Federal Reserve Bulletin, 2014-01

Federal Reserve Bulletin 2014 Compilation www.federalreserve.gov 0215 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM @FederalReserve Flickr.com/FederalReserve YouTube.com/FedReserveBoard Federal Reserve Bulletin 2014 Compilation

Federal Reserve Bulletin 2014 Compilation BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

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iii Federal Reserve BULLETIN Contents Preface .................................................................................................................v ChangesinU.S.FamilyFinancesfrom 2010to2013:EvidencefromtheSurveyof ConsumerFinances...............................1 JesseBricker,LisaJ.Dettling,AliceHenriques,JoanneW.Hsu, KevinB.Moore,JohnSabelhaus,JeffreyThompson,andRichardA. Windleof theBoard’sDivisionof ResearchandStatistics,prepared thisarticlewithassistancefromSebastianDevlin-FoltzandJacob Krimmel. The2013HomeMortgageDisclosureActData ...................................................41 NeilBhuttaandDanielR.Ringo,of theDivisionof Researchand Statistics,preparedthisarticle.MaduraWatanagaseprovided researchassistance. LegalDevelopments:FourthQuarter,2013 ..........................................................73 LegalDevelopments:FirstQuarter,2014 ............................................................131 LegalDevelopments:SecondQuarter,2014 ........................................................151 LegalDevelopments:ThirdQuarter,2014...........................................................239 Index .................................................................................................................279

v Federal Reserve BULLETIN Preface TheFederalReserveBulletinwasintroducedin1914asavehicletopresentpolicyissues developedbytheFederalReserveBoard.Throughouttheyears,theBulletinhasbeen viewedasajournalof record,servingtoprovidethepublicwithdataandresearchresults generatedbytheBoard. AuthorsfromtheBoard’sResearchandStatistics,MonetaryAffairs,International Finance,BankingSupervisionandRegulation,ConsumerandCommunityAffairs,Reserve BankOperations,andLegaldivisionscontributetothecontentpublishedintheBulletin, whichincludestopicalresearchandanalysisandquarterly“LegalDevelopments.” Startingin2004,theBulletinwaspublishedquarterlyratherthanmonthly.In2006,in responsetotheincreaseduseof theInternet—andinordertoreleasearticlesandreportsin amoretimelyfashion—theBoarddiscontinuedthequarterlyprintversionof theBulletin andbegantopublishthecontentsof theBulletinonitspublicwebsiteastheinformation becameavailable.Allarticles,ordersonbankingapplications,andenforcementactionsthat werepublishedintheonlineBulletinin2010areincludedinthisprintcompilation. ThetablesthatappearedintheFinancialandBusinessStatisticssectionof theBulletin from1914through2003wereremovedandpublishedmonthlyasaseparateprintand onlinepublication,theStatisticalSupplementtotheFederalReserveBulletin,from2004to 2008.Effectivewiththepublicationof theDecember2008issue,theFederalReserveBoard discontinuedboththeprintandonlineversions. Themajorityof datapublishedintheStatisticalSupplementareavailableelsewhereonthe FederalReserveBoard’swebsiteatwww.federalreserve.gov/econresdata/statisticsdata.htm. TheBoardhascreatedawebpagethatprovidesadetailedlistof linkstothemostrecent dataonitssiteandlinkstootherdataprovidedbytheFederalReserveBankof NewYork, theU.S.Treasury,andtheFederalFinancialInstitutionsExaminationCouncil. OnlineaccesstotheBulletinisfree.Afreee-mailnotificationservice (www.federalreserve.gov/generalinfo/subscribe/notification.htm)isavailabletoalertsubscriberstothereleaseof articlesandordersintheBulletin,aswellaspressreleases,testimonies,andspeeches.Thenotificationmessageprovidesabrief descriptionandalinkto therecentposting. ‰ FederalReserveBulletin:www.federalreserve.gov/pubs/bulletin ‰ DatasourcesforthetablesinthediscontinuedStatisticalSupplementtotheFederal ReserveBulletin:www.federalreserve.gov/pubs/supplement/statsupdata/statsupdata.htm

1 Federal Reserve BULLETIN September 2014 Vol 100, No 4 Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances JesseBricker,LisaJ.Dettling,AliceHenriques,JoanneW.Hsu,KevinB.Moore,John Sabelhaus,JeffreyThompson,andRichardA.Windleof theBoard’sDivisionof Researchand Statistics,preparedthisarticlewithassistancefromSebastianDevlin-FoltzandJacob Krimmel. TheFederalReserveBoard’striennialSurveyof ConsumerFinances(SCF)collectsinformationaboutfamilyincomes,networth,balancesheetcomponents,credituse,andother financialoutcomes.1The2013SCFrevealssubstantialdisparitiesintheevolutionof incomeandnetworthsincetheprevioustimethesurveywasconducted,in2010.2 Duringthethreeyearsbetweenthebeginningof the2010and2013surveys,realgross domesticproductgrewatanannualrateof 2.1percent,thecivilianunemploymentratefell from9.9percentto7.5percent,andtheannualrateof changeintheconsumerpriceindex (CPI)averaged2.3percent.3Althoughaggregateeconomicperformanceimprovedsubstantiallyrelativetotheperiodbetweenthe2007and2010surveys,theeffectonincomesfor differenttypesof familieswasfarfromuniform.SeveralobservationsfromtheSCFabout familyincomesstandout:4 ‰ Between2010and2013,mean(overallaverage)familyincomerose4percentinreal terms,butmedianincomefell5percent,consistentwithincreasingincomeconcentration duringthisperiod(figure1). ‰ Someof the2010to2013growthdifferentialreflectedareturntotrend,afterthecyclical narrowingof theincomedistributionbetween2007and2010,whenlargedecreasesin topincomesassociatedwiththerecentfinancialcrisisreducedmeanfamilyincomemore thanmedianfamilyincome. ‰ Familiesatthebottomof theincomedistributionsawcontinuedsubstantialdeclinesin averagerealincomesbetween2010and2013,continuingthetrendobservedbetweenthe 2007and2010surveys.5 1 Seebox1,“TheDataUsedinThisArticle,”forageneraldescriptionoftheSCFdata.Theappendixtothisarticle providesasummaryofkeytechnicalaspectsofthesurvey. 2 Foradetaileddiscussionofthe2010surveyaswellasreferencestoearliersurveys,seeJesseBricker,ArthurB.Kennickell,KevinB.Moore,andJohnSabelhaus(2012),“ChangesinU.S.FamilyFinancesfrom2007to2010:Evidence fromtheSurveyofConsumerFinances,”FederalReserveBulletin,vol.98,pp.A1–A80, www.federalreserve.gov/pubs/bulletin/2012/pdf/scf12.pdf. 3 ChangesinaggregatestatisticsreportedherearemeasuredfromMarchtoMarchorfirstquartertofirstquarterofthe respectivesurveyyears,justpriortothebeginningofthefieldperiodforeachsurvey. 4 Incomeismeasuredfortheyearpriortothesurvey. 5 Theincomemeasureusedtogroupfamiliesfordistributionalpurposeshereandthroughoutmostofthisarticleis basedontheSCFconceptof“usual”income.Seebox2,“UsualversusActualIncome,”foranexplanationand exampleofwhytheusualincomemeasureispreferableforgroupingfamilies. Note:ThisarticlewasrepublishedonOctober24,2014.PleaseseetheErrataonpage40.

