontroltractsinhome-purchaselendinginvolves borrowerincome.Themeanincomeofhome-purchase Other borrowers in high-foreclosure tracts, which increased 100 substantiallyfasterthanmeanincomesin“other”tracts during2005and2006,hasdeclinedsignificantlyfaster thaninthecontroltracts(figure10).Ineachquarterof 2004 2005 2006 2007 2008 2009 2009, the average income of borrowers in the highforeclosure tracts was over 10 percent lower than the NOTE: See notes to figure 9.

A70 FederalReserveBulletin□December2010 11. Share of first-time borrowers, 2004–09 12. Share of first-time borrowers, by census-tract group, 2004–09 Percent Percent 20 High-foreclosure 50 15 40 30 10 Control 20 5 Other 10 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009 NOTE: The data are monthly. For information on data calculation, see text; also see text notes 61 and 62. NOTE: See notes to figure 11. For definitions of census-tract groups, see SOURCE: Authors’ calculations based on Equifax data. text. from2004through2009whohadnotpreviouslyhada tracts. For much of 2009, one-third or more of new mortgage.61Thesedatasuggestthattheshareof first- mortgage borrowers in high-foreclosure tracts were time homebuyers by this metric, which remained individualstakingouttheirfirstmortgages. around 15 percent between 2004 and 2007, increased Thetimingoftheincreasesintheshareoffirst-time sharplybeginninginApril2008toover20percentin homebuyersinApril2008isconsistentwiththefirstlate2008(figure11).Theshareoffirst-timehomebuy- timehomebuyertaxcredithavingincreasedthenumber ersagainpeakedatabout20percentin2009.62 of first-time homebuyers. The effect of the first-time A larger share of first-time homebuyers may help homebuyertaxcreditmay,however,beoverstatedby explain the observed declines in mean borrower in- these results. Some of the higher share of first-time comes beginning in 2008 (both for the whole market homebuyers could be explained by the fact that refiand for high-foreclosure tracts). In the case of high- nancingactivityinthesetractshasfallenmorerapidly foreclosuretracts,theincreaseintheshareoffirst-time than has home-purchase lending. Unfortunately, it is homebuyerswasparticularlysteepbeginninginApril difficult to distinguish between refinance loans and 2008, reaching levels of 40 percent during 2008 (fig- home-purchase loans in the Equifax data. In other ure 12). This increase was much larger than that ob- words,theincreasingshareoffirst-timehomebuyersis servedfortheothertracts,thoughsimilartothepattern afunctionof boththetaxcrediteffectanddifferential observed for the control tracts, suggesting that the changesinrefinanceandhome-purchaseactivity.And increasewasalsoexperiencedin“other”tractsinthe itisnotpossibletodeterminetherelativecontributions same MSAs as the high-foreclosure tracts. However, of these two factors. Nevertheless, a higher share of during2009,theshareof first-timemortgageborrow- first-timehomebuyinginthesetractsoffersareasonersinhigh-foreclosuretractsremainedwellabovethe able explanation for the fall in the mean income of levels observed in the other tracts or in the control borrowersinhigh-foreclosuretracts. 61. This second source of data, from Equifax, is a nationally DIFFERENCESINLENDINGOUTCOMESBY representativesampleof individualcreditrecords,observedquarterlyfrom1999through2009.Thedatasetincludesauniquese- RACE,ETHNICITY,ANDSEXOFTHE quencenumberthatallowsustotrackindividualcreditexperiences BORROWER overtimewithoutanypersonalidentifyinginformation.Allof the individualsinoursampleremainanonymous. 62. Theshareoffirst-timehomebuyerscalculatedusingthecredit Analysesof theHMDAdataforeachyearsincepricrecorddatadifferssubstantiallyfromtheshareofloanstofirst-time ingdatawereintroducedin2004havefoundsubstanhomebuyerscalculatedearlierusingtaxrecorddataandtheHMDA tialdifferencesintheincidenceofhigher-pricedlending dataforseveralreasons.Theseincludethattheformerisashareof borrowerswhilethelatterisashareofloans.Inaddition,theloan acrossracialandethniclines—differencesthatcannot purpose, lien status, and occupancy status cannot be easily deci- be fully explained by factors included in the HMDA pheredinthecreditrecorddata.Assuch,thesharecalculatedinthis data.63 Analyses have also found differences across sectionusingthecreditrecorddataincludesborrowerswhotookout junior-lienloans,loansbackedbynon-owner-occupiedproperties, orrefinanceloansandthereforeisfarlowerthanthe48percentof 63. SeeAvery,Brevoort,andCanner,“The2006HMDAData”; loanstofirst-timehomebuyerscitedearlier. Avery,Brevoort,andCanner,“Higher-PricedHomeLendingand

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A71 groupsinmeanAPRspreadspaidbythosewithhigher- account for borrower-related factors plus lender (or pricedloans,butsuchdifferenceshavegenerallybeen “lender modified”).65 The analysis distinguishes besmall. Analyses of denial rate data, collected since tween conventional and nonconventional lending, re- 1990,havealsoconsistentlyfoundevidenceof differ- flectingthedifferentunderwritingstandardsandfees ences across racial and ethnic groups that cannot be associatedwiththesetwobroadloanproductcategofullyexplainedbytheinformationintheHMDAdata. ries.66 Here,weexaminethe2009HMDAdatatodetermine theextenttowhichthesedifferencespersist. Incidenceof Higher-PricedLendingbyRace, Unfortunately,ouranalysisof the2009pricingdata Ethnicity,andSex is severely hampered by the introduction of the new pricingthresholdinOctober2009andthesignificant Theportionofthe2009HMDAdataforwhichwecan variation in the PMMS−Treasury gap over the year, conduct the most meaningful analysis—applications bothof whichwerediscussedearlier.Becausethenew covered under the PMMS reporting threshold— and old HMDA reporting rules use different, and showsverylittlevariationinthefrequencyofreported incomparable, thresholds, we conducted a pricing higher-priced lending across racial and ethnic groups analysisseparatelyforapplicationsreceivedonorafter (tables 13.A, 13.B, 13.C, and 13.D). This result is October1,2009,forwhichthenewreportingthreshold driven to a large extent by the fact that the overall was in place. For comparison purposes, we also con- incidence of higher-priced lending for all groups is ducted an analysis of loans covered under the old muchlowerthanitwasinearlieryears.Forexample, Treasury-based threshold rules, but note that for the we estimated that 22.7 percent of black conventional reasons discussed earlier, comparison of the two re- refinanceborrowersin2008paidaninterestratethat sultsshouldbeviewedwiththeutmostcaution.Unlike was more than 1.75 percentage points above PMMS in previous years, we do not report the results of an prime.67Forloanscoveredbythenewthresholdrules, analysis of mean APR spreads paid by those with only6.3percentof blackconventionalrefinanceborhigher-pricedloans,astheincidenceofhigh-ratelend- rowers were reported to have had an interest rate ingin2009wassolowastomakesuchtestsmeaning- 1.50 percentage points above the PMMS prime rate. less.Thedatausedfortheanalysisof racialandethnic Thereductionintheincidenceissimilarforallgroups differencesindenialratesareunaffectedbytheprob- and all products. Overall, once other factors are aclemswiththepricingdata,soameaningfulcompari- countedfor,therearenosignificantdifferencesinthe soncanbemadewithpreviousyears. incidence of higher-priced loans between groups for The methodology we use for our analysis of both loanscoveredbythenewrules. pricing and denial rates can be described as follows. Asnotedearlier,wealsoconductedapricinganaly- Comparisonsofaverageoutcomesforeachracial,eth- sis for loans covered under the old Treasury-based nic, or gender group are made both before and after thresholdreportingrules.Thisanalysis,reportedinthe accountingfordifferencesintheborrower-relatedfac- firstfourdatacolumnsof table13,alsoshowsamuch tors contained in the HMDA data (income, loan lowerincidenceof higher-pricedlendingforallgroups amount,locationoftheproperty(MSA),andpresence than was shown in earlier years. Perhaps as a conseof a co-applicant) and for differences in borrower- quence, pricing disparities among groups, whether relatedfactorsplusthespecificlendinginstitutionused grossorcontrollingforotherfactors,aremuchlower bytheborrower.64Comparisonsforlendingoutcomes than estimated in earlier periods. However, as disacross groups are of three types: gross (or “un- cussed earlier, the reporting threshold for fixed-rate modified”),modifiedtoaccountforborrower-related loans priced in April 2009 or later was much higher factors (or “borrower modified”), and modified to thaninpreviousyears.Thus,itisnotpossibletoknow forsurewhetherthedeclineinthereportedincidence the2005HMDAData”;andAvery,Canner,andCook,“NewInformationReportedunderHMDA,”allinnote14. 64. Excludedfromtheanalysisareapplicantsresidingoutsidethe 65. For purposes of presentation, the borrower- and lender- 50statesandtheDistrictofColumbiaaswellasapplicationsdeemed modifiedoutcomesshowninthetablesarenormalizedsothat,for tobebusinessrelated.Applicantgenderiscontrolledforintheracial thebasecomparisongroup(non-Hispanicwhitesinthecaseofcomandethnicanalyses,andraceandethnicityarecontrolledforinthe parisonbyraceandethnicityandmalesinthecaseofcomparisonby analysesof genderdifferences.Fortheanalysisof loanpricingfor sex),themeanateachmodificationlevelisthesameasthegross loanscoveredundertheTreasury-basedthreshold,wecontrolfor mean. whethertheloanwaspricedinthefirstthreemonthsof2009versus 66. Althoughresultsarereportedfornonconventionallendingas theremainingpartoftheyear,sincethereportingthreshold(under awhole,theanalysiscontrolsforthespecifictypeofloanprogram the old rules) differed so much between these two periods. This (FHA,VA,orFSA/RHS)thatwasused. distinctionispossibleonlybecausewehaveaccesstotheinformation 67. SeeAveryandothers,“The2008HMDAData:TheMortonapplicationandactiondates,whicharenotpubliclyavailable. gageMarketduringaTurbulentYear,”innote14.

A72 FederalReserveBulletin□December2010 13. Incidenceof higher-pricedlending,unmodifiedandmodifiedforborrower-andlender-relatedfactors,byrace, ethnicity,andsexof borrower,2009 A.Homepurchase,conventionalloan Percentexceptasnoted Modifiedincidence, Modifiedincidence, bymodificationfactor bymodificationfactor Number Unmodified Number Unmodified ofloans incidence ofloans incidence Race,ethnicity,andsex Borrower- Borrower- Borrower- Borrowerrelated related related related pluslender pluslender Oldpricingrules1 Newpricingrules2 Raceotherthanwhiteonly3 AmericanIndianorAlaskaNative... 3,519 7.2 5.5 7.7 502 3.6 4.2 3.3 Asian............................... 52,420 2.5 3.9 5.0 11,291 .9 2.5 3.0 BlackorAfricanAmerican.......... 21,178 7.3 6.8 7.6 3,220 3.4 3.7 3.8 NativeHawaiianorotherPacific Islander.......................... 3,093 3.1 4.7 5.3 386 2.1 4.4 4.5 Twoormoreminorityraces.......... 498 3.8 5.0 5.7 71 .0 2.2 .6 Joint................................ 13,560 2.8 3.7 5.0 2,089 1.5 2.8 3.3 Missing............................. 74,943 2.4 3.1 5.1 12,632 .9 2.1 3.1 White,byethnicity3 Hispanicwhite...................... 37,725 7.9 6.2 6.4 5,948 6.3 4.4 3.8 Non-Hispanicwhite................. 393,916 4.9 4.9 4.9 81,537 3.2 3.2 3.2 Sex Onemale............................ 171,398 5.0 5.0 5.0 34,584 2.9 2.9 2.9 Onefemale.......................... 128,179 4.4 4.3 4.7 25,707 2.5 2.5 2.7 Twomales........................... 11,970 5.4 5.4 5.4 1,769 4.4 4.4 4.4 Twofemales......................... 9,411 3.8 4.3 5.9 1,373 3.3 3.1 1.9 NOTE:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Fordefinitionofhigher-pricedlendingand explanationsofoldandnewpricingrulesandmodificationfactors,seetext.Loanstakenoutjointlybyamaleandfemalearenottabulatedherebecausetheywould notbedirectlycomparablewithloanstakenoutbyoneborrowerorbytwoborrowersofthesamesex. 1.Seetable11,note1. 2.Seetable11,note2. 3.Seetable10.A,note5. 13. Incidenceof higher-pricedlending,unmodifiedandmodifiedforborrower-andlender-relatedfactors,byrace, ethnicity,andsexof borrower,2009 B.Refinance,conventionalloan Percentexceptasnoted Modifiedincidence, Modifiedincidence, bymodificationfactor bymodificationfactor Number Unmodified Number Unmodified ofloans incidence ofloans incidence Race,ethnicity,andsex Borrower- Borrower- Borrower- Borrowerrelated related related related pluslender pluslender Oldpricingrules1 Newpricingrules2 Raceotherthanwhiteonly3 AmericanIndianorAlaskaNative... 10,978 6.9 6.2 4.7 1,398 2.7 2.6 1.7 Asian............................... 88,310 1.5 2.9 3.8 16,982 .6 2.2 2.6 BlackorAfricanAmerican.......... 70,486 9.0 8.5 6.2 9,554 6.3 6.0 3.7 NativeHawaiianorotherPacific Islander.......................... 9,207 3.5 4.8 3.6 1,113 1.3 2.3 2.7 Twoormoreminorityraces.......... 2,000 1.4 3.4 1.7 245 .8 6.4 4.3 Joint................................ 43,100 2.7 3.0 3.3 6,219 1.4 2.0 2.9 Missing............................. 245,310 2.5 2.9 4.0 38,810 1.1 2.0 2.7 White,byethnicity3 Hispanicwhite...................... 88,837 6.5 5.2 4.9 12,768 4.8 3.6 3.3 Non-Hispanicwhite................. 955,406 5.1 5.1 5.1 191,459 2.8 2.8 2.8 Sex Onemale............................ 357,819 4.8 4.8 4.8 64,520 2.5 2.5 2.5 Onefemale.......................... 303,443 3.8 4.4 4.4 53,489 3.2 2.6 2.5 Twomales........................... 27,757 2.8 2.8 2.8 3,466 2.1 2.1 2.1 Twofemales......................... 28,789 3.4 2.7 2.9 3,623 2.6 1.8 1.5 NOTE:Seenotestotable13.A.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A73 13. Incidenceof higher-pricedlending,unmodifiedandmodifiedforborrower-andlender-relatedfactors,byrace, ethnicity,andsexof borrower,2009 C.Homepurchase,nonconventionalloan Percentexceptasnoted Modifiedincidence, Modifiedincidence, bymodificationfactor bymodificationfactor Number Unmodified Number Unmodified Race,ethnicity,andsex ofloans incidence Bo re r l r a o t w ed er- p B lu o re s r l r a l o e t w n ed d er e - r ofloans incidence Bo re r l r a o t w ed er- p B lu o re s r l r a l o e t w n ed d er e - r Oldpricingrules1 Newpricingrules2 Raceotherthanwhiteonly3 AmericanIndianorAlaskaNative... 7,059 5.2 4.7 5.3 1,024 .6 .8 1.5 Asian............................... 23,449 4.6 4.6 5.4 4,490 .8 1.2 1.3 BlackorAfricanAmerican.......... 61,000 7.9 6.9 7.5 12,520 2.2 2.3 2.0 NativeHawaiianorotherPacific Islander.......................... 4,927 5.6 5.8 6.8 710 .7 .6 .7 Twoormoreminorityraces.......... 801 4.4 4.1 4.6 120 .8 .6 -.2 Joint................................ 15,731 4.3 5.5 6.2 2,332 .7 1.5 1.0 Missing............................. 65,714 5.3 5.5 5.8 12,139 1.0 1.1 1.1 White,byethnicity3 Hispanicwhite...................... 66,431 7.9 5.8 6.2 13,330 1.4 1.6 1.1 Non-Hispanicwhite................. 327,069 5.3 5.3 5.3 78,296 1.1 1.1 1.1 Sex Onemale............................ 179,507 5.9 5.9 5.9 42,427 1.3 1.3 1.3 Onefemale.......................... 127,108 6.6 5.5 5.8 29,774 1.5 1.1 1.0 Twomales........................... 16,864 7.3 7.3 7.3 2,584 1.1 1.1 1.1 Twofemales......................... 13,476 7.2 6.5 7.1 2,000 1.3 1.1 1.5 NOTE:Seenotestotable13.A. 13. Incidenceof higher-pricedlending,unmodifiedandmodifiedforborrower-andlender-relatedfactors,byrace, ethnicity,andsexof borrower,2009 D.Refinance,nonconventionalloan Percentexceptasnoted Modifiedincidence, Modifiedincidence, bymodificationfactor bymodificationfactor Number Unmodified Number Unmodified ofloans incidence ofloans incidence Race,ethnicity,andsex Borrower- Borrower- Borrower- Borrowerrelated related related related pluslender pluslender Oldpricingrules1 Newpricingrules2 Raceotherthanwhiteonly3 AmericanIndianorAlaskaNative... 3,868 5.0 7.1 6.2 408 4.4 5.1 4.1 Asian............................... 10,449 5.4 5.8 6.5 1,642 3.2 3.2 1.8 BlackorAfricanAmerican.......... 57,330 9.1 9.5 8.9 8,750 5.9 4.0 .9 NativeHawaiianorotherPacific Islander.......................... 2,867 4.3 5.9 6.5 358 3.1 2.8 4.8 Twoormoreminorityraces.......... 586 3.1 2.7 5.0 74 9.5 .9 .0 Joint................................ 12,588 5.0 6.8 7.6 1,753 2.1 3.9 .6 Missing............................. 69,924 8.4 8.8 7.5 9,547 1.9 1.7 .0 White,byethnicity3 Hispanicwhite...................... 35,824 7.8 7.6 7.1 5,874 5.2 3.0 .0 Non-Hispanicwhite................. 292,529 7.8 7.8 7.8 53,931 4.8 4.8 4.8 Sex Onemale............................ 135,396 7.8 7.8 7.8 23,718 4.0 4.0 4.0 Onefemale.......................... 97,662 9.7 8.0 8.4 17,070 7.6 5.8 6.1 Twomales........................... 8,284 7.4 7.4 7.4 1,226 2.0 2.0 2.0 Twofemales......................... 8,739 7.9 7.2 5.2 1,032 2.6 1.8 .2 NOTE:Seenotestotable13.A.

A74 FederalReserveBulletin□December2010 of higher-pricedlendingreflectslesshigh-pricedlend- down more substantially from 2008 but still remain ing or a higher reporting threshold (although the re- muchhigherthanratesforcomparablehome-purchase portedincidenceisalsolowerthaninpreviousyearsin applicants.Forexample,almostone-halfofblackconthe first three months of 2009, when a much lower ventionalrefinanceapplicantsweredenied,versusonly reportingthresholdapplied).Consequently,greatcau- one-thirdofblackconventionalhome-purchaseapplition should be exercised in drawing any meaningful cants.Thereisnoconsistentpatternbetweenconveninferenceaboutdisparitiesinpricingacrossracialand tional and nonconventional lending. Non-Hispanic ethnicgroupsfromthisportionoftheanalysis. white conventional and nonconventional home- With regard to the sex of applicants, no notable purchase applicants were denied at about the same differencesareevidentforeitherconventionalornon- rate;nonconventionalrefinanceapplicantsofthesame conventional lending or for either of the threshold groupweredeniedatamuchhigherratethanconvenrules. tionalrefinanceapplicants.Blackapplicants,however, consistentlyshowedlowerdenialratesfornonconven- DenialRatesbyRace,Ethnicity,andSex tionalloansthanforcomparableconventionalloans. Controlling for borrower-related factors in the Analyses of the HMDA data from earlier years have HMDAdatareducesthedifferencesamongracialand consistentlyfoundthatdenialratesvaryacrossappli- ethnicgroups.Accountingforthespecificlenderused cantsgroupedbyraceorethnicity.In2009,asinearlier bytheapplicantreducesdifferencesfurther,although years,forbothhome-purchaseandrefinanceconven- unexplaineddifferencesremainbetweennon-Hispanic tional and nonconventional lending, black and whites and other racial and ethnic groups. Overall, Hispanic white applicants had notably higher gross withtheexceptionof thedisparitybetweenblackand denial rates than non-Hispanic white applicants non-Hispanic white applicants for conventional refi- (tables 14.A, 14.B, 14.C, and 14.D). The pattern for nanceloans,unexplaineddifferencesaremodestlyre- Asian applicants is similar but much more muted. ducedfrom2008.Withregardtothesexofapplicants, Denialratesforallgroupsshowmodestdecreasesfrom no notable differences are evident for either conven- 2008 to 2009. For refinance loans, denial rates are tionalornonconventionallending. 14. Denialratesonapplications,unmodifiedandmodifiedforborrower-andlender-relatedfactors,byraceandethnicity, andsexof applicant,2008−09 A.Homepurchase,conventionalloanapplication Percentexceptasnoted Modifieddenialrate, Modifieddenialrate, Numberof bymodificationfactor Numberof bymodificationfactor Unmodified Unmodified applications applications denial denial actedupon actedupon Race,ethnicity,andsex bylender rate Borrower- Borrower- bylender rate Borrower- Borrowerrelated related related related pluslender pluslender 2008 2009 Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative... 9,939 29.7 24.6 21.0 6,677 27.7 22.6 20.4 Asian............................... 152,213 18.7 16.6 16.8 160,900 16.6 15.6 15.5 BlackorAfricanAmerican.......... 105,001 36.1 29.7 25.4 50,667 32.3 27.4 24.1 NativeHawaiianorotherPacific Islander.......................... 8,016 26.9 22.7 21.0 5,335 24.1 19.9 17.6 Twoormoreminorityraces.......... 1,669 23.6 21.9 23.8 925 26.9 18.0 18.8 Joint................................ 28,195 14.8 17.6 15.3 25,300 13.2 15.2 14.0 Missing............................. 220,395 21.5 19.9 17.0 182,358 19.1 17.5 15.4 White,byethnicity1 Hispanicwhite...................... 160,823 31.1 22.7 22.0 90,662 25.6 19.7 19.0 Non-Hispanicwhite................. 1,425,869 13.6 13.6 13.6 1,159,857 13.1 13.1 13.1 Sex Onemale............................ 640,030 21.3 21.3 21.3 481,586 18.0 18.0 18.0 Onefemale.......................... 443,753 19.8 19.4 19.9 336,677 16.9 16.1 16.6 Twomales........................... 25,195 21.1 21.1 21.1 21,092 20.2 20.2 20.2 Twofemales......................... 19,148 20.4 19.3 19.6 15,684 19.1 17.6 17.5 NOTE:First-lienmortgagesforowner-occupied,one-tofour-family,site-builtproperties;excludesbusinessloans.Forexplanationofmodificationfactors,see text.Applicationsmadejointlybyamaleandfemalearenottabulatedherebecausetheywouldnotbedirectlycomparablewithapplicationsmadebyoneapplicant orbytwoapplicantsofthesamesex. 1.Seetable10.A,note5.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A75 14. Denialratesonapplications,unmodifiedandmodifiedforborrower-andlender-relatedfactors,byraceandethnicity, andsexof applicant,2008−09 B.Refinance,conventionalloanapplication Percentexceptasnoted Modifieddenialrate, Modifieddenialrate, Numberof bymodificationfactor Numberof bymodificationfactor Unmodified Unmodified applications applications denial denial actedupon actedupon Race,ethnicity,andsex bylender rate Borrower- Borrower- bylender rate Borrower- Borrowerrelated related related related pluslender pluslender 2008 2009 Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative... 36,265 65.4 56.7 43.0 29,013 44.1 40.4 36.5 Asian............................... 150,970 31.6 35.4 36.1 398,222 22.8 24.8 24.3 BlackorAfricanAmerican.......... 343,389 61.2 59.9 44.9 268,726 49.8 44.7 38.3 NativeHawaiianorotherPacific Islander.......................... 19,275 51.8 52.2 43.4 23,332 38.8 36.4 32.1 Twoormoreminorityraces.......... 4,682 50.5 49.7 42.0 4,660 41.8 42.6 33.1 Joint................................ 53,200 41.8 46.0 36.8 114,738 23.4 27.6 25.2 Missing............................. 532,425 41.5 42.5 37.8 964,105 28.9 29.1 25.5 White,byethnicity1 Hispanicwhite...................... 320,845 50.6 45.3 41.3 323,805 41.0 33.0 30.1 Non-Hispanicwhite................. 2,894,154 31.7 31.7 31.7 5,726,883 21.0 21.0 21.0 Sex Onemale............................ 1,125,624 41.5 41.5 41.5 1,621,336 29.6 29.6 29.6 Onefemale.......................... 889,334 40.7 39.0 39.6 1,291,103 28.4 27.1 27.5 Twomales........................... 32,014 38.2 38.2 38.2 59,147 27.1 27.1 27.1 Twofemales......................... 35,706 41.7 38.5 36.9 59,281 26.8 26.0 26.7 NOTE:Seenotestotable14.A. 14. Denialratesonapplications,unmodifiedandmodifiedforborrower-andlender-relatedfactors,byraceandethnicity, andsexof applicant,2008−09 C.Homepurchase,nonconventionalloanapplication Percentexceptasnoted Modifieddenialrate, Modifieddenialrate, Numberof bymodificationfactor Numberof bymodificationfactor Unmodified Unmodified applications applications denial denial actedupon actedupon Race,ethnicity,andsex bylender rate Borrower- Borrower- bylender rate Borrower- Borrowerrelated related related related pluslender pluslender 2008 2009 Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative... 10,154 19.7 20.6 18.6 13,392 18.5 19.4 18.5 Asian............................... 26,711 21.3 19.2 18.6 49,739 18.5 17.7 16.8 BlackorAfricanAmerican.......... 161,187 25.0 24.0 22.6 161,885 23.1 21.8 20.6 NativeHawaiianorotherPacific Islander.......................... 6,581 21.7 18.9 18.3 8,267 19.8 16.3 17.4 Twoormoreminorityraces.......... 1,141 23.8 23.3 17.3 1,282 21.5 21.2 19.5 Joint................................ 25,123 14.7 16.2 16.3 28,304 13.7 14.5 13.9 Missing............................. 121,400 21.9 20.8 19.8 161,196 19.3 18.6 17.2 White,byethnicity1 Hispanicwhite...................... 152,228 24.0 19.8 20.0 198,875 21.4 17.5 17.6 Non-Hispanicwhite................. 890,659 14.1 14.1 14.1 1,155,799 13.1 13.1 13.1 Sex Onemale............................ 433,829 19.0 19.0 19.0 590,855 16.9 16.9 16.9 Onefemale.......................... 283,404 19.2 17.7 17.8 409,757 16.4 15.7 15.8 Twomales........................... 29,772 20.9 20.9 20.9 30,976 21.1 21.1 21.1 Twofemales......................... 23,519 20.5 18.7 18.5 23,212 20.5 18.5 19.8 NOTE:Seenotestotable14.A.

A76 FederalReserveBulletin□December2010 14. Denialratesonapplications,unmodifiedandmodifiedforborrower-andlender-relatedfactors,byraceandethnicity, andsexof applicant,2008−09 D.Refinance,nonconventionalloanapplication Percentexceptasnoted Modifieddenialrate, Modifieddenialrate, Numberof bymodificationfactor Numberof bymodificationfactor Unmodified Unmodified applications applications denial denial actedupon actedupon Race,ethnicity,andsex bylender rate Borrower- Borrower- bylender rate Borrower- Borrowerrelated related related related pluslender pluslender 2008 2009 Raceotherthanwhiteonly1 AmericanIndianorAlaskaNative... 5,229 49.7 49.6 43.6 8,946 39.1 37.3 35.0 Asian............................... 11,836 51.5 49.0 45.1 28,290 41.3 36.4 34.0 BlackorAfricanAmerican.......... 155,665 45.0 47.2 46.1 203,611 38.1 39.7 37.5 NativeHawaiianorotherPacific Islander.......................... 3,643 49.7 47.7 47.2 6,589 38.2 32.9 35.4 Twoormoreminorityraces.......... 873 58.2 59.7 53.1 1,491 47.4 44.4 36.7 Joint................................ 14,154 38.7 44.1 42.2 28,105 27.2 33.0 32.5 Missing............................. 165,776 54.6 47.7 43.9 236,542 44.6 40.1 32.6 White,byethnicity1 Hispanicwhite...................... 73,118 47.6 44.1 44.3 116,354 37.1 35.3 34.4 Non-Hispanicwhite................. 662,593 37.5 37.5 37.5 1,157,984 29.9 29.9 29.9 Sex Onemale............................ 300,070 42.8 42.8 42.8 477,570 34.2 34.2 34.2 Onefemale.......................... 219,503 44.0 41.2 41.3 345,310 36.0 32.8 33.0 Twomales........................... 11,826 41.8 41.8 41.8 17,944 30.6 30.6 30.6 Twofemales......................... 13,808 41.2 40.3 40.3 19,001 34.3 31.7 30.8 NOTE:Seenotestotable14.A. SomeLimitationsof theDatainAssessing does not mean that such disparities do not exist; the FairLendingCompliance reportingthresholdforpricingunderHMDAmaysimplyhavebeensettoohightodetectthem. Ininterpretingthefindingsinthissection,itisimpor- Differences in pricing and underwriting outcomes tanttonotethatbothpreviousresearchandexperience mayalsoreflectdiscriminatorytreatmentofminorities gained in the fair lending enforcement process show orotheractionsbylenders,includingmarketingpracthatdifferencesinloanoutcomesamongracialoreth- tices.TheHMDAdataareregularlyusedtofacilitate nicgroupsstem,inpart,fromcredit-relatedfactorsnot the fair lending examination and enforcement proavailable in the HMDA data, such as measures of cesses.Whenexaminersforthefederalbankingagencredithistory(includingcreditscores),LTVandPTI, cies evaluate an institution’s fair lending risk, they anddifferencesinchoiceofloanproducts.Differential analyze HMDA price data in conjunction with other costsof loanoriginationandthecompetitiveenviron- informationandriskfactors,asdirectedbytheInterment also may bear on the differences in pricing, as agencyFairLendingExaminationProcedures.68 maydifferencesacrosspopulationsincredit-shopping activities.Itisalsoimportanttonotethattheabsence 68. TheInteragencyFairLendingExaminationProceduresare of the finding of disparities in pricing across groups availableatwww.ffiec.gov/PDF/fairlend.pdf.

The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress A77 APPENDIXA:REQUIREMENTSOF —FannieMae REGULATIONC —GinnieMae —FreddieMac The Federal Reserve Board’s Regulation C requires —FarmerMac lenderstoreportthefollowinginformationonhome- —Privatesecuritization purchase and home-improvement loans and on —Commercialbank,savingsbank,orsavingsassorefinancingloans: ciation —Life insurance company, credit union, mortgage Foreachapplicationorloan bank,orfinancecompany —Affiliateinstitution v applicationdateandthedateanactionwastakenon —Othertypeofpurchaser theapplication v actiontakenontheapplication Foreachapplicantorco-applicant —approvedandoriginated —approvedbutnotacceptedbytheapplicant v race —denied (with the reasons for denial—voluntary v ethnicity forsomelenders) v sex —withdrawnbytheapplicant v incomereliedonincreditdecision —fileclosedforincompleteness v preapproval program status (for home-purchase Foreachproperty loansonly) —preapproval request denied by financial institu- v location, by state, county, metropolitan statistical tion area,andcensustract —preapproval request approved but not accepted v typeofstructure byindividual —one-tofour-familydwelling v loanamount —manufacturedhome v loantype —multifamilyproperty(dwellingwithfiveormore —conventional units) —insuredbytheFederalHousingAdministration v occupancystatus(owneroccupied,non-owneroccu- —guaranteed by the U.S. Department of Veterans pied,ornotapplicable) Affairs —backed by the Farm Service Agency or Rural Forloanssubjecttopricereporting HousingService v lienstatus v spreadabovecomparableTreasurysecurityforappli- —firstlien cationstakenpriortoOctober1,2010 —juniorlien v spread above average prime offer rate for applica- —unsecured tionstakenonorafterOctober1,2010 v loanpurpose —homepurchase ForloanssubjecttotheHomeOwnership —refinance andEquityProtectionAct —homeimprovement v type of purchaser (if the lender subsequently sold v indicator of whether loan is subject to the Home theloanduringtheyear) OwnershipandEquityProtectionAct [

Legal Developments

B1 March 2010 Legal Developments: Fourth Quarter, 2009 ORDER ISSUED UNDER BANK 1 percent of the total amount of deposits of insured HOLDING COMPANYACT depositoryinstitutionsinthestate.4 COMPETITIVE CONSIDERATIONS Order Issued under Section 3 of the Bank Holding Company Act Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or that would be in furtherance of an attempt to monopolize the business of banking in any relevant banking market. Sandhills Bancshares, Inc. The BHC Act also prohibits the Board from approving a Iraan, Texas proposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket,unlesstheanticompetitiveeffects Order Approving the Formation of a Bank oftheproposalareclearlyoutweighedinthepublicinterest Holding Company by the probable effect of the proposal in meeting the convenienceandneedsofthecommunitytobeserved.5 Sandhillsdoesnotcurrentlycontroladepositoryinstitu- SandhillsBancshares,Inc.(‘‘Sandhills’’)hasrequestedthe tion. Based on all the facts of record, the Board has Board’s approval under section 3 of the Bank Holding concluded that consummation of the proposal would not Company Act (‘‘BHC Act’’)1 to become a bank holding haveasignificantlyadverseeffectoncompetitionoronthe companyandtoacquireallthevotingsharesofTransPecos concentrationofbankingresourcesinanyrelevantbanking Banks-Iraan (‘‘Bank’’),2 both of Iraan, from TransPecos market and that competitive considerations are consistent FinancialCorp.,SanAntonio,allofTexas.3 withapproval. Notice of the proposal, affording interested persons an opportunity to comment, has been published (74 Federal FINANCIAL, MANAGERIAL, AND SUPERVISORY Register34,015(2009)).Thetimeforfilingcommentshas CONSIDERATIONS AND FUTURE PROSPECTS expired, and the Board has considered the application and all comments received in light of the factors set forth in Section3oftheBHCActrequirestheBoardtoconsiderthe section3oftheBHCAct. financialandmanagerialresourcesandfutureprospectsof Sandhills is a newly organized corporation formed for the companies and depository institutions involved in the thepurposeofacquiringcontrolofBank.Bank,withtotal proposalandcertainothersupervisoryfactors.6TheBoard assetsofapproximately$23.7million,isthe583rdlargest hasconsideredthefactorsinlightofallthefactsofrecord, insureddepositoryinstitutioninTexas,controllingdeposits including supervisory and examination information reof approximately $21.2 million, which represent less than ceived from the relevant federal and state supervisors of Bank and publicly reported and other available financial information, including information provided by Sandhills. In addition, the Board has consulted with the primary federalandstatesupervisorsofBank. In evaluating financial factors in proposals involving 1. 12U.S.C.§1842. newly formed small bank holding companies, the Board 2. Bank’s name will change to Tejas Bank after the acquisition. reviewsthefinancialconditionofboththeapplicantandthe Bank currently has one branch in Iraan, Texas, and had filed an applicationwiththeFederalDepositInsuranceCorporation(‘‘FDIC’’) target depository institution. The Board also evaluates the and the Texas Department of Banking (‘‘TDOB’’), Bank’s primary financialconditionoftheproformaorganization,including federalandstatesupervisors,toestablishasecondbranchinMona- its capital position, asset quality, and earnings prospects, hans,Texas,onconsummationofthisproposal.TheBoardreceived onecommentinoppositionandfourteencommentsinsupportofthe proposal to establish the Monahans branch. Those comments were 4. AssetanddepositdataareasofJune30,2009.Staterankingis forwardedtotheTDOBandFDIC,andbothagencieshaveapproved basedon2008FDICSummaryofDepositdata.Inthiscontext,insured theproposedbranch(September8andSeptember11,2009,respec- depositoryinstitutionsincludecommercialbanks,savingsbanks,and tively). savingsassociations. 3. Thesellerisabankholdingcompanywithoneothersubsidiary 5. 12U.S.C.§1842(c)(1). bank,TransPecosBanks,Pecos,Texas. 6. 12U.S.C.§1842(c)(2)and(3).