2 FederalReserveBulletin|September2014 ‰ Familiesinthemiddletoupper- Figure1.Changeinmedianandmeanfamilyincomes, middleparts(betweenthe40th 2007–13surveys and90thpercentiles)of the incomedistributionsawlittle 10 changeinaveragerealincomes Median between2010and2013andthus Mean havefailedtorecoverthelosses 5 experiencedbetween2007 and2010. 0 ‰ Onlyfamiliesattheverytopof theincomedistributionsaw widespreadincomegains -5 between2010and2013, althoughmeanandmedian incomeswerestillbelow -10 2007levels. ‰ Thedifferentialsinaverage -15 incomegrowthbetween2010 2007–10 2010–13 and2013arealsoobservedfor otherfamilygroupingsinwhich Note:Changesarebasedoninflation-adjusteddollars. Source:FederalReserveBoard,SurveyofConsumerFinances. largedifferencesinincomelevels areobserved,notablyacrosseducationgroups,byraceandethnicity,homeownershipstatus,andlevelsof networth. Theimprovementsineconomicactivityalongwithchangesinhouseandcorporateequity pricescombinedtoeffectivelystabilizeaverageandmedianfamilynetworth(wealth) between2010and2013afterbothmeasuresfelldramaticallybetween2007and2010.The CoreLogicnationalhousepriceindexincreasedatanannualrateof 2.0percentbetween early2010andearly2013,justbelowtherateof consumerpriceinflation.Thevalueof corporateequityholdings,asmeasuredbymajorstockpriceindexes,grewatjustovera 10percentannualratebetweenthetwosurveys,leadingtolargeinflation-adjustedincreases inequityholdings.6Thesedifferentialpricetrendshadpredictableeffectsonthedistributionof changesinnetworthacrossthepopulation: ‰ Overall,between2010and2013therewaslittlemovementinmedianandmeannet worth,asthemedianfellamodest2percentandthemeanincreasedslightly(figure2). ‰ Consistentwithincometrendsanddifferentialholdingsof housingandcorporateequities,familiesatthebottomof theincomedistributionsawcontinuedsubstantialdeclines inrealnetworthbetween2010and2013,whilethoseinthetophalf saw,onaverage, modestgains. ‰ Ownershipratesof housingandbusinessesfellsubstantiallybetween2010and2013. ‰ Retirementplanparticipationin2013continuedonthedownwardtrajectoryobserved betweenthe2007and2010surveysforfamiliesinthebottomhalf of theincomedistribution.Participationreboundedslightlyforupper-middleincomefamilies,butitdidnot movebacktothelevelsobservedin2007. 6 Intheyearfollowingthebeginningofthe2013survey,betweenMarch2013andMarch2014,theCoreLogic nationalhousepriceindexsurged10.9percent,greatlysurpassingtherateofconsumerpriceinflation.In thesameperiodtheStandardandPoor’sS&P500stockpriceindexincreasedmorethan20percent.These pricechangesemphasizetheneedtoevaluateSCFfindingsintheappropriatetimeframe;bothmedianand meannetworthrosesubstantiallybetweenthebeginningofthe2013surveyandthepublicationofthisreport.

ChangesinU.S.FamilyFinancesfrom2010to2013 3 ‰ Thevalueof directandindirectholdingsof corporateequitiesincreasedbetween2010 and2013thoughtheownershipratefell.Thedecreaseinstockownershiprateswasmost pronouncedforthebottomhalf of theincomedistribution. ‰ Thedecreaseinownershipratesforhousingandcorporateequityholdingswasconcentratedinthebottomandupper-middlepartsof theincomedistribution,thoughthe decreaseinbusinessownershipwasconcentratedamonghigher-incomefamilies. Between2010and2013,interestratesfellonmosttypesof consumerdebt:Typicalfixedrate30-yearmortgageinterestratesfellfrom5.3percentto3.5percent,newvehicleloan interestratesfellfrom6.5percentto4.7percent,andcreditcardinterestratesfellfrom 14.3percentto11.9percent.Atthesametime,debtholdingsof familiesdecreased,and manyaspectsof families’debtcircumstancesimproved: ‰ Overall,debtobligationsfell Figure2.Changeinmedianandmeanfamilynetworth, between2010and2013:Median 2007–13surveys debtdeclined20percent,and meandebtdecreased13percent 10 Median forfamilieswithdebt. Mean ‰ Forthemedianfamilywithdebt, 0 debtburdensalsofellbetween 2010and2013:Leverageratios, debt-to-incomeratios,and -10 payment-to-incomeratiosallfell. Thefractionof familieswith -20 payment-to-incomeratios greaterthan40percentdeclined belowthelevelseenin2001. -30 ‰ Muchof thedeclineindebtcan beexplainedbyalargedeclinein -40 2007–10 2010–13 thefractionof familieswith home-secureddebt,whichfell Note:Changesarebasedoninflation-adjusteddollars. from47.0percentto Source:FederalReserveBoard,SurveyofConsumerFinances. 42.9percent,adeclinethatis onlypartlyexplainedbythe muchsmallerdropinhomeownership. ‰ Between2010and2013,thefractionof familieswithcreditcarddebtalsodecreased. Medianandmeanbalancesforfamilieswithcreditcarddebtfell18percentand 25percent,respectively,andthefractionof familiesthatpayoff creditcardsevery monthincreased. ‰ Thefractionof familiesconsideredcreditconstrained—thosewhoreportedbeingdenied credit,aswellasthosewhodidnotapplyforcreditforfearof beingdenied—declined slightlyfrom28.3percentin2010to27.6percentin2013. ‰ Althoughmanymeasuresof debtanddebtobligationsindicatethatdebthasfallen,educationdebtincreasedsubstantiallybetween2010and2013.

4 FederalReserveBulletin|September2014 Income Medianandmeaninflation-adjustedbefore-taxfamilyincomesmovedindifferentdirectionsbetween2010and2013.7Overall,medianincomefell5percentbetween2010and 2013,from$49,000to$46,700(table1).Meanincomeincreased4percent,from$84,100to $87,200.Thedeclineinmedianincomecoupledwiththeriseinmeanincomeisconsistent withawideningincomedistributionduringthisperiod.8 Overtheprecedingthree-yearperiod,2007–10,medianandmeanincomebothfellsharply (8percentand11percent,respectively).Thechangesforboththe2007–10and2010–13 periodsstandinstarkcontrasttoapatternof substantialincreasesinboththemedianand themeandatingbacktotheearly1990s.9 Somepredictablepatternsinincomelevelsacrossdemographicgroupsareobservedinthe 2013SCF,andthosepatternsarelargelyconsistentwithpriorsurveys.10Acrossagegroups, medianandmeanincomesshowalife-cyclepattern,risingtoapeakinthemiddleage groupsandthendecliningforgroupsthatareolderandincreasinglymorelikelytobe retired.Incomealsoshowsastrongpositiveassociationwitheducation;inparticular, incomesforfamiliesheadedbyapersonwhohasacollegedegreetendtobesubstantially higherthanforthosewithlowerlevelsof schooling.Incomesof whitenon-Hispanicfamiliesaresubstantiallyhigherthanthoseof otherfamilies.11Incomeisalsohigherfor homeownersthanforotherfamilies,andincomeissystematicallyhigherforgroupswith greaternetworth.12 Changes in Income by Family Characteristics Changesinmedianandmeanincomesbetween2010and2013variedsubstantiallyacross differenttypesof families,whethergroupedbyeconomiccharacteristicssuchasincome, wealth,andhomeownerstatus,orbypurelydemographicvariablessuchasage,education, orraceandethnicity.Patternsaregenerallyconsistentwiththeoverallwideningof the incomedistribution,asreflectedinthedifferentialgrowthof overallmedianandmean familyincome. Foragivenfamily,incomeataparticulartimemaynotbeindicativeof its“usual”income. Unemployment,abonus,acapitallossorgain,orotherfactorsmaycauseincometo 7 Tomeasureincome,theinterviewersrequestinformationonthefamily’scashincome,beforetaxes,forthefull calendaryearprecedingthesurvey.ThecomponentsofincomeintheSCFarewages,self-employmentand businessincome,taxableandtax-exemptinterest,dividends,realizedcapitalgains,foodstampsandother relatedsupportprogramsprovidedbygovernment,pensionsandwithdrawalsfromretirementaccounts,Social Security,alimonyandothersupportpayments,andmiscellaneoussourcesofincomeforallmembersoftheprimaryeconomicunitinthehousehold. 8 Box3,“RecentTrendsintheDistributionofIncomeandWealth,”discussestrendsinincomeandwealth shares,asmeasuredbytheSCF,since1989. 9 Between1992and2007,meanandmedianincomegenerallyincreasedbetweensurveywaves.Meanincome increased,onaverage,8.0percentbetweensurveywaves,andmedianincomeincreased,onaverage,4.2percent betweensurveywaves.The2001–04periodistheonlyexception,whenmeanincomefellmodestly. 10 Tabulateddatafromthesurveybeyondthatpresentedinthisarticleareavailableatwww.federalreserve.gov/ econresdata/scf/scfindex.htm.Thisinformationincludessomealternativeversionsofthetablesinthisarticle, includingtablesthatmatchthestructureusedinearlierversionsofthispublication.Forthosewhowishto makefurtheralternativecalculations,thiswebsiteprovidesavarietyofdatafilesaswellasaccesstoonline tabulationsoftwarethatmaybeusedtocreatecustomizedtablesbasedonthevariablesanalyzedinthisarticle. 11 SeetheappendixforadiscussionofracialandethnicidentificationintheSCF. 12 Inthisarticle,afamilyisconsideredahomeownerifatleastonepersoninthefamilyownsatleastsomepartof thefamily’sprimaryresidence.

ChangesinU.S.FamilyFinancesfrom2010to2013 5 Box 1. The Data Used in This Article DatafromtheSurveyofConsumerFinances(SCF)arethebasisoftheanalysispresented inthisarticle.TheSCFisatriennialinterviewsurveyofU.S.familiessponsoredbythe BoardofGovernorsoftheFederalReserveSystemwiththecooperationoftheU.S. DepartmentoftheTreasury.Since1992,datafortheSCFhavebeencollectedbyNORC,a researchorganizationattheUniversityofChicago,roughlybetweenMayandDecemberof eachsurveyyear. Themajorityofstatisticsincludedinthisarticlearerelatedtocharacteristicsof“families.” Asusedhere,thistermismorecomparablewiththeU.S.CensusBureaudefinitionof “households”thanwithitsuseof“families,”whichexcludesthepossibilityofone-person families.Theappendixprovidesfulldefinitionsof“family”fortheSCFandtheassociated family“head.” Thesurveycollectsinformationonfamilies’totalincomebeforetaxesforthecalendaryear precedingthesurvey.Butthebulkofthedatacoverthestatusoffamiliesasofthetimeof theinterview,includingdetailedinformationontheirbalancesheetsanduseoffinancial servicesaswellasontheirpensions,laborforceparticipation,anddemographiccharacteristics.Exceptinasmallnumberofinstances(seetheappendixandthemaintextfor details),thesurveyquestionnairehaschangedinonlyminorwaysrelevanttothisarticle since1989,andeveryefforthasbeenmadetoensurethemaximumdegreeofcomparabilityofthedataovertime. Theneedtomeasurefinancialcharacteristicsimposesspecialrequirementsonthesample designforthesurvey.TheSCFisexpectedtoprovidereliableinformationbothonattributesthatarebroadlydistributedinthepopulation(suchashomeownership)andonthose thatarehighlyconcentratedinarelativelysmallpartofthepopulation(suchascloselyheld businesses).Toaddressthisrequirement,theSCFemploysasampledesign,essentially unchangedsince1989,consistingoftwoparts:astandard,geographicallybasedrandom sampleandaspecialoversampleofrelativelywealthyfamilies.Weightsareusedtocombineinformationfromthetwosamplestomakeestimatesforthefullpopulation.Inthe 2013survey,6,026familieswereinterviewed,andinthe2010survey,6,492were interviewed. Thisarticledrawsprincipallyuponthefinaldatafromthe2013and2010surveys.Toprovidealargercontext,someinformationisalsoincludedfromthefinalversionsofearlier surveys.1Differencesbetweenestimatesfromearliersurveysasreportedhereandas reportedinearlierFederalReserveBulletinarticlesareattributabletoadditionalstatistical processing,correctionofminordataerrors,revisionstothesurveyweights,conceptual changesinthedefinitionsofvariablesusedinthearticles,andadjustmentsforinflation.In thisarticle,alldollaramountsfromtheSCFareadjustedto2013dollarsusingthe“current methods”versionoftheconsumerpriceindexforallurbanconsumers(CPIURS).The appendixprovidesadditionaldetailontheadjustments. Theprincipaldetailedtables(tables1through4)describingincome,networth,andasset anddebtholdingsfocusonthepercentageofvariousgroupsthathavesuchitemsand/or themedianandmeanholdingforthosewhohavethem.2Generally,whenonedealswith datathatexhibitverylargevaluesforarelativelysmallpartofthepopulation—asisthe caseformanyoftheitemsconsideredinthisarticle—estimatesofthemedianareoften statisticallylesssensitivetosuchoutliersthanareestimatesofthemean.Atthesame time,meansaregenerallymoreusefulforcomparingacrosspopulationsubgroups becauseeverymemberofthegroupcontributesequallytotheoverallaverage. Oneliabilityofusingthemedianasadescriptivedeviceisthatmediansarenotadditive— thatis,thesumofthemediansoftwoitemsforthesamepopulationisnotgenerallyequal tothemedianofthesum(forexample,medianassetslessmedianliabilitiesdoesnotequal mediannetworth).Incontrast,meansforacommonpopulationareadditive.Wherea comparablemedianandmeanaregiven,thegainorlossofthemeanrelativetothe medianmayusuallybetakenasindicativeoftherelativechangeatthetopofthedistribution;forexample,whenthemeandecreasesmorerapidlythanthemedian,itistypically continuedonnextpage

6 FederalReserveBulletin|September2014 Box 1. The Data Used in This Article—continued takentoindicatethatthevaluesintheupperpartofthedistributionfellmorethanthosein thelowerpartofthedistribution. Toprovideameasureofthesignificanceofthedevelopmentsdiscussedinthisarticle, standarderrorscausedbysamplingandimputationformissingdataaregivenforselected estimates.Spacelimitspreventtheinclusionofthestandarderrorsforallestimates. Althoughthestatisticalsignificanceoftheresultsisnotdirectlyaddressed,thearticlehighlightsfindingsthataresignificantorareinterestinginabroadercontext. 1 AdditionalinformationaboutthesurveyisavailableontheBoard’spublicwebsiteat www.federalreserve.gov/econresdata/scf/scfindex.htm. 2 Themedianofadistributionisdefinedasthevalueatwhichequalpartsofthepopulationconsideredhavevalues thatarelargerorsmaller. deviatetemporarilyfromtheusualamount.13Acrossthedistributionof familiesgrouped byusualincome,allbutthehighestquintilesawdeclinesinmedianincomebetween2010 and2013,withsecondandthirdquintilesseeingthelargestdeclines(7percentand6percent,respectively).14Medianincomeincreased2percentforthetopincomedecile.Mean incomedeclinedstronglyforthebottomtwoquintilesandbarelybudgedforthosebetween the40thand90thpercentiles,whereasthemeanincomeof thetopdecileincreased10percentbetween2010and2013. Nearlyallagegroupsexperienceddeclinesinmedianincome,withtheexceptionof families headedbythoseage35to44(6percentincrease)andage65to74(nochange).Mean incomesincreased18percentforages35to44and22percentforages65to74.Unlikefor medianincomes,themeanincomeof theoldesthouseholdsincreasedabout7percent.For everyagegroup,meanincomesdeclinedbylessthanmedianincomesorrosebymorethan medianincomes. Between2010and2013,bothmedianandmeanincomechangeswerepositivelyassociated witheducationalattainment.Themedianincomeof householdswithahighschool diplomaorlessfellbetween6and9percent,whereasthemeanincomeof thosewithouta highschooldiplomafellmuchmorethanthatof thosewhograduatedfromhighschool(a 17percentdeclineversusa2percentdecline).Themedianincomeof thosewithsomecollegedecreased11percent,whereasthemedianincomeof thosewithacollegedegree increased1percent.Meanincomeforthosewithacollegedegreeincreased5percent. Overthe2010–13period,medianincomeforwhitenon-Hispanicfamiliesdecreasedmodestly,1percent,whereastheirmeanincomeincreased8percent.Theirincomesinboth yearsweremuchhigherthannon-whiteorHispanicfamilies,whosawdeclinesinmedian incomeof 9percentanddeclinesinmeanincomeof 11percent. Forhomeowners,medianincomefell1percentbetween2010and2013,whilemeanincome increased7percentduringthisperiod.Medianandmeanincomesforrentersandother familiesdeclinedverymodestly,1percentforbothmeasures. Bypercentileof networthmeasuredconcurrentlyintheSCF,bothmeanandmedian incomefellforthoseinthebottomthreequartiles,whilebothmeasuresroseforthetop 13 Box2,“UsualversusActualIncome,”discussesincomevariabilityandtheimplicationsofcategorizingfamilies bythetwoincomemeasures. 14 Eachquintilerepresents20percentofthepopulation.Seetheappendixforinformationaboutdistribution groupcutoffs.