B2 Federal Reserve BulletinhMarch 2010 andtheimpactoftheproposedfundingonthetransaction. involved in the proposal are consistent with approval, as In addition, for proposals involving small bank holding aretheothersupervisoryfactorsundertheBHCAct.10 companies, the Board evaluates the institutions’ compliance with the Board’s Small Bank Holding Company CONVENIENCE AND NEEDS CONSIDERATIONS Policy Statement, including compliance with those measures that are to be used to assess capital adequacy and Inactingonproposalsundersection3oftheBHCAct,the overall financial strength.7 In assessing financial factors, Boardalsomustconsidertheeffectsoftheproposalonthe convenienceandneedsofthecommunitiestobeservedand the Board consistently has considered capital adequacy to take into account the records of the relevant insured beespeciallyimportant. depositoryinstitutionsundertheCommunityReinvestment TheBoardhasconsideredcarefullythefinancialfactors Act(‘‘CRA’’).11Bankreceiveda‘‘satisfactory’’ratingatits of the proposal. Bank currently is well capitalized and mostrecentCRAperformanceevaluationbytheFDIC,as would remain so on consummation of the proposal, and of July 30, 2007. After consummation of the proposal, Sandhills would be in compliance with relevant capital Sandhills does not plan to alter the Bank’s current CRA standards.Thetransactionisstructuredasacashpurchase policies.Sandhillshasrepresentedthattheproposalwould funded from the proceeds of an issuance of new holding provide convenience to Bank’s customers by continuing company stock. Based on its review of those factors, the productsandservicescurrentlyofferedbyBank. BoardfindsthatSandhillshassufficientfinancialresources toeffecttheproposalandtocomplywiththeBoard’sSmall CONCLUSION BankHoldingCompanyPolicyStatement.8 TheBoardalsohasconsideredthemanagerialresources Based on the foregoing and all facts of record, the Board oftheapplicant,includingtheproposedmanagementofthe has determined that the application should be, and hereby organization. The Board has reviewed the examination is, approved. In reaching its conclusion, the Board has records of Bank, including assessments of its current consideredallthefactsofrecordinlightofthefactorsthat management,risk-managementsystems,andoperations.In itisrequiredtoconsiderundertheBHCAct.TheBoard’s addition,theBoardhasconsideredthesupervisoryexperiapproval is specifically conditioned on compliance by ence of the other relevant banking agencies with Bank, Sandhills with all representations and commitments made including its records of compliance with applicable bankto the Board in connection with the application. For inglawsandanti-money-launderinglaws,andtheproposed purposes of this action, these representations and commitmanagement officials and principal shareholders of Sandments are deemed to be conditions imposed in writing by hills.TheBoardalsohasconsideredSandhills’planforthe theBoardinconnectionwithitsfindingsanddecisionand, proposed acquisition, including the proposed changes in as such, may be enforced in proceedings under applicable managementatBankaftertheacquisition.9 law. The Board also has considered carefully the future The proposed transaction may not be consummated prospectsofSandhillsandBank.Basedonallthefactsof beforethe15thcalendardayaftertheeffectivedateofthis record,theBoardconcludesthatconsiderationsrelatingto order,orlaterthanthreemonthsaftertheeffectivedateof thefinancialandmanagerialresourcesandfutureprospects thisorder,unlesssuchperiodisextendedforgoodcauseby the Board or the Federal Reserve Bank of Dallas, acting pursuanttodelegatedauthority. ByorderoftheBoardofGovernors,effectiveOctober1, 7. 12CFR225,appendixC. 8. Sandhills also has adequate resources to finance the establish- 2009. mentoftheproposedMonahansbranch. 9. TheBoardreceivedacommentregardingtwoproposedofficers Votingforthisaction:ChairmanBernanke,ViceChairmanKohn, and directors of Sandhills from a bank in Monahans, Texas, where andGovernorsWarsh,Duke,andTarullo. Bank plans to open its new branch. One of the individuals was previouslyemployedbyabankthatwasacquiredbythecommenter, Robert deV. Frierson andtheotherhadworkedforacompanythatprovidedservicestosuch Deputy Secretary of the Board bank.Thecommenterallegedthattheseindividualspotentiallycould use proprietary knowledge about the commenter’s operations and customers.Thecommenteralsoallegedthattheproposedserviceofits former employee at Sandhills would violate an unwritten, implied agreementnottoserveasanemployeeofacompetitorinstitution.The commenterfurtheralleged,withoutprovidinganysubstantiatinginformation, that the second proposed official had previously failed to providecertainservicestothebankacquiredbythecommenter.The proposed management officials denied the commenter’s allegations, includingthatanyimpliedagreementrestrictstheemploymentofany 10. Thecommenteralsoraisedconcernsaboutthefutureprospects ofBank’semployees.Inweighingthemanagerialfactor,theBoardhas of the proposed Monahans branch.As previously noted, the Board considered carefully the information provided by the commenter, forwarded these comments to the TDOB and FDIC, the primary informationonallproposedmanagementofficialsprovidedbySand- supervisorswithjurisdictiontoactontheproposedbranchfilings,for hills,includinginformationonthemanagementrecordinbankingof theirconsideration,andbothagencieshaveapprovedestablishmentof the individual who was employed by the bank acquired by the thebranch. commenter,andavailablesupervisoryandotherinformation. 11. 12U.S.C.§2901etseq.

Legal Developments: Fourth Quarter, 2009 B3 ORDER ISSUED UNDER SavoieMont-BlancregionofFrance,andtheMid-Atlantic INTERNATIONAL BANKING ACT region of France. CFCM is wholly owned by these five federations, which are in turn owned by their member banks. In addition to providing strategic advice to its members, CFCM through its subsidiary, BFCM, issues Banque Transatlantique debtandotherinstrumentsinsupportofmemberbanksand Paris, France maintains the federation’s solidarity fund.5 CFCM has no direct operations in the United States and is one of 13 Order Approving Establishment of a subgroupsthataremembersofCM.6CFCMisabankthat Representative Office is supervised by the French bank licensing authority, the Comité des établissements de crédit et des enterprises BanqueTransatlantique(‘‘Bank’’),Paris,France,aforeign d’investissement(the‘‘CommissionBancaire’’). bank within the meaning of the International BankingAct The proposed representative office would market the (‘‘IBA’’), has applied under section 10(a) of the IBA1 to products and services of Bank to prospective French cusestablish a representative office in New York, New York. tomersintheUnitedStatesandwouldfacilitatecommuni- TheForeignBankSupervisionEnhancementActof1991, cationsbetweenBank’sexistingandprospectivecustomers whichamendedtheIBA,providesthataforeignbankmust and employees of Bank at its headquarters in Paris.7 obtaintheapprovaloftheBoardtoestablisharepresenta- Specifically, the proposed representative office would tiveofficeintheUnitedStates. presentandpromoteBank’sproductsandservices,conduct Noticeoftheapplication,affordinginterestedpersonsan research,solicitloansofprincipalamountsabove$250,000 opportunity to submit comments, has been published in a and, in connection with such loans, assemble credit infornewspaper of general circulation in NewYork, NewYork mation,makeinspectionsandappraisalsofproperty,secure (The Daily News, March 16, 2009). The time for filing title information, prepare loan applications and make reccomments has expired, and all comments received have ommendations, and solicit other banking business except beenconsidered. fordepositsordeposit-typeliabilities. Bank, with total consolidated assets of approximately In acting on an application under the IBAand Regula- $2.7 billion,2 is a member of the Crédit Mutuel group tionKbyaforeignbanktoestablisharepresentativeoffice, (‘‘CM’’),oneofthelargestcooperativebankinggroupsin the Board shall take into account whether (1) the foreign France. Bank primarily provides private banking services bankhasfurnishedtotheBoardtheinformationitneedsto to French nationals living in France and abroad. Outside assesstheapplicationadequately;(2)theforeignbankand France. Bank operates a branch in London, operates a anyforeignbankparentengagedirectlyinthebusinessof representative office in Singapore, and owns more than banking outside of the United States; and (3) the foreign 50percentofBanqueTransatlantiqueBelgiumandBanque bankandanyforeignbankparentaresubjecttocomprehen- Transatlantique Luxembourg, which are banks located in sive supervision on a consolidated basis by their home- BelgiumandLuxembourg,respectively.Theproposedrep- country supervisor.8 The Board also may consider addiresentativeofficewouldbeBank’sonlyofficeintheUnited States.3BankisadirectwhollyownedsubsidiaryofCrédit 5. The fund serves as an emergency fund that may be used by a IndustrialetCommercial(‘‘CIC’’),Paris,France.Through memberbanktomeetitsemergencyliquidityandfundingneeds. its offices and subsidiaries, CIC offers banking services 6. CMconsistsof1,200cooperativebanksthataregroupedinto18 directly in a number of countries worldwide and owns federations and 13 subgroups. CM does not operate under legally subsidiarybanksinSwitzerland,Luxembourg,andLiecht- binding cross-guarantee mechanisms but instead the subgroups, including CFCM, maintain a solidarity fund to which all members enstein.4 In the United States, CIC operates a branch in withinthesubgroupcontribute. NewYork, NewYork. CIC is majority owned by Banque 7. A representative office may engage in representational and Fédérative du Crédit Mutuel (‘‘BFCM’’), Strasbourg, administrativefunctionsinconnectionwiththebankingactivitiesof France. BFCM does not conduct operations in the United the foreign bank, including soliciting new business for the foreign States. BFCM is majority owned by Caisse Fédérale de bank, conducting research, acting as a liaison between the foreign bank’s head office and customers in the United States, performing Crédit Mutuel Centre Est Europe (‘‘CFCM’’), also of preliminary and servicing steps in connection with lending, and Strasbourg,whichisBank’sultimateparent. performing back-office functions. A representative office may not CFCMisthecentralbodyfortheCreditMutuelCentre contractforanydepositordeposit-likeliability,lendmoney,orengage Est Europe subgroup, which consists of five federations inanyotherbankingactivity(12CFR211.24(d)(1)). 8. 12 U.S.C. §3107(a)(2); 12 CFR 211.24(d)(2). In assessing the located in Northeast France, Southeast France, Paris, the supervision standard, the Board considers, among other indicia of comprehensive, consolidated supervision, the extent to which the home-country supervisors (i) ensure that the bank has adequate 1. 12U.S.C.§3107(a). proceduresformonitoringandcontrollingitsactivitiesworldwide;(ii) 2. Unlessotherwiseindicated,dataareasofDecember31,2008. obtain information on the condition of the bank and its subsidiaries 3. BankpreviouslyhadarepresentativeofficeinWashington,D.C. and offices through regular examination reports, audit reports, or (seeBanqueTransatlantique,79FederalReserveBulletin900(1993)), otherwise; (iii) obtain information on the dealings with and the whichitopenedin1993andclosedinDecember2008. relationship between the bank and its affiliates, both foreign and 4. CIC’ssubsidiarybanksareCICSuisse,BanquedeLuxembourg, domestic;(iv)receivefromthebankfinancialreportsthatareconsoliandBanquePasche,respectively. dated on a worldwide basis or comparable information that permits

B4 Federal Reserve BulletinhMarch 2010 tionalstandardssetforthintheIBAandRegulationK.9The Withrespecttothefinancialandmanagerialresourcesof Boardwillconsiderthatthesupervisionstandardhasbeen Bank, taking into consideration Bank’s record of operamet if it determines that the applicant bank is subject to a tions in its home country, its overall financial resources, supervisoryframeworkthatisconsistentwiththeactivities anditsstandingwithitshome-countrysupervisor,financial of the proposed representative office, taking into account andmanagerialfactorsareconsistentwithapprovalofthe the nature of such activities.This is a lesser standard than proposed representative office. Bank appears to have the the comprehensive, consolidated supervision standard ap- experienceandcapacitytosupporttheproposedrepresenplicable to proposals to establish branch or agency offices tativeofficeandhasestablishedcontrolsandproceduresfor ofaforeignbank.TheBoardconsidersthelesserstandard the proposed representative office to ensure compliance sufficientforapprovalofrepresentativeofficeapplications with U.S. law, as well as controls and procedures for its because representative offices may not engage in banking worldwideoperationsgenerally. activities.10Thisapplicationhasbeenconsideredunderthe France is a member of the FinancialActionTask Force lesserstandard. (‘‘FATF’’)andsubscribestotheFATF’srecommendations Asnotedabove,Bank,CIC,BFCM,andCFCMengage regardingmeasurestocombatmoneylaunderingandinterdirectly in the business of banking outside the United nationalterrorism.Inaccordancewiththeserecommenda- States.BankalsohasprovidedtheBoardwithinformation tions, France has enacted laws and created legislative and necessary to assess the application through submissions regulatory standards to deter money laundering, terrorist thataddresstherelevantissues. financing,andotherillicitactivities.Moneylaunderingisa TheCommissionBancaireistheprimaryregulatoryand criminal offense in France, and financial services busisupervisoryauthorityforFrenchbanksand,assuch,isthe nesses are required to establish internal policies, procehome-countrysupervisorofBank,CIC,BFCM,andCFCM. dures, and systems for the detection and prevention of The Board previously has determined that, in connection money laundering. Bank has policies and procedures to with other applications involving banks in France, those complywiththeselawsandregulations,andthesepolicies banksweresubjecttoconsolidatedcomprehensivesupervi- andproceduresaremonitoredbytheCommissionBancaire. sion by the Commission Bancaire.11 Bank, CIC, BFCM, With respect to access to information on Bank’s operaandCFCMaresupervisedbytheCommissionBancaireon tions,therestrictionsondisclosureinrelevantjurisdictions substantiallythesametermsandconditionsasthoseother in which Bank operates have been reviewed, and relevant Frenchbanks.Basedonallthefactsofrecord,ithasbeen government authorities have been communicated with determinedthatfactorsrelatingtothesupervisionofBank regarding access to information. Bank and its ultimate byitshome-countrysupervisorareconsistentwithapproval parent CFCM have committed to make available to the oftheproposedrepresentativeoffice. BoardsuchinformationontheoperationsofBankandany Theadditionalstandardssetforthinsection7oftheIBA ofitsaffiliatesthattheBoarddeemsnecessarytodetermine andRegulationK12havealsobeentakenintoaccount.The and enforce compliance with the IBA, the Bank Holding CommissionBancairehasnoobjectiontotheestablishment Company Act of 1956, as amended, and other applicable oftheproposedrepresentativeoffice. federal law. To the extent that the provision of such information to the Board may be prohibited by law or otherwise, Bank and CFCM have committed to cooperate analysisofthebank’sfinancialconditiononaworldwideconsolidated withtheBoardtoobtainanynecessaryconsentsorwaivers basis;and(v)evaluateprudentialstandards,suchascapitaladequacy and risk asset exposure, on a worldwide basis. No single factor is that might be required from third parties for disclosure of essential,andotherelementsmayinformtheBoard’sdetermination. suchinformation.Inaddition,subjecttocertainconditions, 9. See 12 U.S.C. §3105(d)(3)–(4); 12 CFR 211.24(c)(2). These theCommissionBancairemayshareinformationonBank’s standardsinclude(1)whetherthebank’shome-countrysupervisorhas operations with other supervisors, including the Board. In consentedtotheestablishmentoftheoffice;thefinancialandmanagelight of these commitments and other facts of record, and rial resources of the bank; (2) whether the bank has procedures to combatmoneylaundering,whetherthereisalegalregimeinplacein subject to the condition described below, it has been thehomecountrytoaddressmoneylaundering,andwhetherthehome determined that Bank and CFCM have provided adequate country is participating in multilateral efforts to combat money assurancesofaccesstoanynecessaryinformationthatthe laundering; (3) whether the appropriate supervisors in the home Boardmayrequest. country may share information on the bank’s operations with the Board; and (4) whether the bank and its U.S. affiliates are in Based on the foregoing and all the facts of record, compliancewithU.S.law;theneedsofthecommunity;andthebank’s Bank’s application to establish a representative office is record of operation. See also Standard Chartered Bank, 95 Federal hereby approved.13 Should any restrictions on access to ReserveBulletinB98(2009). information on the operations or activities of Bank or its 10. 12CFR211.24(d)(2). affiliatessubsequentlyinterferewiththeBoard’sabilityto 11. See,e.g.,FédérationNationaleduCréditAgricole,92Federal Reserve Bulletin C159 (2006); Calyon, S.A., 92 Federal Reserve obtaininformationtodetermineandenforcecomplianceby BulletinC159(2006);BNPParibas,91FederalReserveBulletin51 Bank or its affiliates with applicable federal statutes, the (2005); Société Générale, 87 Federal Reserve Bulletin 353 (2001); Board may require termination of any of Bank’s direct or CaisseNationaledeCréditAgricole,86FederalReserveBulletin412 (2000);CréditAgricoleIndosuez,83FederalReserveBulletin1025 (1997); Caisse Nationale de Crédit Agricole, 81 Federal Reserve 13. ApprovedbytheDirectoroftheDivisionofBankingSupervi- Bulletin1055(1995). sion and Regulation, with the concurrence of the General Counsel, 12. See12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2). pursuanttoauthoritydelegatedbytheBoard.

Legal Developments: Fourth Quarter, 2009 B5 indirect activities in the United States. Approval of this tions imposed by the Board in writing in connection with application also is specifically conditioned on compliance its findings and decision and, as such, may be enforced in by Bank and CFCM with the conditions imposed in this proceedingsunderapplicablelaw. order and the commitments made to the Board in connec- By order, approved pursuant to authority delegated by tion with this application.14 For purposes of this action, theBoard,effectiveOctober1,2009. thesecommitmentsandconditionsaredeemedtobecondi- Robert deV. Frierson Deputy Secretary of the Board 14. The Board’s authority to approve the establishment of the proposedrepresentativeofficeparallelsthecontinuingauthorityofthe stateofNewYorktolicenseofficesofaforeignbank.TheBoard’s approvalofthisapplicationdoesnotsupplanttheauthorityofthestate (‘‘Department’’),tolicensetheproposedofficeofBankinaccordance of NewYork or its agent, the NewYork State Banking Department withanytermsorconditionsthattheDepartmentmayimpose.

B7 July 2010 Legal Developments: First Quarter, 2010 ORDER ISSUED UNDER BANK FNFGrouphasrequestedapprovalundersection3forFN HOLDING COMPANYACT Banktobecomeasubsidiarybankontheproposedconversion and to hold FNC Bank as a subsidiary of FN Bank untilsuchconversionandmerger.4Inaddition,FNFGroup Order Issued under Sections 3 and 4 has requested the Board’s approval pursuant to secof the Bank Holding Company Act tions 4(c)(8) and 4(j) of the BHCAct5 to retain FN Bank andtherebyoperateFNBankasasavingsassociationuntil its conversion to a national bank. Operating a savings First Niagara Financial Group, Inc. association is an activity permissible for bank holding companies under the Board’s Regulation Y.6 FNF Group Buffalo, New York alsohasrequestedtheBoard’sapprovalundersection3of theBHCActtoacquireHarleysville’sminorityownership Order Approving Formation of a Bank interest in Berkshire Bancorp, Inc. (‘‘Berkshire’’) and to Holding Company and Notice to Engage in own up to 19.9 percent of the voting shares of Berkshire Nonbanking Activities anditssubsidiarybank,BerkshireBank,bothofWyomissing,Pennsylvania.7 First Niagara Financial Group, Inc. (‘‘FNF Group’’), a Notice of the proposal, affording interested persons an savingsandloanholdingcompanythatownsFirstNiagara opportunity to submit comments, has been published Bank (‘‘FN Bank’’), both of Buffalo, a federal savings (75FederalRegister2544and4395(2010)).Thetimefor bank, and its subsidiary, First Niagara Commercial Bank filingcommentshasexpired,andtheBoardhasconsidered (‘‘FNCBank’’),1Lockport,allofNewYork,hasrequested the proposal and all comments received in light of the the Board’s approval to become a bank holding company factorssetforthinsections3and4oftheBHCAct. by acquiring another bank holding company. FNF Group FNF Group, with total consolidated assets of approxialso has requested approval to operate FN Bank as a mately $14.6 billion, controls FN Bank and FNC Bank, subsidiarysavingsassociationuntilitbecomesasubsidiary whichoperateinPennsylvaniaandNewYork.FNBankis bankonitsconversiontoanationalbank. the18thlargestinsureddepositoryinstitutioninPennsylva- Specifically, FNF Group has requested approval under nia, controlling deposits of approximately $3.7 billion, section 3 of the BHC Act2 to merge with Harleysville whichrepresent1percentofthetotalamountofdepositsof NationalCorporation(‘‘Harleysville’’)andtherebyacquire insured depository institutions in that state (‘‘state depos- HarleysvilleNationalBankandTrustCompany(‘‘Harleys- its’’).8 villeBank’’),bothofHarleysville,Pennsylvania.Afterthe merger, FNF Group would convert FN Bank to a national 4. TheBoardreceivedcommentsfromtheOfficeofThriftSupervibank and would merge FNC Bank and Harleysville Bank sion(‘‘OTS’’),FNBank’sprimaryfederalsupervisor,concerningFN intoFNBank,withFNBankasthesurvivor.3Accordingly, Bank’sproposedcharterconversionascontemplatedundertheJuly1, 2009, Statement on Regulatory Conversions (‘‘Policy Statement’’) issuedbytheFederalFinancialInstitutionsExaminationCouncil.The BoardhasconsideredcarefullythecommentsmadebyOTSinlightof 1. FNCBankisastate-charteredbankthatacceptsonlymunicipal theinformationprovidedbyFNFGroup.Afterconsultationwithother deposits.AlthoughFNCBankisa‘‘bank’’forpurposesoftheBank appropriatefederalsupervisors,andbasedonallthefactsofrecord, Holding Company Act of 1956, as amended (‘‘BHC Act’’), FNF the Board believes the transaction is consistent with the Policy Groupisnottreatedasabankholdingcompany.FNFGroupcontrols Statement. FNCBankpursuanttosection2(a)(5)(E)oftheBHCAct,12U.S.C. 5. 12U.S.C.§§1843(c)(8)and1843(j). §1841(a)(5)(E),whichexemptsacompanyfromtreatmentasabank 6. 12CFR225.28(b)(4).FNFGroupalsohasappliedtoretainor holding company if the state-chartered bank or trust company is acquire subsidiaries that engage in lending and other credit-related owned by a thrift institution and only accepts deposits of public activities, leasing, and the sale of credit-related insurance. These money. nonbankingsubsidiariesarelistedinAppendixA. 2. 12U.S.C.§1842. 7. Asaresultofthemerger,FNFGroupwillacquireHarleysville’s 3. FNBankhasfiledapplicationsthatarependingwiththeOffice ownershipof17.5percentofBerkshire’svotingshares.FNFGroup oftheComptrolleroftheCurrency(‘‘OCC’’)toconvertFNBanktoa alsohasrequestedapprovaltoownupto19.9percentofBerkshire’s nationalbankandtomergeHarleysvilleBankwithandintoFNBank. votingshares. AllthenonbankingsubsidiariesofFNBankwillremainsubsidiaries 8. Asset and deposit data are as of June 30, 2009, with the of FN Bank after the conversion and merger. After its charter exceptionofdataforFNFGroup,whichareasofSeptember30,2009. conversion,FNBankwilldobusinessasFirstNiagaraBank,N.A. Deposit data include the deposits of FNC Bank. In this context,

B8 Federal Reserve BulletinhJuly 2010 Harleysville, with total consolidated assets of approxi- COMPETITIVE CONSIDERATIONS mately $5.2 billion, controls Harleysville Bank, which operates only in Pennsylvania. Harleysville Bank is the TheBoardhasconsideredcarefullythecompetitiveeffects 17thlargestinsureddepositoryinstitutioninPennsylvania, of FNF Group’s acquisition of Harleysville. Section 3 of controllingdepositsof$4billion. the BHC Act prohibits the Board from approving a pro- On consummation of the proposal, FNF Group would posal that would result in a monopoly.The BHCAct also become the ninth largest depository organization in Penn- prohibits the Board from approving a proposed bank sylvania, controlling deposits of approximately $7.6 bil- acquisition that would substantially lessen competition in lion, which represent approximately 2.5 percent of state any relevant banking market unless the anticompetitive deposits. effectsoftheproposalareclearlyoutweighedinthepublic BerkshireBank,withtotalassetsof$145million,isthe interest by the probable effect of the proposal in meeting 182nd largest insured depository institution in Pennsylva- theconvenienceandneedsofthecommunitytobeserved.12 nia. The bank operates only in Pennsylvania and controls Inaddition,theBoardmustconsiderthecompetitiveeffects deposits of approximately $108 million. If FNF Group of a proposal to acquire a savings association under the weredeemedtocontrolBerkshireonconsummationofthe publicbenefitsfactorofsection4(j)oftheBHCAct. proposal, FNF Group would remain the ninth largest FNF Group and Harleysville do not compete in any bankingorganizationinPennsylvania,controllingapproxi- relevantbankingmarket.HarleysvilleBankandBerkshire mately $7.7 billion in deposits, which would represent Bank, however, compete in the Reading, Pennsylvania 2.6percentofstatedeposits. bankingmarket(‘‘Readingmarket’’).13AlthoughtheBoard has determined that FNF Group would not control Berkshire Bank, the Board previously has found that one INTERSTATE ANALYSIS company need not acquire control of another company to lessen competition between them substantially and has Section 3(d) of the BHCAct allows the Board to approve recognized that a significant reduction in competition can an application by a bank holding company to acquire result from the sharing of nonpublic financial information control of a bank located in a state other than the bank between two organizations that are not under common holding company’s home state if certain conditions are control.Ineachcase,theBoardanalyzesthespecificfacts met.ForpurposesoftheBHCAct,thehomestateofFNF todeterminewhethertheminorityinvestmentinacompeti- Group will be Pennsylvania,9 and FN Bank, after the torwouldresultinsignificantadversecompetitiveeffectsin conversion, will be located in Pennsylvania and abankingmarket.14Inparticular,theBoardhasconsidered NewYork.10 Based on a review of all the facts of record, thenumberofcompetitorsthatwouldremaininthebankincluding relevant state statutes, the Board finds that the ing market; the relative shares of total deposits in deposiconditions for an interstate acquisition enumerated in sec- tory institutions in the market (‘‘market deposits’’) contion3(d)oftheBHCActaremetinthiscase.11 trolledbyFNBankandBerkshireBank;15theconcentration level of market deposits and the increase in the level as measured by the Herfindahl–Hirschman Index (‘‘HHI’’) undertheDepartmentofJusticeMergerGuidelines(‘‘DOJ insured depository institutions include commercial banks, savings Guidelines’’);16othercharacteristicsofthemarket;andthe associations,andsavingsbanks. 9. Abankholdingcompany’shomestateisthestateinwhichthe total deposits of all banking subsidiaries of such company were the largestonJuly1,1966,orthedateonwhichthecompanybecamea 12. 12U.S.C.§1842(c)(1). bankholdingcompany,whicheverislater(12U.S.C.§1841(o)(4)(C)). 13. TheReadingmarketisdefinedasBerksCounty,Pennsylvania. FNFGroupplanstoacquireHarleysvillebeforeitconvertsFNBank 14. See,e.g.,TheBankofNovaScotia,93FederalReserveBulletin toanationalbank.Accordingly,thestatewherethetotaldepositsofall C136(2007);PassumpsicBancorp,92FederalReserveBulletinC175 ofFNFGroup’sbankingsubsidiarieswillbethelargestisPennsylva- (2006); BOK Financial Corp., 81 Federal Reserve Bulletin 1052, niaonthedateofconsummation. 1053–54 (1995); Sun Banks, Inc., 71 Federal Reserve Bulletin 243 10. For purposes of section 3(d) of the BHC Act, the Board (1985). considers a bank to be located in the states in which the bank is 15. DepositandmarketsharedataareasofJune30,2009,andare chartered or headquartered or operates a branch (12 U.S.C. §§1841 based on calculations in which the deposits of thrift institutions are (o)(4)–(7),1842(d)(1)(A),and1842(d)(2)(B)). included at 50 percent, except as noted. The Board previously has 11. 12 U.S.C. §§1842(d)(1)(A)–(B) and 1842(d)(2)–(3). FNF indicatedthatthriftinstitutionshavebecome,orhavethepotentialto Groupisadequatelycapitalizedandadequatelymanaged,asdefined become, significant competitors of commercial banks. See, e.g., byapplicablelaw.FNBankhasbeeninexistenceandoperatedforthe Midwest Financial Group, 75 Federal Reserve Bulletin 386, 387 minimumperiodoftimerequiredbyNewYorklawandformorethan (1989);NationalCityCorporation,70FederalReserveBulletin743, fiveyears.See12U.S.C.§1842(d)(1)(B)(i)–(ii).Onconsummationof 744(1984).TheBoardregularlyhasincludedthriftinstitutiondeposits the proposal, FNF Group would control less than 10 percent of the inthemarketsharecalculationona50percentweightedbasis.See, total amounts of deposits of insured depository institutions in the e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52,55(1991). United States (12 U.S.C. §1842(d)(2)(A)). FNF Group also would In this case, FNF Group’s deposits are weighted at 50 percent control less than 30 percent of, and less than the applicable state pre-merger and 100 percent post-merger to reflect the resulting deposit cap for, the total amount of deposits in insured depository ownershipbyacommercialbankingorganization. institutionsintherelevantstates(12U.S.C.§§1842(d)(2)(B)–(D)).All 16. UndertheDOJGuidelines,amarketisconsideredunconcenotherrequirementsofsection3(d)oftheBHCActwouldbemeton tratedifthepost-mergerHHIislessthan1000,moderatelyconcenconsummationoftheproposal. tratedifthepost-mergerHHIisbetween1000and1800,andhighly

Legal Developments: First Quarter, 2010 B9 commitments made by FNF Group to the Board not to cially important. The Board also evaluates the financial controlBerkshireandBerkshireBank. condition of the combined organization at consummation, Consummationoftheproposalwouldbeconsistentwith including its capital position, asset quality, and earnings Board precedent and within the thresholds in the DOJ prospects, and the impact of the proposed funding of the GuidelinesintheReadingmarket.Onconsummationofthe transaction. proposal, the Reading market would remain moderately The Board has carefully considered the proposal under concentrated.The change in the HHI would be small, and the financial factors. FNF Group, Harleysville, and their numerouscompetitorswouldremaininthemarket.17 subsidiary depository institutions are well capitalized and TheBoardalsohascarefullyconsideredthecompetitive wouldremainsoonconsummationoftheproposal.Based effects of FNF Group’s proposed acquisition of Har- on its review of the record, the Board also finds that FNF leysville’s other nonbanking subsidiaries and activities in Group has sufficient financial resources to effect the prolightofallthefactsofrecord.FNFGroupandHarleysville posal.19 The proposed transaction is structured as a share do not engage in the same nonbanking activities. As a exchange. result, the Board expects that consummation of the pro- TheBoardalsohasconsideredthemanagerialresources posal would have a de minimis effect on competition for of the organizations involved and the proposed combined theseservices. organization. The Board has reviewed the examination Basedonallthefactsofrecord,theBoardconcludesthat records of FNF Group, Harleysville, and their subsidiary consummationoftheproposalwouldnothaveanysignifi- depositoryinstitutions,includingassessmentsoftheirmancantly adverse effects on competition or on the concentra- agement, risk-management systems, and operations. In tionofbankingresourcesintheReadingmarketorinany addition, the Board has considered its supervisory experiother relevant banking or nonbanking market and that the ences and those of the other relevant bank and thrift competitivefactorsareconsistentwithapproval. institutionsupervisoryagencieswiththeorganizationsand their records of compliance with applicable banking law, FINANCIAL, MANAGERIAL, AND OTHER includinganti-money-launderinglaws.FNFGroupandits SUPERVISORY CONSIDERATIONS subsidiarydepositoryinstitutionsareconsideredtobewell managed. The Board also has considered FNF Group’s Sections 3 and 4 of the BHC Act require the Board to plans for implementing the proposal, including the proconsiderthefinancialandmanagerialresourcesandfuture posedmanagementafterconsummationoftheproposal. prospects of the companies and banks involved in the Basedonallthefactsofrecord,theBoardhasconcluded proposalandcertainothersupervisoryfactors.18TheBoard thatconsiderationsrelatingtothefinancialandmanagerial has carefully considered these factors in light of all the resourcesandfutureprospectsoftheorganizationsinvolved facts of record, including supervisory and examination intheproposalareconsistentwithapproval,asaretheother information received from the relevant federal and state supervisoryfactorsundertheBHCAct.20 supervisors of the organizations involved in the proposal and other available financial information, including informationprovidedbyFNFGroup. Inevaluatingfinancialfactorsinexpansionproposalsby 19. FNFGrouphasissuednearly$1billionincommonequitysince late2008. banking organizations, the Board reviews the financial 20. AcommentfromthepublicexpressedconcernthatFNFGroup condition of the organizations involved on both a parentacquiredcontroloverHarleysvillebeforeobtainingBoardapprovalof onlyandconsolidatedbasis,aswellasthefinancialcondi- theapplicationbecauseofanextensionofcreditFNFGroupmadeto tion of the subsidiary depository institutions and the orga- Harleysville. In December 2009, and after FNF Group filed its nizations’ significant nonbanking operations. In this applicationwiththeBoardtoacquireHarleysville,FNFGrouploaned Harleysville$50million,securedbythesharesofHarleysvilleBank. evaluation, the Board considers a variety of information, Harleysville invested the loan proceeds in Harleysville Bank to including capital adequacy, asset quality, and earnings increasethebank’scapital. performance. In assessing financial factors, the Board The Board is concerned when a banking organization seeking to consistently has considered capital adequacy to be espe- acquireanotherbankingorganizationmakesaloantotheacquireein advance of the Board’s approval of the acquisition. Those types of loans raise concern that the transaction would be, in substance, the concentratedifthepost-mergerHHIismorethan1800.TheDepart- acquisitionofacontrollinginterestorwouldprovidetheacquirerwith mentofJustice(‘‘DOJ’’)hasinformedtheBoardthatabankmergeror theabilitytoexerciseacontrollinginfluenceoverthemanagementand acquisitiongenerallywillnotbechallenged(intheabsenceofother policiesofthebankholdingcompanybeforereceivingBoardapproval. factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI TheBoardhasreviewedcarefullytheloantoHarleysville,including is at least 1800 and the merger increases the HHI more than 200 thecircumstancesandtermsoftheloan,themergeragreements,the points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds purposeoftheloan,andtherelationshipsoftheorganizationsafterthe for screening bank mergers for anticompetitive effects implicitly loantransaction.Basedonallthefactsofrecord,theBoarddoesnot recognizethecompetitiveeffectsoflimited-purposelendersandother believethattheloanresultedinFNFGroupacquiringvotingsecurities nondepositoryfinancialentities. of,oracontrollingequityinterestin,Harleysville,orinFNFGroup 17. IfFNFGroupweredeemedtocontrolBerkshire,FNFGroup exercising, or having the ability to exercise, a controlling influence would be the ninth largest depository organization in the market, over Harleysville in this case. The Board continues to believe that controlling$19.8millionindeposits,whichwouldrepresent2.6per- loans made by an acquirer to a target organization before agency centofmarketdeposits.TheHHIwouldincrease3pointsto1354. approvalofitsacquisitionproposalraiseimportantissues,anditwill 18. 12U.S.C.§1842(c)(2)and(3). reviewthesearrangementscriticallyandcarefully.