ChangesinU.S.FamilyFinancesfrom2010to2013 7 Box 2. Usual versus Actual Income TheincomeclassifierusedthroughoutthisreportistheSurveyofConsumerFinances respondent-reportedmeasureof“usual”income.Thisclassifierisdesignedtocapturea versionofhouseholdincomewithtransitoryfluctuationssmoothedawayinorderto approximatetheeconomicconceptof“permanent”income.Usualincomediffersfrom actualincomewhentherespondentreportsthatthefamilyexperiencedanegativeorpositiveincome“shock”thatistransitoryinnature,sayfromatemporaryunemploymentspell oranunexpectedsalarybonus.Usualincomeismeasuredinthesurveyafteractual incomehasbeenreported,whenrespondentsweregiventheoptiontoreporttheirusual incomeiftheybelievetheyexperiencedatemporarydeviation.1 Thefractionoffamilieswithactualincomedeviatingfromusualincomevariesoverthe businesscycle,andgroupingfamiliesbyactualincomecanbiasestimatesofchangesin economicoutcomesacrossgroups,particularlyinvolatileperiods.In2007,14.4percentof familiesreportedthattheiractualincomewastemporarilybelowtheirusualincome (figureA).Thefractionreportingunusuallylowincomesurgedto25.2percentin2010and thenfellbackto18.4percentin2013. FigureA.Familieswithpositiveandnegativeincomeshocks,2007–13surveys 90 2007 80 2010 70 60 2013 50 40 30 20 10 0 Income below usual Income equal to usual Income above usual (negative shock) (no shock) (positive shock) Thepotentialforbiasarisesbecauseaveragenetworth,portfoliocomposition,borrowing, andspendingbehaviorforwealthyfamilieswithtemporarilylowincomesareallverydifferentfromfamilieswhoseincomeisusuallylower.Consider,forexample,thefirstquintileof familiessortedbyactualincome.Thisactualincomegroupincludessomefamilieswhose incomeisusuallylowandsomefamilieswhoseincomeistemporarilylow.In2007,the fractionoffamiliesinthebottomactualincomequintilewhoseusualincomewouldput theminahighergroupwas23.5percent(tableB).Thatfractionsurgedto38.8percentin 2010beforefallingbackto31.2percentinthemostrecentsurvey,2013. TableB.Effectofgroupingbyactualincomeonaveragenetworthforbottom20percent, 2007–13surveys Thousandsof2013dollarsexceptasnoted 2007 2010 2013 Percentoffamiliesin“usuallyhigher”incomegroup 23.5 38.8 31.2 Averagenetworthof… Allfamilies,bottom20percentbyactualincome 118.2 125.1 86.1 Familiesusuallyinbottom20percent 101.6 81.8 64.6 Familieswithincomeusuallyabovebottom20percent 232.0 318.6 216.4 continuedonnextpage

8 FederalReserveBulletin|September2014 Box 2. Usual versus Actual Income—continued Iffamilieshadbeengroupedbyactualincome,insteadofusualincome,theestimatesof averagenetworthwouldhavebeenseverelybiased.Lookingatallfamiliesinthebottom 20percentbyactualincome,onewouldcomeawaywiththeimpressionthataveragenet worthincreasedbetween2007and2010,from$118,200to$125,100,beforefallingto $86,300in2013.Amongthosefamiliesinthebottomquintilewhoseincomeisusuallylow, averagenetworthfellfrom$101,600to$81,800between2007and2010,andthenfellfurther,to$64,600in2013.Groupingfamiliesbyusualincomeprovidesamuchmoreaccuraterepresentationofthechangesinnetworthexperiencedacrossincomegroups. 1 Specifically,afterthedataonactualincomearecollected,respondentswereasked,“Isthisincomeunusuallyhigh orlowcomparedtowhatyouwouldexpectina‘normal’year,orisitnormal?”Iftherespondentansweredthat incomewasunusuallyhighorlow,thefollow-upquestionis,“Aboutwhatwouldyourtotalincomehavebeenifit hadbeenanormalyear?” quartile.Forhouseholdsinthelowestquartileof networth,medianincomedeclined7percentandmeanincomefell10percent.Householdsinthesecondandthirdquartilesaw smallerdeclinesinincome(5percentforbothgroupsformedianincome,and3to4percent formeanincome,forbothgroups).However,bothmeanandmedianincomeincreasedfor thetopquartile.Forthosehouseholdsinthe75thto90thpercentileof networth,median incomerose10percent,whileitrose5percentforthetopdecile.Thelargestincreasewasin meanincomeforthetopdecileof networth,anincreaseof 13percent. Net Worth Medianandmeaninflation-adjustednetworth—thedifferencebetweenfamilies’gross assetsandtheirliabilities—werebothlittlechangedbetween2010and2013(table2).Overall,themediannetworthof allfamiliesfellamodest2percentto$81,200,whilemeannet worthwaseffectivelyunchangedat$534,600.Incontrast,the2010SCFshoweddramatic decreasesinmedianandmeannetworthinthe2007–10period,whilethe2007survey showedsubstantialincreasesrelativeto2004.15Thesepatternsinnetworthoverthepast decadewerelargelydrivenbytheboomandbustinhouseandotherassetprices.Thebust, inparticular,hadadisproportionateeffectonfamiliesinthemiddleof thenetworthdistribution,whosewealthportfolioisdominatedbyhousing.Divergenttrendsinmedianand meannetworthoverthepastfewsurveyssuggestsubstantialheterogeneityinwealth changesacrossfamilies.16 Themedianandmeanvaluesof wealthrisesystematicallywithusualincome,arelationship reflectingahigherlevelof savingamonghigher-incomefamilies,andthefeedbackeffectof higherincomesfromtheaccumulatedassets.17Medianandmeanfamilynetworthgenerally increasewithage,withaplateauormodestdecreasesfortheoldestagegroupsrelativetothe near-retirementagegroups.Thispatternreflectsbothlife-cyclesavingbehaviorandahistoricalpatternof long-rungrowthininflation-adjustedwages,asyoungercohortshavegenerally hadhigherlifetimeearningsthanprecedingcohorts.Wealthshowsstrongdifferentialsacross groupsdefinedintermsof education,racialorethnicbackground,andhousingstatus;these differentialsgenerallymirrorthoseforincome,butthewealthdifferencesarelarger. 15 Betweenthe2004and2007surveys,meannetworthincreased13.0percentandmediannetworthincreased 17.9percent. 16 Box3,“RecentTrendsintheDistributionofIncomeandWealth,”discussessharesofincomeandwealth,as measuredbytheSCF,since1989. 17 Seebox4,“SavingBehavior,”foradiscussionofpatternsofsavingbyusualincome,andbox5,“Shopping forFinancialServices,”foradiscussionoftheresourcesthatfamiliesusewhenmakinginvestmentandborrowingdecisions.

ChangesinU.S.FamilyFinancesfrom2010to2013 9 Table1.Before-taxmedianandmeanfamilyincome,byselectedcharacteristicsoffamilies, 2010and2013surveys Thousandsof2013dollarsexceptasnoted Medianincome Meanincome Familycharacteristic Percentchange Percentchange 2010 2013 2010 2013 2010–13 2010–13 Allfamilies 49.0 46.7 -5 84.1 87.2 4 (.6) (.6) (1.2) (1.5) Percentileofusualincome Lessthan20 15.8 15.2 -4 16.5 15.2 -8 20–39.9 32.7 30.4 -7 32.4 30.5 -6 40–59.9 51.8 48.7 -6 49.9 49.6 -1 60–79.9 79.5 77.9 -2 78.9 80.0 1 80–89.9 125.3 121.7 -3 124.3 123.5 -1 90–100 217.9 223.2 2 361.5 397.5 10 Ageofhead(years) Lessthan35 37.6 35.3 -6 51.1 48.7 -5 35–44 57.7 60.9 6 86.8 102.0 18 45–54 65.4 60.9 -7 109.5 103.8 -5 55–64 59.0 55.1 -7 113.4 110.1 -3 65–74 45.8 45.9 0 81.2 98.8 22 75ormore 31.2 28.5 -9 49.4 53.1 7 Educationofhead Nohighschooldiploma 24.6 22.3 -9 36.1 30.0 -17 Highschooldiploma 39.2 37.0 -6 51.6 50.7 -2 Somecollege 46.0 40.9 -11 63.0 61.3 -3 Collegedegree 79.1 80.0 1 138.1 145.4 5 Raceorethnicityofrespondent Whitenon-Hispanic 56.6 55.8 -1 96.6 104.5 8 NonwhiteorHispanic 37.1 33.6 -9 58.3 51.6 -11 Housingstatus Owner 63.8 63.4 -1 105.3 112.4 7 Renterorother 28.0 27.8 -1 40.6 40.1 -1 Percentileofnetworth Lessthan25 25.4 23.7 -7 35.0 31.4 -10 25–49.9 40.6 38.6 -5 48.8 46.9 -4 50–74.9 58.8 55.8 -5 67.8 65.8 -3 75–89.9 79.9 87.5 10 95.4 100.0 5 90–100 174.9 183.4 5 319.2 361.2 13 Note:Incomeismeasuredfortheyearpriortothesurvey.Seetheappendixfordetailsonstandarderrors(showninparenthesesbelowthefirst rowofdataforthemeansandmedians). Changes in Net Worth by Family Characteristics Familieswithhigherlevelsof usualincomereportedgreaterlevelsof networth,but changesinnetworthvariedsubstantiallyacrosstheusualincomedistribution.Mediannet worthdecreasedbetween2010and2013formostusualincomegroups,fallingbetween 10and17percent,withtheexceptionof thefourthquintile.Thoseinthelowestusual incomequintilesawsmalldecreasesinmediannetworth(12percent,from$7,300to $6,400),buttheyalsosawthelargestproportionaldecreaseinmeannetworth(21percent, from$81,800to$64,600).Householdsinthesecondandthirdquintileof usualincomesaw largedeclinesinmediannetworth(10percentand17percent,respectively),aswellasmean

10 FederalReserveBulletin|September2014 Box 3. Recent Trends in the Distribution of Income and Wealth Incomeinequality,particularlytheshareofincomereceivedbythetop1percentofthe incomedistribution,hasreceivedincreasedattentioninrecentyears.1TheSurveyofConsumerFinances(SCF)isuniquelycapableofcontributingtoourunderstandingoftrendsin incomeandwealthinequalitybecausethesurveycollectsdataonnetworthinadditionto income,anditalsoeffectivelysamplesaffluentfamilies.2 Datafromthe2013SCFconfirmthatthesharesofincomeandwealthheldbyaffluent familiesareatmodernhistoricallyhighlevels.Also,thegainsinincomeandwealthshares havebeenconcentratedamongthetopfewpercentilesofthedistribution.Contraryto someanalysisofInternalRevenueServicedataindicatingwealthgainsareisolatedtothe top1percent,oreven0.5percent,datafromtheSCFshowthatthetopfewpercentof familieshaveexperiencedrisingsharesofincomeandwealth. Theshareofincomereceivedbythetop3percentoffamilieswas31.4percentin2007but fellto27.7percentin2010asbusinessandassetincomedeclinedparticularlysharplyin therecessionandfinancialcrisis(figureA).Sincethattime,theincomeshareofthetop 3percenthasrebounded,climbingto30.5percentin2013.Theshareofincomereceived bythenexthighest7percentofthedistribution(percentiles90through97)hasnot changedoverthepastquarterofacentury,sittingslightlybelow17percentin1989and 2013.Correspondingly,therisingincomeshareofthetop3percentmirrorsthedeclining incomeshareofthebottom90percentofthedistribution,whichfellto52.7percent in2013. FigureA.Incomesharesbyincomepercentile,1989–2013surveys 75 Top 3 percent Next 7 percent Bottom 90 percent 50 25 0 1989 1992 1995 1998 2001 2004 2007 2010 2013 Changesinthesharesofwealthheldbydifferentsegmentsofthewealthdistributionhave beenlesscyclicalthanincome.Thewealthshareofthetop3percentclimbedfrom 44.8percentin1989to51.8percentin2007and54.4percentin2013(figureB).Aswith income,thesharesofwealthheldbythenext7highestpercentoffamilieschangedvery little,hoveringbetween19and22percentoverthepast25years,andregistering20.9percentin2013.Similartothesituationwithincome,therisingwealthshareofthetop3percentoffamiliesismirroredbythedecliningshareofwealthheldbythebottom90percent. Theshareofwealthheldbythebottom90percentfellfrom33.2percentin1989to 24.7percentin2013. continuedonnextpage

ChangesinU.S.FamilyFinancesfrom2010to2013 11 Box 3. Recent Trends in the Distribution of Income and Wealth— continued FigureB.Wealthsharesbywealthpercentile,1989–2013surveys 75 Top 3 percent Next 7 percent Bottom 90 percent 50 25 0 1989 1992 1995 1998 2001 2004 2007 2010 2013 1 See,forexample,FacundoAlvaredo,AnthonyB.Atkinson,ThomasPiketty,andEmmanuelSaez(2013),“TheTop 1PercentinInternationalandHistoricalPerspective,”JournalofEconomicPerspectives,vol.27(Summer), pp.3–20. 2 SeethesamplingtechniquessectionoftheappendixforfurtherdiscussionoftheSCF’sabilitytocaptureaffluent families. networth(16percentand13percent).Thefourthincomequintilewastheonlygroupthat experiencedincreasesinbothmedianandmeannetworth:16percentformediannetworth and14percentformeannetworth.Thoseatthetopof theincomedistributionexperienced decreasesinmediannetworth,whilemeannetworthwaslittlechanged. Differentagegroupsexperiencedverydifferenttrendsinnetworthbetween2010and2013. Bothmeanandmediannetworthincreasedforthoseunderage45,decreasedforthose betweenage45and64,increasedforthosebetweenage65and74,anddecreasedforthe oldestgroup.Increasesweregenerallylargerformeannetworththanformediannetworth, whiledeclinesweresimilarinmagnitudeforthetwomeasures.Gainsinmediannetworth rangedbetween3and5percent,whiledeclinesrangedbetween14and17percent. From2010to2013,networthfolloweddifferentpatternsfordifferenteducationgroups. Thosewithoutahighschooldiplomasawnochangeinmediannetworthbetween2010 and2013,buttheirmeannetworthfell9percent.Thosewithhighschooldiplomasor somecollegebothsaw14percentdeclinesinmediannetworth;theformersawa15percent declineinmeannetworth,whilethosewithsomecollegehad9percenthighermeannet worthin2013.Mediannetworthincreased5percentforthosewithcollegedegrees,while theirmeannetworthdeclined2percent. Meanandmediannetworthof non-Hispanicwhitefamilieschangedsimilarly,a1percent meanincreaseand2percentmedianincrease,withmediannetworthreaching$142,000and meannetworthreaching$705,900in2013.However,themediannetworthof non-whiteor Hispanicfamiliesfell17percentto$18,100,andmeannetworthfell2percentto$183,900.

12 FederalReserveBulletin|September2014 Table2.Familymedianandmeannetworth,byselectedcharacteristicsoffamilies, 2010and2013surveys Thousandsof2013dollarsexceptasnoted Mediannetworth Meannetworth Familycharacteristic Percentchange Percentchange 2010 2013 2010 2013 2010–13 2010–13 Allfamilies 82.8 81.2 -2 534.5 534.6 0 (2.6) (2.8) (10.0) (9.3) Percentileofusualincome Lessthan20 7.3 6.4 -12 81.8 64.6 -21 20–39.9 31.0 27.9 -10 134.7 113.1 -16 40–59.9 66.6 55.4 -17 189.5 164.8 -13 60–79.9 138.6 161.3 16 306.8 350.9 14 80–89.9 321.7 287.9 -11 645.0 631.4 -2 90–100 1,275.7 1,125.9 -12 3,274.6 3,327.3 2 Ageofhead(years) Lessthan35 10.0 10.4 4 70.0 75.5 8 35–44 45.2 46.7 3 233.0 347.2 49 45–54 126.3 105.3 -17 614.1 530.1 -14 55–64 192.3 165.9 -14 943.6 798.4 -15 65–74 221.5 232.1 5 909.2 1,057.0 16 75ormore 232.3 194.8 -16 726.5 645.2 -11 Educationofhead Nohighschooldiploma 17.2 17.2 0 118.6 108.3 -9 Highschooldiploma 60.7 52.5 -14 233.8 199.6 -15 Somecollege 54.5 46.9 -14 291.7 317.9 9 Collegedegree 209.2 219.4 5 1,047.8 1,031.6 -2 Raceorethnicityofrespondent Whitenon-Hispanic 139.9 142.0 2 701.4 705.9 1 NonwhiteorHispanic 21.9 18.1 -17 188.5 183.9 -2 Housingstatus Owner 187.0 195.4 4 764.6 783.0 2 Renterorother 5.4 5.4 0 61.3 70.3 15 Percentileofnetworth Lessthan25 † † … –13.7 –13.4 2 25–49.9 34.5 31.3 -9 38.2 35.9 -6 50–74.9 168.5 168.1 0 181.0 177.7 -2 75–89.9 517.3 505.8 -2 565.7 546.2 -3 90–100 1,997.8 1,871.8 -6 3,982.8 4,024.8 1 †Lessthan0.05($50). ...Notapplicable. Note:Networthisthedifferencebetweenfamilies'grossassetsandtheirliabilities.Seetheappendixfordefinitionsofassetandliability categoriesusedintheSCF,aswellasdetailsonstandarderrors(showninparenthesesbelowthefirstrowofdataforthemeansandmedians). Themediannetworthof homeownersincreased4percentbetween2010and2013,whereas thatof rentersorothernon-homeownersdidnotchange.Themeannetworthof homeownersincreased2percentcomparedwiththe15percentincreaseforrenters. Mediannetworthfellforallpercentilegroupsof thedistributionof networth,withthe largestdecreasesinproportionaltermsbeingforthesecondquartile(9percentdecline)and thetopdecile(6percent)of thenetworthdistribution.Forthelowestquartile,mediannet worthwaslessthan$50inboth2010and2013,whilemeannetworthincreased2percent