B10 Federal Reserve BulletinhJuly 2010 CONVENIENCE AND NEEDS AND CRA Although the HMDAdata might reflect certain dispari- PERFORMANCE CONSIDERATIONS ties in the rates of loan applications, originations, and denialsamongmembersofdifferentracialorethnicgroups Inactingonaproposalundersection3oftheBHCAct,the incertainlocalareas,theyprovideaninsufficientbasisby Board must consider the effects of the proposal on the themselvesonwhichtoconcludewhetherornotFNBank convenienceandneedsofthecommunitiestobeservedand orHarleysvilleBankisexcludingorimposinghighercosts to take into account the records of the relevant depository onanygrouponaprohibitedbasis.TheBoardrecognizes institutions under the Community Reinvestment Act that HMDA data alone, even with the recent addition of (‘‘CRA’’).21 The Board must also review the records of pricinginformation,provideonlylimitedinformationabout performanceundertheCRAoftherelevantinsureddeposi- the covered loans.25 HMDA data, therefore, have limitatoryinstitutionswhenactingonanoticeundersection4of tions that make them an inadequate basis, absent other the BHC Act to acquire voting securities of an insured information,forconcludingthataninstitutionhasengaged savingsassociation.22 inillegallendingdiscrimination. TheBoardhascarefullyconsideredtheconvenienceand Accordingly, the Board has taken into account other needsfactorandtheCRAperformancerecordsofFNBank information, including examination reports that provide andHarleysvilleBankinlightofallthefactsofrecord.As on-siteevaluationsofcompliancewithfairlendinglawsby provided in the CRA, the Board evaluates the record of FNF Group and its subsidiaries. The Board also has performance of an institution in light of examinations by consulted with the OTS and OCC about FN Bank’s and the appropriate federal supervisors of the CRA perfor- HarleysvilleBank’srecordsoffairlendingcompliance.In mance records of the relevant institutions.An institution’s addition,theBoardhasconsideredinformationprovidedby most recent CRAperformance evaluation is a particularly FNF Group about its compliance-risk management sysimportantconsiderationintheapplicationsprocessbecause tems. it represents a detailed, on-site evaluation of the institu- The record of this application, including confidential tion’soverallrecordofperformanceundertheCRAbyits supervisory information, indicates that FNF Group has appropriatefederalsupervisor.23 taken steps to ensure compliance with fair lending and FNBankreceiveda‘‘satisfactory’’ratingundertheCRA other consumer protection laws and regulations. FNF atitsmostrecentperformanceevaluationbytheOTS,asof Grouprepresentsthatithaspoliciesandprocedurestohelp March12,2007.TheOCCratedHarleysvilleBank‘‘satis- ensure compliance with all fair lending and consumer factory’’after its most recent CRAevaluation, as of Sep- protectionlawsapplicabletoitslendingactivitiesandthat tember18,2007.FNFGrouphasrepresentedthatafterthe its policies and procedures will apply to the combined acquisition of Harleysville Bank, the combined organiza- institutiononconsummationoftheproposal.FNFGroup’s tion will offer the same or substantially similar products compliance program includes annual training of lending and services as are currently offered by the respective personnel,regularfairlendinganalyses,andoversightand organizations. monitoringofconsumerlendingfunctions.Underthecom- The Board also has considered the fair lending records plianceprogram,FNBankhasusedathirdpartytoanalyze of, and the 2008 lending data reported under the Home its HMDA data for evidence of discriminatory lending Mortgage Disclosure Act (‘‘HMDA’’)24 by, FN Bank and patterns or practices and has provided the analysis to FN Harleysville Bank in light of a comment from the public Bank’sboardofdirectorsandtotheOTS.FNFGroupalso receivedontheproposal.Thecommenteralleged,basedon represents that it performs quarterly loan file compliance 2008 HMDAdata, that FN Bank had denied applications assessments to monitor compliance with lending laws and forconventionalhomepurchaseloansandrefinancingsby regulations. In addition, mortgage loan applications slated minorityapplicantsmorefrequentlythanthoseapplications fordenialundergoasecondreviewtoensurecompleteand by nonminority applicants in the Buffalo MSA. The com- carefultreatmentofloanapplicantsandtopreventdiscrimimenteralsoallegedthatinthePhiladelphiaMSAin2008, natorylendingpractices.FNBankalsohasimplementeda Harleysville Bank denied applications for conventional formalcomplaint-resolutionprocessmanagedbythebank’s home purchase loans by minority applicants more fre- vicepresidentforcustomerrelations. quentlythanthoseapplicationsbynonminorityapplicants. Based on a review of the entire record and for the reasons discussed above, including the consultations with theOTSandOCC,theBoardhasconcludedthatconsiderations relating to convenience and needs and the CRA 21. 12U.S.C.§2903;12U.S.C.§1842(c)(2). 22. See,e.g.,NorthForkBancorporation,Inc.,86FederalReserve Bulletin767(2000). 25. Thedata,forexample,donotaccountforthepossibilitythatan 23. SeeInteragencyQuestionsandAnswersRegardingCommunity institution’soutreacheffortsmayattractalargerproportionofmargin- Reinvestment,74FederalRegister11642at11665(2009). ally qualified applicants than other institutions attract and do not 24. 12 U.S.C. §2801 et seq. The Board reviewed HMDA data provideabasisforanindependentassessmentofwhetheranapplicant reported by FN Bank and by Harleysville Bank in each bank’s whowasdeniedcreditwas,infact,creditworthy.Inaddition,credit combined assessment areas, as well as in each bank’s headquarters historyproblems,excessivedebtlevelsrelativetoincome,andhigh assessment area of the Buffalo, New York, Metropolitan Statistical loanamountsrelativetothevalueoftherealestatecollateral(reasons Area (‘‘Buffalo MSA’’) and the Philadelphia, Pennsylvania, MSA mostfrequentlycitedforacreditdenialorhighercreditcost)arenot (‘‘PhiladelphiaMSA’’),respectively. availablefromHMDAdata.

Legal Developments: First Quarter, 2010 B11 performancerecordsofFNBankandHarleysvilleBankare NONCONTROLLING INVESTMENT consistentwithapprovaloftheproposal. As noted, FNF Group proposes to acquire 17.5 percent of NONBANKING ACTIVITIES Berkshire’s voting shares that Harleysville currently owns and to increase up to 19.9 percent its total ownership FNF Group also has filed a notice under sections 4(c)(8) interestofBerkshire’svotingshares.Harleysville’sinvestand4(j)oftheBHCActtoretainitsownershipinterestin mentinBerkshireisapassiveinvestment,andHarleysville FNBankandtherebyoperateasavingsassociationandto has complied with certain commitments previously relied engage in activities that are permissible for bank holding on by the Board in determining that an investing bank companies through its nonbanking subsidiaries, including holding company would not exercise a controlling influlending, loan servicing and related activities, leasing, and ence over another bank holding company or bank for thesaleofcredit-relatedinsurance.26TheBoardpreviously purposes of the BHC Act (‘‘Passivity Commitments’’).30 hasdeterminedbyregulationthattheoperationofasavings FNFGrouphasstatedthatitdoesnotproposetocontrolor association by a bank holding company, and the other exerciseacontrollinginfluenceoverBerkshireandthatits nonbankingactivitiesforwhichFNFGrouphasrequested indirect investment in Berkshire Bank also would be a approval, are closely related to banking for purposes of passiveinvestment.Inthislight,FNFGrouphasprovided section4(c)(8)oftheBHCAct.27Aspartofitsevaluation the Passivity Commitments to the Board.31 For example, ofthepublicinterestfactorsundersection4(j)oftheBHC among other things, FNF Group has committed not to Act,theBoardalsomustdeterminethattheoperationofFN exerciseorattempttoexerciseacontrollinginfluenceover Bank by FNF Group ‘‘can reasonably be expected to the management or policies of Berkshire or any of its producebenefitstothepublic,suchasgreaterconvenience, subsidiaries; not to have or seek to have any employee or increasedcompetition,orgainsinefficiency,thatoutweigh representative of FNF Group or its affiliates serve as an possible adverse effects, such as undue concentration of officer, agent, or employee of Berkshire or any of its resources, decreased or unfair competition, conflicts of subsidiaries;andnottoseekoracceptrepresentationonthe interests,orunsoundbankingpractices.’’28 board of directors of Berkshire or any of its subsidiaries. Therecordindicatesthatconsummationoftheproposal FNFGroupalsohascommittednottoattempttoinfluence would create a stronger and more diversified financial the dividend policies, loan decisions, or operations of services organization and would provide the current and BerkshireBankoranyofitssubsidiaries. futurecustomersofHarleysvilleBankwithexpandedfinan- Based on these considerations and all the other facts of cialproductsandservices.Forthereasonsdiscussedabove, record,theBoardhasconcludedthatFNFGroupwouldnot and based on the entire record, the Board has determined acquirecontrolof,orhavetheabilitytoexerciseacontrolthat the conduct of the proposed nonbanking activities ling influence over, Berkshire or Berkshire Bank through withintheframeworkofRegulationYandBoardprecedent theproposedacquisitionofBerkshire’svotingshares.The isnotlikelytoresultinsignificantlyadverseeffects,suchas Board also notes that the BHC Act would require FNF undue concentration of resources, decreased or unfair Group to file an application and receive the Board’s competition, conflicts of interests, or unsound banking approval before the company could directly or indirectly practices. Moreover, based on all the facts of record, the acquire additional shares of Berkshire or attempt to exer- Board has concluded that consummation of the proposal cise a controlling influence over Berkshire or Berkshire canreasonablybeexpectedtoproducepublicbenefitsthat Bank.32 would outweigh any likely adverse effects. Accordingly, the Board has determined that the balance of the public 30. Althoughtheacquisitionoflessthanacontrollinginterestina benefits under the standard of section 4(j)(2) of the BHC bankorbankholdingcompanyisnotanormalacquisitionforabank Actisconsistentwithapproval. holdingcompany,therequirementinsection3(a)(3)oftheBHCAct FNF Group engages in certain activities that are not thattheBoard’sapprovalbeobtainedbeforeabankholdingcompany permissible for a bank holding company. Section 4 of the acquiresmorethan5percentofthevotingsharesofabanksuggests BHCActbyitstermsprovidesacompanythatbecomesa thatCongresscontemplatedtheacquisitionbybankholdingcompaniesofbetween5percentand25percentofthevotingsharesofbanks. bankholdingcompanytwoyearswithinwhichtoconform See12U.S.C.§1842(a)(3).Onthisbasis,theBoardpreviouslyhas (includingbydivestitureifnecessary)itsexistingnonbank- approved the acquisition by a bank holding company of less than a inginvestmentsandactivitiestothesection’srequirements, controllinginterestinabankorbankholdingcompany.See,e.g.,Penn with the possibility of three one-year extensions.29 FNF Bancshares,Inc.,92FederalReserveBulletinC37(2006)(acquisition of up to 24.89 percent of the voting shares of a bank holding Group must conform any impermissible activities and company);S&TBancorpInc.,91FederalReserveBulletin74(2005) investments that it currently conducts or holds, directly or (acquisition of up to 24.9 percent of the voting shares of a bank indirectly, to the requirements of the BHCAct within the holding company); Brookline Bancorp, MHC, 86 Federal Reserve timeperiodsprovidedbytheact. Bulletin52(2000)(acquisitionofupto9.9percentofthevotingshares ofabankholdingcompany). 31. ThecommitmentsmadebyFNFGrouparesetforthinAppen- 26. 12U.S.C.§§1843(c)(8)and1843(j);see12U.S.C.§1843(i). dixB. 27. 12CFR225.28(b)(1),(2),(3),(4),(8),and(11). 32. See,e.g.,EmigrantBancorp,Inc.,82FederalReserveBulletin 28. 12U.S.C.§1843(j)(2)(A). 555 (1996); First Community Bancshares, Inc., 77 Federal Reserve 29. See12U.S.C.§1843(a)(2). Bulletin50(1991).

B12 Federal Reserve BulletinhJuly 2010 CONCLUSION Votingforthisaction:ChairmanBernanke,ViceChairmanKohn, andGovernorsWarsh,Duke,andTarullo. Based on the foregoing and all the facts of record, the Robert deV. Frierson Boardhasdeterminedthattheapplicationsundersection3 Deputy Secretary of the Board and the notice under section 4 of the BHCAct should be, andherebyare,approved.33Inreachingitsconclusion,the Boardhasconsideredallthefactsofrecordinlightofthe Appendix A factors that it is required to consider under the BHCAct. The Board’s approval is specifically conditioned on com- FNF GROUP’S NONBANKING SUBSIDIARIES pliance by FNF Group with all the conditions imposed in this order and all the commitments made to the Board in Nonbanking Subsidiaries Retained by FNF Group connection with the applications and notice and on the 1. HomesteadFundingCorporationandtherebyengagein receipt of all other required regulatory approvals for the activitiesrelatedtoextendingcredit,inaccordancewith section 225.28(b)(2) of Regulation Y (12 CFR proposal.The Board’s approval of the proposed nonbank- 225.28(b)(2)). ing activities is subject to all the conditions set forth in Regulation Y, including those in sections 225.7 and Nonbanking SubsidiariesAcquired from Harleysville by 225.25(c),34 and to the Board’s authority to require such FNF Group modification or termination of the activities of a bank 2. Harleysville Financial Company (in dissolution) and holding company or any of its subsidiaries as the Board thereby engage in investment transactions as principal, finds necessary to ensure compliance with, and to prevent inaccordancewithsection225.28(b)(8)ofRegulationY evasionof,theprovisionsoftheBHCActandtheBoard’s (12CFR225.28(b)(8)). 3. HarleysvilleReinsuranceCompanyandtherebyengage regulationsandordersissuedthereunder.Theseconditions in insurance activities, in accordance with secandcommitmentsaredeemedtobeconditionsimposedin tion 225.28(b)(11) of Regulation Y (12 CFR writing by the Board in connection with its findings and 225.28(b)(11)). decision and, as such, may be enforced in proceedings underapplicablelaw. Appendix B Theproposalmaynotbeconsummatedbeforethe15th calendar day after the effective date of this order, or later FNF GROUP’S PASSIVITY COMMITMENTS than three months after the effective date of this order, unlesssuchperiodisextendedforgoodcausebytheBoard FNF Group will not, without the prior approval of the ortheFederalReserveBankofNewYork,actingpursuant Board of Governors of the Federal Reserve System todelegatedauthority. (‘‘Board’’)oritsstaff,directlyorindirectly: ByorderoftheBoardofGovernors,effectiveMarch25, 1. Exerciseorattempttoexerciseacontrollinginfluence 2010. overthemanagementorpoliciesofBerkshireBancorp, Inc.(‘‘Berkshire’’),Wyomissing,Pennsylvania,orany ofitssubsidiaries; 2. Have or seek to have a representative of FNF Group serve on the board of directors of Berkshire or any of itssubsidiaries; 33. The commenter also requested that the Board hold a public 3. Haveorseektohaveanyemployeeorrepresentativeof meetingorhearingontheproposal.Section3(b)oftheBHCActdoes notrequiretheBoardtoholdapublichearingonanapplicationunless FNF Group serve as an officer, agent, or employee of the appropriate supervisory authorities for the bank to be acquired Berkshireoranyofitssubsidiaries; make a timely written recommendation of denial of the application 4. Take any action that would cause Berkshire or any of (12CFR225.16(e)).TheBoardhasnotreceivedsucharecommenda- itssubsidiariestobecomeasubsidiaryofFNFGroup; tionfromtheappropriatesupervisoryauthorities.TheBoard’sregula- 5. Acquireorretainsharesthatwouldcausethecombined tionsprovideforahearingundersection4oftheBHCActifthereare interests of FNF Group and its officers, directors, and disputedissuesofmaterialfactthatcannotberesolvedinsomeother affiliates to equal or exceed 19.9 percent of the outmanner(12CFR225.25(a)(2)).Underitsregulations,theBoardalso standing voting shares of Berkshire or any of its may, in its discretion, hold a public meeting or hearing on an subsidiaries; applicationtoacquireabankifameetingorhearingisnecessaryor 6. Proposeadirectororslateofdirectorsinoppositionto appropriatetoclarifyfactualissuesrelatedtotheapplicationandto a nominee or slate of nominees proposed by the provideanopportunityfortestimony(12CFR262.3(e)and262.25(d)). managementorboardofdirectorsofBerkshireorany TheBoardhasconsideredcarefullythecommenter’srequestinlight ofitssubsidiaries; ofallthefactsofrecord.IntheBoard’sview,thecommenterhashad 7. Solicit or participate in soliciting proxies with respect ample opportunity to submit views and, in fact, submitted written to any matter presented to the shareholders of Berkcomments that the Board has considered carefully in acting on the shireoranyofitssubsidiaries; proposal.Therequestfailstoidentifydisputedissuesoffactthatare 8. Attempttoinfluencethedividendpolicies;loan,credit, material to the Board’s decision that would be clarified by a public orinvestmentdecisionsorpolicies;pricingofservices; meetingorhearing.Forthesereasons,andbasedonallthefactsof record,theBoardhasdeterminedthatapublicmeetingorhearingis personneldecisions;operationsactivities,includingthe notrequiredorwarrantedinthiscase.Accordingly,therequestfora location of any offices or branches or their hours of publicmeetingorhearingontheproposalisdenied. operation,etc.;oranysimilaractivitiesordecisionsof 34. 12CFR225.7and225.25(c)). Berkshireoranyofitssubsidiaries;

Legal Developments: First Quarter, 2010 B13 9. Disposeorthreatentodispose(explicitlyorimplicitly) whollyownedsubsidiaryofTheDepositoryTrust&ClearofsharesofBerkshireinanymannerasaconditionor ing Corporation (‘‘DTCC’’).4 Through its subsidiaries, inducement of specific action or non-action by Berk- DTCC provides clearing and settlement services with shireoranyofitssubsidiaries; respecttoequities,corporateandmunicipalbonds,govern- 10. Enter into any other banking or nonbanking transacmentandmortgage-backedsecurities,moneymarketinstrutions with Berkshire or any of its subsidiaries, except that FNF Group may establish and maintain deposit ments,andover-the-counter(‘‘OTC’’)derivatives. accounts with Berkshire, provided that the aggregate MarkitSERV LLC (‘‘MarkitSERV’’), a subsidiary of balance of all such deposit accounts does not exceed Deriv/SERV,providesaconfirmationandmatchingservice $500,000 and that the accounts are maintained on for OTC derivatives trades, under which parties to trades substantially the same terms as those prevailing for submittransactioninformationtoMarkitSERV,whichthen comparableaccountsofpersonsunaffiliatedwithBerkcomparestheinformationreceived,andmatches,confirms, shire. 11. Acquire or seek to acquire any nonpublic financial and reports discrepancies in unmatched trades.5 Informainformation of Berkshire or any of its subsidiaries, tion on confirmed CDS transactions flows into Deriv/ beyond the information already available to it as a SERV’s Trade Information Warehouse (‘‘TIW’’).6 TIW shareholder of Berkshire. FNF Group also confirms createsauniqueelectronicrecordforeachcontract,which that there are no legal, contractual, or statutory provithen is deemed to be the official record of the contract for sionsthatwouldallowitoritssubsidiariestohaveany the contracting parties. TIW updates the record for credit access to financial information of Berkshire or its subsidiariesbeyondtheinformationavailabletoshare- events over the life of the contract, including transfers, holders. terminations, and reorganizations, and for credit events such as a reference entity’s bankruptcy or default. In The terms used in these commitments have the same addition,TIWcalculatespaymentsastheycomedueonthe meanings as set forth in the BHC Act and the Board’s contracts and transmits payment instructions to facilitate RegulationY. settlement.All of TIW’s operations will be transferred to Warehouse Trust when Warehouse Trust opens for business. ORDER ISSUED UNDER FEDERAL RESERVE ACT FACTORS GOVERNING BOARD REVIEW OF THE PROPOSAL The Warehouse Trust Company LLC In acting on an application for membership in the Federal New York, New York Reserve System, the Board is required by the Act and RegulationHtoconsiderthefinancialhistoryandcondition Order Approving Application for oftheapplyingbank;theadequacyofitscapitalinrelation Membership to its assets and to its prospective deposit liabilities and other corporate responsibilities; its future earnings pros- TheWarehouseTrustCompanyLLC(‘‘WarehouseTrust’’), pects;thegeneralcharacterofitsmanagement;whetherits an uninsured trust company under New York law,1 has corporate powers are consistent with the purposes of the requested the Board’s approval under section 9 of the Act;andtheconvenienceandneedsofthecommunitytobe FederalReserveAct(the‘‘Act’’)2tobecomeamemberof served.7Inaddition,allstatememberbanksarerequiredto theFederalReserveSystem.3WarehouseTrustproposesto establish and maintain programs for compliance with the operate a central trade registry for credit default swap BankSecrecyAct.8 (‘‘CDS’’)contractsandtoofferrelatedservices,including According to DTCC,TIWcurrently houses the records the processing of life-cycle events for the contracts and ofapproximately95percentofCDStradesworldwide.The facilitationofpaymentssettlement. WarehouseTrustisawhollyownedsubsidiaryofDTCC 4. NeitherTheDepositoryTrustCompany(‘‘DTC’’),astatemem- Deriv/SERV LLC (‘‘Deriv/SERV’’), which in turn is a berbanksubsidiaryofDTCCinNewYork,NewYork,norWarehouse Trust,arebanksasdefinedintheBankHoldingCompanyAct(‘‘BHC Act’’)(12U.S.C.§1841etseq.).See12U.S.C.§1841(c)(1).Deriv/ 1. UnderNewYorklaw,alimited-liabilitytrustcompanymaynot SERV and DTCC, therefore, are not bank holding companies for acceptdepositsfromthegeneralpublicandmustobtainanexemption purposes of the BHC Act. The NYSBB has approved DTCC’s fromthegeneralrequirementunderstatelawthatNewYork-chartered applicationtobecomeabankholdingcompanyunderNewYorklaw banks and trust companies have federal deposit insurance. See when Warehouse Trust opens for business. See New York Banking NewYorkBankingLaw§§32and102a.TheNewYorkStateBanking Law§142. Board(‘‘NYSBB’’)hasapprovedWarehouseTrust’sarticlesoforga- 5. MarkitSERV is a joint venture of Deriv/SERV and Markit, a nization and its exemption from the deposit insurance requirement. companythatprovidesdata,tradeprocessing,andotherservicestothe SeeletterfromNYSBBtoDouglasJ.McClintock,Esq.,November5, derivativesmarkets. 2009. 6. MarkitSERValsoprovidesmatchingandconfirmationservices 2. 12U.S.C.§321etseq. forOTCequityandinterestratederivativesinadditiontoCDS,but 3. 12U.S.C.§§221and321.WarehouseTrustwouldbeabankfor onlyconfirmedCDScontractsarerecordedbyTIW. purposesoftheActand,therefore,iseligibleformembershipinthe 7. 12U.S.C.§§322and329;12CFR208.3(b)(3). FederalReserveSystem. 8. 12CFR208.63.

B14 Federal Reserve BulletinhJuly 2010 Board, therefore, has also reviewed the applicable factors Based on this review and all the facts of record, the in light of elements of the Federal Reserve’s Policy on Board has concluded that the general character of Ware- PaymentSystemRisk(‘‘PSRPolicy’’)thatarerelevantto house Trust’s management is consistent with approval of WarehouseTrust.9Theseelementsincludestandardsregard- theproposal. ing participation and access criteria, operational risk and reliability,andgovernance.10 OTHER CONSIDERATIONS In considering whether the corporate powers exercised by FINANCIAL CONSIDERATIONS Warehouse Trust are consistent with the purposes of the Act, the Board notes that Warehouse Trust’s proposed In considering the financial history and condition, future activitiesarepermissibleforastatememberbankunderthe earnings prospects, capital adequacy, and other financial Act’sapplicableprovisionsandwouldnotposesubstantial factors as they relate to this proposal, the Board has risks to the bank’s safety and soundness.12 Under Regulareviewed Warehouse Trust’s business plan and financial tion H, Warehouse Trust would be required to obtain the projectionsandhasassessedtheadequacyofitsanticipated Board’sapprovalbeforechangingthegeneralcharacterof capitallevelsinlightoftheproposedassetsandliabilities. its business or the scope of the corporate powers it exer- TIW has been in business since November 2006, and cises.13 In addition, Warehouse Trust has provided the because Warehouse Trust will assume TIW’s operations, Board with several commitments intended to ensure that theBoardhasalsoconsideredTIW’sfinancialhistoryand the Board will have adequate enforcement authority over condition. Warehouse Trust will be well capitalized at the WarehouseTrustasanuninsuredstatememberbank.14For timeitcommencesoperations,anditwillmaintaincapital thesereasonsandbasedonareviewoftheentirerecord,the that is sufficient to allow for an orderly wind-down if Board has concluded that this consideration is consistent confrontedwiththeneedtoceaseoperations.11 withapprovaloftheproposal. After carefully considering all the facts of record, the The Board also has considered the convenience and Board has concluded that Warehouse Trust’s financial needs of the community to be served.15 As the primary condition,capitaladequacy,futureearningsprospects,and trade repository for CDS, the TIW is an essential compoother financial factors are consistent with approval of the nent of the market infrastructure for CDS, andWarehouse proposal. Trust membership in the Federal Reserve System would subjectDTCC’sprovisionofCDStraderepositoryservices MANAGERIAL CONSIDERATIONS toactivefederalbankingagencyoversightforthefirsttime. Warehouse Trust would promote greater market transpar- In reviewingWarehouseTrust’s managerial resources, the ency by making CDS data publicly available pursuant to Board has considered carefully the experience of Ware- applicable statutes, regulations, policy statements, and houseTrust’sproposedmanagement,aswellasitsplanned guidance. For these reasons and based on a review of the risk-management systems, operations, and anti-money- entirerecord,theBoardhasconcludedthattheconvenience launderingcomplianceprogram.Inaddition,theBoardhas and needs considerations are consistent with approval of reviewedWarehouseTrust’sproposedgovernancearrange- theproposal. ments. The Board notes that the directors and officers of Warehouse Trust are all currently employed in similar CONCLUSION capacities by DTCC and its subsidiaries. The Board has alsoconsidereditssupervisoryexperiencewiththeDTCC Basedontheforegoingandallthefactsofrecord,including organization,theparentofWarehouseTrust,includingthe allthecommitments,stipulations,andrepresentationsmade compliance record of DTC with applicable banking laws in connection with the application, and subject to all the andanti-money-launderinglaws. terms and conditions set forth in this order, the Board has determinedthatWarehouseTrust’sapplicationformembershipintheFederalReserveSystemshouldbe,andhereby is, approved. The Board’s approval is specifically condi- 9. Federal Reserve Policy on Payments System Risk, available at www.federalreserve.gov/paymentsystems/psr/default.htm. The PSR tionedoncompliancewithRegulationH,16withreceiptof PolicyincorporatesminimumstandardsissuedjointlybytheCommitteeonPaymentandSettlementSystemsoftheBankforInternational Settlements and by the Technical Committee of the International 12. See12U.S.C.§§330and335. Organization of Securities Commissioners with respect to central 13. 12CFR208.3(d)(2). counterparties (Recommendations for Central Counterparties 14. Warehouse Trust has stipulated that it will be subject to the (‘‘RCCP’’),issuedinNovember2004)andwithrespecttosecurities supervisory, examination, and enforcement authority of the Board settlementsystems(RecommendationsforSecuritiesSettlementSys- undertheFederalDepositInsuranceActasifWarehouseTrustwerean tems(‘‘RSSS’’),issuedinNovember2001). insureddepositoryinstitutionforwhichtheBoardistheappropriate 10. RCCP2,8,and13;RSSS11,13,and14. federalbankingagencyunderthatact. 11. In addition, the Board retains the authority to specify capital 15. Because Warehouse Trust will not accept deposits or have requirementsforWarehouseTrustiftheBoardatanytimeconcludes federal deposit insurance, it will not be subject to the Community that Warehouse Trust’s capital is inadequate in view of its assets, ReinvestmentAct(12U.S.C.§2901etseq). liabilities,andresponsibilities(12CFR208.4(a)). 16. 12CFRpart208.

Legal Developments: First Quarter, 2010 B15 required authorizations from the NewYork State Banking Times,January26,2010).Thetimeforfilingcommentshas Department,17 and with all the commitments, stipulations, expired,andallcommentsreceivedhavebeenconsidered. and representations made in connection with the applica- Bank, with total consolidated assets of approximately tion, including the commitments and conditions discussed $276billion,isthethirdlargestbankinTheNetherlands.2 in this order.18The commitments, stipulations, representa- Bankisindirectlyownedbyaconsortium(‘‘Consortium’’) tions, and conditions relied on in reaching this decision composedofthegovernmentofTheNetherlands,theRoyal shallbedeemedtobeconditionsimposedinwritingbythe BankofScotlandGroupplc(‘‘RBS’’),andBancoSantander Boardinconnectionwithitsfindingsanddecisionand,as S.A. (‘‘Santander’’).3 Bank is a newly licensed entity such,maybeenforcedinproceedingsunderapplicablelaw. resultingfromthedecisionbytheConsortiumtodividethe WarehouseTrust will become a member of the Federal businessesoftheentityformerlycalledABNAMROBank Reserve System upon its purchase of stock in the Federal (‘‘FormerABNAMRO’’). Certain assets of FormerABN ReserveBankofNewYork(‘‘ReserveBank’’).Thistrans- AMRO(‘‘StateAllocatedAssets’’)havebeenallocatedby action must occur not later than three months after the theConsortiumtothegovernmentofTheNetherlands.On effectivedateofthisorder,unlesssuchperiodisextended February 6, 2010, the State Allocated Assets were transfor good cause by the Board or the Reserve Bank acting ferred to Bank from Former ABN AMRO, and Former pursuanttodelegatedauthority. ABN AMRO was renamed The Royal Bank of Scotland By order of the Board of Governors, effective Febru- N.V.ThemembersoftheConsortiumremainedtheindirect ary2,2010. parents of Bank after the transfer. In a transaction scheduled to occur on March 31, 2010, the government of The Votingforthisaction:ChairmanBernanke,ViceChairmanKohn, andGovernorsWarsh,Duke,andTarullo. NetherlandswillbecomethesoleownerofBank. The operations of Former ABN AMRO allocated to Robert deV. Frierson BankincludeTheNetherlandsbusiness,theglobalprivate Deputy Secretary of the Board client business, most of the global asset management business, and the global diamond and jewelry financing business.Subjecttoreceiptofrequiredregulatoryapprov- ORDER ISSUED UNDER als, Bank plans to operate branch offices in Belgium, INTERNATIONAL BANKING ACT Dubai, Hong Kong, India, Japan, Jersey, and Singapore; a representativeofficeinSpain;andsubsidiariesinBotswana, France,Germany,Luxembourg,andSwitzerland.Thepro- ABN AMRO Bank N.V. posedNewYorkrepresentativeofficewillsolicitloansand Amsterdam, The Netherlands market other products of Bank in the United States, perform preliminary and servicing steps in connection with Order Approving Establishment of a lending,andactasaliaisonbetweenBankanditsprospec- Representative Office tiveU.S.-basedcustomers.4 In acting on an application under the IBAand Regula- ABN AMRO Bank N.V., Amsterdam, The Netherlands tionKbyaforeignbanktoestablisharepresentativeoffice, (‘‘Bank’’), a foreign bank within the meaning of the the Board shall take into account whether (1) the foreign International Banking Act (‘‘IBA’’), has applied under bankhasfurnishedtotheBoardtheinformationitneedsto section10(a)oftheIBA1toestablisharepresentativeoffice assesstheapplicationadequately;(2)theforeignbankand in New York, New York. The Foreign Bank Supervision anyforeignbankparentengagedirectlyinthebusinessof EnhancementAct of 1991, which amended the IBA, pro- banking outside of the United States; and (3) the foreign vides that a foreign bank must obtain the approval of the bankandanyforeignbankparentaresubjecttocomprehen- Board to establish a representative office in the United sive supervision on a consolidated basis by their home- States. Noticeoftheapplication,affordinginterestedpersonsan opportunity to submit comments, has been published in a 2. DataareasofSeptember30,2009,andareonaproformabasis. newspaperofgeneralcirculationinNewYork(TheNewYork 3. Bank is wholly owned by RFS Holdings B.V., a Netherlands corporation(‘‘RFS’’).RBSowns38.3percentofRFS,thegovernment ofTheNetherlandsowns33.8percent,andSantanderowns27.9per- 17. BeforeWarehouseTrustmaybeginoperations,theSuperinten- cent. The government of the United Kingdom owns 84 percent of dent must issue an authorization certificate. See NewYork Banking RBS. Law§25. 4. A representative office may engage in representational and 18. AsaconditionoftheBoard’sapproval,WarehouseTrustwill, administrativefunctionsinconnectionwiththebankingactivitiesof before purchasing stock in the Federal Reserve Bank of NewYork, the foreign bank, including soliciting new business for the foreign take certain actions and execute certain commitments to the Board. bank; conducting research; acting as a liaison between the foreign These commitments and conditions also shall be deemed to be bank’s head office and customers in the United States; performing conditions imposed in writing by the Board in connection with its preliminary and servicing steps in connection with lending; and findingsanddecisiononWarehouseTrust’sapplication. performing back-office functions. A representative office may not contractforanydepositordeposit-likeliability,lendmoney,orengage 1. 12U.S.C.§3107(a). inanyotherbankingactivity(12CFR211.24(d)(1)).