ChangesinU.S.FamilyFinancesfrom2010to2013 13 Box 4. Saving Behavior Becausesavingoutofcurrentincomeisanimportantdeterminantoffamilynetworth,the SurveyofConsumerFinances(SCF)asksrespondentswhether,overtheprecedingyear, thefamily’sspendingwaslessthan,morethan,oraboutequaltoitsincome.Thoughonly qualitative,theanswersareausefulindicatorofwhetherfamiliesaresaving. Between2010and2013,theproportionofallfamiliesthatsavedremainedbasicallyconstant,risingonlyslightlyfrom52.0percentto53.0percent(figureA).Thefractionoffamilieswhoreportedsavinginthe2013SCFisstilllowerthanitwasinthe2007survey,when thefractionoffamiliesthatsavedwas56.4percent. FigureA.Familiesthatsavedbyusualincome,2007–13surveys 100 2007 2010 2013 80 60 40 20 0 All 0–49.9 50–89.9 90–100 Percentile of usual income Acrossfamiliesgroupedbyusualincometherearelargedifferencesinthefractionoffamilieswhosave,andthefractionsavingincreaseswithusualincome(figureA).1Infact,in 2013,thefractionoffamiliesinthetopincomegroupthatsavedwas82.4percent. Thispercentagewasmorethandoublethe40.2percentthatsavedinthelowestincome group. Between2007and2010,thefractionoffamiliesthatsavedfellineachofthethreegroupingsofusualincome,whilebetween2010and2013,thefractionoffamiliesthatsavedfell forthelowestincomegroup,butrosefortheothertwogroups.Thefractionoffamilieswho savedinthebottom50percentandthenext40percentoftheincomedistributionhaveyet toregainthelevelofsavingsfoundinthe2007survey,andforthosefamiliesinthetop 10percentoftheincomedistribution,thefractionsavingnowexceedsthatfoundin2007. 1 Foradescriptionoftheusualincomemeasure,seebox2,“UsualversusActualIncome.” fromnegative$13,700tonegative$13,400.Whilethesecondquartileexperiencedthelargestdeclinesinmeanandmediannetworth,mediannetworthof thethirdquartilewasvirtuallyunchangedbetween2010and2013atapproximately$168,100andmeannetworth declined2percentto$177,700.Familiesbetweenthe75thand90thpercentileof networth sawa2percentdeclineinmediannetworth,reaching$505,800in2013,anda3percent declineinmeannetworth.Whilethemediannetworthof thetopdeciledropped6percent to$1,871,800in2013,thegroup’smeannetworthroseslightlyandexceeded$4million in2013.

14 FederalReserveBulletin|September2014 Box 5. Shopping for Financial Services Asanormalpartoftheirfinanciallives,familiesmakeavarietyofdecisionstoselect investmentproductsforanysavingstheymayhave,orloanproductsforanycreditthey mayuse.Totheextentthatfamiliesdevotemoreorlessattentiontosuchdecisions,orare betterorworseinformed,thewealthofotherwisecomparablefamiliesmaydiffersubstantiallyovertime. TheSurveyofConsumerFinances(SCF)containsaself-assessmentoffamilies’intensity ofshoppingforborrowingorinvestingservices.Notethatalthoughthesurveyquestions areintendedtoelicitadescriptionofbehavioringeneral,theresponsescouldalsoreflect short-termneedsforsuchservicesandthereforetheimmediateneedforshopping. In2013,only29percentoffamiliesreportedshopping“agreatdeal”forloanterms,and 24percent“agreatdeal”forinvestmentterms(figureA).However,therateofshopping“a greatdeal”forbothloanandinvestmenttermshasincreasedineachwaveoftheSCF from2007to2013.Thepercentoffamilieswhoreportedshoppingeither“amoderate amount”or“almostnone”declinedfrom2010to2013. FigureA.Intensityofshoppingforborrowingorinvesting,2007–13surveys 60 2007 2010 50 2013 40 30 20 10 0 Almost none Moderate A great deal Almost none Moderate A great deal (borrowing) amount (borrowing) (investing) amount (investing) (borrowing) (investing) In2013,forthefirsttime,morefamiliesturnedtotheInternetthantoanyothersourcefor informationaboutborrowing(tableB).ThefractionoffamilieswhoreportedusingtheInternetforinformationaboutborrowingreached47percentin2013,welloverthe41.7percent whoreporteddoingsoin2010.ThesharereportingthattheyusedtheInternetasasource ofinformationforinvestingalsorosebetween2010and2013,from33.0percentto 35.3percent. continuedonnextpage

ChangesinU.S.FamilyFinancesfrom2010to2013 15 Box 5. Shopping for Financial Services—continued TableB.Informationusedfordecisionsaboutborrowingorinvesting,2007–13surveys Percent Typeofservice Source Borrowing Investing 2007 2010 2013 2007 2010 2013 Callingaround 33.4 27.0 24.7 18.0 15.7 13.2 Advertisementsandmedia 43.0 34.2 29.0 29.9 26.1 21.3 Internet 38.4 41.7 47.0 28.3 33.0 35.3 Friends,relatives,associates 45.9 43.9 46.1 42.3 40.8 40.8 Bankers,brokers,andothersellersoffinancialservices 39.2 39.5 41.5 38.3 39.1 38.3 Lawyers,accountants,andotherfinancialadvisors 19.5 19.5 21.5 29.3 31.1 31.8 Doesnotborroworinvest 9.6 14.6 13.7 10.2 11.7 13.2 Friends,relatives,andassociatesremainedverycommonsourcesforinformationusedto makeborrowingandinvestingdecisionsin2013(46.1percentforborrowingand40.8percentforinvesting),suggestingthattheremaybefeedbackeffectsinfinancialoutcomes; thosewhoknowrelativelywell-informedpeoplemayobtainbetterservices. Sellersoffinancialservicesalsoremainedcommonlyreportedsourcesofinformationin 2013(41.5percentforborrowing,38.3percentforinvesting).Forbothtypesofdecisions, fewerfamiliesreportedconsultingprintmediaormaterialinthemailin2013thanin2010. Assets Between2010and2013,ownershipof anytypeof assetchangedlittle,risingslightlyfrom 97.4percentto97.9percentin2013(table3).Atthesametime,ownershipratesof nearly everytypeof individualassetfellbetween2010and2013.Thisfindingindicatesthatwhile mostfamiliescontinuetoholdsometypeof asset,manymorefamiliesnowholdfewer differenttypesof assets. Conditionalonholdinganyassets,themedianfamily’stotalassetholdingsfell11percent, from$200,600in2010to$177,900in2013.Theconditionalmeanvalueof totalassetsalso fell,althoughthedropwasmoremodest,at3percent.Muchof thisdeclineintheconditionalmedianandmeanvalueof totalassetsheldcanbeexplainedbydeclinesinhomeownershipandstagnantrealhomepricesbetween2010and2013.Thelargerdropin median—versusmean—assetholdingsindicatesthatlossesinassetvalueswerespread unequallyacrossfamiliesandassettypes. Financial Assets Overall,ownershipof anyfinancialassets—whichincludestransactionaccounts,certificatesof deposit,savingsbonds,otherbonds,stocks,pooledinvestmentfunds,retirement accounts,cashvaluelifeinsurance,andothermanagedassets—remainedhighin2013,at 94.5percent.18Thisfindingrepresentedalmostnochangefromthelevelseenin2010 (94.0percent).However,theconditionalmedianvalueof allfinancialassetsheldbyfamiliesfell8percent,from$23,000in2010to$21,200in2013.Conditionalmeanvalues,by contrast,rose5percent,from$257,800to$270,100.Thisincreaseindicatesthatsome 18 SeetheappendixfordetaileddefinitionsofSCFassetandliabilitycategories.