B16 Federal Reserve BulletinhJuly 2010 country supervisor.5 The Board may also consider addi- applications involving other Netherlands banks.9 Bank is tionalstandardssetforthintheIBAandRegulationK.6The supervisedbytheDNBonsubstantiallythesametermsand Boardwillconsiderthatthesupervisionstandardhasbeen conditions as those other banks. Based on all the facts of met if it determines that the applicant bank is subject to a record, it has been determined that Bank is subject to a supervisoryframeworkthatisconsistentwiththeactivities supervisoryframeworkthatisconsistentwiththeactivities of the proposed representative office, taking into account of the proposed representative office, taking into account the nature of such activities.This is a lesser standard than thenatureofsuchactivities.10 the comprehensive, consolidated supervision standard ap- Theadditionalstandardssetforthinsection7oftheIBA plicable to applications to establish branch or agency andRegulationKhavealsobeentakenintoaccount.11The offices of a foreign bank. The Board considers the lesser DNBhasnoobjectiontotheestablishmentoftheproposed standard sufficient for approval of representative office representativeoffice. applicationsbecauserepresentativeofficesmaynotengage Withrespecttothefinancialandmanagerialresourcesof inbankingactivities.7Thisapplicationhasbeenconsidered Bank, taking into consideration the record of operation of Former ABN AMRO in its home country, its overall underthelesserstandard. financialresources,anditsstandingwithitshome-country Asnotedabove,Bankengagesdirectlyinthebusinessof supervisor, financial and managerial factors are consistent bankingoutsidetheUnitedStates.Santanderalsoengages with approval of the proposed representative office. Bank directly in the business of banking outside the United appearstohavetheexperienceandcapacitytosupportthe States. Bank has provided the Board with information proposedrepresentativeofficeandhasestablishedcontrols necessary to assess the application through submissions and procedures for the proposed representative office to that address the relevant issues.At the proposed represenensure compliance with U.S. law, as well as controls and tative office, Bank may engage only in activities permisproceduresforitsworldwideoperationsgenerally. sibleforarepresentativeofficeunderRegulationK,which The Netherlands is a member of the Financial Action include the proposed solicitation and customer-liaison Task Force and subscribes to its recommendations on activitiesnotedabove.8 measurestocombatmoneylaundering.Inaccordancewith Withrespecttosupervisionbyhome-countryauthorities, theserecommendations,TheNetherlandshasenactedlaws the Board has considered that Bank is supervised by De and created legislative and regulatory standards to deter NederlandscheBankN.V.(‘‘DNB’’),theprimaryregulator money laundering, terrorist financing, and other illicit of financial institutions in The Netherlands. The Board activities. Money laundering is a criminal offense in The previously has considered the supervisory regime in The Netherlands,andfinancialinstitutionsarerequiredtoestab- Netherlands for financial institutions in connection with lish internal policies, procedures, and systems for the detection and prevention of money laundering throughout their worldwide operations. Bank has policies and procedures to comply with these laws and regulations that are 5. 12 U.S.C. §3107(a)(2); 12 CFR 211.24(d)(2). In assessing the monitored by governmental entities responsible for antisupervision standard, the Board considers, among other indicia of money-launderingcompliance. comprehensive,consolidatedsupervision,theextenttowhichhome- With respect to access to information about Bank’s countrysupervisors(i)ensurethatthebankhasadequateprocedures operations, the Board has reviewed the restrictions on for monitoring and controlling its activities worldwide; (ii) obtain information on the condition of the bank and its subsidiaries and disclosureinrelevantjurisdictionsinwhichBankoperates offices through regular examination reports, audit reports, or other- and has communicated with relevant government authoriwise;(iii)obtaininformationonthedealingswithandtherelationship ties regarding access to information. Bank and Santander between the bank and its affiliates, both foreign and domestic; (iv) have committed to make available to the Board such receive from the bank financial reports that are consolidated on a information on Bank’s operations and any of its affiliates worldwide basis or comparable information that permits analysis of thebank’sfinancialconditiononaworldwideconsolidatedbasis;and that the Board deems necessary to determine and enforce (v) evaluate prudential standards such as capital adequacy and risk compliancewiththeIBA,theBankHoldingCompanyAct, assetexposure,onaworldwidebasis.Nosinglefactorisessential,and and other applicable federal law. To the extent that the otherelementsmayinformtheBoard’sdetermination. provisionofsuchinformationtotheBoardmaybeprohib- 6. See 12 U.S.C. §3105(d)(3)–(4); 12 CFR 211.24(c)(2). These standardsinclude(1)whetherthebank’shome-countrysupervisorhas itedbylaworotherwise,BankandSantanderhavecommitconsentedtotheestablishmentoftheoffice;thefinancialandmanagerial resources of the bank; (2) whether the bank has procedures to combatmoneylaundering,whetherthereisalegalregimeinplacein 9. See Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., thehomecountrytoaddressmoneylaundering,andwhetherthehome RabobankNederland,89FederalReserveBulletin81(2003);seealso country is participating in multilateral efforts to combat money INGBank,85FederalReserveBulletin448(1999). laundering; (3) whether the appropriate supervisors in the home 10. Santander has been found to be subject to comprehensive country may share information on the bank’s operations with the consolidated supervision by the Bank of Spain. See, e.g., Banco Board; and (4) whether the bank and its U.S. affiliates are in SantanderS.A.,85FederalReserveBulletin441(1999).TheRoyal compliancewithU.S.law;theneedsofthecommunity;andthebank’s BankofScotlandplc,aUnitedKingdombanksubsidiaryofRBS,has record of operation. See also Standard Chartered Bank, 95 Federal beenfoundtobesubjecttocomprehensiveconsolidatedsupervision ReserveBulletinB98(2009). bytheUnitedKingdomFinancialServicesAuthority.TheRoyalBank 7. See12CFR211.24(d)(2). ofScotlandplc,93FederalReserveBulletinC104(2007). 8. Seesupranote4. 11. Seesupranote6.

Legal Developments: First Quarter, 2010 B17 ted to cooperate with the Board to obtain any necessary FINAL DECISION consents or waivers that might be required from third parties for disclosure of such information. In addition, This is an administrative proceeding pursuant to the Fedsubjecttocertainconditions,theDNBmayshareinforma- eralDepositInsuranceAct(‘‘FDIAct’’)inwhichtheBoard tiononBank’soperationswithothersupervisors,including of Governors of the Federal Reserve System (‘‘Board’’) theBoard.Inlightofthesecommitmentsandotherfactsof seeks to prohibit the Respondent, Adam L. Benarroch record,andsubjecttotheconditiondescribedbelow,ithas (‘‘Respondent’’),fromfurtherparticipationintheaffairsof been determined that Bank and Santander have provided any financial institution based on actions he took while adequateassurancesofaccesstoanynecessaryinformation employedasanAssistantVicePresidentatMidwestBank thattheBoardmayrequest. andTrust,ElmwoodPark,Illinois(‘‘Midwest’’). Based on the foregoing and all the facts of record, Upon review of the administrative record, the Board Bank’s application to establish the representative office is issues this Final Decision adopting the Recommended hereby approved.12 Should any restrictions on access to DecisionofAdministrativeLawJudgeC.RichardMisereninformationontheoperationsoractivitiesofBankandits dino (‘‘ALJ’’), and orders the issuance of the attached affiliatessubsequentlyinterferewiththeBoard’sabilityto OrderofProhibition. obtaininformationtodetermineandenforcecomplianceby Bank or its affiliates with applicable federal statutes, the I. PROCEDURAL HISTORY Board may require termination of any of Bank’s direct or indirect activities in the United States. Approval of this On April 14, 2009, the Board issued a Notice upon application also is specifically conditioned on compliance Respondentthatsoughtanorderofprohibitionagainsthim byBankandSantanderwiththeconditionsimposedinthis basedonhisfabricationofbankdocumentsandforgeryof order and the commitments made to the Board in connec- thesignaturesofbankofficialsinconnectionwithorigination with this application.13 For purposes of this action, tion of loans while he was anAssistant Vice President of thesecommitmentsandconditionsaredeemedtobecondi- Midwest. After several extensions, Respondent appeared tions imposed by the Board in writing in connection with proseandfiledhisAnsweronJuly27,2009.Respondent’s these findings and decision and, as such, may be enforced Answer does not deny the specific allegations of the inproceedingsunderapplicablelaw. Notice. Rather, it concedes that the Respondent made By order, approved pursuant to authority delegated by certain ‘‘bad decisions while employed at Midwest Bank theBoard,effectiveFebruary26,2010. and Trust Company’’and claims that he operated ‘‘under tremendous pressure to close loan transactions’’ as his Robert deV. Frierson year-end bonus depended on loan volume. Respondent Deputy Secretary of the Board claims that he lacked the necessary assistance in this position to perform his duties and he apologized ‘‘for putting the bank in jeopardy’’ through the various loan transactions at issue here. Respondent concluded his An- FINAL ENFORCEMENT DECISION swerbyrequestingasecondchanceinthebankingindustry ISSUED BY THE BOARD shortofapermanentban,andproposingcertainlimitations andrestrictionsonpermittedactivities(limitationsshortof In the Matter of prohibition) that would enable him to continue to work in theindustry. On September 16, 2009, Board Enforcement Counsel Adam L. Benarroch, moved for summary disposition of the proceeding and A former institution-affıliated party of submitteddocumentaryevidencesupportingtheallegations of the Notice. Board Enforcement Counsel contended that Midwest Bank and Trust, nogenuineissueofmaterialfactexistedandthattheBoard Elmwood Park, Illinois wasthereforeentitledtothereliefsoughtintheNotice.In his October 7, 2009, response, Respondent conceded the Docket No. 09-052-I-E factual assertions set forth in the evidentiary exhibits submitted in support of the motion and again offered apologies for his actions. Respondent also offered further details concerning his personal, professional, and family 12. ApprovedbytheDirectoroftheDivisionofBankingSupervi- situation,whichhesubmittedinmitigationoftheoffenses sion and Regulation, with the concurrence of the General Counsel, heotherwiseadmits. pursuanttoauthoritydelegatedbytheBoard. 13. The Board’s authority to approve the establishment of the On October 29, 2009, the ALJ granted the Board’s proposedrepresentativeofficeparallelsthecontinuingauthorityofthe Motion for Summary Disposition because there were no stateofNewYorktolicenseofficesofaforeignbank.TheBoard’s material facts in dispute and the evidence presented by approvalofthisapplicationdoesnotsupplanttheauthorityofthestate Enforcement Counsel supported an order prohibiting Reof NewYork or its agent, the NewYork State Banking Department spondent from further participation in the industry, as (‘‘Department’’),tolicensetheproposedofficeofBankinaccordance withanytermsorconditionsthattheDepartmentmayimpose. provided in section 8(e) of the FDI Act, 12 U.S.C.

B18 Federal Reserve BulletinhJuly 2010 §1818(e).OnNovember30,2009,Respondentsubmitteda a. Respondent’sAppeal dated November 30, 2009 documententitled‘‘Appeal,’’inwhichhespecificallystates that he ‘‘do[es] not deny the specific [allegations] in the As previously noted, Respondent filed an Appeal at the Notice’’but asks that the decision be modified for several point at which exceptions to the ALJ’s recommended otherreasons,includingthefactthathecouldnotaffordto decisionwerepermittedbytheBoard’sregulations(12CFR hireanattorneytorepresenthimthroughoutthisprocess. 263.39(a)). The regulation provides that exceptions must ‘‘setforthpageorparagraphreferencestothespecificparts of the administrative law judge’s recommendations to II. STATUTORY AND REGULATORY whichexceptionistaken,thepageorparagraphreferences FRAMEWORK tothoseportionsoftherecordreliedupontosupporteach exception, and the legal authority relied upon to support UndertheFDIActandtheBoard’sregulations,theALJis eachexception’’(12CFR263.39(c)(2)).Failureofaparty responsible for conducting proceedings on a notice of to file exceptions to a finding, conclusion, or proposed charges relating to a proposed order of prohibition order ‘‘is deemed a waiver of objection’’ (12 CFR (12 U.S.C. §1818(e)(4)). TheALJ issues a recommended 263.39(b)(1). decision that is referred to the Board together with any Respondent’s Appeal does not conform to any of the exceptions to those recommendations filed by the parties. requirements of a valid exception. It does not identify the TheBoardmakesthefinalfindingsoffact,conclusionsof portionsoftheALJ’srecommendationtowhichanexceplaw, and determination whether to issue the requested tion was taken or cite the portions of the record or legal order.Id;,12CFR263.40. authority in support of its position. Accordingly, the TheFDIActsetsforththesubstantivebasisuponwhich Respondentisdeemedtohavewaivedhisrighttoobjectto afederalbankingagencymayissueagainstabankofficial anyportionoftheRecommendedDecision. oremployeeanorderofprohibitionfromfurtherparticipa- However, even if Respondent’s filing could be considtion in banking. To issue such an order, the Board must ered a valid exception, the Board finds that it raises no makeeachofthreefindings:(1)thattheindividualengaged meritorious claim. In his Appeal, Respondent does not in identified misconduct, including a violation of law or contest the allegations in the Notice, but requests that the regulation, an unsafe or unsound practice, or a breach of Board modify the final decision because (1) Respondent fiduciary duty; (2) that the conduct had a specified effect, couldnotaffordanattorneyduringtheprocessanddidnot including financial loss to the institution or gain to the have an adequate defense; (2) Respondent misunderstood respondent;and(3)thattherespondent’sconductinvolved EnforcementCounsel’sstatementregardinghisfifthamendculpabilityofacertaindegree—eitherpersonaldishonesty ment right against self-incrimination; (3) Respondent was or a willful or continuing disregard for the safety or terminatedfromemploymentatadifferentfinancialinstitusoundness of the institution (12 U.S.C. §1818(e)(1)(A)– tion because his employer was informed of these public (C)). proceedings;and(4)thefinancialconditionofMidwesthas significantly deteriorated. None of these issues merits modificationoftheALJ’sfinaldecision. III. FACTS First, Enforcement Counsel consented to and the ALJ provided several extensions to permit Respondent time to Theundisputedfactsofthiscaseshowthatwithrespectto findcounseltorepresenthim.Arespondentinthistypeof 14 loan transactions handled by Respondent, Respondent administrative action is not entitled to free counsel, and forgedsignaturesofbankofficers,fabricateddocumentsto Respondent’s inability to pay for counsel does not taint makeitappearthatloanshadbeenproperlyapprovedwhen these proceedings. See, e.g., Crothers v. Commodities they had not, and changed the terms of approved loans to Futures Trading Comm’n, 33 F.3d 405 (4th Cir. 1994) thedetrimentofMidwest,includingincreasingtheamount (sixth amendment rights inapplicable to administrative of the loan and lowering the interest rate and fees. As a license revocation proceedings). Second, although it apresultoftheseactions,Midwestwasexposedtoadditional pearsthatRespondentinitiallymisunderstoodEnforcement risk on numerous loans, was deprived of more than Counsel’s statement regarding his fifth amendment rights $350,000 in interest and fees, and was forced to write off and may have believed he did not have to respond to the $109,000 in principal. The specific details regarding each NoticeofCharges,thisissuewasclarifiedandhewasgiven oftheloantransactionsarerecountedintheALJ’sRecomadditionaltimetorespond.Asnoted,inhisresponsehedid mended Decision on Summary Disposition. (Rec. Dec., notcontestthefactsstatedintheNotice.Third,thefactthat pages3-16.) Respondent was terminated from employment at another institutionasaresultofthependencyofthiscasedoesnot IV. LEGAL CONCLUSIONS suggest that a prohibition order should not issue. In fact, Respondentwillbeprohibitedfromsuchemploymentupon TheBoardhasreviewedtherecordinthismatterandfinds issuance of the order. Finally, the current financial condithat the ALJ properly granted Enforcement Counsel’s tionofMidwestisirrelevanttotheseproceedings.Accord- MotionforSummaryDisposition.Asexplainedbelow,the ingly, even if Respondent’sAppeal qualified as an excep- Boardagreesthataprohibitionordershouldbeissued. tion,itwouldbeentirelyunpersuasive.

Legal Developments: First Quarter, 2010 B19 b. Prohibition Order affiliated party, as defined in section 3(u) of the FDI Act (12 U.S.C. §1813(u)) of Midwest Bank and Trust, Elm- The Respondent does not contest any of the allegations in woodPark,Illinois(‘‘Midwest’’). the administrative record, including Enforcement Coun- NOW,THEREFORE,ITISHEREBYORDERED,pursel’s initial Notice or the summary of facts in the ALJ’s suant to section 8(e) of the FDIAct, 12 U.S.C. §1818(e), Recommended Decision. Based on the undisputed evi- that: dence in the administrative record, Respondent’s actions 1. In the absence of prior written approval by the Board, satisfy the misconduct, effect, and culpability elements andbyanyotherFederalfinancialinstitutionregulatory requiredforanorderofprohibition. agency where necessary pursuant to section 8(e)(7)(B) TheRespondent’sconductmeetsallthecriteriaforentry oftheFDIAct(12U.S.C.§1818(e)(7)(B)),Benarrochis herebyprohibited: of an order of prohibition under 12 U.S.C. §1818(e). a. from participating in any manner in the conduct of Creating false entries in the books and records of a bank the affairs of any institution or agency specified in violates 18 U.S.C. §1005, and constitutes an unsafe or section 8(e)(7)(A) of the FDI Act (12 U.S.C. unsoundpractice.Exposingthebanktoadditionalriskand §1818(e)(7)(A)), including, but not limited to, any loweringinterestratesandfeesbreachesabankemployee’s insured depository institution, any insured deposifiduciaryduty.Respondent’sactionscausedactuallossesto toryinstitutionholdingcompanyoranyU.S.branch Midwest of over $460,000. Finally, Respondent’s actions oragencyofaforeignbankingorganization; b. from soliciting, procuring, transferring, attempting also exhibit both personal dishonesty and a willful and to transfer, voting, or attempting to vote any proxy, continuing disregard for the safety or soundness of Midconsent or authorization with respect to any voting west.Accordingly, the requirements for an order of prohi- rights in any institution described in subsecbitionhavebeenmetandtheBoardherebyissuessuchan tion 8(e)(7)(A) of the FDI Act (12 U.S.C. order. §1818(e)(7)(A)); c. from violating any voting agreement previously approvedbyanyFederalbankingagency;or CONCLUSION d. fromvotingforadirector,orfromservingoracting as an institution-affiliated party as defined in sec- For these reasons, the Board orders the issuance of the tion3(u)oftheFDIAct(12U.S.C.§1813(u)),such attachedOrderofProhibition. asanofficer,director,oremployeeinanyinstitution By Order of the Board of Governors, this 12th day of described in section 8(e)(7)(A) of the FDI Act March,2010. (12U.S.C.§1818(e)(7)(A)). 2. Any violation of this Order shall separately subject BOARD OF GOVERNORS OFTHE Benarroch to appropriate civil or criminal penalties or bothundersection8oftheFDIAct(12U.S.C.§1818). FEDERALRESERVE SYSTEM 3. ThisOrder,andeachandeveryprovisionhereof,isand shall remain fully effective and enforceable until ex- Jennifer J. Johnson pressly stayed, modified, terminated or suspended in Secretary of the Board writingbytheBoard. This Order shall become effective at the expiration of ORDER OF PROHIBITION thirtydaysafterserviceismade. By Order of the Board of Governors this 12th day of WHEREAS,pursuanttosection8(e)oftheFederalDeposit March2010. Insurance Act, as amended (‘‘FDI Act’’) (12 U.S.C. §1818(e)),theBoardofGovernorsoftheFederalReserve BOARD OF GOVERNORS OFTHE System (‘‘Board’’) is of the opinion, for the reasons set FEDERALRESERVE SYSTEM forthintheaccompanyingFinalDecision,thatafinalOrder of Prohibition should issue against ADAM L. BENAR- Jennifer J. Johnson ROCH(‘‘Benarroch’’),aformeremployeeandinstitution- Secretary of the Board

B21 September 2010 Legal Developments: Second Quarter, 2010 ORDER ISSUED UNDER BANK FirstUnited,withtotalassetsofapproximately$1.7bil- HOLDING COMPANY ACT lion, is the 17th largest insured depository institution in Maryland. First Bank operates in Maryland and West Virginiaandcontrolsdepositsofapproximately$267mil- Order Issued under Section 3 of the lion in West Virginia. If City Holding were deemed to Bank Holding Company Act controlFirstUnitedonconsummationoftheproposal,City Holdingwouldbecomethethirdlargestbankingorganization in West Virginia, controlling approximately $2.2 bil- City Holding Company lionindeposits,whichwouldrepresent7.7percentofstate Charleston, West Virginia deposits. City Holding has stated that it does not propose to Order Approving the Acquisition of controlorexerciseacontrollinginfluenceoverFirstUnited andthatitsindirectinvestmentinFirstBankalsowouldbe Additional Shares of a Bank Holding anoncontrollinginvestment.Inthislight,CityHoldinghas Company and Determination on a Financial agreed to abide by certain commitments on which the Holding Company Election Board has previously relied in determining that an investingbankholdingcompanywouldnotbeabletoexercisea City Holding Company (‘‘City Holding’’), a bank holding controlling influence over another bank holding company company within the meaning of the Bank Holding Com- orbankforpurposesoftheBHCAct(‘‘PassivityCommitpanyAct(‘‘BHCAct’’),hasrequestedtheBoard’sapproval ments’’).4Forexample,CityHoldinghascommittednotto undersection3oftheBHCAct1toincreaseitsownership exerciseorattempttoexerciseacontrollinginfluenceover interestfrom4.9percentto7.5percentofthevotingshares the management or policies of First United or any of its of First United Corporation (‘‘First United’’) and thereby subsidiaries; not to have or seek to have any employee or increase its indirect interest in First United’s subsidiary representative of City Holding or its affiliates serve as an bank, First United Bank & Trust (‘‘First Bank’’), both of officer, agent, or employee of First United or any of its Oakland, Maryland. City Holding also has filed with the subsidiaries;andnottoseekoracceptrepresentationonthe Board an election to become a financial holding company boardofdirectorsofFirstUnitedoranyofitssubsidiaries. pursuant to sections 4(k) and (l) of the BHC Act and City Holding also has committed not to enter into any section225.82ofRegulationY.2 agreement with First United or any of its subsidiaries that Notice of the proposal, affording interested persons an substantiallylimitsthediscretionofFirstUnited’smanageopportunity to submit comments, has been published mentovermajorpoliciesordecisions. (74 Federal Register 69,109 (2009)). The time for filing Based on these considerations and all the other facts of comments has expired, and the Board has considered the record, the Board has concluded that City Holding would application and all comments received in light of the not acquire control of, or have the ability to exercise a factorssetforthinsection3oftheBHCAct. controlling influence over, First United or First Bank CityHolding,withtotalbankingassetsofapproximately through the proposed acquisition of the First United’s $2.6 billion, controls one depository institution, City voting shares.The Board notes that the BHCAct requires NationalBankofWestVirginia(‘‘CityBank’’),Charleston, CityHoldingtofileanapplicationandreceivetheBoard’s West Virginia, that operates in West Virginia, Ohio, and approval before the company could directly or indirectly Kentucky.CityBankisthefifthlargestinsureddepository institutioninWestVirginia,controllingdepositsofapproximately$1.9billion,whichrepresent6.7percentofthetotal amountofdepositsofinsureddepositoryinstitutionsinthe state(‘‘statedeposits’’).3 activitythroughthatdate.Inthiscontext,insureddepositoryinstitu- 1. 12U.S.C.§1842. tionsincludecommercialbanks,savingsbanks,andsavingsassocia- 2. 12U.S.C.§§1843(k)and(l);12CFR225.82. tions. 3. AssetdataareasofJune30,2009;statewidedepositandranking 4. The commitments made by City Holding are set forth in the dataalsoareasofJune30,2009,andreflectmergerandacquisition appendix.

B22 Federal Reserve BulletinhSeptember 2010 acquire additional shares of First United or attempt to A. Banking Market within Established Guidelines exercise a controlling influence over First United or First Bank.5 Consummation of the proposal would be consistent with Board precedent and within the thresholds in the DOJ COMPETITIVE CONSIDERATIONS Guidelines in the Washington banking market.9 On consummation of the proposal, the market would remain TheBoardhasconsideredcarefullythecompetitiveeffects moderately concentrated as measured by the HHI. The oftheproposalinlightofallthefactsofrecord.Section3 changeintheHHIinthemarketwouldbeconsistentwith of the BHC Act prohibits the Board from approving a BoardprecedentandthethresholdsintheDOJGuidelines, proposal that would result in a monopoly or would be in andanumberofcompetitorswouldremain.10 furtherance of an attempt to monopolize the business of bankinginanyrelevantbankingmarket.TheBHCActalso B. Banking Market Warranting Special Scrutiny prohibitstheBoardfromapprovingabankacquisitionthat would substantially lessen competition in any relevant The structural effects that consummation of the proposal banking market, unless the anticompetitive effects of the would have on the Martinsburg banking market warrant a proposalareclearlyoutweighedinthepublicinterestbythe detailedreview.11Inthisbankingmarket,theconcentration probableeffectoftheproposalinmeetingtheconvenience level on consummation of the proposal would exceed the andneedsofthecommunitytobeserved.6 threshold levels in the DOJ Guidelines. City Bank is the City Bank and First Bank compete directly in two fourthlargestdepositoryinstitutioninthemarket,controlbankingmarkets:thegreaterWashington,D.C.areabank- ling$113.98millionindeposits,whichrepresents11.1pering market (‘‘Washington banking market’’) and the Mar- cent of market deposits. First Bank is the third largest tinsburg, West Virginia banking market (‘‘Martinsburg depositoryinstitutioninthemarket,controlling$113.99milbanking market’’). The Board has reviewed carefully the lion in deposits, which also represents 11.1 percent of competitive effects of the proposal in these banking mar- marketdeposits.Ifconsideredacombinedorganizationon kets in light of all the facts of record. In particular, the consummation of the proposal, City Bank and First Bank Boardhasconsideredthenumberofcompetitorsthatwould wouldbethesecondlargestdepositoryorganizationinthe remain in the banking markets; the relative shares of total Martinsburg banking market, controlling $228 million in deposits in depository institutions in the market (‘‘market deposits, which would represent approximately 22.2 perdeposits’’) controlled by City Bank and First Bank;7 the cent of market deposits. The proposal would exceed the concentration level of market deposits and the increase in DOJ Guidelines because the HHI for the Martinsburg thelevelasmeasuredbytheHerfindahl–HirschmanIndex bankingmarketwouldincrease246pointsto2046.Inthis (‘‘HHI’’) under the Department of Justice Merger Guide- light, consummation of the proposal would raise competilines (‘‘DOJ Guidelines’’);8 other characteristics of the tive issues in the Martinsburg banking market for the market;andthePassivityCommitmentsthatCityHolding combinedorganization. made to the Board with respect to First United and First Aftercarefulanalysisoftherecord,however,theBoard Bank. has concluded that no significant reduction in competition is likely to result from City Holding’s proposed indirect investmentinFirstBank.Ofparticularsignificanceinthis 5. See e.g., Emigrant Bancorp, Inc., 82 Federal Reserve Bulletin case are the structure of the proposed investment and the 555 (1996); First Community Bancshares, Inc., 77 Federal Reserve Bulletin50(1991). Passivity Commitments that City Holding has provided to 6. 12U.S.C.§1842(c)(1). the Board, which are designed to limit the ability of City 7. DepositandmarketsharedataareasofJune30,2009,andare Holding to use its proposed investment to engage in any based on calculations in which the deposits of thrift institutions are anticompetitivebehavior.ThestructureoftheMartinsburg includedat50percent.TheBoardpreviouslyhasindicatedthatthrift institutionshavebecome,orhavethepotentialtobecome,significant banking market, the number of competitors in the market, competitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup, and the market’s record of recent entry also indicate that 75FederalReserveBulletin386,387(1989);NationalCityCorporation, 70 Federal Reserve Bulletin 743, 744 (1984). The Board regularly has included thrift institution deposits in the market share calculationona50percentweightedbasis.See,e.g.,FirstHawaiian, 9. TheWashingtonbankingmarketisdefinedastheWashington, Inc.,77FederalReserveBulletin52,55(1991). DC-MD-VARand McNallyArea (RMA); the non-RMAportions of 8. Under the DOJ Guidelines, a market is considered unconcen- Calvert,Charles,Frederick,andSt.Mary’scountiesinMaryland;the tratedifthepost-mergerHHIislessthan1000,moderatelyconcen- non-RMAportionsofFauquierandLoudouncountiesinVirginia;the tratedifthepost-mergerHHIisbetween1000and1800,andhighly independentcitiesofAlexandria,Fairfax,FallsChurch,Manassas,and concentratedifthepost-mergerHHIismorethan1800.TheDepart- ManassasParkinVirginia;andJeffersonCounty,WestVirginia. mentofJustice(‘‘DOJ’’)hasinformedtheBoardthatabankmergeror 10. If City Holding were deemed to control First United, City acquisitiongenerallywillnotbechallenged(intheabsenceofother Holdingwouldbethe45thlargestdepositoryinstitutioninthemarket, factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI controllingdepositsof$164million,whichwouldrepresentlessthan is at least 1800 and the merger increases the HHI more than 200 1percentofmarketdeposits.TheHHIwouldincreasebylessthan1 points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds pointto1134. for screening bank mergers for anticompetitive effects implicitly 11. TheMartinsburgbankingmarketisdefinedasBerkeleyCounty, recognizethecompetitiveeffectsoflimited-purposelendersandother West Virginia, excluding the portion of that county included in the nondepositoryfinancialentities. HagerstownRMA.

Legal Developments: Second Quarter, 2010 B23 the market concentrations, as measured by the HHI, over- C. Views of OtherAgencies and Conclusion on statethecompetitiveeffectsoftheproposal. Competitive Considerations TheBoardpreviouslyhasnotedthatonecompanyneed notacquirecontrolofanothercompanytolessencompeti- The DOJ also has reviewed the proposal and has advised tion between them substantially and has recognized that a theBoardthatitdoesnotbelievethattheacquisitionwould significant reduction in competition can result from the likelyhaveasignificantlyadverseeffectoncompetitionin sharing of nonpublic financial information between two any relevant banking market. The appropriate banking organizations that are not under common control. In each agencies have been afforded an opportunity to comment case, the Board analyzes the specific facts to determine andhavenotobjectedtotheproposal. whether the minority investment in a competitor would Accordingly,inlightofallthefactsofrecord,theBoard result in significant adverse competitive effects in a bank- concludes that consummation of the proposal would not ingmarket. haveasignificantlyadverseeffectoncompetitionoronthe The Board has concluded, after careful analysis of the concentrationofresourcesinanyrelevantbankingmarket entire record, that no significant reduction in competition and that competitive considerations are consistent with will likely result from City Holding’s proposed minority approval. investment in First United. As noted, City Holding has committednottoexerciseacontrollinginfluenceoverFirst UnitedorFirstBankandnottoseekoracceptrepresenta- FINANCIAL, MANAGERIAL, AND SUPERVISORY tionontheboardofdirectorsofFirstUnitedorFirstBank. CONSIDERATIONS CityHoldingalsohascommittednottoacquireorseekto acquire nonpublic financial information from First United Section3oftheBHCActrequirestheBoardtoconsiderthe orFirstBank.Thesecommitmentsaredesignedtoprevent financialandmanagerialresourcesandfutureprospectsof anticompetitivebehaviorthatotherwisemightoccurthrough the companies and depository institutions involved in the eitherinfluencingthebehaviorofFirstUnitedorFirstBank proposal and certain other supervisory factors. The Board orthecoordinationofCityHolding’sactivitieswiththose has considered these factors in light of all the facts of ofFirstUnitedorFirstBank.Inaddition,therearenolegal, record,includingconfidentialreportsofexamination,other contractual, or statutory provisions that would otherwise supervisory information from the primary supervisors of allowCityHoldingtohaveanyaccesstofinancialinforma- the organizations involved in the proposal, publicly retion of First United or First Bank beyond the information ported and other financial information, and information already available to it as a shareholder with less than a providedbyCityHolding. 10 percent interest. These limitations restrict City Hold- Inevaluatingfinancialfactorsinexpansionproposalsby ing’saccesstoconfidentialinformationthatcouldenableit banking organizations, the Board reviews the financial to engage in anticompetitive behavior in the Martinsburg condition of the organizations involved on both a parentbankingmarketwithrespecttoFirstBank. onlyandconsolidatedbasis,aswellasthefinancialcondi- The Board also has considered additional facts indicat- tion of the subsidiary banks and significant nonbanking ing that the proposal is not likely to have a significantly operations.TheBoardalsoevaluatesthefinancialcondition adverse effect on competition in the Martinsburg banking ofthecombinedorganization,includingitscapitalposition, market.InadditiontoCityBankandFirstBank,tenother assetquality,andearningsprospects,andtheimpactofthe bank competitors, including two competitors with market proposed funding of the transaction. In assessing financial shares of at least 20 percent each, provide additional factors, the Board consistently has considered capital sourcesofbankingservicestothemarket.TheBoardalso adequacytobeespeciallyimportant. notesthatthemarketincludestwocommunitycreditunions TheBoardhasconsideredcarefullythefinancialfactors with broad membership criteria that include most of the of the proposal. City Holding and City Bank are well residents in the market, offer a wide range of consumer capitalized and would remain so on consummation of the banking products, and operate at least one street-level proposal.The proposed transaction would be funded from branch.12 The market also appears relatively attractive for CityHolding’sexistingcashreserves.Basedonitsreview entry. There has been substantial recent entry into the of the record, the Board finds that City Holding has Martinsburg banking market, with four banks entering the sufficientfinancialresourcestoeffecttheproposalandthat marketwithinthelastfiveyears. thefinancialresourcesofCityHoldinganditssubsidiaries wouldnotbeadverselyaffectedbytheproposal. TheBoardalsohasconsideredthemanagerialresources 12. TheBoardpreviouslyhasconsideredcompetitionfromcertain of City Holding, First United, and their subsidiary banks. active credit unions with those features as a mitigating factor. See The Board has reviewed the examination records of these Passumpsic Bancorp, 92 Federal Reserve Bulletin C175 (2006); Capital City Group, Inc., 91 Federal Reserve Bulletin 418 (2005); institutions, including assessments of their management, F.N.B.Corporation,90FederalReserveBulletin481(2004);Gateway risk-managementsystems,andoperations.Inaddition,the Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004). If City Boardhasconsidereditssupervisoryexperiencesandthose BankandFirstBankwereconsideredasacombinedorganizationon ofotherrelevantbanksupervisoryagencieswiththeorgaconsummationoftheproposal,theHHIfortheMartinsburgbanking nizations and their records of compliance with applicable marketwouldincrease236pointsto1966ifthedepositsofthecredit unionareweightedat50percent. bankinglaw,includinganti-money-launderinglaws.

B24 Federal Reserve BulletinhSeptember 2010 Basedonallthefactsofrecord,theBoardhasconcluded tion with the application. For purposes of this action, the thatconsiderationsrelatingtothefinancialandmanagerial conditions and commitments are deemed to be conditions resourcesandfutureprospectsoftheorganizationsinvolved imposed in writing by the Board in connection with its are consistent with approval, as are the other supervisory findingsanddecisionhereinand,assuch,maybeenforced factorsundertheBHCAct. inproceedingsunderapplicablelaw. The proposed transaction may not be consummated Convenience and Needs and CRAPerformance beforethe15thcalendardayaftertheeffectivedateofthis Considerations order,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuchperiodisextendedforgoodcauseby Inactingonaproposalundersection3oftheBHCAct,the the Board or the Federal Reserve Bank of Richmond, Board must consider the effects of the proposal on the actingpursuanttodelegatedauthority. convenienceandneedsofthecommunitiestobeservedand By order of the Board of Governors, effective June 9, take into account the records of the relevant depository 2010. institutions under the Community Reinvestment Act (‘‘CRA’’).13TheBoardhascarefullyconsideredtheconve- Votingforthisaction:ChairmanBernanke,ViceChairmanKohn, nienceandneedsfactorandtheCRAperformancerecords andGovernorsWarsh,Duke,andTarullo. of City Bank and First Bank in light of all the facts of Robert deV. Frierson record. As provided in the CRA, the Board evaluates the Deputy Secretary of the Board recordofperformanceofaninstitutioninlightofexaminations by the appropriate federal supervisors of the CRA performance records of the relevant institutions.14 City Appendix BankandFirstBankreceived‘‘satisfactory’’ratingsattheir most recent examinations for CRA performance by the Passivity Commitments Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, as of November 2, 2009, City Holding Company (‘‘City Holding’’), Charleston, and July 6, 2009, respectively. Based on a review of the West Virginia, will not, without the prior approval of the entire record, the Board has concluded that considerations Board of Governors of the Federal Reserve System relating to convenience and needs considerations and the (‘‘Board’’)oritsstaff,directlyorindirectly: CRAperformancerecordsofCityBankandFirstBankare 1. Exerciseorattempttoexerciseacontrollinginfluence consistentwithapprovaloftheproposal. over the management or policies of First United Corporation (‘‘First United’’), Oakland, Maryland, or any ofitssubsidiaries; FINANCIAL HOLDING COMPANY ELECTION 2. HaveorseektohavearepresentativeofCityHolding serveontheboardofdirectorsofFirstUnitedoranyof As noted, City Holding has elected to become a financial itssubsidiaries; holding company in connection with the proposal. City 3. Haveorseektohaveanyemployeeorrepresentativeof HoldinghascertifiedthatCityBankiswellcapitalizedand CityHoldingserveasanofficer,agent,oremployeeof wellmanagedandhasprovidedalltheinformationrequired FirstUnitedoranyofitssubsidiaries; undertheBoard’sRegulationY.15Basedonallthefactsof 4. TakeanyactionthatwouldcauseFirstUnitedoranyof itssubsidiariestobecomeasubsidiaryofCityHolding; record, the Board has determined that City Holding’s 5. Acquireorretainsharesthatwouldcausethecombined electioniseffectiveasofthedateofthisorder. interestsofCityHoldinganditsofficers,directors,and affiliatestoequalorexceed25percentoftheoutstand- CONCLUSION ing voting shares of First United or any of its subsidiaries;1 Based on the foregoing and all the facts of record, the 6. Proposeadirectororslateofdirectorsinoppositionto Board has determined that the application under section 3 a nominee or slate of nominees proposed by the management or board of directors of First United or of the BHC Act should be, and hereby is, approved. In anyofitssubsidiaries; reaching its conclusion, the Board has considered all the 7. Solicit or participate in soliciting proxies with respect facts of record in light of the factors that it is required to to any matter presented to the shareholders of First considerundertheBHCActandotherapplicablestatutes. Unitedoranyofitssubsidiaries; The Board’s approval is specifically conditioned on com- 8. Attempttoinfluencethedividendpolicies;loan,credit, pliancebyCityHoldingwiththeconditionsimposedinthis orinvestmentdecisionsorpolicies;pricingofservices; personneldecisions;operationsactivities,includingthe order and the commitments made to the Board in conneclocation of any offices or branches or their hours of operation,etc.;oranysimilaractivitiesordecisionsof 13. 12 U.S.C. §2901 et seq.; 12 U.S.C. §2903; 12 U.S.C. FirstUnitedoranyofitssubsidiaries; §1842(c)(2). 9. Disposeorthreatentodispose(explicitlyorimplicitly) 14. The Interagency Questions andAnswers Regarding CommunityReinvestmentprovidethataCRAexaminationisanimportantand oftencontrollingfactorintheconsiderationofaninstitution’sCRA 1. City Holding is required to file an application and receive the record.See75FederalRegister11642at11665(2009). Board’sapprovalpursuanttosection3(a)(3)oftheBHCActbefore 15. See12CFR225.82(b). increasingitsownershipinterestinFirstUnitedabove7.5percent.

Legal Developments: Second Quarter, 2010 B25 ofsharesofFirstUnitedinanymannerasacondition Banco Popular, with total assets of approximately of or inducement to specific action or non-action by $23.3 billion, operates in Puerto Rico, the U.S. Virgin FirstUnitedoranyofitssubsidiaries; Islands, and New York.4 Banco Popular is the largest 10. Enter into any other banking or nonbanking transacinsured depository institution in Puerto Rico, controlling tionswithFirstUnitedoranyofitssubsidiaries,except deposits of approximately $17 billion, which represent that City Holding may establish and maintain deposit accountswithFirstUnited,providedthattheaggregate 27.4 percent of the total amount of deposits of insured balance of all such deposit accounts does not exceed depositoryinstitutionsintheCommonwealth(‘‘totaldepos- $500,000 and that the accounts are maintained on its’’). substantially the same terms as those prevailing for WesternbankoperatesonlyinPuertoRicowhereitisthe comparableaccountsofpersonsunaffiliatedwithFirst third largest insured depository institution, controlling United;and depositsofapproximately$10.2billion.Onconsummation 11. Acquire or seek to acquire any nonpublic financial information of First United or any of its subsidiaries, of the proposal, Banco Popular would remain the largest beyond the information already available to it as a insured depository institution in Puerto Rico, controlling shareholderofFirstUnited.CityHoldingalsoconfirms deposits of approximately $19.5 billion, which represent that there are no legal, contractual, or statutory provi- 31.4percentoftotaldeposits.5 sionsthatwouldallowitoritssubsidiariestohaveany access to financial information of First United or its subsidiariesbeyondtheinformationavailabletoshare- COMPETITIVE CONSIDERATIONS holders. The terms used in these commitments have the same TheBoardhasconsideredcarefullythecompetitiveeffects meanings as the terms set forth in the BHC Act and the of the proposal in light of the facts of record. The Bank Board’sRegulationY. MergerActprohibitstheBoardfromapprovingaproposal thatwouldresultinamonopolyorwouldbeinfurtherance ofanattempttomonopolizethebusinessofbankinginany ORDER ISSUED UNDER BANK relevantbankingmarket.TheBankMergerActalsoprohib- MERGER ACT itstheBoardfromapprovingabankacquisitionthatwould substantially lessen competition in any relevant banking market, unless the anticompetitive effects of the proposal Banco Popular de Puerto Rico are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience Hato Rey, Puerto Rico andneedsofthecommunityserved.6 BancoPopularandWesternbankdirectlycompeteinall Order Approving the Merger of Banks and four banking markets in Puerto Rico. The Board has the Establishment of Branches reviewed carefully the competitive effects of the proposal ineachofthesebankingmarketsinlightofallthefactsof Banco Popular de Puerto Rico (‘‘Banco Popular’’),1 Hato record.Inparticular,theBoardhasconsideredthefinancial Rey, a state member bank, has requested the Board’s conditionofWesternbankandthefactthattheOfficeofthe approvalundersection18(c)oftheFederalDepositInsur- Commissioner of Financial Institutions of the Commonance Act2 (‘‘Bank Merger Act’’) to acquire assets and wealth of Puerto Rico (‘‘Puerto Rico OCFI’’) has placed assume liabilities ofWesternbank Puerto Rico (‘‘Western- thebankintoFDICreceivership.Inaddition,theFDIC,as bank’’), Mayagüez, both of Puerto Rico. Banco Popular receiverforWesternbank,hasselectedBancoPopular’sbid also proposes to establish and operate branches at the for Westernbank in accordance with the least-cost resolulocationsoftheacquiredbranchesofWesternbank. tionrequirementsintheFederalDepositInsuranceAct7and The Federal Deposit Insurance Corporation (‘‘FDIC’’) eliminated more costly proposals. The Board also has hasbeenappointedreceiverofWesternbankandhassched- consideredtheresultinglossofWesternbankasanindepenuled the sale of certain assets and the transfer of certain dentcompetitorinthebankingmarketsifthistransactionis liabilities, of Westernbank for April 30, 2010. The FDIC has recommended immediate action by the Board to prevent the probable failure of Westernbank. On the basis of 4. AssetdataareasofDecember31,2009,anddepositandranking the information before the Board, the Board finds that it data are as of June 30, 2009. For purposes of this order, insured mustactimmediatelypursuanttotheBankMergerAct3to depositoryinstitutionsincludecommercialbanks.Nosavingsassociasafeguard the depositors of Westernbank. Accordingly, tionsoperateinPuertoRico. public notice of the application and opportunity for com- 5. Intheproposedtransaction,BancoPopularwouldassumeonly $2.5billionofWesternbank’sdeposits. mentisnotrequiredbytheBankMergerAct. 6. 12U.S.C.§1828(c)(5). 7. The least-cost procedures require the FDIC to choose the resolutionmethodinwhichthetotalamountoftheFDIC’sexpendi- 1. BancoPopularisasubsidiaryofPopular,Inc.,SanJuan,Puerto turesandobligationsincurred(includinganyimmediateorlong-term Rico. obligationandanydirectorcontingentliability)istheleastcostlyto 2. 12U.S.C.§1828(c). the deposit insurance fund of all possible methods. See 12 U.S.C. 3. 12U.S.C.§1828(c)(3). §§1821,1822,and1823(c)–(k).

B26 Federal Reserve BulletinhSeptember 2010 notconsummated,aswellasvariousmeasuresofcompeti- BancoPopulariswellcapitalizedandwouldremainsoon tionandmarketconcentration,andothercharacteristicsof consummation of the proposal. In addition, the parent themarkets. holdingcompanyofBancoPopular,PopularInc.,recently Under the proposal, Banco Popular would purchase raised in a public offering approximately $1.1 billion in assets and assume liabilities of Westernbank and thereby additional capital, of which a sufficient portion will be merge Westernbank’s businesses into a viable ongoing downstreamed to Banco Popular to effect this transaction. concern with demonstrated capital strength and manage- Based on its review of the record in this case, the Board mentcapability.BancoPopular’sproposalwouldcontinue finds that Banco Popular has sufficient financial resources theavailabilityofcreditopportunitiesandbankingservices toeffecttheproposal.Asnoted,theproposedtransactionis for the customers and communities that Westernbank structured as a purchase of assets and assumption of served and avoid serious economic disruption in Puerto liabilities from the FDIC as receiver, and the transaction Rico. The FDIC actively solicited bids for Westernbank willbefundedbycash. and selected Banco Popular’s proposal under the proce- TheBoardalsohasconsideredthemanagerialresources dures specified by Congress in the Federal Deposit Insur- ofBancoPopular.TheBoardhasreviewedtheexamination anceActforresolvingfailedbanks.8TheFDICconsidered records of Banco Popular, including assessments of its thisproposalinlightofcompetingproposalssubmittedby management,risk-managementsystems,andoperations.In other bidders and determined that Banco Popular’s bid addition, the Board has considered its supervisory experirepresentedthelowestcosttotheDepositInsuranceFund. ences and those of other relevant banking supervisory Onthisbasis,theBancoPopularproposalistheonlymeans agencies, including the FDIC, with the organizations and beforetheBoardofachievingthepublicbenefitsdiscussed their records of compliance with applicable banking law above. and anti-money-laundering laws.The Board also has con- Under these circumstances, and after careful consider- sidered Banco Popular’s plans for implementing the proationofallthefactsofrecord,theBoardconcludesthatthe posal, including its plans for managing the integration of anticompetitive effects of this proposal in the relevant theacquiredassetsandoperationsintothebank. marketsareclearlyoutweighedinthepublicinterestbythe Basedonallthefactsofrecord,theBoardconcludesthat probable effect of the Banco Popular proposal in meeting considerations relating to the financial and managerial theconvenienceandneedsofthecommunitiestobeserved resourcesandfutureprospectsofBancoPopularareconsisinPuertoRico. tent with approval under the Bank MergerAct, as are the otherstatutoryfactors. FINANCIAL AND MANAGERIAL RESOURCES AND FUTURE PROSPECTS CONVENIENCE AND NEEDS CONSIDERATIONS The Bank Merger Act requires the Board to consider the In acting on a proposal under the Bank Merger Act, the financialandmanagerialresourcesandfutureprospectsof Boardisrequiredtoconsidertheeffectsoftheproposalon the companies and depository institutions involved in the theconvenienceandneedsofthecommunitiestobeserved proposal and certain other supervisory factors. The Board and take into account the records of the relevant insured has considered these factors in light of all the facts of depositoryinstitutionsundertheCommunityReinvestment record,includingconfidentialsupervisoryandexamination Act (‘‘CRA’’).9 Banco Popular received an ‘‘outstanding’’ information from the Puerto Rico OCFI and the U.S. rating at its most recent CRA performance evaluation by banking supervisors of the institutions involved, and pubthe Federal Reserve Bank of New York, as of Septemlicly reported and other financial information, including ber15,2008.Westernbankreceiveda‘‘satisfactory’’rating substantialinformationprovidedbyBancoPopular. at its most recent CRA performance evaluations by the Inevaluatingfinancialfactorsinexpansionproposalsby FDIC, as of July 1, 2007. After consummation of the banking organizations, the Board reviews the financial proposal, Banco Popular plans to implement its CRA condition of the organizations involved on both a parentpolicies at the branches and acquired consumer lending onlyandconsolidatedbasis,aswellasthefinancialcondioperationsofWesternbank. tionofthesubsidiarydepositoryinstitutionsandsignificant Asnoted,theBoardbelievesthattheproposalwillresult nonbanking operations. In this evaluation, the Board coninsubstantialbenefitstotheconvenienceandneedsofthe sidersavarietyofinformation,includingcapitaladequacy, communitiestobeservedbymaintainingtheavailabilityof assetquality,andearningsperformance.Inassessingfinancredit and deposit services to customers of Westernbank. cialresources,theBoardalsoevaluatesthefinancialcondi- Banco Popular has represented that consummation of the tionofthecombinedorganizationatconsummation,includproposal would allow it to provide a broader range of ing its capital position, asset quality, earnings prospects, financialproductsandservicestothecustomersofWesternandtheimpactoftheproposedfundingofthetransaction. bank.Basedonallthefactsofrecord,theBoardconcludes The Board has carefully considered the financial rethatconsiderationsrelatingtotheconvenienceandneedsof sources of the organizations involved in the proposal. 8. See12U.S.C.§§1821,1822,and1823(c)–(k). 9. 12U.S.C.§§2901etseq.

Legal Developments: Second Quarter, 2010 B27 the communities to be served and the CRA performance per of general circulation in New York, New York recordsoftherelevantdepositoryinstitutionsareconsistent (New York Post, March 8, 2010). The time for filing withapproval. comments has expired, and all comments received have beenconsidered. CONCLUSION NACF, with total consolidated assets of approximately $251billion,andbankingbusinessassetsofapproximately Based on the foregoing and all facts of record, the Board $168 billion, is a special-purpose organization created by has determined that the application should be, and hereby the Korean government that acts as an umbrella organizais, approved. In reaching its conclusion, the Board has tionforKoreanagriculturalcooperatives.2NACFconducts consideredallthefactsofrecordinlightofthefactorsthat avarietyoffinancialandnonfinancialactivities,including it is required to consider under the Bank MergerAct.The banking, insurance, agricultural marketing, agricultural Board’sapprovalisspecificallyconditionedoncompliance supply, and education and support services. NACF conbyBancoPopularwiththecommitmentsmadetotheBoard ductsbankingactivitiesthroughanunincorporatedbanking in connection with the application and the conditions unit, which would rank as one of the largest banks in imposed in this order. These commitments and conditions Korea,byassetanddepositsize.Theproposedrepresentaare deemed to be conditions imposed in writing by the tive office would be NACF’s only direct office outside Board in connection with its findings and decision herein, Korea.3 NACF offers a broad range of financial services, and, as such, may be enforced in proceedings under including the provision of specialized agricultural and applicablelaw. general commercial credit and banking services and the The transaction may be consummated immediately but sale of life insurance. NACF is entirely owned by its innoeventlaterthanthreemonthsaftertheeffectivedate member agricultural cooperatives, which include 1,102 ofthisOrder,unlesssuchperiodisextendedforgoodcause regional cooperatives and 82 commodity cooperatives, bytheBoardorbytheFederalReserveBankofNewYork, representing nearly all of the farmers in Korea. No shareactingpursuanttodelegatedauthority. holder,directlyorindirectly,owns5percentormoreofthe ByorderoftheBoardofGovernors,effectiveApril30, votingsharesofNACF. 2010. The proposed representative office would act as liaison between NACF and its U.S. customers and would engage Votingforthisaction:ChairmanBernanke,ViceChairmanKohn, in other representational activities, including soliciting andGovernorsWarsh,Duke,andTarullo. purchasersofloans,partiestocontractwithNACFforthe servicing of NACF loans, and other banking business Robert deV. Frierson (except for deposits or deposit-type liabilities); and con- Deputy Secretary of the Board ducting research.4 The proposed office would also solicit loans in principal amounts of $250,000 or more and, in ORDER ISSUED UNDER connection with those loans, would assemble credit information,makepropertyinspectionsandappraisalsofprop- INTERNATIONAL BANKING ACT erty,securetitleinformation,prepareloanapplications,and makerecommendations. National Agricultural Cooperative In acting on an application under the IBAand RegulationKbyaforeignbanktoestablisharepresentativeoffice, Federation the Board must consider whether (1) the foreign bank has Seoul, Republic of Korea furnishedtotheBoardtheinformationitneedstoassessthe application adequately; (2) the foreign bank and any for- Order Approving Establishment of a eignbankparentengagedirectlyinthebusinessofbanking Representative Office outside of the United States; and (3) the foreign bank and any foreign bank parent are subject to comprehensive NationalAgricultural Cooperative Federation (‘‘NACF’’), supervisiononaconsolidatedbasisbytheirhome-country Seoul, Korea, a foreign bank within the meaning of the International Banking Act (‘‘IBA’’), has applied under 2. AssetandrankingdataareasofMarch31,2010. section10(a)oftheIBA1toestablisharepresentativeoffice 3. Through a Korean nonbanking subsidiary, NACF has a U.S. subsidiary that engages primarily in agricultural market research, in New York, New York. The Foreign Bank Supervision marketingKoreanagriculturalproducts,andothernonbankingactivi- EnhancementAct of 1991, which amended the IBA, proties.NACFhassimilarestablishmentsinTokyoandBeijing. vides that a foreign bank must obtain the approval of the 4. A representative office may engage in representational and Board to establish a representative office in the United administrativefunctionsinconnectionwiththebankingactivitiesof States. the foreign bank, including soliciting new business for the foreign bank, conducting research, acting as a liaison between the foreign Noticeoftheapplication,affordinginterestedpersonsan bank’s head office and customers in the United States, performing opportunity to comment, has been published in a newspa- preliminary and servicing steps in connection with lending, and performing back-office functions. A representative office may not contractforanydepositordeposit-likeliability,lendmoney,orengage 1. 12U.S.C.§3107(a). inanyotherbankingactivity(12CFR211.24(d)(1)).

B28 Federal Reserve BulletinhSeptember 2010 supervisor.5TheBoardalsoconsidersadditionalstandards supervision on a consolidated basis by the FSS.10 The set forth in the IBA and Regulation K.6 The Board will banking unit of NACF is supervised on substantially the consider that the supervision standard has been met if it sametermsandconditionsasthoseotherfinancialinstitudetermines that the applicant bank is subject to a supervi- tions, with additional oversight of the banking unit and of soryframeworkthatisconsistentwiththeactivitiesofthe NACFasawholebyothergovernmentalbodiesrelatedto proposed representative office, taking into account the NACF’s status as a specialized agricultural cooperative.11 nature of such activities.This is a lesser standard than the The FSS does not have supervisory responsibility for comprehensive, consolidated supervision standard appli- NACFasawhole.However,theFSShasauthoritytolimit cabletoproposalstoestablishbranchoragencyofficesofa transactions by NACF’s banking unit with other NACF foreign bank. The Board considers the lesser standard businessunitsandtoobtaininformationfromthoseunits.12 sufficientforapprovalofrepresentativeofficeapplications Basedonallthefactsofrecord,ithasbeendetermined because representative offices may not engage in banking that NACF is subject to a supervisory framework that is activities.7This application has been considered under the consistentwiththeactivitiesoftheproposedrepresentative lesserstandard. office,takingintoaccountthenatureofsuchactivitiesand Asnotedabove,NACFengagesdirectlyinthebusiness thesupervisionofNACF’sbankingunitbyFSS. ofbankingoutsidetheUnitedStates.8NACFhasprovided Theadditionalstandardssetforthinsection7oftheIBA the Board with the information necessary to assess the andRegulationKalsohavebeentakenintoaccount.13The application through submissions that address the relevant FSShasnoobjectiontotheestablishmentoftheproposed issues. At the proposed representative office, NACF may representativeoffice. engage only in activities permissible for a representative Withrespecttothefinancialandmanagerialresourcesof office,whichincludetheproposedcustomer-liaison,solic- NACF,takingintoconsiderationNACF’srecordofoperaiting,marketing,andadministrativeactivitiesnotedabove.9 tions in its home country, its overall financial resources, Withrespecttosupervisionbyhome-countryauthorities, anditsstandingwithitshome-countrysupervisor,financial the Board has considered that the unincorporated banking andmanagerialfactorsareconsistentwithapprovalofthe unitofNACFissupervisedbyKorea’sFinancialSupervi- proposed representative office. NACF appears to have the sory Service (‘‘FSS’’). The Board previously has deter- experienceandcapacitytosupporttheproposedrepresenminedthat,inconnectionwithapplicationsinvolvingother tativeofficeandhasestablishedcontrolsandproceduresfor Koreanbanks,thosebanksweresubjecttocomprehensive the proposed representative office to ensure compliance with U.S. law, as well as controls and procedures for its worldwideoperationsgenerally. Korea became a member of the Financial Action Task 5. 12 U.S.C. §3107(a)(2); 12 CFR 211.24(d)(2). In assessing the Force(‘‘FATF’’)onOctober14,2009,andsubscribestothe supervision standard, the Board considers, among other indicia of FATF’s recommendations regarding measures to combat comprehensive, consolidated supervision, the extent to which the money laundering and international terrorism. In accorhome-country supervisors (i) ensure that the bank has adequate proceduresformonitoringandcontrollingitsactivitiesworldwide;(ii) dance with those recommendations, Korea has enacted obtain information on the condition of the bank and its subsidiaries laws and created legislative and regulatory standards to and offices through regular examination reports, audit reports, or determoneylaundering,terroristfinancing,andotherillicit otherwise; (iii) obtain information on the dealings with and the relationship between the bank and its affiliates, both foreign and domestic;(iv)receivefromthebankfinancialreportsthatareconsoli- 10. The FSS is the executive body of the Financial Services dated on a worldwide basis or comparable information that permits Commission (‘‘FSC,’’formerly the Financial Supervisory Commisanalysisofthebank’sfinancialconditiononaworldwideconsolidated sion),whichisresponsibleforpromulgatingsupervisoryregulations, basis;and(v)evaluateprudentialstandards,suchascapitaladequacy makingpolicydecisionsaboutsupervision,andimposingsanctionson and risk asset exposure, on a worldwide basis. No single factor is Koreanfinancialinstitutions.TheFSSisresponsibleforthesuperviessential,andotherelementsmayinformtheBoard’sdetermination. sionofKoreanfinancialinstitutions,includingoverseasoffices,pursu- 6. See 12 U.S.C. §3105(d)(3)–(4); 12 CFR 211.24(c)(2). These ant to regulations promulgated by the FSC. See Shinhan Financial standardsinclude(1)whetherthebank’shome-countrysupervisorhas Group Co., Ltd., 90 Federal Reserve Bulletin 85 (2004); Woori consentedtotheestablishmentoftheoffice;thefinancialandmanage- FinanceHoldingsCo.,Ltd.,89FederalReserveBulletin436(2003). rial resources of the bank; (2) whether the bank has procedures to 11. NACF is supervised by the Ministry for Food, Agriculture, combatmoneylaundering,whetherthereisalegalregimeinplacein ForestryandFisheries,whichinspectseachNACFunit,otherthanthe thehomecountrytoaddressmoneylaundering,andwhetherthehome bankingunit,overthecourseofathree-yearschedule.Additionally, country is participating in multilateral efforts to combat money NACFissubjecttoperiodicon-siteexaminationofallitsbusinesses laundering; (3) whether the appropriate supervisors in the home by the Korean NationalAssembly’s Committee ofAgriculture, Forcountry may share information on the bank’s operations with the estry and Ocean in connection with its oversight of the Korean Board; and (4) whether the bank and its U.S. affiliates are in agriculturalindustry. compliancewithU.S.law;theneedsofthecommunity;andthebank’s 12. The Korean national legislature is considering a proposal to record of operation. See also Standard Chartered Bank, 95 Federal establishNACF’sbankingunitasaseparatelegalentitythatwould ReserveBulletinB98(2009). remainasubsidiaryofNACF(‘‘separationplan’’).Underthesepara- 7. 12CFR211.24(d)(2). tionplan,NACF’sbankingsubsidiarywouldbesubject,asaseparate 8. Althoughnotincorporatedasabank,NACFmeetsthedefinition legalentity,toconsolidatedsupervisionbytheFSSonsubstantially of ‘‘foreign bank’’ in the IBA. Foreign bank is defined as ‘‘any thesametermsandconditionsasotherbanksinKoreathattheBoard company organized under the laws of a foreign country ... which has determined to be subject to comprehensive supervision. NACF engagesinthebusinessofbanking...’’(12U.S.C.§3101(7)). expectstheseparationplantobeimplementedbytheendof2011. 9. Seesupranote4. 13. See12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2).

Legal Developments: Second Quarter, 2010 B29 activities.MoneylaunderingisacriminaloffenseinKorea, By order, approved pursuant to authority delegated by and financial services businesses are required to establish theBoard,effectiveJune29,2010. internalpolicies,procedures,andsystemsforthedetection and prevention of money laundering throughout their Robert deV. Frierson worldwide operations. NACF has policies and procedures Deputy Secretary of the Board to comply with those laws and regulations, and these policies and procedures are monitored by governmental FINAL ENFORCEMENT DECISION entitiesresponsibleforanti-money-launderingcompliance. With respect to access to information about NACF’s ISSUED BY THE BOARD operations, the restrictions on disclosure in relevant jurisdictionsinwhichNACFoperateshavebeenreviewedand In the Matter of relevant government authorities have been communicated with regarding access to information. NACF has committedtomakeavailabletotheBoardsuchinformationonthe Antonio Garcia-Adanez, operationsofNACFandanyofitsaffiliatesthattheBoard A Former Institution-Affıliated Party of deemsnecessarytodetermineandenforcecompliancewith the IBA, the Bank Holding Company Act of 1956, as Standard Chartered Bank International amended, and other applicable federal law. To the extent that providing such information to the Board may be (Americas) Limited, prohibited by law or otherwise, NACF has committed to An Edge corporation subsidiary of cooperatewiththeBoardtoobtainanynecessaryconsents orwaiversthatmightberequiredfromthirdpartiesforthe disclosure of such information. In addition, subject to Standard Chartered Bank, certain conditions, the FSS may share information on London, United Kingdom NACF’s operations with other supervisors, including the Board. In light of these commitments and other facts of Docket No. 10-057-E-I record,andsubjecttotheconditiondescribedbelow,ithas been determined that NACF has provided adequate assur- Order of Prohibition Issued upon Consent ancesofaccesstoanynecessaryinformationthattheBoard Pursuant to Section 8(e) of the Federal mayrequest. Deposit Insurance Act, as Amended Based on the foregoing and all the facts of record, NACF’s application to establish the proposed representative office is hereby approved by the Director of the WHEREAS, pursuant to sections 8(b)(3), 8(e) and 8(i)(3) DivisionofBankingSupervisionandRegulation,withthe of the Federal Deposit Insurance Act, as amended (the concurrence of the General Counsel, pursuant to authority ‘‘FDIAct’’),12U.S.C.§§1818(e)and(i)(3),theBoardof delegatedbytheBoard.14Shouldanyrestrictionsonaccess Governors of the Federal Reserve System (the ‘‘Board of toinformationontheoperationsoractivitiesofNACFand Governors’’)issuesthisOrderofProhibition(the‘‘Order’’) itsaffiliatessubsequentlyinterferewiththeBoard’sability upontheconsentofAntonioGarcia-Adanez(‘‘Garcia’’),a toobtaininformationtodetermineandenforcecompliance formeremployeeandinstitution-affiliatedparty,asdefined by NACF or its affiliates with applicable federal statutes, in section 3(u) of the FDI Act, 12 U.S.C. §1813(u), of theBoardmayrequireterminationofanyofNACF’sdirect Standard Chartered Bank International (Americas) Ltd. orindirectactivitiesintheUnitedStates.Approvalofthis (‘‘SCBI’’), at all relevant times an Edge corporation orgaapplication also is specifically conditioned on compliance nized under Section 25A of the Federal Reserve Act byNACFwiththeconditionsimposedinthisorderandthe (12U.S.C.§611etseq.); commitments made to the Board in connection with this WHEREAS,Garcia,whileemployedasaprivatebankapplication.15 For purposes of this action, these commit- ingrelationshipmanageratSCBIinMiami,Florida,allegmentsandconditionsaredeemedtobeconditionsimposed edly engaged in violations of law, unsafe and unsound in writing by the Board in connection with this decision bankingpractices,andbreachesoffiduciarydutythathave and, as such, may be enforced in proceedings under caused substantial losses to SCBI, including, inter alia, applicablelaw. manipulating the account statements of SCBI clients to misrepresentclientinvestments,obligationsandauthorizations. WHEREAS,byaffixinghissignaturehereunder,Garcia 14. 12CFR265.7(d)(12). 15. The Board’s authority to approve the establishment of the hasconsentedtotheissuanceofthisOrderbytheBoardof proposedrepresentativeofficeparallelsthecontinuingauthorityofthe Governors and has agreed to comply with each and every stateofNewYorktolicenseofficesofaforeignbank.TheBoard’s provision of this Order, and has waived any and all rights approvalofthisapplicationdoesnotsupplanttheauthorityofthestate he might have pursuant to 12 U.S.C. §1818, 12 CFR Part ofNewYorkoritsagent,theNewYorkStateBankingDepartment,to 263,orotherwise(a)totheissuanceofanoticeofintentto licensetheproposedofficeofNACFinaccordancewithanytermsor conditionsthatitmayimpose. prohibitonanymatterimpliedorsetforthinthisOrder;(b)

B30 Federal Reserve BulletinhSeptember 2010 toahearingforthepurposeoftakingevidencewithrespect 2. All communications regarding this Order shall be adtoanymatterimpliedorsetforthinthisOrder;(c)toobtain dressedto: judicial review of this Order or any provision hereof; and a. RichardM.Ashton,Esq. DeputyGeneralCounsel (d) to challenge or contest in any manner the basis, BoardofGovernorsoftheFederalReserveSystem issuance,terms,validity,effectiveness,orenforceabilityof 20th&CStreetsNW thisOrderoranyprovisionhereof. Washington,DC20551 NOW THEREFORE, prior to the taking of any testi- b. Mr.AntonioGarcia-Adanez mony or adjudication of or finding on any issue of fact or 3162CommodorePlaza law implied or set forth herein, and without this Order Miami,Florida33133 Withacopyto: constitutinganadmissionbyGarciaofanyallegationmade MartinB.Goldberg,Esq. or implied by the Board of Governors in connection with Lash&GoldbergLLP thisproceeding,andsolelyforthepurposeofsettlementof 100SoutheastSecondStreet thisproceedingwithoutprotractedorextendedhearingsor Suite1200 testimony: Miami,Florida33131 IT IS HEREBY ORDERED, pursuant to sec- 3. Any violation of this Order shall separately subject Garciatoappropriatecivilorcriminalpenalties,orboth, tions 8(b)(3), 8(e) and (i)(3) of the FDI Act, 12 U.S.C. under sections 8(i) and (j) of the FDI Act, 12 U.S.C §§1818(b)(3),(e)and(i)(3),that: §§1818(i)and(j). 1. Garcia, without the prior written approval of the Board 4. The provisions of this Order shall not bar, estop, or of Governors and, where necessary pursuant to secotherwisepreventtheBoardofGovernors,oranyother tion8(e)(7)(B)oftheFDIAct,12U.S.C.§1818(e)(7)(B), federal or state agency or department, from taking any another federal financial institutions regulatory agency, other action affecting Garcia; provided, however, that isherebyandhenceforthprohibitedfrom: theBoardofGovernorsshallnottakeanyfurtheraction a. participating in any manner in the conduct of the against Garcia relating to the matters addressed by this affairs of any institution or agency specified in OrderbaseduponfactspresentlyknownbytheBoardof section 8(e)(7)(A) of the FDI Act, 12 U.S.C. Governors. §1818(e)(7)(A), including, but not limited to, any 5. EachprovisionofthisOrdershallremainfullyeffective insureddepositoryinstitution,anyholdingcompany andenforceableuntilexpresslystayed,modified,termiof an insured depository institution, any subsidiary nated, or suspended in writing by the Board of Goverof such holding company, any foreign bank, or any nors. Edge corporation organized under Section 25A of theFederalReserveAct(12U.S.C.§611etseq.); By order of the Board of Governors of the Federal b. soliciting,procuring,transferring,attemptingtotrans- ReserveSystem,effectivethis13thdayofMay,2010. fer,votingorattemptingtovoteanyproxy,consent, orauthorizationwithrespecttoanyvotingrightsin anyinstitutiondescribedinsection8(e)(7)(A)ofthe BOARD OF GOVERNORS OFTHE FDIAct,12U.S.C.§1818(e)(7)(A); FEDERALRESERVE SYSTEM c. violatinganyvotingagreementpreviouslyapproved byanyfederalbankingagency;or Jennifer J. Johnson d. voting for a director, or serving or acting as an institution-affiliatedparty,asdefinedinsection3(u) Secretary of the Board of the FDI Act, 12 U.S.C. §1813(u), such as an (signed) officer, director or employee, in any institution Antonio Garcia-Adanez describedinsection8(e)(7)(A)oftheFDIAct.