16 FederalReserveBulletin|September2014 Table3.Holdingandvaluesofassets,2010and2013surveys Thousandsof2013dollarsexceptasnoted Percentholding Conditionalmedianvalue Conditionalmeanvalue Balancesheetitem Percentchange Percentchange 2010 2013 2010 2013 2010 2013 2010–13 2010–13 AnyAsset 97.4 97.9 200.6 177.9 -11 656.2 638.9 -3 Typesoffinancialasset Anyfinancialasset 94.0 94.5 23.0 21.2 -8 257.8 270.1 5 Transactionaccounts 92.5 93.2 3.8 4.1 9 34.8 36.3 4 Certificatesofdeposit 12.2 7.8 21.4 16.0 -25 77.8 64.5 -17 Savingsbonds 12.0 10.0 1.1 1.0 -7 6.6 6.4 -3 Bonds 1.6 1.4 146.8 94.5 -36 659.1 581.7 -12 Stocks 15.1 13.8 21.4 27.0 26 224.8 294.3 31 Pooledinvestmentfunds 8.7 8.2 85.7 80.0 -7 416.4 462.9 11 Retirementaccounts 50.4 49.2 47.2 59.0 25 183.4 201.3 10 Cashvaluelifeinsurance 19.7 19.2 7.8 8.0 2 30.4 35.3 16 Othermanagedassets 5.7 5.2 75.0 100.0 33 265.7 370.6 39 Other 8.0 6.9 5.4 4.0 -25 68.5 55.1 -20 Typesofnonfinancialasset Anynonfinancialasset 91.3 91.0 165.6 148.4 -10 434.6 407.2 -6 Vehicles 86.7 86.3 16.3 15.8 -4 23.7 22.6 -5 Primaryresidence 67.3 65.2 182.2 170.0 -7 280.1 262.6 -6 Otherresidentialproperty 14.3 13.2 128.6 123.8 -4 309.7 316.3 2 Equityinnonresidential property 7.7 7.2 69.7 60.0 -14 344.6 268.0 -22 Businessequity 13.3 11.7 84.4 67.5 -20 844.8 973.9 15 Other 7.0 7.3 16.1 13.0 -19 71.3 72.2 1 Note:SeetheappendixfordefinitionsofassetcategoriesusedintheSCF. familiesexperiencedlargegainsinthevaluesof theirfinancialassets,butthemedianfamily experiencedalossinfinancialassetvalues. Althoughoverallownershipratesof anyfinancialassetremainedunchanged,ownership ratesof almosteveryspecifictypeof financialassetfell(withtheexceptionof transaction accounts),suggestingfamiliesnowholdfewerdifferenttypesof financialassets. Transactionaccounts—whichincludechecking,savings,moneymarket,andcall accounts—remainedthemostcommonlyheldtypeof financialassetin2013,withanownershiprateof 93.2percent,aslightincreasefromthe92.5percentof familiesthathelda transactionaccountin2010.Theconditionalmedianandmeanvaluesof thoseaccounts alsorosebetween2010and2013,9percentand4percent,respectively.In2013,median transactionaccountholdingswere$4,100,andmeanholdingswere$36,300. Ratesof ownershipof certificatesof depositsfellmarkedlybetween2010and2013,from 12.2percentto7.8percent.Theamountheldinthoseaccountsalsofell,withthemedian declining25percentandthemeandeclining17percent.Thesedeclinesare,atleastinpart, attributabletolowinterestratesoverthisperiod,whichreducedtheadvantageof certificatesof depositovertransactionaccounts. Ownershipof savingsbonds,otherbonds,directlyheldstocks,andpooledinvestment fundssustainedsizabledropsinownershipratesbetween2010and2013,althoughnoneof thefourtypesof assetsarecommonlyheld,withownershipratesin2013varyingbetween 1.4percent(otherbonds)and13.8percent(directlyheldstocks).Theconditionalmedian andmeanvalueof mostof theseassetsalsofellbetween2010and2013,withtheexception

ChangesinU.S.FamilyFinancesfrom2010to2013 17 of pooledinvestmentfundsandstocks.Themedianvalueof stocksrose26percent,from $21,400in2010to$27,000in2013.Thegrowthinmedianandmeanholdingsof stocksis largelyexplainedbythewidespreadincreaseinstockmarketindexesbetween2010and 2013.19However,someof theincreaseinconditionalholdingsmightbeduetoexitsfrom ownership,if thosewhoexitedtendedtohavestockholdingsof lowervalue.20 Ownershipof retirementaccounts—includingindividualretirementaccounts(IRAs), Keoghaccounts,andcertainemployer-sponsoredaccounts,suchas401(k),403(b),and thriftsavingsaccounts—fellbelow50percentin2013,continuingthedownwardtrendalso observedbetweenthe2007and2010surveys.Medianandmeanvaluesof retirement accounts,however,rosesubstantially.Theconditionalmedianvalueof retirementaccounts rose25percentfrom$47,200in2010to$59,000in2013;andthemeanvaluerose10percent,from$183,400in2010to$201,300in2013.Thisgrowthislikelyexplainedbyacombinationof resurgentstockmarketsandincreasedcontributionsbythosewhoparticipated inretirementplans.21 Thepercentof familiesowningtheremainingfinancialassetcategories—cashvalueof life insurance,othermanagedassets,andthecatch-all“other”category—declinedbetween 2010and2013.Themedianandmeanvaluesof othermanagedassetsmovedinlinewith stocksandretirementaccounts,andtheyreflectedthepositiveeffectof thestockmarketon thevalueof assetsintheseportfolios. Nonfinancial Assets Ownershipof nonfinancialassets—includingvehicles,residentialandnonresidentialproperty,andbusinessequity—remainedhighin2013at91.0percent,fallingonlyslightlyfrom 2010.Foreveryseparatecategoryof nonfinancialassetsexcept“other,”however,ownershipratesfell.Thesepatternsindicatethatmostfamiliesstillholdanonfinancialasset,but theyholdfewertypesthanwereheldin2010. Themostcommonlyheldtypeof nonfinancialassetin2013wasvehicles,averybroadcategorythatincludescars,vans,sportutilityvehicles,trucks,motorhomes,recreational vehicles,motorcycles,boats,airplanes,andhelicopters.Between2010and2013,thefractionof familiesowningavehicledeclinedslightlyfrom86.7percentto86.3percent.The medianandmeanvalueof vehiclesownedbyfamiliesalsofellbetween2010and2013.The medianvaluedecreasedfrom$16,300to$15,800,andthemeandeclinedfrom$23,700to $22,600between2010and2013.22 Housingownershipalsofell,bothforprimaryresidencesandforotherresidentialproperty. Ownershipdeclinedfrom67.3percentof familiesowningaprimaryresidencein2010to 65.2percentowningaprimaryresidencein2013.Thisdecreaserepresentedacontinued declinesincethe2004SCFwasconducted,whenthehomeownershipratewas69.1percent.23 19 Forcomparison,theMarch2010toMarch2013increasesintheS&P500,theDowJonesIndustrialIndex,and theWilshire5000indexeswere34.6percent,35.0percent,and36.3percent,respectively.Inrealterms,these correspondtoincreasesof25.9percent,26.3percentand27.4percent,respectively. 20 Seebox6,“DirectandIndirectHoldingsofPubliclyTradedStock,”formoredetailsonpatternsinstock holding. 21 Seebox7,“RetirementAccountsandPlanParticipation,”formoredetails. 22 Surveyrespondentswereaskedtoprovidetheyear,make,andmodelofeachoftheircars,vans,sportutility vehicles,andtrucks.ThisinformationwasusedtoobtainmarketpricesfromdatacollectedbytheNational AutomobileDealersAssociationandavarietyofothersources.Forothertypesofvehicles,therespondentwas askedtoprovideabestestimateofthecurrentvalue. 23 Seebox8,“HomeownershipandNetHousingWealth,”formoredetails.