B31 November 2010 Legal Developments: Third Quarter, 2010 ORDERS ISSUED UNDER BANK the foreign bank or company were a bank holding com- HOLDING COMPANY ACT pany.3Asaresult,CICandHuijinaresubjecttotheBHC Act as if they were bank holding companies4 and are requiredtoobtainpriorBoardapprovaltomakeadirector Orders Issued under Section 3 of indirect investment in 5 percent or more of the voting the Bank Holding Company Act sharesofabankholdingcompanyorU.S.bank.5 In December 2007, CIC, primarily through a wholly owned nonbank subsidiary, invested in units consisting of China Investment Corporation trust preferred securities of Morgan Stanley and a stock purchase agreement to acquire voting common stock of Beijing, People’s Republic of China Morgan Stanley byAugust 2010, subject to certain conditions.6 In addition, CIC currently holds, through other Order Approving Acquisition of an Interest subsidiaries, 2.49 percent of the voting common stock of in a Bank Holding Company Morgan Stanley. On consummation of the proposal, CIC would own and control up to 10 percent of Morgan China Investment Corporation (‘‘CIC’’), Beijing, People’s Stanley’s voting common stock. At the time of its initial Republic of China, has requested the Board’s approval investment in Morgan Stanley, CIC did not yet own the undersection3oftheBankHoldingCompanyActof1956, Chinese banks with U.S. branches and, therefore, was not as amended (‘‘BHC Act’’),1 to acquire indirectly up to subjecttotheBHCAct.Inaddition,MorganStanley,which 10 percent of the voting shares of Morgan Stanley, became a bank holding company in September 2008, was NewYork,NewYork. notabankholdingcompanyatthetimeitenteredintothe Notice of the proposal, affording interested persons an stockpurchaseagreementwithCIC.Therefore,thetransacopportunity to submit comments, has been published tion in 2007 between CIC and Morgan Stanley did not (75FederalRegister45628(August3,2010)).Thetimefor requirerevieworapprovalbytheBoard.BecauseMorgan filingcommentshasexpired,andtheBoardhasconsidered Stanley is now a bank holding company and CIC is now the proposal and all comments received in light of the subject to the BHC Act as if it were a bank holding factorssetforthinsection3oftheBHCAct. companyasaresultofitsacquisitionofHuijin,CICmust CICisasovereignwealthfundorganizedbytheChinese receive prior Board approval under section 3(a)(3) of the government for the purpose of investing its foreign exchange reserves. CIC controls Central SAFE Investments Limited(‘‘Huijin’’),alsoofBeijing,aChinesegovernment- 3. 12U.S.C.§3106. ownedinvestmentcompanyorganizedtoinvestinChinese 4. TheBoardpreviouslyprovidedcertainexemptionstoCICand financial institutions. Huijin owns controlling interests in Huijin under section 4(c)(9) of the BHCAct, which authorizes the three Chinese banks that operate banking offices in the Boardtogranttoforeigncompaniesexemptionsfromthenonbanking United States: Bank of China, China Construction Bank, restrictions of the BHC Act where the exemptions would not be substantiallyatvariancewiththepurposesoftheactandwouldbein and Industrial and Commercial Bank of China, all also of the public interest. See 12 U.S.C. §1843(c)(9). The exemptions Beijing.2UndertheInternationalBankingAct,anyforeign providedtoCICandHuijindonotextendtoBankofChina,China bankthatoperatesabranch,agency,orcommerciallending ConstructionBank,IndustrialandCommercialBankofChina,orany company in the United States, and any company that other Chinese banking subsidiary of CIC or Huijin that operates a branchoragencyintheUnitedStates.SeeBoardletterdatedAugust5, controls the foreign bank, is subject to the BHCAct as if 2008,toH.RodginCohen. 5. 12U.S.C.§1842(a)(3). 6. Theagreementprovidedthatthetrustpreferredsecuritieswould 1. 12U.S.C.§1842. eitherberemarketedinordertoraisethefundsnecessaryforCICto 2. Bank of China operates two grandfathered insured federal purchaseMorganStanley’svotingcommonstockordirectlyredeemed branches in New York City and a limited federal branch in Los inexchangeforcommonstockofMorganStanley.Thesecuritieswere Angeles.BankofChina,inturn,controlsawhollyownedsubsidiary converted directly into voting common stock of Morgan Stanley on bank, Nanyang Commercial Bank, Limited, Hong Kong SAR, Peo- August 17, 2010, and the portion of such shares that would have ple’s Republic of China, that operates a federal branch in San causedCICtoownmorethan4.99percentofMorganStanley’svoting Francisco. China Construction Bank operates a state branch and a shares were transferred into a custody account. The shares in the representative office, and Industrial and Commercial Bank of China custodyaccountwillbereleasedonBoardapprovalofthisapplication operatesastatebranch,allinNewYorkCity. andtheexpirationofthe15-daywaitingperiod.

B32 Federal Reserve BulletinhNovember 2010 BHCActtoownorcontrol5percentormoreofthevoting acquirecontrolof,orhavetheabilitytoexerciseacontrolsharesofMorganStanley.7 linginfluenceover,MorganStanleyoranyofitssubsidiar- MorganStanley,withtotalconsolidatedassetsofapproxi- ies through the conversion of the trust preferred securities mately$626billion,engagesincommercialandinvestment heldbyCICinMorganStanleyintovotingcommonstock banking,securitiesunderwritinganddealing,assetmanage- of Morgan Stanley. The Board notes that the BHC Act ment,trading,andotheractivitiesbothintheUnitedStates requires CIC to receive the Board’s approval before it and abroad. Morgan Stanley controls Morgan Stanley directlyorindirectlyacquiresadditionalsharesofMorgan Bank, National Association (‘‘Morgan Bank’’), Salt Lake Stanleyorattemptstoexerciseacontrollinginfluenceover City, Utah, which operates one branch in the state, with MorganStanleyoranyofitssubsidiaries.10 totalconsolidatedassetsofapproximately$66.2billionand deposits of approximately $54.1 billion. In addition, Mor- COMPETITIVE AND CONVENIENCE AND NEEDS gan Stanley controls Morgan Stanley Private Bank, Na- CONSIDERATIONS tional Association (‘‘MSPB’’), Purchase, New York, with total consolidated assets of $6.6 billion and deposits of The Board has considered the competitive effects of the $5.8billion.8 proposalinlightofallthefactsoftherecord.Section3of the BHC Act prohibits the Board from approving a pro- NONCONTROLLING INVESTMENT posal that would result in a monopoly or would be in furtherance of any attempt to monopolize the business of CIC has stated that it does not propose to control or bankinginanyrelevantbankingmarket.TheBHCActalso exercise a controlling influence over Morgan Stanley and prohibits the Board from approving a proposal that would that its indirect investment will be a passive investment.9 substantially lessen competition in any relevant banking CIC has agreed to abide by certain commitments substan- market, unless the anticompetitive effects of the proposal tially similar to those on which the Board has previously clearly are outweighed in the public interest by the probreliedindeterminingthataninvestingcompanywouldnot ableeffectoftheproposalinmeetingtheconvenienceand be able to exercise a controlling influence over another needsofthecommunitytobeserved.11 bank holding company or bank for purposes of the BHC Several of the Chinese banks indirectly owned by CIC Act (‘‘Passivity Commitments’’). For example, CIC has maintain branches that compete directly with a subsidiary committednottoexerciseorattempttoexerciseacontrol- bank of Morgan Stanley in the Metro New York banking linginfluenceoverthemanagementorpoliciesofMorgan market.12 The Board has reviewed carefully the competi- Stanley;nottoseekoracceptmorethanonerepresentative tiveeffectsoftheproposalintheMetroNewYorkbanking on the board of directors of Morgan Stanley; and not to market in light of all the facts of record. In particular, the have any other director, officer, employee, or agent inter- Board has considered the number of competitors that locks with Morgan Stanley. The Passivity Commitments remain in the banking market, the relative shares of total also include certain restrictions on the business relation- deposits in depository institutions in the market (‘‘market shipsbetweenCICandMorganStanley. deposits’’) controlled by relevant institutions,13 and the Based on these considerations and all the other facts of concentration level of market deposits and the increase in record, the Board has concluded that CIC would not thelevelasmeasuredbytheHerfindahl–HirschmanIndex 7. 12U.S.C.§1842(a)(3). 10. 12U.S.C.§1842.See,e.g.,EmigrantBancorp,Inc.,82Federal 8. Inaddition,MorganStanleyholdsanoncontrolling9.9percent ReserveBulletin555(1996). interest in a bank holding company, Chinatrust Financial Holding 11. 12U.S.C.§1842(c)(1). Company,Ltd.(‘‘Chinatrust’’),Taipei,Taiwan,andanationalbank, 12. TheMetroNewYorkbankingmarketincludes:Bronx,Dutch- HeraldNationalBank(‘‘Herald’’),NewYork,NewYork.SeeMorgan ess,Kings,Nassau,NewYork,Orange,Putnam,Queens,Richmond, Stanley,95FederalReserveBulletinB86(2009),andMorganStanley, Rockland, Suffolk, Sullivan, Ulster, and Westchester counties in 95FederalReserveBulletinB93(2009). NewYork; Bergen, Essex, Hudson, Hunterdon, Mercer, Middlesex, 9. Althoughtheacquisitionoflessthanacontrollinginterestina Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, and bankorbankholdingcompanyisnotanormalacquisitionforabank Warren counties and the northern portions of Mercer County in holdingcompany,therequirementinsection3(a)(3)oftheBHCAct NewJersey;MonroeandPikecountiesinPennsylvania;andFairfield thattheBoard’sapprovalbeobtainedbeforeabankholdingcompany CountyandportionsofLitchfieldandNewHavencountiesinConacquiresmorethan5percentofthevotingsharesofabanksuggests necticut. thatCongresscontemplatedtheacquisitionbybankholdingcompa- 13. Call report, deposit, and market share data are based on data niesofbetween5percentand25percentofthevotingsharesofbanks. reportedbyinsureddepositoryinstitutionsinthesummaryofdeposits See12U.S.C.§1842(a)(3).Onthisbasis,theBoardpreviouslyhas dataasofJune30,2009.Thedataarealsobasedoncalculationsin approved the acquisition by a bank holding company of less than a whichthedepositsofthriftinstitutionsareincludedat50percent.The controlling interest in a bank or bank holding company. See, e.g., Boardpreviouslyhasindicatedthatthriftinstitutionshavebecome,or MitsubishiUFGFinancialGroup,Inc.,95FederalReserveBulletin havethepotentialtobecome,significantcompetitorsofcommercial B34(2009)(acquisitionofupto24.9percentofthevotingsharesofa banks.See,e.g.,MidwestFinancialGroup,Inc.,75FederalReserve bank holding company); Brookline Bancorp, MHC, 86 Federal Bulletin386(1989);NationalCityCorporation,70FederalReserve Reserve Bulletin 52 (2000) (acquisition of up to 9.9 percent of the Bulletin 743 (1984). Thus, the Board regularly has included thrift votingsharesofabankholdingcompany);MansuraBancshares,Inc., institution deposits in the market share calculation on a 50 percent 79FederalReserveBulletin37(1993)(acquisitionof9.7percentof weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve thevotingsharesofabankholdingcompany). Bulletin52(1991).

Legal Developments: Third Quarter, 2010 B33 (‘‘HHI’’) under the Department of Justice Bank Merger FINANCIAL, MANAGERIAL, AND OTHER CompetitiveReviewguidelines(‘‘DOJBankMergerGuide- SUPERVISORY CONSIDERATIONS lines’’).14 Consummation of the acquisition is consistent with Section3oftheBHCActrequirestheBoardtoconsiderthe BoardprecedentandwithinthethresholdsintheDOJBank financialandmanagerialresourcesandfutureprospectsof MergerGuidelinesintheMetroNewYorkbankingmarket. the companies and depository institutions involved in the Onconsummation,thebankingmarketwouldremainmod- proposal,andcertainothersupervisoryfactors.TheBoard erately concentrated, and numerous competitors would has carefully considered these factors in light of all the remaininthemarket.15 facts of record, including confidential supervisory and The DOJ also has reviewed the matter and has advised examinationinformationregardingMorganStanleyandits the Board that it does not believe that CIC’s ownership depository institution subsidiaries, publicly reported and interest in Morgan Stanley is likely to have a significant other financial information, and information provided by adverse effect on competition in any relevant banking CIC.Withrespecttothefinancialandmanagerialresources market. The appropriate banking agencies have been and future prospects of the companies and depository affordedanopportunitytocommentandhavenotobjected institutions involved in the proposal, Morgan Stanley’s totheapplication. subsidiary banks currently are well capitalized and would Basedonallthefactsofrecord,theBoardhasconcluded remain so on consummation of this proposal. In addition, that consummation of the proposal would not have a the Board has considered the financial, managerial, and significantly adverse effect on competition or on the con- future prospects of CIC in light of the fact that CIC is a centration of banking resources in any relevant banking government-owned investment company organized to inmarket and that competitive factors are consistent with vesttheforeignexchangereservesofthegovernment. approvaloftheproposal. Basedonallthefactsofrecord,theBoardhasconcluded In addition, considerations relating to the convenience thatconsiderationsrelatingtothefinancialandmanagerial and needs of the communities to be served, including the resourcesandfutureprospectsoftheorganizationsinvolved records of performance of the institutions involved under intheproposalareconsistentwithapproval,asaretheother the Community ReinvestmentAct (‘‘CRA’’),16 are consis- supervisoryfactors.19 tent with approval of the application.17 Morgan Bank received an ‘‘outstanding’’ rating at its most recent CRA SUPERVISION OR REGULATION ON A performance evaluation by the FDIC, as of January 30, CONSOLIDATED BASIS 2006.18 Inevaluatingthisapplication,theBoardconsideredwhether CICissubjecttocomprehensivesupervisionorregulation 14. UndertheDOJBankMergerGuidelines,amarketisconsidered on a consolidated basis by appropriate authorities in its unconcentrated if the post-merger HHI is under 1000, moderately homecountry.Thesystemofcomprehensivesupervisionor concentratedifthepost-mergerHHIisbetween1000and1800,and highlyconcentratedifthepost-mergerHHIexceeds1800.TheDepart- regulation may vary, depending on the nature of the mentofJustice(‘‘DOJ’’)hasinformedtheBoardthatabankmergeror acquiring company and the proposed investment. The acquisitiongenerallywouldnotbechallenged(intheabsenceofother Board believes that CIC may be found to be subject to an factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI appropriatetypeandlevelofcomprehensiveregulationon is at least 1800 and the merger increases the HHI more than 200 aconsolidatedbasis,givenitsuniquenatureandstructure. points.AlthoughtheDOJandtheFederalTradeCommissionrecently issuedrevisedHorizontalMergerGuidelines,theDOJhasconfirmed CICisanentitythatiswhollyownedbythegovernmentof that the DOJ Bank Merger Guidelines, which were issued in 1995, China,wasestablishedtocarryoutthefunctionofinvestwerenotchanged.PressRelease,DepartmentofJustice(August19, ingforeignexchangereserves,andismanagedbyofficials 2010), available at www.justice.gov/opa/pr/2010/August/10-atwhoareselectedbyandreportdirectlytotheStateCouncil 938.html. 15. The HHI would remain unchanged at 1315 in the Metro of the People’s Republic of China (‘‘State Council’’), NewYorkbankingmarket,whichhas272insureddepositoryinstitu- whichisthehighestexecutivebodyintheChinesegoverntioncompetitors.Thecombineddepositsoftherelevantinstitutionsin theMetroNewYorkbankingmarketrepresentlessthan1percentof marketdeposits. 19. Section3oftheBHCActalsorequirestheBoardtodetermine 16. 12 U.S.C. §2901 et seq.; 12 U.S.C. §2903; 12 U.S.C. thatanapplicanthasprovidedadequateassurancesthatitwillmake §1842(c)(2). availabletotheBoardsuchinformationonitsoperationsandactivities 17. BankofChinahastwograndfatheredfederalbrancheswhose andthoseofitsaffiliatesthattheBoarddeemsappropriatetodeterdeposits are insured by the Federal Deposit Insurance Corporation mine and enforce compliance with the BHC Act (12 U.S.C. (‘‘FDIC’’).Thebranchesreceiveda‘‘satisfactory’’ratingattheirmost §1842(c)(3)(A)).CIChascommittedthat,totheextentnotprohibited recent CRAperformance evaluation by the FDIC, as of August 18, byapplicablelaw,itwillmakeavailabletotheBoardsuchinformation 2008. on the operations of its affiliates that the Board deems necessary to 18. MorganBankbecameanationalbankonSeptember23,2008, determineandenforcecompliancewiththeBHCAct,theInternational on its conversion from a Utah-chartered industrial bank. The 2006 BankingAct,andotherapplicablefederallaws.CICalsohascommitevaluation was conducted before this conversion. MSPB became a tedtocooperatewiththeBoardtoobtainanywaiversorexemptions national bank on July 1, 2010, on its conversion from a limited- that may be necessary to enable it or its affiliates to make such purposesavingsassociationnotsubjecttotheCRA.MSPBhasnotyet informationavailabletotheBoard.Basedonallfactsofrecord,the beenevaluatedundertheCRAbytheOfficeoftheComptrollerofthe Board has concluded that CIC has provided adequate assurances of Currency. accesstoanyappropriateinformationtheBoardmayrequest.

B34 Federal Reserve BulletinhNovember 2010 ment. The chairman and vice chairman of CIC are ap- Theproposalmaynotbeconsummatedbeforethe15th pointed directly by the State Council and all other officer calendar day after the effective date of this order, or later and director positions must be approved by the State than three months after the effective date of this order, Council.EachofthefollowingChinesegovernmentagen- unlesssuchperiodisextendedforgoodcausebytheBoard cies is entitled to a seat on CIC’s board of directors: the ortheFederalReserveBankofNewYork,actingpursuant MinistryofFinance,thePeople’sBankofChina(‘‘PBOC’’), todelegatedauthority. the National Development and Reform Commission, the ByorderoftheBoardofGovernors,August31,2010. Ministry of Commerce, and the State Administration of ForeignExchange.Inaddition,theMinistryofFinanceof Voting for this action: Chairman Bernanke and Governors Kohn, Warsh,Duke,andTarullo. the People’s Republic of China supervises CIC’s finances and accounting, and China’s National Audit Office con- Robert deV. Frierson ductsperiodicexternalauditsofCIC.Thisoversightbythe Deputy Secretary of the Board StateCouncilandbyanumberofagenciesoftheChinese government, including the Ministry of Finance and the PBOC, allows for review of the worldwide investment Premier Commerce Bancorp, Inc. strategy and portfolio of CIC. On this basis, appropriate Palos Hills, Illinois authoritiesinChinawouldappeartohavefullaccesstoand oversightofCICanditsactivities. Order Approving the Formation of a Bank In considering this issue, the Board has taken into Holding Company account that the proposed investment in Morgan Stanley would be a minority, noncontrolling interest. CIC has PremierCommerceBancorp,Inc.(‘‘PremierCommerce’’) representedthatithasnointentiontocontrolorexercisea has requested the Board’s approval under section 3 of the controllinginterestoverMorganStanleyand,asnoted,has Bank Holding Company Act (‘‘BHC Act’’)1 to become a providedtheBoardwithPassivityCommitmentsthathelp bankholdingcompanyandtoacquireallthevotingshares ensure that CIC cannot exercise control or a controlling of G.R. Bancorp, Ltd. (‘‘GRB’’), and thereby indirectly influence. In addition, business relationships between CIC acquireGRB’ssubsidiarybank,TheFirstNationalBankof and Morgan Stanley are limited by the Passivity Commit- GrandRidge(‘‘Bank’’),2bothofGrandRidge,Illinois. ments. Notice of the proposal, affording interested persons an Based on all the facts of record, the Board has deteropportunity to comment, has been published (75 Federal minedthatCICissubjecttocomprehensivesupervisionon Register8944-45(2010)).Thetimeforfilingcommentshas a consolidated basis by its appropriate home-country expired, and the Board has considered the application and authoritiesforpurposesofthisapplication.20 all comments received in light of the factors set forth in section3oftheBHCAct. CONCLUSION Premier Commerce is a newly organized corporation formedforthepurposeofacquiringcontrolofGRB.Bank, Based on the foregoing and all the facts of record, the with total assets of $35.2 million, is the 545th largest Board has approved CIC’s application to acquire up to insureddepositoryinstitutioninIllinois,controllingdepos- 10percentofthevotingsharesofMorganStanleypursuant its of approximately $28.4 million, which represent less to section 3(a)(3) of the BHC Act.21 In reaching its than 1 percent of the total amount of deposits of insured conclusion,theBoardhasconsideredallthefactsofrecord depositoryinstitutionsinthestate.3 in light of the factors that it is required to consider under theBHCActandotherapplicablestatutes. The Board’s approval is specifically conditioned on COMPETITIVE CONSIDERATIONS compliance by CIC with the conditions imposed in this order and the commitments made to the Board in connec- Section 3 of the BHC Act prohibits the Board from tion with the application. For purposes of this action, the approving a proposal that would result in a monopoly or conditions and commitments are deemed to be conditions that would be in furtherance of an attempt to monopolize imposed in writing by the Board in connection with its the business of banking in any relevant banking market. findingsanddecisionhereinand,assuch,maybeenforced The BHC Act also prohibits the Board from approving a inproceedingsunderapplicablelaw. proposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket,unlesstheanticompetitiveeffects oftheproposalareclearlyoutweighedinthepublicinterest 20. Neither Huijin nor any of the three Chinese banks with U.S. banking operations that are controlled by Huijin will be a direct or indirectinvestorinMorganStanley.InevaluatingaproposalbyHuijin oranyoftheChinesebanksownedbyHuijintoacquireaninsured 1. 12U.S.C.§1842. depositoryinstitutionintheUnitedStates,theBoardwouldevaluate 2. GRBowns83.3percentofthevotingsharesofBank. whether that entity is subject to consolidated comprehensive home- 3. Asset and deposit data are as of December 31, 2009. Ranking countrysupervision. dataareasofJune30,2009,andreflectmergeractivitythroughthat 21. TheBoardalsohasapprovedtheindirectacquisitionbyCICof date.Inthiscontext,insureddepositoryinstitutionsincludecommer- Morgan’sinterestsinChinatrustandHerald. cialbanks,savingsbanks,andsavingsassociations.

Legal Developments: Third Quarter, 2010 B35 by the probable effect of the proposal in meeting the addition,theBoardhasconsideredthesupervisoryexpericonvenienceandneedsofthecommunitytobeserved.4 ence of the OCC with Bank, including its record of PremierCommercedoesnotcurrentlycontroladeposi- compliancewithapplicablebankinglawsandanti-moneytoryinstitution.Basedonallthefactsofrecord,theBoard laundering laws, and the proposed management officials has concluded that consummation of the proposal would and principal shareholders of Premier Commerce. The nothaveasignificantlyadverseeffectoncompetitionoron Board also has considered Premier Commerce’s plan for the concentration of banking resources in any relevant implementing the proposal, including the proposed manbanking market and that competitive considerations are agementafterconsummation. consistentwithapproval. In addition, the Board has considered carefully the futureprospectsofPremierCommerceandBank.Basedon FINANCIAL, MANAGERIAL, AND SUPERVISORY all the facts of record, the Board concludes that consider- CONSIDERATIONS AND FUTURE PROSPECTS ations relating to the financial and managerial resources and future prospects of the institutions involved in the Section3oftheBHCActrequirestheBoardtoconsiderthe proposal are consistent with approval, as are the other financialandmanagerialresourcesandfutureprospectsof supervisoryfactorsundertheBHCAct. the companies and the depository institutions involved in the proposal and certain other supervisory factors.5 The CONVENIENCE AND NEEDS CONSIDERATIONS Board has considered those factors in light of all the facts ofrecord,includingsupervisoryandexaminationinforma- Inactingonproposalsundersection3oftheBHCAct,the tion received from the Office of the Comptroller of Cur- Boardalsomustconsidertheeffectsoftheproposalonthe rency (‘‘OCC’’), the primary federal supervisor of Bank, convenienceandneedsofthecommunitiestobeservedand andpubliclyreportedandotheravailablefinancialinforma- take into account the records of the relevant insured tion, including information provided by Premier Com- depositoryinstitutionsundertheCommunityReinvestment merce.Inaddition,theBoardhasconsultedwiththeOCC. Act(‘‘CRA’’).7TheBoardhascarefullyconsideredallthe In evaluating financial factors in proposals involving facts of record, including evaluations of the CRA perfornewly formed small bank holding companies, the Board mance record of Bank, information provided by Premier reviewsthefinancialconditionofboththeapplicantandthe Commerce,andpubliccommentreceivedontheproposal. target depository institution. The Board also evaluates the Bank received a ‘‘satisfactory’’ rating at its most recent financialconditionoftheproformaorganization,including CRAperformanceevaluationbytheOCC,asofMarch31, its capital position, asset quality, and earnings prospects, 2008. andtheimpactoftheproposedfundingonthetransaction. A commenter expressed concern that Bank would not In addition, for proposals involving small bank holding adequatelyservelocalcreditneedsafterconsummationof companies, the Board evaluates the institution’s compli- the proposal because few of the proposed directors have ance with the Board’s Small Bank Holding Company associationswiththelocalcommunity.PremierCommerce Policy Statement, including compliance with those mea- has stated that it intends to maintain Bank’s current locasures that are used to assess capital adequacy and overall tion for the indefinite future and that it is contractually financialstrength.6Inassessingfinancialfactors,theBoard obligatedtomaintainBank’sGrandRidgeofficeforatleast consistently has considered capital adequacy to be espe- five years. Premier Commerce also has represented that it ciallyimportant. expectstoincreaselendingintheGrandRidgecommunity TheBoardhasconsideredcarefullythefinancialfactors after acquiring Bank. In addition, Premier Commerce has of the proposal. Bank currently is well capitalized and representedthattheproposalwouldbenefitBank’scustomwould remain so on consummation of the proposal, and ers by expanding the bank’s offerings to include internet Premier Commerce would be in compliance with relevant banking,remotecapture,andothertechnology-basedprodcapital standards. The transaction will be structured as a uctsandservices. cashpurchasefundedfromproceedsoftheissuanceofnew Based on a review of the entire record, the Board has holdingcompanystock.Basedonitsreviewofthefinancial concluded that convenience and needs considerations and considerationsrelatedtotheproposal,theBoardfindsthat the CRAperformance record of Bank are consistent with Premier Commerce has sufficient financial resources to approvaloftheproposal. effecttheacquisitionandtocomplywiththeBoard’sSmall BankHoldingCompanyPolicyStatement. CONCLUSION TheBoardalsohasconsideredthemanagerialresources oftheapplicant,includingtheproposedmanagementofthe Based on the foregoing and all facts of record, the Board organization. The Board has reviewed the examination has determined that the application should be, and hereby records of Bank, including assessments of its current is, approved. In reaching its conclusion, the Board has management,risk-managementsystems,andoperations.In consideredallthefactsofrecordinlightofthefactorsthat it is required to consider under the BHC Act and other 4. 12U.S.C.§1842(c)(1). 5. 12U.S.C.§1842(c)(2)and(3). 6. 12CFR225,AppendixC. 7. 12U.S.C.§2901etseq.

B36 Federal Reserve BulletinhNovember 2010 applicable statutes. The Board’s approval is specifically Bank USA, National Association (‘‘TD Bank USA’’), conditionedoncompliancebyPremierCommercewiththe Portland,Maine.TDBankUSHC,withtotalconsolidated conditionsinthisorderandallthecommitmentsitmadeto assetsof$155billion,isthe18thlargestdepositoryorganitheBoardinconnectionwiththeapplication.Forpurposes zation in the United States, controlling $125 billion in ofthisaction,theconditionsandcommitmentsaredeemed deposits.4Itssubsidiarybanksoperatein12statesandthe to be conditions imposed in writing by the Board in District of Columbia.5 In Florida, the only state where a connection with its findings and decision herein and, as subsidiary depository institution of TD Bank US HC and such,maybeenforcedinproceedingsunderapplicablelaw. TSFG both operate, TD Bank US HC is the 16th largest The proposed transaction may not be consummated depository organization, controlling deposits of approxibeforethe15thcalendardayaftertheeffectivedateofthis mately$4.4billion. order,orlaterthanthreemonthsaftertheeffectivedateof TSFG has total consolidated assets of approximately thisorder,unlesssuchperiodisextendedforgoodcauseby $12.4 billion, and its subsidiary bank operates in South theBoardortheFederalReserveBankofChicago,acting Carolina, North Carolina, and Florida. TSFG is the 13th pursuanttodelegatedauthority. largestdepositoryorganizationinSouthCarolina,control- By order of the Board of Governors, effective July 1, ling deposits of $5.5 billion. In Florida,TSFG is the 20th 2010. largest depository organization, controlling deposits of $3billion. Voting for this action: Chairman Bernanke and Governors Kohn, On consummation of the proposal, TD Bank US HC Warsh,Duke,andTarullo. would become the 17th largest depository organization in Robert deV. Frierson theUnitedStates,withtotalconsolidatedassetsofapproxi- Deputy Secretary of the Board mately $167 billion. TD Bank US HC would control deposits of approximately $134.7 billion, which represent 1.7 percent of the total amount of deposits of insured The Toronto-Dominion Bank depositoryinstitutionsintheUnitedStates.6InFlorida,TD Toronto, Canada Bank US HC would become the 11th largest depository organization,controllingdepositsofapproximately$7.4bil- Order Approving the Acquisition of a Bank lion,whichrepresentapproximately1.8percentofdeposits ofinsureddepositoryinstitutionsinthestate. Holding Company The Toronto-Dominion Bank (‘‘TD’’) and its subsidiary bank holding companies, TD US P & C Holdings ULC INTERSTATE ANALYSIS (‘‘TDULC’’),Calgary,Canada,andTDBankUSHolding Section 3(d) of the BHCAct allows the Board to approve Company (‘‘TD Bank US HC’’), Portland, Maine (collecan application by a bank holding company to acquire tively,‘‘Applicants’’),haverequestedtheBoard’sapproval control of a bank located in a state other than the bank undersection3oftheBankHoldingCompanyAct(‘‘BHC holding company’s home state if certain conditions are Act’’)1 to acquire The South Financial Group, Inc. met.ForpurposesoftheBHCAct,thehomestateofTDis (‘‘TSFG’’) and its subsidiary bank, Carolina First Bank NewYork,7andTSFGislocatedinSouthCarolina,North (‘‘CarolinaFirst’’),bothofGreenville,SouthCarolina.2 Carolina,andFlorida.8 Notice of the proposal, affording interested persons an Based on a review of all the facts of record, including opportunity to submit comments, has been published relevant state statutes, the Board finds that the conditions (75 Federal Register 30,406 (2010)). The time for filing for an interstate acquisition enumerated in section 3(d) of comments has expired, and the Board has considered the proposal and all comments received in light of the factors setforthintheBHCAct. TD,withtotalconsolidatedassetsequivalentto$568bil- 4. Asset data and nationwide deposit ranking data are as of lion, is the second largest depository organization in March 31, 2010, and statewide deposit and ranking data are as of Canada.3 TD operates a branch in New York City and an June30,2009. 5. TD Bank operates in Connecticut, Delaware, Florida, Maine, agencyinHouston.ThroughTDBankUSHC,TDcontrols Maryland, Massachusetts, New Hampshire, New Jersey, NewYork, twosubsidiarybanksintheUnitedStates,TDBankandTD Pennsylvania, Vermont, Virginia, and the District of Columbia. TD BankUSAoperatesinMaine. 6. Inthiscontext,insureddepositoryinstitutionsincludecommer- 1. 12U.S.C.§1842. cialbanks,savingsbanks,andsavingsassociations. 2. TD, TD ULC, and TD Bank US HC are all financial holding 7. Abankholdingcompany’shomestateisthestateinwhichthe companieswithinthemeaningoftheBHCAct.TDfiledanapplication total deposits of all banking subsidiaries of such company were the with the Office of the Comptroller of the Currency (‘‘OCC’’) on largestonJuly1,1966,orthedateonwhichthecompanybecamea June 18, 2010, for approval under the Bank MergerAct (12 U.S.C. bankholdingcompany,whicheverislater(12U.S.C.§1841(o)(4)(C). §1828(c)) to merge Carolina First into TD’s subsidiary bank, TD 8. Forpurposesofsection3(d)oftheBHCAct,theBoardconsiders Bank,N.A.,(‘‘TDBank’’),Wilmington,Delaware. a bank to be located in the states in which the bank is chartered or 3. CanadianassetandrankingdataareasofApril30,2010,andare headquartered or operates a branch (12 U.S.C. §§1841(o)(4)–(7), basedontheexchangerateasofthatdate. 1842(d)(1)(A),and1842(d)(2)(B)).

Legal Developments: Third Quarter, 2010 B37 theBHCActaremetinthiscase.9Inlightofallthefactsof A. Banking Market with Divestiture record, the Board is permitted to approve the proposal undersection3(d)oftheBHCAct. Applicants and TSFG compete directly in one banking market,thePalatkabankingmarket,thatwarrantsadetailed review of competitive effects.13 TD Bank is the largest COMPETITIVE CONSIDERATIONS insured depository institution in the Palatka banking market, controlling deposits of approximately $250.2 million, The BHC Act prohibits the Board from approving a which represent approximately 34.3 percent of market proposal that would result in a monopoly or would be in deposits. Carolina First is the fourth largest depository furtherance of any attempt to monopolize the business of institution in the market, controlling deposits of approxibankinginanyrelevantbankingmarket.TheBHCActalso mately $92.7 million, which represent approximately prohibitstheBoardfromapprovingabankacquisitionthat 12.7 percent of market deposits. On consummation and would substantially lessen competition in any relevant without the proposed divestiture, the HHI in this market banking market, unless the anticompetitive effects of the wouldincrease873points,from2071to2944,andthepro proposalareclearlyoutweighedinthepublicinterestbyits forma market share of the combined entity would be probableeffectinmeetingtheconvenienceandneedsofthe 47percent. communitytobeserved.10 Toreducethepotentialadverseeffectsoncompetitionin Applicants and TSFG have subsidiary insured deposithe Palatka banking market, TD has committed to divest tory institutions that compete directly in five banking branches with no less than $59 million in deposits, in the markets in Florida: Miami-Fort Lauderdale, Orlando, aggregate,toanout-of-marketinsureddepositoryorganiza- Palatka, St.Augustine, and West Palm Beach. The Board tion.14Onconsummationoftheproposedmerger,andafter has reviewed carefully the competitive effects of the proaccountingforthedivestiture,TDwouldremainthelargest posal in each of these banking markets in light of all the depositoryinstitutioninthemarket,controllingdepositsof factsofrecord.Inparticular,theBoardhasconsideredthe approximately $283.9 million, which represent 38.9 pernumber of competitors that would remain in the banking centofmarketdeposits.TheHHIwouldincreasenomore markets, the relative shares of total deposits in depository than243pointsto2313. institutions (‘‘market deposits’’) controlled by Applicants The Board has considered carefully whether other facand TSFG in the markets,11 the concentration levels of tors either mitigate the competitive effects of the proposal market deposits and the increases in those levels as meaor indicate that the proposal would have a significantly sured by the Herfindahl–Hirschman Index (‘‘HHI’’) under adverse effect on competition in the market.15 In this theDepartmentofJusticeMergerGuidelines(‘‘DOJGuidemarket, the anticompetitive effects of this proposal are lines’’),12othercharacteristicsofthemarkets,andcommitmitigated by several factors. On consummation of the ments thatTD has made to divest branches in the Palatka proposal and the proposed divestiture to an out-of-market bankingmarket. insureddepositoryinstitution,fiveotherinsureddepository institutionswouldcontinuetooperateinthemarket. 9. 12 U.S.C. §§1842(d)(1)(A)–(B) and 1842(d)(2)–(3). TD is adequatelycapitalizedandadequatelymanaged,asdefinedbyapplicablelaw.TSFG’ssubsidiarybankhasbeeninexistenceandoperated mentofJustice(‘‘DOJ’’)hasinformedtheBoardthatabankmergeror fortheminimumperiodoftimerequiredbyapplicablestatelawsand acquisitiongenerallywillnotbechallenged(intheabsenceofother for more than five years. See 12 U.S.C. §1842(d)(1)(B)(i)–(ii). On factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI consummationoftheproposal,TDwouldcontrollessthan10percent is at least 1800 and the merger increases the HHI more than 200 ofthetotalamountofdepositsofinsureddepositoryinstitutionsinthe points.TheDOJhasstatedthatthehigher-than-normalHHIthresholds UnitedStates(12U.S.C.§1842(d)(2)(A)).TDalsowouldcontrolless for screening bank mergers for anticompetitive effects implicitly than30percentof,andlessthantheapplicablestatedepositcapfor, recognizethecompetitiveeffectsoflimited-purposelendersandother the total amount of deposits in insured depository institutions the nondepositoryfinancialentities. relevant states (12 U.S.C. §1842(d)(2)(B)–(D)). All other require- 13. ThePalatkabankingmarketisdefinedasPutnamCountyand mentsofsection3(d)oftheBHCActwouldbemetonconsummation theHastingsareaofSt.JohnsCounty,Florida. oftheproposal. 14. TDhascommittedthat,beforeconsummationoftheproposed 10. 12U.S.C.§1842(c)(1). merger,itwillexecuteanagreementfortheproposeddivestitureinthe 11. Deposit and market share data are based on data reported by PalatkabankingmarketwithapurchaserthattheBoarddeterminesto insureddepositoryinstitutionsinthesummaryofdepositsdataasof be competitively suitable. TD also has committed to complete the June30,2009,andarebasedoncalculationsinwhichthedepositsof divestiture within 180 days after consummation of the proposed thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhas merger. In addition, TD has committed that, if it is unsuccessful in indicatedthatthriftinstitutionshavebecome,orhavethepotentialto completing the proposed divestiture within such time period, it will become, significant competitors of commercial banks. See, e.g., transfer the unsold branches to an independent trustee who will be Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); instructedtosellthebranchestoanalternatepurchaserorpurchasers NationalCityCorporation,70FederalReserveBulletin743(1984). inaccordancewiththetermsofthisorderandwithoutregardtoprice. Thus,theBoardregularlyhasincludedthriftinstitutiondepositsinthe The trust agreement, trustee, and any alternate purchaser must be market share calculation on a 50 percent weighted basis. See, e.g., deemed acceptable by the Board. See BankAmerica Corporation, FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 78FederalReserveBulletin338(1992);UnitedNewMexicoFinan- 12. UndertheDOJGuidelines,amarketisconsideredunconcen- cialCorporation,77FederalReserveBulletin484(1991). tratedifthepost-mergerHHIislessthan1000,moderatelyconcen- 15. Thenumberandstrengthoffactorsnecessarytomitigatethe tratedifthepost-mergerHHIisbetween1000and1800,andhighly competitiveeffectsofaproposaldependonthesizeoftheincreasein concentratedifthepost-mergerHHIismorethan1800.TheDepart- andresultinglevelofconcentrationinabankingmarket.

B38 Federal Reserve BulletinhNovember 2010 Inaddition,theBoardnotesthatthreecommunitycredit has carefully considered these factors in light of all the unions also exert a competitive influence in the Palatka facts of record, including confidential supervisory and bankingmarket.16Thesecreditunionsofferawiderangeof examinationinformationfromtheU.S.bankingsupervisors consumerproducts,operatestreet-levelbranches,andhave oftheinstitutionsinvolvedandpubliclyreportedandother membershipopentoalmostalltheresidentsinthemarket. financial information, including substantial information The Board concludes that their activities in this banking providedbyApplicants.TheBoardalsohasconsultedwith marketexertsufficientcompetitiveinfluencethatmitigate, the Office of the Superintendent of Financial Institutions inpart,thepotentialcompetitiveeffectsoftheproposal.17 (‘‘OSFI’’), the agency with primary responsibility for the supervision and regulation of Canadian banks, including B. Banking Markets without Divestiture TD. In evaluating the financial resources in expansion pro- Consummation of the proposal would be consistent with posals by banking organizations, the Board reviews the Board precedent and within the thresholds in the DOJ financialconditionoftheorganizationsinvolvedonbotha Guidelinesinthefourremainingbankingmarketsinwhich parent-onlyandconsolidatedbasis,aswellasthefinancial TD’s subsidiary depository institutions and Carolina First condition of the subsidiary insured depository institutions directly compete.18 On consummation of the proposal, and significant nonbanking operations. In this evaluation, three markets would remain moderately concentrated, and the Board considers a variety of information, including one would remain unconcentrated, as measured by the capital adequacy, asset quality, and earnings performance. HHI. The change in the HHI measure of concentration in Inassessingfinancialresources,theBoardconsistentlyhas eachofthebankingmarketswouldbesmall,however,and consideredcapitaladequacytobeespeciallyimportant.The numerouscompetitorswouldremainineachmarket. Board also evaluates the financial condition of the combined organization at consummation, including its capital C. Views of OtherAgencies and Conclusion on position, asset quality, and earnings prospects, and the Competitive Considerations impactoftheproposedfundingofthetransaction. The Board has considered carefully the financial re- The DOJ also has conducted a detailed review of the sources of the organizations involved in the proposal in potential competitive effects of the proposal and has light of information provided by Applicants and superviadvised the Board that consummation of the proposal sory information on these organizations available to the would not likely have a significantly adverse effect on Federal Reserve, including information from the Federal competition in any relevant banking market. In addition, Deposit Insurance Corporation (‘‘FDIC’’), the primary the appropriate banking agencies have been afforded an federal supervisor of Carolina First. The capital levels of opportunity to comment and have not objected to the TD exceed the minimum levels that would be required competitiveeffectsoftheproposal. undertheBaselCapitalAccordandare,therefore,consid- Basedonallthefactsofrecord,theBoardconcludesthat ered to be equivalent to the capital levels that would be consummation of the proposal would not have a signifirequired of a U.S. banking organization. TD also plans to cantly adverse effect on competition or on the concentraraiseanadditional$240millionincapitalbeforeconsumtionofresourcesinthefivebankingmarketsinwhichTD mationthatwillbedownstreamedtoitsU.S.operations.In and TSFG compete directly or in any other relevant addition, the subsidiary depository institutions of TD banking market. Accordingly, the Board has determined involved in the proposal are well capitalized and would that competitive considerations are consistent with apremain so on consummation. The proposed transaction is proval. structured as a partial share exchange and a partial cash purchase of shares.Applicants will use existing resources FINANCIAL, MANAGERIAL, AND SUPERVISORY tofundthecashpurchaseofshares.19Basedonitsreview CONSIDERATIONS of the record, the Board finds that Applicants have sufficientfinancialresourcestoeffecttheproposal. Section3oftheBHCActrequirestheBoardtoconsiderthe TheBoardalsohasconsideredthemanagerialresources financialandmanagerialresourcesandfutureprospectsof oftheorganizationsinvolved.TheBoardhasreviewedthe the companies and depository institutions involved in the examinationrecordsofApplicants,TSFG,andtheirsubsidproposal and certain other supervisory factors. The Board iary depository institutions, including assessments of their management,risk-managementsystems,andoperations.In 16. The Board previously has considered the competitiveness of addition, the Board has considered its supervisory expericertainactivecreditunionsasamitigatingfactor.See,e.g.,Regions ences and those of other relevant banking supervisory Financial Corporation, 93 Federal Reserve Bulletin C16 (2007); Wachovia Corporation, 92 Federal Reserve Bulletin C183 (2006); F.N.B.Corporation,90FederalReserveBulletin481(2004). 17. Ifcreditunionsarefactoredintothemarketcalculationsona 19. On May 18, 2010, TD entered into a Securities Purchase 50percentweightedbasis,TDwouldcontrolapproximately35per- Agreement with the U.S. Department of the Treasury (‘‘Treasury’’) centofmarketdepositsonconsummationoftheproposal,andtheHHI under which TD will purchase from Treasury all the issued and wouldincrease196pointsto1920. outstandingsharesofTSFG’spreferredstockandtherelatedwarrant 18. Thesebankingmarketsandtheeffectsoftheproposalontheir issuedinconnectionwiththeTreasury’sCapitalPurchaseProgramon concentrationsofbankingresourcesaredescribedintheappendix. December5,2008.

Legal Developments: Third Quarter, 2010 B39 agencies, including the OCC and the FDIC, with the OSFIistheprimarysupervisorofCanadianbanks,includorganizations and their records of compliance with appli- ing TD. The Board previously has determined that TD is cablebankinglawandwithanti-money-launderinglaws. subject to comprehensive supervision on a consolidated The Board also has considered carefully the future basis by its home-country supervisor.23 Based on this prospects of the organizations involved in the proposal in findingandallthefactsofrecord,theBoardhasconcluded light of the financial and managerial strength that Appli- thatTDcontinuestobesubjecttocomprehensivesupervicantswillbringtotheoperationsofTSFG.TheBoardnotes sion on a consolidated basis by its home-country supervithat TSFG and Carolina First have recently experienced sor. financial and managerial difficulties and are operating under formal supervisory actions by the Federal Reserve CONVENIENCE AND NEEDS CONSIDERATIONS Bank of Richmond and the FDIC. Consummation of this proposalwouldcreateacombinedorganizationthatwould Inactingonaproposalundersection3oftheBHCAct,the serve as a strong provider of banking and other financial Boardalsomustconsidertheeffectsoftheproposalonthe servicesinthemarketsservedbyCarolinaFirst.Moreover, convenienceandneedsofthecommunitiestobeservedand theBoardhasconsideredApplicants’plansforimplement- take into account the records of the relevant insured ing the acquisition and managing the integration ofTSFG depositoryinstitutionsundertheCommunityReinvestment into the TD organization and the proposed management Act (‘‘CRA’’).24 The CRA requires the federal financial after consummation.20 The Board also has considered supervisoryagenciestoencourageinsureddepositoryinsti- Applicants’ experience with acquiring banking organiza- tutionstohelpmeetthecreditneedsofthelocalcommunitionsandsuccessfullyintegratingthemintotheTDorgani- ties in which they operate, consistent with their safe and zation. soundoperation,andrequirestheappropriatefederalfinan- Basedonallthefactsofrecord,theBoardhasconcluded cial supervisory agency to take into account a relevant thatconsiderationsrelatingtothefinancialandmanagerial depository institution’s record of meeting the credit needs resourcesandfutureprospectsoftheorganizationsinvolved of its entire community, including low- and moderateintheproposalareconsistentwithapproval,asaretheother income(‘‘LMI’’)neighborhoods,inevaluatingexpansionsupervisoryfactors.21 aryproposals.25 Section 3 of the BHCAct also provides that the Board The Board has considered carefully all the facts of may not approve an application involving a foreign bank record,includingreportsofexaminationoftheCRAperforunlessthebankissubjecttocomprehensivesupervisionor mancerecordsofTD’ssubsidiaryinsureddepositoryinstiregulation on a consolidated basis by the appropriate tutions and Carolina First, data reported by TD under the authorities in the bank’s home country.22 As noted, the HomeMortgageDisclosureAct(‘‘HMDA’’),26otherinformation provided byTD, confidential supervisory information, and public comment received on the proposal. A 20. The Board received a comment expressing concern about a commenter alleged, based on 2009 HMDA data, that TD lawsuitthathasbeenfiledbycertainshareholdersofTSFGconcerning thepricethatTDhasofferedforTSFGshares.Theseallegationsare hasengagedindisparatetreatmentofminorityindividuals subjecttolitigationbeforeacourtofcompetentjurisdictionandare inhomemortgagelending. notwithinthediscretionoftheBoardtoresolve.WesternBancshares, Inc.v.BoardofGovernors,480F.2d749(10thCir.1973). A. CRAPerformance Evaluations 21. Section3oftheBHCActalsorequirestheBoardtodetermine thatanapplicanthasprovidedadequateassurancesthatitwillmake As provided in the CRA, the Board has considered the availabletotheBoardsuchinformationonitsoperationsandactivities andthoseofitsaffiliatesthattheBoarddeemsappropriatetodeter- convenienceandneedsfactorinlightoftheevaluationsby mine and enforce compliance with the BHC Act (12 U.S.C. the appropriate federal supervisors of the CRA perfor- §1842(c)(3)(A)).TheBoardhasreviewedtherestrictionsondisclo- mance records of the relevant insured depository institusure in the relevant jurisdictions in which TD operates and has communicatedwithrelevantgovernmentauthoritiesconcerningaccess toinformation.Inaddition,TDpreviouslyhascommittedthat,tothe supervisorreceivessufficientinformationontheworldwideoperations extentnotprohibitedbyapplicablelaw,itwillmakeavailabletothe ofthebank,includingitsrelationshipwithanyaffiliates,toassessthe BoardsuchinformationontheoperationsofitsaffiliatesthattheBoard bank’s overall financial condition and its compliance with laws and deemsnecessarytodetermineandenforcecompliancewiththeBHC regulations.See12CFR211.24(c)(1). Act,theInternationalBankingAct,andotherapplicablefederallaws. 23. SeeTheToronto-DominionBank,94FederalReserveBulletin TD also previously has committed to cooperate with the Board to C51(2008);92FederalReserveBulletinC100(2006);and91Federal obtainanywaiversorexemptionsthatmaybenecessarytoenableits ReserveBulletin277(2005). affiliatestomakesuchinformationavailabletotheBoard.Basedonall 24. 12U.S.C.§2901etseq.;12U.S.C.§1842(c)(2). facts of record, the Board has concluded that TD has provided 25. 12U.S.C.§2903.ThecommenteralsocriticizedTDBankfor adequate assurances of access to any appropriate information the acquiringassetsandliabilitiesoffailedinsureddepositoryinstitutions Boardmayrequest. inFDICresolutiontransactions,becausethosetransactionsprovided 22. 12 U.S.C. §1843(c)(3)(B).As provided in Regulation Y, the no public comment period to submit comments on the bank’s CRA Board determines whether a foreign bank is subject to consolidated performance record. The Board notes that the transactions were home-country supervision under the standards set forth in Regula- processedunderemergencyreviewproceduresspecificallyauthorized tionK.See12CFR225.13(a)(4).RegulationKprovidesthataforeign bystatute.Moreover,inconnectionwiththisproposal,thecommenter bank will be considered subject to comprehensive supervision or provided public information about the possible locations of bank’s regulation on a consolidated basis if the Board determines that the futurebranches. bankissupervisedorregulatedinsuchamannerthatitshome-country 26. 12U.S.C.§2801etseq.

B40 Federal Reserve BulletinhNovember 2010 tions.Aninstitution’smostrecentCRAperformanceevalu- lendingpracticesarebasedoncriteriathatensurenotonly ation is a particularly important consideration in the safe and sound lending but also equal access to credit by applicationsprocessbecauseitrepresentsadetailed,on-site creditworthyapplicantsregardlessoftheirraceorethnicity. evaluation of the institution’s overall record of perfor- Moreover,theBoardbelievesthatallbankholdingcompamance under the CRA by its appropriate federal supervi- nies and their affiliates must conduct their mortgage lendsor.27 ingoperationswithoutanyabusivelendingpracticesandin TD Bank received an ‘‘outstanding’’rating at its most compliancewithallconsumerprotectionlaws. recent CRA performance evaluation by the OCC, as of BecauseofthelimitationsofHMDAdata,theBoardhas December8,2008.28CarolinaFirstreceivedan‘‘outstand- consideredthesedatacarefullyandtakenintoaccountother ing’’ratingatitsmostrecentCRAperformanceevaluation information, including examination reports that provide by the FDIC, as of September 5, 2006. After the merger on-site evaluations of compliance by TD’s subsidiary with TD Bank, Carolina First’s operations will adopt the insured depository institutions with fair lending laws.The CRAprogram of TD Bank, as modified to address issues BoardalsohasconsultedwiththeOCC,theprimaryfederal specifictothemarketsservedbyCarolinaFirst. supervisorofTD’ssubsidiarybanks.Inaddition,theBoard has considered information provided by TD about its B. HMDAand Fair Lending Record compliancerisk-managementsystems. The record of this application, including confidential TheBoardhascarefullyconsideredthefairlendingrecords supervisoryinformation,indicatesthatTDhastakensteps andHMDAdataofTDinlightofpubliccommentreceived toensurecompliancewithfairlendingandotherconsumer ontheproposal.Acommenterallegedthat,basedon2009 protectionlawsandregulations.TDalsorepresentsthatits HMDA data, TD has denied the home mortgage loan subsidiarybankshavesuchcompliancepoliciesandproceapplications of African American, Hispanic, and Native dures in place. Specifically, TD Bank maintains a fair Americanborrowersmorefrequentlythanthoseofnonmilendingcomplianceprogramthatincludesasecond-review nority applicants.29 The commenter also alleged that TD processtoidentifyandpreventanydiscriminatorypractices made higher-cost mortgage loans disproportionately to and a process for resolving fair lending complaints. TD AfricanAmerican borrowers than to nonminority borrow- Bankprovidesannualfairlendingtrainingforallemployers. eesandcompliancepersonnelinvolvedinanyrespectwith Although the HMDAdata might reflect certain disparimortgage and consumer lending activities and conducts ties in the rates of loan applications, originations, denials, periodic internal audits of its fair lending and consumer or pricing among members of different racial or ethnic protection programs, which also are subject to periodic groups in certain local areas, they provide an insufficient review by the OCC. TD has stated that Carolina First’s basis by themselves on which to conclude whether or not operations would be integrated into TD’s existing fair TDisexcludinganyracialorethnicgrouponaprohibited basis. The Board recognizes that HMDAdata alone, even lending and consumer protection compliance programs with the recent addition of pricing information, provide afterconsummationoftheproposal. onlylimitedinformationaboutthecoveredloans.30HMDA TheBoardalsohasconsideredtheHMDAdatainlight data, therefore, have limitations that make them an inad- ofotherinformation,includingoverallperformancerecords equatebasis,absentotherinformation,forconcludingthat of the subsidiary banks of TD and TSFG under the CRA. aninstitutionhasengagedinillegallendingdiscrimination. Theseestablishedeffortsandrecordsofperformancedem- TheBoardisneverthelessconcernedwhenHMDAdata onstrate that the institutions are active in helping to meet foraninstitutionindicatedisparitiesinlendingandbelieves thecreditneedsoftheirentirecommunities. thatalllendinginstitutionsareobligatedtoensurethattheir C. Conclusion on Convenience and Needs and CRAPerformance 27. SeeInteragencyQuestionsandAnswersRegardingCommunity Reinvestment,75FederalRegister11642at11665(2010). TheBoardhasconsideredcarefullyallthefactsofrecord, 28. TD’sotherbanksubsidiary,TDBankUSA,receiveda‘‘satisfactory’’ratingatitsmostrecentCRAperformanceevaluationbythe including the evaluation of the CRAperformance records OCC,asofDecember8,2008. of TD Bank and TD Bank USA, information provided by 29. TheBoardreviewedHMDAdatafor2009forTDBankinits TD, comments received on the proposal, and confidential combined assessment area and in its statewide assessment areas for supervisoryinformation.TDrepresentedthatitwouldoffer Maine,Massachusetts,NewHampshire,NewJersey,andPennsylvania. a broader array of banking products and services to the 30. Thedata,forexample,donotaccountforthepossibilitythatan customersservicedbyCarolinaFirst.Inaddition,consuminstitution’soutreacheffortsmayattractalargerproportionofmargin- mation of the proposal would allow the combined organially qualified applicants than other institutions attract and do not zation to continue to provide credit and other financial provideabasisforanindependentassessmentofwhetheranapplicant whowasdeniedcreditwas,infact,creditworthy.Inaddition,credit services in support of the convenience and needs of the historyproblems,excessivedebtlevelsrelativetoincome,andhigh communities served by Carolina First. Based on a review loanamountsrelativetothevalueoftherealestatecollateral(reasons of the entire record, the Board concludes that considermostfrequentlycitedforacreditdenialorhighercreditcost)arenot ationsrelatingtotheconvenienceandneedsfactorandthe availablefromHMDAdata.

Legal Developments: Third Quarter, 2010 B41 CRAperformance records of the relevant insured deposi- mentsandconditionsaredeemedtobeconditionsimposed toryinstitutionsareconsistentwithapprovalofthetransac- inwritingbytheBoardinconnectionwithitsfindingsand tion. decision and, as such, may be enforced in proceedings underapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15th CONCLUSION calendar day after the effective date of this order, or later Based on the foregoing, and in light of all the facts of than three months after the effective date of this order, record, the Board has determined that the application unlesssuchperiodisextendedforgoodcausebytheBoard shouldbe,andherebyis,approved.Inreachingitsconclu- or by the Federal Reserve Bank of New York, acting sion, the Board has considered all the facts of record in pursuanttodelegatedauthority. lightofthefactorsthatitisrequiredtoconsiderunderthe By order of the Board of Governors, effective July 22, BHC Act and other applicable statutes. The Board’s 2010. approval is specifically conditioned on compliance by Voting for this action: Chairman Bernanke and Governors Kohn, Applicants with the conditions in this order and all the Warsh,Duke,andTarullo. commitments made to the Board in connection with the proposal.31Forpurposesofthistransaction,thesecommit- Robert deV. Frierson Deputy Secretary of the Board 31. ThecommenterrequestedthattheBoardholdapublicmeeting orhearingontheproposal.Section3oftheBHCActdoesnotrequire commenter’srequestinlightofallthefactsofrecord.Asnoted,the the Board to hold a public hearing on an application unless the commenter had ample opportunity to submit its views and, in fact, appropriatesupervisoryauthorityforthebanktobeacquiredmakesa submittedwrittencommentsthattheBoardhasconsideredcarefullyin writtenrecommendationofdenialoftheapplication.TheBoardhas actingontheproposal.Thecommenter’srequestfailstodemonstrate not received such a recommendation from a supervisory authority. whywrittencommentsdonotpresentitsviewsadequatelyorwhya Under its rules, the Board also may, in its discretion, hold a public meetingorhearingotherwisewouldbenecessaryorappropriate.For meetingorhearingonanapplicationtoacquireabankifnecessaryor these reasons, and based on all the facts of record, the Board has appropriatetoclarifymaterialfactualissuesrelatedtotheapplication determined that a public meeting or hearing is not required or and to provide an opportunity for testimony (12 CFR 225.16(e), warrantedinthiscase.Accordingly,therequestforapublicmeetingor 262.3(e), and 262.25(d)). The Board has considered carefully the hearingontheproposalisdenied. Appendix TD AND TSFG BANKING MARKETS IN FLORIDA CONSISTENT WITH BOARD PRECEDENT AND DOJ GUIDELINES Market Amount Remaining deposit Resulting Change in Bank Rank of deposits number of shares HHI HHI (dollars) competitors (percent) Miami-Fort Lauderdale—Broward and Miami-Dade counties TD Bank US HC Pre-Consummation ... 28 495.7 mil. .5 753 1 102 TSFG ............................................ 33 398.5 mil. .4 753 1 102 TD Bank US HC Post-Consummation .. 22 894.2 mil. .8 753 1 102 Orlando—Orange, Osceola, and Seminole counties; the western half of Volusia County; and the towns of Clermont and Groveland in Lake County TD Bank US HC Pre-Consummation ... 20 266.6 mil. .8 1,199 1 49 TSFG ............................................ 15 335.1 mil. 1.0 1,199 1 49 TD Bank US HC Post-Consummation .. 10 601.7 mil. 1.8 1,199 1 49

B42 Federal Reserve BulletinhNovember 2010 Appendix—Continued TD AND TSFG BANKING MARKETS IN FLORIDA CONSISTENT WITH BOARD PRECEDENT AND DOJ GUIDELINES—Continued Market Amount Remaining deposit Resulting Change in Bank Rank of deposits number of shares HHI HHI (dollars) competitors (percent) St.Augustine—St. Johns County, excluding the towns of Fruit Cove, Ponte Vedra, Ponte Vedra Beach, Jacksonville, Switzerland, and Hastings TD Bank US HC Pre-Consummation ... 4 105.5 mil. 6.2 1,266 36 14 TSFG ............................................ 11 49.2 mil. 2.9 1,266 36 14 TD Bank US HC Post-Consummation .. 4 154.7 mil. 9.1 1,266 36 14 West Palm Beach—Palm Beach County, east of Loxahatchee; and the towns of Indiantown and Hobe Sound in Martin County TD Bank US HC Pre-Consummation ... 10 843.1 mil. 2.3 1,100 2 58 TSFG ............................................ 29 164.7 mil. .5 1,100 2 58 TD Bank US HC Post-Consummation .. 8 1.0 bil. 2.8 1,100 2 58 Note: Deposit data are as of June 30, 2009. Deposit amounts are unweighted.Rankings,marketdepositshares,andHHIsarebasedonthriftinstitutiondepositsweightedat50percent. ORDER ISSUED UNDER BANK Notice of the proposal, affording interested persons an MERGER ACT opportunity to submit comments, has been published in localpublicationsinaccordancewiththeBankMergerAct and the Board’s Rules of Procedure.5 As required by the Metcalf Bank BankMergerAct,areportonthecompetitiveeffectsofthe merger was requested from the United States Attorney Lee’s Summit, Missouri General, and a copy of the request was provided to the Federal Deposit Insurance Corporation (‘‘FDIC’’). The Order Approving the Acquisition and time for filing comments has expired, and the Board has Establishment of Branches consideredtheproposalandallcommentsreceivedinlight ofthefactorssetforthintheBankMergerAct.6 Metcalf Bank,1 a state member bank, has requested the Central, the parent bank holding company of Metcalf Board’sapprovalundersection18(c)oftheFederalDeposit Bank, has total assets of approximately $9.1 billion and Insurance Act2 (‘‘Bank Merger Act’’) to acquire certain operates 13 banks in Missouri, Kansas, Oklahoma, and assetsandassumecertainliabilitiesoffourbranchesofThe Illinois.7 Metcalf Bank, with total assets of $990 million, First National Bank of Olathe (‘‘FNB Olathe’’), Olathe, operatesinMissouriandKansas.InMissouri,Centralisthe Kansas (‘‘Kansas Branches’’).3 In addition, Metcalf Bank fourthlargestdepositoryorganization,controllingdeposits has applied under section 9 of the Federal Reserve Act ofapproximately$5.8billion,whichrepresent4.7percent (‘‘FRA’’)toestablishandoperatebranchesatthelocations ofthetotalamountofdepositsofdepositoryorganizations oftheKansasBranches.4 5. 12CFR262.3(b). 6. Although no comments were received in connection with this 1. Metcalf Bank is a subsidiary of First National Bancor, Inc. application,theBoardreceivedcommentsonMetcalfBank’srecord (‘‘FNB’’), also of Lee’s Summit, which in turn is a subsidiary of ofmeetingtheconvenienceandneedsofitscommunityinconnection CentralBancompany(‘‘Central’’),JeffersonCity,Missouri.FNBand with an application by Central to acquire Overland Bancorp, Inc. Centralarebankholdingcompanies. (‘‘Overland’’)andtherebyindirectlyacquireBankofBelton,bothof 2. 12U.S.C.§1828(c). Belton, Missouri. The Board has not acted on that application. The 3. TheKansasBranchesarelocatedat7800CollegeBoulevardand commentsregardingMetcalfBankthatwerereceivedinconnection 7960West135thStreet,bothinOverlandPark,and15100West67th withtheOverlandapplicationhavealsobeenconsideredinconnection Streetand6114NiemanRoad,bothinShawnee,allinKansas. withthisproposal. 4. 12U.S.C.§321. 7. AssetdataareasofJune30,2010.

Legal Developments: Third Quarter, 2010 B43 in the state (‘‘state deposits’’).8 In Kansas, Central is the bankingmarket’’).13TheBoardhasreviewedcarefullythe 38thlargestdepositoryorganization,controllingdepositsof competitive effects of the proposal in this banking market approximately $307.6 million. The Kansas Branches con- in light of all the facts of record, including the number of troldepositsof$234.1million.Onconsummation,Central competitors that would remain and the relative shares of would become the 21st largest depository organization in total deposits in insured depository institutions in the Kansas,controllingdepositsofapproximately$541.7mil- KansasCitybankingmarket(‘‘marketdeposits’’)thatthey lion,whichrepresentlessthan1percentofstatedeposits. wouldcontrol,14theconcentrationlevelofmarketdeposits andtheincreaseinthatlevel,asmeasuredbytheHerfindahl– INTERSTATE ANALYSIS Hirschman Index (‘‘HHI’’) and the Department of Justice BankMergerCompetitiveReviewguidelines(‘‘DOJBank Section 102 of the Riegle-Neal Interstate Banking and Merger Guidelines’’),15 and other characteristics of the Branching Efficiency Act of 1994 (‘‘Riegle-Neal Act’’) markets. authorizesabanktomergewithanotherbankundercertain Consummationoftheproposalwouldbeconsistentwith conditions unless, before June 1, 1997, the home state of BoardprecedentandwithinthethresholdsintheDOJBank oneofthebanksinvolvedinthetransactionadoptedalaw MergerGuidelinesintheKansasCitybankingmarket.On expresslyprohibitingmergertransactionsinvolvingout-of- consummation, the banking market would remain unconstatebanks.9ForpurposesoftheRiegle-NealAct,thehome centrated,asmeasuredbytheHHI,andnumerouscompetistate of Metcalf Bank is Missouri, and the home state of torswouldremaininthebankingmarket.16 FNBOlatheisKansas.10MetcalfBankhasprovidedacopy The DOJ has advised the Board that consummation of of its Bank Merger Act application to the relevant state the proposal is not likely to have a significant adverse agencyandhascompliedwithstatelaw.Theproposalalso competitiveeffectintheKansasCitybankingmarket.The complies with all other requirements of the Riegle-Neal Act.11 Accordingly, the Riegle-Neal Act authorizes the proposedinterstatebranchacquisitions. 13. CentraloperatestwobanksintheKansasCitybankingmarket: Metcalf Bank and First Central Bank, Warrensburg, Missouri. The COMPETITIVE CONSIDERATIONS KansasCitybankingmarketencompassesCass,Clay,Jackson,Platte, andRaycounties,Missouri;thetownsofTrimbleandHoltinClinton TheBankMergerActprohibitstheBoardfromapprovinga County,Missouri;thetownsofChilhowee,Holden,andKingsvillein proposal that would result in a monopoly or would be in JohnsonCounty,Missouri;andJohnson,Leavenworth,andWyandotte counties,Kansas. furtherance of any attempt to monopolize the business of 14. Deposit and market share data are based on data reported by banking in any relevant banking market. The act also insureddepositoryinstitutionsinthesummaryofdepositsdataasof prohibits the Board from approving a proposal that would June30,2009,andarebasedoncalculationsinwhichthedepositsof substantially lessen competition in any relevant banking thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhas market, unless the anticompetitive effects of the proposal indicatedthatthriftinstitutionshavebecome,orhavethepotentialto become, significant competitors of commercial banks. See, e.g., areclearlyoutweighedinthepublicinterestbyitsprobable Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); effectinmeetingtheconvenienceandneedsofthecommu- NationalCityCorporation,70FederalReserveBulletin743(1984). nitytobeserved.12 Thus,theBoardregularlyhasincludedthriftinstitutiondepositsinthe MetcalfBankandtheKansasBranchescompetedirectly market share calculation on a 50 percent weighted basis. See, e.g., FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). intheKansasCity,Missouribankingmarket(‘‘KansasCity 15. UndertheDOJBankMergerGuidelines,amarketisconsidered unconcentrated if the post-merger HHI is under 1000, moderately concentratedifthepost-mergerHHIisbetween1000and1800,and highlyconcentratedifthepost-mergerHHIexceeds1800.TheDepart- 8. DepositdataandstaterankingsareasofJune30,2009. mentofJustice(‘‘DOJ’’)hasinformedtheBoardthatabankmergeror 9. 12U.S.C.§1831u. acquisitiongenerallywouldnotbechallenged(intheabsenceofother 10. See12U.S.C.§1831u(a)(4)and(g)(4). factorsindicatinganticompetitiveeffects)unlessthepost-mergerHHI 11. See12U.S.C.§1831u.MetcalfBankisadequatelycapitalized is at least 1800 and the merger increases the HHI more than 200 and adequately managed, as defined in the Riegle-Neal Act. The points.AlthoughtheDOJandtheFederalTradeCommissionrecently MissouriDivisionofFinancehasindicatedthatthistransactionwould issuedrevisedHorizontalMergerGuidelines,theDOJhasconfirmed complywithapplicableMissourilawandonJune22,2010,indicated that the DOJ Bank Merger Guidelines, which were issued in 1995, that it would be in a position to act favorably on Metcalf Bank’s werenotchanged.PressRelease,DepartmentofJustice(August19, application to establish branches at the locations of the Kansas 2010), available at www.justice.gov/opa/pr/2010/August/10-at- Branches.ThereisnofilingrequirementwithKansas’sOfficeofthe 938.html. State Banking Commissioner when an out-of-state bank acquires a 16. Centraloperatesthe11thlargestdepositoryorganizationinthe Kansas branch. See Special Kansas Banking Order 1997-2. On market, controlling deposits of approximately $837 million, which consummationoftheproposal,MetcalfBankanditsaffiliatedinsured represent2.3percentofmarketdeposits.MetcalfBankaccountsfor depositoryinstitutionswouldcontrollessthan10percentofthetotal $786.8 million of Central’s deposits in this market. The Kansas amount of deposits in insured depository institutions in the United Branches control $234.1 million in deposits, which represents less States and less than 30 percent of the total amount of deposits in than1percentofmarketdeposits.Afterconsummation,Centralwould insureddepositoryinstitutionsinKansas.Theterm‘‘insureddeposi- becomethe10thlargestdepositoryorganizationinthemarket,controltoryinstitutions’’includesinsuredcommercialbanks,savingsbanks, lingdepositsofapproximately$1.1billion,whichrepresent3percent andsavingsassociations.Allotherrequirementsofsection102ofthe ofmarketdeposits.Onconsummationoftheproposal,theHHIwould Riegle-NealActwouldalsobemetonconsummationoftheproposal. decrease1pointto559fortheKansasCitybankingmarket,and109 12. 12U.S.C.§1828(c)(5). depositoryorganizationswouldremaininthemarket.

B44 Federal Reserve BulletinhNovember 2010 Boardalsohasreceivednoobjectiontotheproposalfrom intheproposalareconsistentwithapprovalundertheBank anyfederalbankingagency. MergerAct. Basedonallthefactsofrecord,theBoardhasconcluded that consummation of the proposal would not have a CONVENIENCE AND NEEDS CONSIDERATIONS significantly adverse effect on competition or on the concentration of resources in any relevant banking market. Inactingontheproposal,theBoardalsomustconsiderits Accordingly, the Board has determined that competitive effectsontheconvenienceandneedsofthecommunitiesto considerationsareconsistentwithapproval. beservedandtakeintoaccounttherecordsoftherelevant insureddepositoryinstitutionsundertheCommunityReinvestment Act (‘‘CRA’’).17 The CRA requires the federal FINANCIAL AND MANAGERIAL RESOURCES financialsupervisoryagenciestoencourageinsureddeposi- AND FUTURE PROSPECTS tory institutions to help meet the credit needs of the local communities in which they operate, consistent with their InreviewingtheproposalundertheBankMergerAct,the safe and sound operation, and requires the appropriate Board has also carefully considered the financial and federalfinancialsupervisoryagencytotakeintoaccountan managerialresourcesandfutureprospectsofthecompanies institution’srecordofmeetingthecreditneedsofitsentire and depository institutions involved in the proposal and community,includinglow-andmoderate-income(‘‘LMI’’) certainothersupervisoryfactors.TheBoardhasconsidered neighborhoods, in evaluating bank expansionary proposthese factors in light of all the facts of record, including als.18 confidentialreportsofexamination,othersupervisoryinfor- The Board has considered carefully all the facts of mation from the primary federal and state supervisors of record, including evaluations of the CRA performance the organizations involved in the proposal, publicly re- records of Metcalf Bank, data reported by Metcalf Bank ported and other financial information, and information under the Home Mortgage Disclosure Act (‘‘HMDA’’)19 providedbyMetcalfBank. and the CRA, other information provided by the bank, Inevaluatingfinancialfactorsinexpansionproposalsby confidentialsupervisoryinformation,andpubliccomment. banking organizations, the Board considers a variety of Two commenters asserted that Metcalf Bank had not measures, including capital adequacy, asset quality, and adequately served the credit and investment needs of its earnings performance. In assessing financial factors, the LMI communities. Based on the bank’s record of lending Board consistently has considered capital adequacy to be to small businesses and small farms and the HMDAdata especiallyimportant.TheBoardalsoevaluatesthefinancial reported by the bank in 2008, the commenters contended condition of the combined organization at consummation, that Metcalf Bank’s percentage of loans in low-income including its capital position, asset quality, and earnings censustractswasnotcommensuratewiththepercentageof prospects, and the impact of the proposed funding of the such tracts in the bank’s assessment area and that Metcalf transaction. Bankhadmadeaninsufficientnumberofresidential,small MetcalfBankiswellcapitalizedandwouldremainsoon business, and small farm loans to low-income borrowers. consummation of the proposal. Central, Metcalf Bank’s ThecommentersalsoexpressedconcernthatMetcalfBank parent holding company, also would remain well capital- did not have a sufficient branch presence in low-income izedonconsummationoftheproposal.Basedonitsreview census tracts.20 In addition, the commenters alleged that oftherecordinthiscase,theBoardfindsthatMetcalfBank Metcalf Bank had not served the credit needs of African hassufficientfinancialresourcestoeffecttheproposal.As Americans and had engaged in disparate treatment of noted, the proposed transaction is structured as an asset AfricanAmericansinitsmortgagelendingactivities. purchase and assumption of liabilities. Central will use its existingresourcestocontributeapproximately$25million A. CRAPerformance Evaluation toMetcalfBanktofundthetransaction. As provided in the CRA, the Board has evaluated the TheBoardalsohasconsideredthemanagerialresources convenienceandneedsfactorinlightoftheevaluationsby of Metcalf Bank and reviewed the examination records of the appropriate federal supervisors of the CRA perforthe bank, including assessments of its management, riskmance records of the relevant insured depository institumanagement systems, and operations. In addition, the tions.Aninstitution’smostrecentCRAperformanceevalu- Board has considered its supervisory experiences with the ation is a particularly important consideration in the relevant organizations and the organizations’ records of applicationsprocessbecauseitrepresentsadetailed,on-site compliance with applicable banking law, including antievaluation of the institution’s overall record of performoney-laundering laws. The Board also has considered Metcalf Bank’s plans for implementing the proposal, includingtheproposedmanagementoftheKansasBranches afterconsummation. 17. 12U.S.C.§2901etseq. Basedonallthefactsofrecord,theBoardconcludesthat 18. 12U.S.C.§2903. 19. 12U.S.C.§2801etseq. considerations relating to the financial and managerial 20. NoneoftheKansasBranchesisinanLMIorminoritycensus resourcesandfutureprospectsoftheorganizationsinvolved tract.

Legal Developments: Third Quarter, 2010 B45 mance under the CRA by its appropriate federal supervi- loans,26 which represent the largest percentage of the sor.21 Metcalf Bank received a ‘‘satisfactory’’rating at its bank’s lending activity, to be good and found that the mostrecentCRAexaminationbytheFederalReserveBank distribution compared favorably with other lenders in the of Kansas City, as of April 13, 2009 (‘‘2009 Examina- assessment area. The examiners found that the bank’s tion’’).FNBOlathealsoreceiveda‘‘satisfactory’’ratingat ability to make small business loans in low-income tracts its most recent CRA examination by the Office of the was limited, in part, because of the low percentage of ComptrolleroftheCurrency,asofJuly6,2009. businesses in those tracts and competition from other Inthe2009Examination,MetcalfBankreceiveda‘‘high institutions. satisfactory’’ratingonitslendingtestanda‘‘lowsatisfac- Inaddition,examinersfoundthatMetcalfBankmadea tory’’ratingonitsinvestmentandservicetests.22Examin- highlevelofqualifiedcommunitydevelopmentloansdurers noted that the bank’s primary lending focus was ing the evaluation period, including loans targeted to commercialloans,whichrepresentedapproximately80per- affordablehousingandcommunitydevelopmentprojectsto cent of its total loan portfolio.23 They found that Metcalf help revitalize and stabilize LMI areas. For example, Bank’s lending activity during the evaluation period re- Metcalf Bank made loans to a community development flected good responsiveness to the credit needs of its corporation that focuses on LMI neighborhood revitalizacommunity.24 Examiners determined that the overall geo- tionandimprovementsinhousingavailabilityinLMIareas graphicdistributionofthebank’sHMDAloansreflectedan through home repair and rehabilitation. Metcalf Bank’s adequate penetration throughout all geographies of the community development lending during the evaluation assessment area, including LMI tracts, in light of the periodtotaledapproximately$13.5million.Examinersalso economicanddemographicaspectsoftheassessmentarea determinedthatMetcalfBank’slevelofcommunitydeveland in comparison to the aggregate of lenders’ lending opment investments during the evaluation period was data.25 Examiners noted a number of factors that reason- adequate.They noted that the bank made many charitable ablylimitedMetcalfBank’sabilitytoincreaseitsmortgage contributions,themajorityofwhichweretoorganizations lendingmarketshareintheLMIgeographies,includingthe that sponsor community services primarily for LMI indismall percentage of LMI tracts in the bank’s assessment vidualsorsupportaffordablehousingprojects. area, the lack of affordable housing in the LMI census Under the service test, examiners found that the bank’s tracts,thedistanceofthebank’sbranchesfromLMItracts, delivery systems were accessible to geographies and indiand the strong competition in Jackson County, Missouri, viduals of different income levels. Examiners noted that from numerous other institutions. In addition, examiners MetcalfBank’scurrentbranchnetwork,whichincludes19 notedfactorsinLMIcensustractsthatcontributedtolower branchesinitsassessmentarea,resultedfromthemergerof demand in the bank’s assessment area for mortgage and three subsidiary banks of Central in 2008. Metcalf Bank relatedhomeloansinthoseareas,includingalowpercent- alsoacquiredafailedsavingsbankin2009.Tenpercentof age of owner-occupied units, a high percentage of rental the bank’s branches were in moderate-income tracts, and units, a large concentration of families below the poverty thebankhadnobranchesinlow-incometracts.27Examinline,andhighunemploymentrates. ersnotedthat,althoughnoneofthepre-mergerbankshad In the 2009 Examination, examiners considered the branches in the central area of Kansas City, where the geographic distribution of Metcalf Bank’s small business substantial majority of LMI census tracts were located, eachbankhadalonghistoryofservingthebankingneeds of its respective communities. They also found that the hoursofoperationsandservicesofferedbyMetcalfBank’s 21. The Interagency Questions andAnswers Regarding Commu- branches did not vary in a way that inconvenienced pornityReinvestmentprovidethataCRAexaminationisanimportantand tions of the assessment area, particularly in LMI geograoftencontrollingfactorintheconsiderationofaninstitution’sCRA phiesorforLMIindividuals.Inaddition,examinersnoted record.SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642at11,665(2010). favorably the bank’s community development service 22. TheCRAevaluationforMetcalfBankincludestherecordof activities with organizations that focused primarily on threeofCentral’ssubsidiarybanksthatmergedin2008:MetcalfBank, affordablehousingandeconomicdevelopment. Overland Park, Kansas; First National Bank of Missouri (‘‘FNB Missouri’’),alsoinLee’sSummit;andFirstKansasBankandTrust Company (‘‘First Kansas Bank’’), Gardner, Kansas. On April 24, 2008, FNB Missouri merged with Metcalf Bank, and on June 21, 26. Inthiscontext,‘‘smallbusinessloans’’arebusinessloansthat 2008, First Kansas Bank merged with Metcalf Bank. On April 18, haveanoriginalamountof$1millionorless. 2009,MetcalfBankacquiredAmericanSterlingBank,SugarCreek, 27. ThecommentersalsorequestedthattheBoardrequireMetcalf Missouri,afailedfederalsavingsbank,fromtheFDICasreceiver. BanktoopenatleastonebranchinanLMIorminoritycensustract. 23. Metcalf Bank originated less than 1 percent of total HMDA TheBoardconsistentlyhasstatedthatneithertheCRAnorthefederal loansoriginatedbyallfinancialinstitutionsinitsassessmentarea. bankingagencies’CRAregulationsrequiredepositoryinstitutionsto 24. TheevaluationperiodforMetcalfBankwasfromOctober18, makepledgesorenterintocommitments.See,e.g.,ThePNCFinan- 2006, to December 31, 2008; for FNB Missouri from February 24, cial Services Group, Inc., 94 Federal Reserve Bulletin C38 (2008); 2003, to December 31, 2008; and for First Kansas Bank from Wachovia Corporation, 91 Federal Reserve Bulletin 77 (2005).The December18,2007,toDecember31,2008. BoardfocusesontheexistingCRAandfairlendingperformanceand 25. The lending data of the aggregate of lenders represent the compliancerecordsofanapplicantandtheprogramsthatanapplicant cumulativelendingforallfinancialinstitutionsthatreportedHMDA hasinplacetoservethecreditneedsofitsassessmentareaatthetime datainaparticularmarket. theBoardreviewsaproposalundertheconvenienceandneedsfactor.

B46 Federal Reserve BulletinhNovember 2010 B. HMDAData, Fair Lending Records, and Other availabilityofowner-occupiedhousing,thehighnumberof Issues rental and vacant properties, and the downturn in the economy. The Board has carefully considered the HMDA data and The record indicates that Metcalf Bank has taken steps fairlendingrecordsofMetcalfBank,includingthosedata anddevelopedprogramstoensurecompliancewithallfair and records for the institutions that merged to form the lending and other consumer protection laws and regulabank in 2008, in light of public comments. Commenters tions.MetcalfBankhasaninternalauditprogram,includalleged,basedon2008HMDAdata,disparatetreatmentof ing comprehensive fair lending reviews on a continuing AfricanAmericansbyMetcalfBankinvolvinghomemort- basis, to ensure that all applicants are treated fairly and gage loan originations.28 The Board’s consideration of consistently under prudent underwriting standards and HMDA-relatedcommentsincludedareviewof2007,2008, industryguidelines.Additionally,MetcalfBankhasadesand preliminary 2009 HMDA data reported by Metcalf ignatedcomplianceofficerdedicatedtoensuringthebank’s Bankandtheinstitutionsthatmergedintothebank. fair lending compliance. Metcalf Bank’s compliance of- Although the HMDAdata might reflect certain dispari- ficer, together with its management, completes an annual ties in the rates of loan applications, originations, and complianceriskassessmentandparticipatesincompliance denialsamongmembersofdifferentracialorethnicgroups monitoring projects, including a project to monitor bank incertainlocalareas,theyprovideaninsufficientbasisby compliancewithfairlending.MetcalfBankhiresanindethemselves on which to conclude whether or not Metcalf pendent party to perform the fair lending compliance Bank is excluding any group on a prohibited basis. The project. Board recognizes that HMDA data alone, even with the Since the last examinations of Metcalf Bank, the bank recentadditionofpricinginformation,provideonlylimited hascontinuedtomakeeffortstoreachandservetheneeds informationaboutthecoveredloans.29HMDAdata,there- of the minority and LMI communities in its assessment fore,havelimitationsthatmakethemaninadequatebasis, area. The bank has enhanced its marketing efforts by absentotherinformation,forconcludingthataninstitution increasing its advertising on public transportation and in hasengagedinillegallendingdiscrimination. localpublicationsfocusedonservingminorities;investing TheBoardisneverthelessconcernedwhenHMDAdata morethan$700,000intargetedmortgage-backedsecurities foraninstitutionindicatedisparitiesinlendingandbelieves inwhichallmortgagesinthepoolaretoLMIindividualsin thatalllendinginstitutionsareobligatedtoensurethattheir thebank’sassessmentarea;anddonatingfundstosupporta lendingpracticesarebasedoncriteriathatensurenotonly small-dollar loan program/payday loan alternative initiasafe and sound lending, but also equal access to credit by tive, which provides an alternative source of short-term creditworthyapplicantsregardlessoftheirraceorethnicity. lending,primarilytoLMIindividuals. Because of the limitations of HMDAdata, the Board has consideredthesedatacarefullyandtakenintoaccountother information, including examination reports that provide C. Conclusion on Convenience and Needs on-siteevaluationsofcompliancewithfairlendinglawsby Considerations MetcalfBankandtheCRAperformancerecordofMetcalf TheBoardhasconsideredcarefullytheCRAperformance, Bankdiscussedabove.Inparticular,examinersdidnotfind HMDAdata, and fair lending records of Metcalf Bank in anyevidencethatMetcalfBankengagedinillegaldiscrimilightofallpubliccommentsreceived.TheBoardalsohas nation or in any other illegal credit practices. Examiners consideredcarefullyallfactsofrecord,includingtheCRA notedthatMetcalfBank’sabilitytooriginateHMDAloans performanceevaluationsoftheinstitutionsinvolved,confitominoritycommunitiesinitsassessmentareawaslimited dential supervisory information, and information provided by the demographics of minority census tracts30 (particuby Metcalf Bank on the actions and programs it has larly in Jackson County), including the relatively low implemented to meet the credit needs of all its communities.Asnotedabove,MetcalfBankistheresultofarecent mergerofthreerelativelysmallaffiliatedbanksandafailed savings bank. Based on the locations and sizes of the 28. The commenters also expressed concern that Metcalf Bank receivedonlyafewapplicationsfromAfricanAmericans,notingthat individual institutions before to the merger and the estabthe percentage of their residential mortgage loan applications was lishedeffortsbyMetcalfBanksincethemerger,theBoard significantlylessthanthepopulationofAfricanAmericanswithinthe believesthat,onbalance,thecurrentrecordofperformance bank’sassessmentarea. of Metcalf Bank in meeting the convenience and needs of 29. Thedata,forexample,donotaccountforthepossibilitythatan institution’soutreacheffortsmayattractalargerproportionofmargin- its communities is consistent with approval of this proally qualified applicants than other institutions attract and do not posal. The Board also notes that the proposal would provideabasisforanindependentassessmentofwhetheranapplicant provide customers of the Kansas Branches with a broader whowasdeniedcreditwas,infact,creditworthy.Inaddition,credit arrayofproductsandservices,includingexpandedoptions historyproblems,excessivedebtlevelsrelativetoincome,andhigh forloansandadditionalbranchlocations. loanamountsrelativetothevalueoftherealestatecollateral(reasons mostfrequentlycitedforacreditdenialorhighercreditcost)arenot Based on a review of the entire record, and for the availablefromHMDAdata. reasonsdiscussedabove,theBoardconcludesthatconsid- 30. ForpurposesofthisHMDAanalysis,aminoritycensustractis erations relating to the convenience and needs factor and acensustractwithaminoritypopulationof51percentormore.

Legal Developments: Third Quarter, 2010 B47 the CRA performance records of the relevant depository Votingforthisaction:ChairmanBernankeandGovernorsKohn,* institutionsareconsistentwithapproval. Warsh,Duke,andTarullo. The changes at Metcalf Bank, however, also reflect an *Governor Kohn voted before his departure from the Board on September1,2010. opportunity for Metcalf Bank to continue to improve its lendingandoutreacheffortstoresidentsinLMIcommuni- Robert deV. Frierson ties and minority borrowers in its entire assessment area. Deputy Secretary of the Board Metcalf Bank has outlined several initiatives designed to enablethebanktoincreaseitslendingtominorityandLMI communities.Thebankplanstoexpandfurtheritsspecial- ORDER ISSUED UNDER ized advertising to minority and LMI applicants; increase INTERNATIONAL BANKING ACT thenumberofminorityandLMIloanapplicantsbydeveloping more effective systems to track and measure its Banco Davivienda, S.A. success in obtaining loan applications from those applicants;andincreasecommunityoutreacheffortsbypartner- Bogotá Columbia ing with organizations that have close ties to minority populations.The Federal Reserve System will continue to Order Approving Establishment of a Branch monitor and evaluate the lending performance of Metcalf Bank as part of the supervisory process, including assess- Banco Davivienda, S.A. (‘‘Bank’’), Bogotá Colombia, a mentsofitsperformanceinsubsequentexaminations. foreignbankwithinthemeaningoftheInternationalBanking Act (‘‘IBA’’), has applied under section 7(d) of the OTHER CONSIDERATIONS IBA1 to establish a branch in Miami, Florida, through the conversion of its wholly owned subsidiary, Bancafé Inter- MetcalfBankalsohasappliedundersection9oftheFRA national (‘‘Bancafé’’), a corporation organized under secto establish and operate branches at the locations of the tion 25A of the Federal Reserve Act (Edge Act corpora- Kansas Branches.The Board has assessed the factors it is tion).2TheForeignBankSupervisionEnhancementActof required to consider when reviewing an application under 1991,whichamendedtheIBA,providesthataforeignbank section9oftheFRAandfindsthosefactorstobeconsistent mustobtaintheapprovaloftheBoardtoestablishabranch withapproval.31 intheUnitedStates. Noticeoftheapplication,affordinginterestedpersonsan CONCLUSION opportunity to comment, has been published in a newspaper of general circulation in Miami (The Miami Herald, Based on the foregoing and all facts of record, the Board February 10, 2010). The time for filing comments has hasdeterminedthattheapplicationsshouldbe,andhereby expired, and the Board has considered all comments are, approved. In reaching its conclusion, the Board has received. consideredallthefactsofrecordinlightofthefactorsthat Bank, with total consolidated assets of approximately it is required to consider under the Bank MergerAct and $12.8billion,3isthethirdlargestbankinColombiabyasset theFRA.TheBoard’sapprovalisspecificallyconditioned size. Sociedades Bolivar S.A. (‘‘Bolivar’’), a company on compliance by Metcalf Bank with the conditions whose shares are publicly traded in Colombia, effectively imposedinthisorder,thecommitmentsmadetotheBoard controls Bank through the direct or indirect ownership of inconnectionwiththeapplications,andreceiptofallother morethan62percentofBank’soutstandingvotingshares.4 regulatory approvals. For purposes of this action, the AnothergroupofColombiancompanies,collectivelyknown conditions and commitments are deemed to be conditions as the ‘‘Cusezar Group,’’ owns directly and indirectly imposed in writing by the Board in connection with its approximately 19.1 percent of Bank’s total voting shares findingsanddecisionhereinand,assuch,maybeenforced outstanding.Noothershareholderorgroupofshareholders inproceedingsunderapplicablelaw. controls more than 10 percent of Bank’s outstanding The proposed transactions may not be consummated shares. Bank engages in commercial and retail banking beforethe15thcalendardayaftertheeffectivedateofthis services, and it engages in fund administration, trust, and order,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuchperiodisextendedforgoodcauseby 1. 12U.S.C.§3105(d). the Board or the Federal Reserve Bank of Kansas City, 2. 12U.S.C.§611etseq. actingpursuanttodelegatedauthority. 3. Unlessotherwiseindicated,dataareasofDecember31,2009. By order of the Board of Governors, effective Septem- 4. Bolivarowns9.94percentofBank’soutstandingsharesdirectly andistheparentcompanyofthebank’slargestdirectshareholders, ber2,2010. Inversiones Financieras Bolivar, S.A.S. and Inversora Anagrama, S.A.S., each of which owns 17.29 percent of Bank’s outstanding shares, as well as other direct and indirect shareholders within the Bolivargroupofcompanies.TheFundaciónUniversidadExternadode Colombia,anonprofitfoundationthatoperatestheUniversidadExternadodeColombia,aninstitutionofhighereducationlocatedinBogotá is the ultimate parent company of Bolivar, owning 26 percent of 31. 12U.S.C.§322;12CFR208.6(b). Bolivar’sshares.

B48 Federal Reserve BulletinhNovember 2010 securities brokerage services through its subsidiaries. In consistent with approval. In deciding whether to exercise addition,BankhasoperationsintheUnitedStatesthrough its discretion to approve an application under this excep- Bancafé and in Panama through a wholly owned bank, tion,theBoardshallalsoconsiderwhethertheforeignbank Bancafé Panama S.A., Panama City.5 Bank and its parent hasadoptedandimplementedprocedurestocombatmoney companies are qualifying foreign banking organizations laundering.11TheBoardalsomaytakeintoaccountwhether underRegulationK.6 thehomecountryoftheforeignbankisdevelopingalegal Bank proposes to establish the branch as a means of regime to address money laundering or is participating in continuing and expanding the international banking busi- multilateraleffortstocombatmoneylaundering.12 ness currently conducted by Bancafé. Bank intends to use Asnotedabove,Bankengagesdirectlyinthebusinessof the branch to provide products and services currently bankingoutsidetheUnitedStates.Bankalsohasprovided offeredbyBancafétoalargercustomerbase.Inparticular, theBoardwithinformationnecessarytoassesstheapplica- Bank believes that the proposed branch will enhance its tionthroughsubmissionsthataddresstherelevantissues. ability to serve the banking needs of the Colombian Withrespecttosupervisionbyhome-countryauthorities, community in the Miami area and to service international the Board previously has determined, in connection with businessassociatedwithColombia.Aftertheestablishment applicationsinvolvingotherbanksinColombia,thatthose of the branch and the transfer of the existing business of banks’home-countryauthoritieswereworkingtoestablish Bancafé to the branch, Bancafé would voluntarily liqui- arrangements for the consolidated supervision of the date.7 banks.13BankissupervisedbytheColombianSuperinten- Under the IBA and Regulation K, in acting on an dencyofFinance(‘‘Superintendency’’)onsubstantiallythe application by a foreign bank to establish a branch, the sametermsandconditionsasthoseotherbanks. Boardmustconsiderwhethertheforeignbank(1)engages The Colombian government has taken a number of directly in the business of banking outside of the United significant steps to combat money laundering. Colombia States; (2) has furnished to the Board the information it has enacted legislation to prevent money laundering and needs to assess the application adequately; and (3) is has established a regulatory infrastructure to assist in this subject to comprehensive supervision on a consolidated effort. Colombia has established a Financial Information basisbyitshome-countrysupervisor.8TheBoardmayalso and Analysis Unit in the Ministry of Finance, which is take into account additional standards as set forth in the responsibleforgatheringandcentralizinginformationfrom IBAandRegulationK.9 publicandprivateentitiesinColombia,aswellasanalyz- The IBA includes a limited exception to the general ingsuchinformation.Inaddition,theSuperintendencyhas requirementrelatingtocomprehensive,consolidatedsuper- issued circulars that require financial institutions to estabvision.10 This exception provides that, if the Board is lishsystemsforthepreventionofmoneylaundering. unable to find that a foreign bank seeking to establish a Colombia participates in international fora that address branch,agency,orcommerciallendingcompanyissubject the issues of asset forfeiture and the prevention of money to comprehensive supervision or regulation on a consoli- laundering.Colombiaisapartytothe1988U.N.Convendated basis by the appropriate authorities in its home tionAgainstIllicitTrafficinNarcoticDrugsandPsychotrocountry, the Board may nevertheless approve an applica- pic Substances (the ‘‘Convention’’), and the United States tion by such foreign bank, provided (i) the appropriate hascertifiedthatColombiahastakenadequatemeasuresto authorities in the home country of the foreign bank are achievefullcompliancewiththegoalsandobjectivesofthe activelyworkingtoestablisharrangementsfortheconsoli- Convention. Colombia also has signed the U.N. Convendatedsupervisionofsuchbankand(ii)allotherfactorsare tionagainstTransnationalOrganizedCrimeandisamemberoftheOrganizationofAmericanStatesInter-American DrugAbuseControlCommissionExpertsGrouptoControl 5. BankacquiredbothBancaféandBancaféPanamaS.A.aspartof Money Laundering. Colombia is not a member of the itsacquisitionofGranbancoS.A.,Bogotáin2007. 6. 12CFR211.23(a). FinancialActionTaskForce(‘‘FATF’’),althoughBankhas 7. 12CFR211.7. takenintoaccountFATF’srecommendationsindeveloping 8. 12U.S.C.§3105(d)(2);12CFR211.24(c)(1).Inassessingthis manuals,internalprocedures,andtrainingcourses. standard,theBoardconsiders,amongotherfactors,theextenttowhich Bank has taken measures to ensure compliance with thehome-countrysupervisors(i)ensurethebankhasadequateprocedures for monitoring and controlling its activities worldwide; (ii) Colombian law and regulations, including implementing obtain information on the condition of the bank and its subsidiaries policies and procedures related to ‘‘know-your-customer’’ and offices through regular examination reports, audit reports, or practices,suspicioustransactionreporting,recordkeeping, otherwise;(iii)obtaininformationonthedealingswithandrelationand employee training.14 An internal central compliance shipbetweenthebankanditsaffiliates,bothforeignanddomestic;(iv) unit monitors Bank’s adherence to these policies and receive from the bank financial reports that are consolidated on a worldwide basis or comparable information that permits analysis of thebank’sfinancialconditiononaworldwide,consolidatedbasis;and (v) evaluate prudential standards, such as capital adequacy and risk 11. 12U.S.C.§3105(d)(6)(B). assetexposure,onaworldwidebasis.Theseareindiciaofcomprehen- 12. Id. sive,consolidatedsupervision.Nosinglefactorisessential,andother 13. Bancolombia S.A., 89 Federal Reserve Bulletin 234 (2003); elementsmayinformtheBoard’sdetermination. BancodeBogotáS.A.,87FederalReserveBulletin552(2001). 9. 12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2)–(3). 14. Compliance is mandatory for all offices of the bank, its 10. 12U.S.C.§3105(d)(6). affiliates,andrepresentativeoffices.

Legal Developments: Third Quarter, 2010 B49 procedures. In addition, Colombia enacted laws in 2000 and has communicated with relevant government authoriand2006thatprovideforthedetection,prevention,inves- ties regarding access to information. Bank and its parent tigation, and punishment of terrorist financing activities. companieshavecommittedtomakeavailabletotheBoard Further, the Superintendency’s predecessor organization suchinformationontheoperationsofBankandanyofits issued regulations in 2002 that emphasized financial insti- affiliatesthattheBoarddeemsnecessarytodetermineand tutions’ obligation to adopt all necessary and effective enforcecompliancewiththeIBA,theBankHoldingComcontrol mechanisms to avoid being used as a conduit for pany Act, and other applicable federal law. To the extent financingterrorism. thattheprovisionofsuchinformationtotheBoardmaybe Based on all the facts of record, the Board has deter- prohibitedbylaworotherwise,Bankanditsparentcompamined that Bank’s home-country authorities are actively nieshavecommittedtocooperatewiththeBoardtoobtain working to establish arrangements for the consolidated any necessary consents or waivers that might be required supervisionofBankandthatconsiderationsrelatingtothe from third parties for disclosure of such information. In stepstakenbyBankanditshomecountrytocombatmoney addition,subjecttocertainconditions,theSuperintendency launderingareconsistentwithapprovalunderthisexemp- may share information on Bank’s operations with other tion. supervisors,includingtheBoard.Inlightofthesecommit- The Board has also taken into account the additional ments and other facts of record, and subject to the condistandards set forth in section 7 of the IBA and Regula- tionsdescribedbelow,theBoardhasdeterminedthatBank tion K.15 The Superintendency has no objection to the has provided adequate assurances of access to any necesestablishmentoftheproposedbranch. saryinformationthattheBoardmayrequest. Bankmustcomplywiththeminimumcapitalstandards Onthebasisoftheforegoingandallthefactsofrecord, of the Basel CapitalAccord (‘‘Accord’’), as implemented Bank’sapplicationtoestablishabranchisherebyapproved. by Colombia. Bank’s capital is in excess of the minimum Should any restrictions on access to information on the levelsthatwouldberequiredbytheAccordandisconsid- operations or activities of Bank and its affiliates subseeredequivalenttothecapitallevelsthatwouldberequired quentlyinterferewiththeBoard’sabilitytoobtaininformaof a U.S. banking organization. Managerial and other tion to determine and enforce compliance by Bank or its financial resources of Bank also are consistent with ap- affiliates with applicable federal statutes, the Board may proval, and Bank appears to have the experience and require Bank to terminate any of its direct or indirect capacity to support the proposed branch. Bank has estab- activitiesintheUnitedStates.Approvalofthisapplication lished controls and procedures for the proposed branch to alsoisspecificallyconditionedonBank’scompliancewith ensure compliance with U.S. law and for its operations in theconditionsimposedinthisorderandthecommitments general. madetotheBoardinconnectionwiththisapplication.16 With respect to access to information about Bank’s By order of the Board of Governors, effective Septemoperations, the Board has reviewed the restrictions on ber7,2010. disclosureinrelevantjurisdictionsinwhichBankoperates Votingforthisaction:ChairmanBernankeandGovernorsWarsh, Duke,andTarullo. 15. See 12 U.S.C. §3105(d)(3)–(4); 12 CFR 211.24(c)(2). These standardsinclude(i)whetherthebank’shome-countrysupervisorhas Robert deV. Frierson consented to the establishment of the office; (ii) the financial and Deputy Secretary of the Board managerial resources of the bank; (iii) whether the bank has procedurestocombatmoneylaundering,whetherthereisalegalregimein placeinthehomecountrytoaddressmoneylaundering,andwhether the home country is participating in multilateral efforts to combat 16. The Board’s authority to approve the branch parallels the money laundering; (iv) whether the appropriate supervisors in the continuing authority of the state of Florida to license offices of a homecountrymayshareinformationonthebank’soperationswiththe foreign bank. The Board’s approval of this application does not Board;(v)whetherthebankanditsU.S.affiliatesareincompliance supplanttheauthorityofthestateofFloridaoritsagent,theFlorida withU.S.law;(vi)theneedsofthecommunity;and(vii)thebank’s Office of Financial Regulation, to license Bank’s Florida office in recordofoperation. accordancewithanytermsorconditionsthatitmayimpose.

Index

C1 Index A D Adjustable-ratemortgages(ARMs),A48–51,A53–54 DepartmentofHousingandUrbanDevelopment,A68 AmericanRecoveryandReinvestmentAct(ARRA),A56 Articles E 2009HMDAData,The:TheMortgageMarketinaTimeofLow EconomicStimulusAct,A56 InterestRatesandEconomicDistress,A39–77 Enforcementactions(SeeLitigation,finalenforcementdecisions) The2009HMDAdataonloanpricing,A47–54 AppendixA:RequirementsofRegulationC,A77 F Changesinthestructureofthemortgageindustry,A63−66 FannieMae,A40,A44–45,A54 Changesintotallendingbyborrowerandareacharacteristics, FarmServiceAgencyloans,A43,A45,A54–55,A61 A61–63 FarmerMac,A44 Thechangingroleofgovernmentinthemortgagemarket, FederalDepositInsuranceCorporation(FDIC),A1,A6,A17–18, A54−61 A21,A24–25 Differencesinlendingoutcomesbyrace,ethnicity,andsexof DebtGuaranteeProgram,A18 borrower,A70–76 FederalFinancialInstitutionsExaminationCouncil(FFIEC),A39, Anoverviewofthe2009HMDAdata,A40−47 A58 Patternsoflendingindistressedneighborhoods,A68−70 FederalHousingAdministration(FHA),A40,A43,A45,A54–61, Subduedrefinanceactivityin2009,A66−68 A63 Summaryoffindings,A40 FederalHousingFinanceAgency(FHFA),A66 ProfitsandBalanceSheetDevelopmentsatU.S.Commercial FederalOpenMarketCommittee,A2,A26 Banksin2009,A1–37 FederalReserve Adjustmentstobalancesheetdataforstructureactivity,A5 SeniorLoanOfficerOpinionSurveyonBankLendingPractices Appendixtables,A27–37 (SLOOS),A8–11,A13,A15,A23 Assets,A3–15 SurveyofTermsofBusinessLending,A8,A23 Bankfailuresandmeasuresofbankingconcentration,A6 FederalReserveAct,orderissuedunder Capital,A18–20 TheWarehouseTrustCompanyLLC,B13–15 CapitalPurchaseProgramandtheSupervisoryCapital FreddieMac,A40,A44,A54,A64 AssessmentProgram,A20 Derivatives,A15–17 G Developmentsinearly2010,A25–26 InternationaloperationsofU.S.commercialbanks,A25 GinnieMae,A44 Liabilities,A17–18 Government-sponsoredenterprise(s),A2,A24,A26,A54 Trendsinprofitability,A21–25 H Asset-backedsecurities,A2,A10 Avery,RobertB.,article,A39–77 Herfindahl-HirschmanIndex(HHI),A66,B8–9,B22,B37–38, B41–43 HMDAData,2009,The:TheMortgageMarketinaTimeofLow B InterestRatesandEconomicDistress,A39–77 Bankfailuresandmeasuresofbankingconcentration,2009, Thechangingroleofgovernmentinthemortgagemarket, A6 A54–61 BankHoldingCompanyAct,ordersissuedunder HomeMortgageDisclosureActof1975(HMDA),A39 ChinaInvestmentCorporation,B31–34 Homeownership,A39–77 CityHoldingCompany,B21–25 HomeOwnershipandEquityProtectionActof1994(HOEPA), FirstNiagaraFinancialGroup,Inc.,B7–13 A45,A47 PremierCommerceBancorp,Inc.,B34–36 HousingandEconomicRecoveryAct(HERA),A56 SandhillsBancshares,Inc.,B1–2 Housingdata,A39–77 TheToronto-DominionBank,B36–41 HUD(seeDepartmentofHousingandUrbanDevelopment) BankMergerAct,ordersissuedunder I BancoPopulardePuertoRico,B25–27 MetcalfBank,B42–47 InternationalBankingAct,ordersissuedunder BankofAmerica,N.A.,A5,A20 ABNAMROBankN.V.,B15–17 Bankingindustryprofitsandbalancesheets,U.S.,A1–37 BancoDavivienda,S.A.,B47−49 Bhutta,Neil,article,A39–77 BanqueTransatlantique,B3–5 Brevoort,KennethP.,article,A39–77 NationalAgriculturalCooperativeFederation,B27–29 L C Lee,SeungJung,article,A1–37 Canner,GlennB.,article,A39–77 LegalDevelopments CapitalPurchaseProgram,A19–21,B38 (SeealsoBankHoldingCompanyAct,ordersissuedunder; Commercialandindustrial(C&I)loans,A7–9,A11,A23,A26 FederalReserveAct,ordersissuedunder;International Commercialrealestate,A2,A4–5,A9–11,A15,A20,A26–36 BankingAct,ordersissuedunder) CommunityReinvestmentAct(CRA),A68,B2,B10,B24,B26–27, Firstquarter,2010,B7–19 B33,B35,B39–41,B44,B46–47 Fourthquarter,2009,B1–5 CountryExposureLendingSurvey,A25 Secondquarter,2010,B21–30 CountrywideBank,F.S.B.,A5 Thirdquarter,2010,B31–49

C2 Federal Reserve Bulletin 2010 Litigation,finalenforcementdecisions Returnonequity(ROE),A1 Benarroch,AdamL.,B17–19 Rose,Jonathan,D.,article,A1–A37 Garcia-Adanez,Antonio,B29–30 RuralHousingServiceguarantees,A43,A54–55,A77 Loans,mortgages,A39–77 S M SupervisoryCapitalAssessmentProgram,A3,A18–21 MerrillLynchBankandTrustCo.,F.S.B.,A5 Mortgagedata,A39–77 T MortgageInsuranceCompaniesofAmerica(MICA),A57–58 Mortgage-backedsecurities(MBS),A1–2,A7,A10,A14–16,A28, TemporaryLiquidityGuaranteeProgram(TLGP),A18 A30,A32,A34,A36 TermAsset-BackedSecuritiesLoanFacility,A2,A9 TroubledAssetReliefProgram(TARP),A3,A19,A20–21 N NeighborhoodStabilizationProgram(NSP),A68 U U.S.bankingindustry,A1–37 P PrimaryMortgageMarketSurvey(PMMS),A50,A52–54,A71 V Privatemortgageinsurancedata,A56–60 VeteransAffairs,A40,A43,A45,A54–58,A60–61,A77 ProfitsandBalanceSheetDevelopmentsatU.S.CommercialBanks in2009,A1–37 W R WellsFargo&Company,A5,A20 RegulationC(HomeMortgageDisclosure),A77 Worker,Homeownership,andBusinessAssistanceActof2009, Returnonassets(ROA),A1,A21–22 A56