18 FederalReserveBulletin|September2014 Box 6. Direct and Indirect Holdings of Publicly Traded Stock Familiesmayholdstocksinpubliclytradedcompaniesdirectlyorindirectly,andinformationabouteachoftheseformsofstockholdingiscollectedseparatelyintheSurveyof ConsumerFinances.1Whendirectandindirectformsofstockholdingsarecombined,the 2013datashowafurtherdeclineinstockownershipoverthemostrecentperiod.Thelevel ofstockownershipin2013,at48.8percent,reflectsacontinueddeclinefromthepeak levelof53.2percentreportedinthe2007survey(figureA).Groupingfamiliesbytheirlocationintheusualincomedistributionrevealsthatthelowestincomegroupexperiencedfurtherdeclinesinstockownershipfrom2010to2013,whiletheownershiprateforthe upper-middleincomegroupremainedaboutthesameoverthemostrecentperiod.2For thetopincomegroup,therateofownershipincreased3.9percentagepointsfrom2010to 2013,reaching92.1percent,slightlyabovethe91.7percentfoundinthe2007survey. FigureA.Familieswithdirectandindirectholdingsofstock,2007–13surveys 100 2007 2010 2013 90 80 70 60 50 40 30 20 10 0 All 0–49.9 50–89.9 90–100 Percentile of usual income Incontrasttothedeclineinstockownership,themeanvalueofstockholdingsincreased from$228,300in2010to$269,900in2013,exceedingthemeanvalueof$254,000in2007 (tableB).Acrossallusualincomegroups,themeanvalueofstockholdingsincreasedfrom 2010to2013,withthemeanvaluefortheupper-middleandtopincomegroupsrising abovethe2007level.Forthelowestincomegroup,themeanvaluein2013remained slightlybelowthelevelattainedin2007.Thevalueofstockholdingsvariessubstantially acrossusualincomegroups,withmeanholdingsforthetopgroupaboutseventimesthe sizeofmeanholdingsoftheupper-middleincomegroup. TableB.Meanlevelsfordirectandindirectholdingsofstock,2007–13surveys Thousandsof2013dollars Conditionalmeanvalue 2007 2010 2013 All 254.0 228.3 269.9 Percentileofusualincome 0–49.9 53.8 36.1 53.6 50–89.9 127.8 113.0 132.3 90–100 982.0 885.9 969.3 continuedonnextpage

ChangesinU.S.FamilyFinancesfrom2010to2013 19 Box 6. Direct and Indirect Holdings of Publicly Traded Stock—continued Amongfamiliesthatheldstock,eitherdirectlyorindirectly,in2013,ownershipthrougha tax-deferredretirementaccountwasthemostcommon(87.0percent),followedbydirect stock(28.2percent),directholdingsofpooledinvestmentfunds(16.0percent),andmanagedinvestmentaccountsoranequityinterestinatrustorannuity(8.2percent).From 2010to2013,ownershipofstockthroughatax-deferredretirementaccountormanaged investmentaccountincreasedslightly,whileownershipthroughallothertypesdeclinedor remainedthesame.Thefractionoffamiliesthatownedstockthroughmultipletypes declinedto31.6percentin2013,downfrom32.8percentin2010. 1 Indirectstockholdingsarethoseinpooledinvestmentfunds,retirementaccounts,andothermanagedassets. 2 Foradescriptionoftheusualincomemeasure,seebox2,“UsualversusActualIncome.” Theconditionalmedianandmeanvalueof primaryresidencesalsofellinrealterms,7percentand6percent,respectively.Amongfamilieswhoarehomeowners,themedianfamily’s homewasworth$170,000in2013,downfrom$182,200in2010.Thedeclineinrespondentreportedhomevaluesbetweenthetwomostrecentsurveysisalittlesurprising,giventhe widespreadperceptionthathousevalueshavestabilizedandpartiallyrecoveredinmost areas.However,inflation-adjustednationalhomepriceindexesshowedslightdeclinesover theperiodbetweentheonsetsof fieldworkforthetwomostrecentsurveys.24Inaddition, thedivergenceinhousepricetrendsiswellwithinempiricalestimatesof homeowner reportingbiasinhousevalues,anditmayreflectacorrectioninperceivedvaluesfollowing thehousingboomperiod,duringwhichhousesmayhavebeenovervaluedbyrespondents.25Itisalsoworthnotingthatsincethe2013surveywasadministered,houseprice indexeshaveincreasedsubstantially. Ownershipandmedianvaluesof otherresidentialproperty,whichincludesresidencessuch assecondhomesandtimeshares,alsofellbetween2010and2013.Meanvaluesof other residencesincreasedslightly. Thelargestrelativedropinownershipratesof anytypeof nonfinancialassetwasinthecategoryof businessequity,whereownershipratesfellfrom13.3percentto11.7percent.The medianfamilywithbusinessequityalsoexperiencedadeclineof 20percentinvalue,with medianbusinessequityfallingfrom$84,400to$67,500between2010and2013.Themean valueof businessequityrose15percent.Thischangeindicatesthatlossesinbusinessequity werenotequallydistributed,andmanybusiness-owningfamiliesexperiencedlargegains, whilethemedianbusiness-owningfamilyexperiencedaloss.26 24 TheCoreLogicnationalhousepriceindexincreasedatanannualrateof2.0percentbetweenearly2010and early2013,andtheFederalHousingFinanceAgency(FHFA)indexroseatanannualrateof0.7percentover thesameperiod.BotharebelowtherateofconsumerpriceinflationusedtoindexSCFassetvalues,whichran 2.3percentduringthatperiod(seetheappendixfordetailsoninflation-adjustingSCFvalues).Therefore,real housepricesmeasuredbyeitherindexfellbetweenthetwosurveys.Intheyearfollowingthebeginningofthe 2013surveyfieldperiod,theCoreLogicindexincreased10.9percent,andtheFHFAindexincreased6.6percent,whileconsumerpriceswerelittlechanged. 25 SeeAliceM.Henriques(2013),“AreHomeownersinDenialaboutTheirHouseValues?ComparingOwner PerceptionswithTransaction-BasedIndexes,”FinanceandEconomicsDiscussionSeries2013-79(Washington: BoardofGovernorsoftheFederalReserveSystem,September),www.federalreserve.gov/pubs/feds/2013/ 201379/201379pap.pdf. 26 Seebox9,“HoldingsofBusinessEquity,”formoredetails.

20 FederalReserveBulletin|September2014 Box 7. Retirement Accounts and Plan Participation Ownershipofretirementaccountsandparticipationinretirementplanscanbothincrease families’networthandprovidesecuritytofamiliesastheyapproachretirement.Afamilyis consideredaparticipantinretirementplansifithasanyofthefollowing:anindividual retirementaccount(IRA);anaccount-typejobpension(definedcontribution,knownas DC),including401(k)s;oradefinedbenefit(DB)pension.Thefollowingdiscussionfocuses onprime-agefamilies,thosewhoseheadisbetweenages35and64,asthesefamilies havegenerallyfinishedtheireducationandareestablishedintheircareersbutaregenerallytooyoungforfullretirement. Groupingfamiliesbyusualincomeindicatesthatthoseinthebottomhalfoftheusual incomedistributionsawoveralldeclinesinretirementplanparticipationbetween2007and 2010andthenagainbetween2010and2013,from48.2percentin2007to40.2percentin 2013(figureA).1ThisoveralldeclinewasdrivenbydeclinesinbothIRAandDCcoverage, astherewaslittlechangeinthefractionoffamilieswithaDBplan.Thosefamiliesinthe next40percentoftheincomedistributionsawonlyaslightnetdeclineinoverallretirement planparticipationbetween2007and2013and,between2010and2013,experienceda slightincreaseinparticipationdrivenbyincreasesinparticipationforallthreeclassesof retirementassets.Familiesinthetop10percentoftheincomedistributionsawaslight increaseinretirementplanparticipationfrom2007to2013,reaching94.6percentin2013, justtoppingthe94.1percentseenin2007. FigureA.Participationinanyretirementplanforfamiliesages35–64,2007–13surveys 100 2007 2010 2013 90 80 70 60 50 40 30 20 10 0 All 0–49.9 50–89.9 90–100 Percentile of usual income ThevalueofassetsheldwithinIRAsandDCplansareamongthemostsignificantcomponentsofmanyfamilies’balancesheetsandareasignificantdeterminantoftheirfuture retirementsecurity.TheaveragecombinedIRAandDCpensionbalanceforfamiliesowningthoseassetsinthelowestincomegroupwas$39,100in2013.Thatfigureiscloseto the2010averagebalanceof$40,500butdownmorethan20percentfromthe2007value of$50,600(tableB).Thoseintheupper-middleincomegroupsawanincreaseintheir averagetotalbalancebetween2007and2010.Whiletherewaslittlechangeinaverage balancefrom2007to2010,between2010and2013,theaveragebalanceforthisgroup increasedbyapproximately$20,000,or16percent,from$126,900to$147,300.Average balancesfellforthoseinthetopincomegroup,andparticularlyforthoseattheverytop. Forexample,thefractionoffamiliesinthetop10percentoftheincomedistributionwith retirementaccountbalancesexceeding$1,000,000fellfrom14percentin2010to9percentin2013. continuedonnextpage

ChangesinU.S.FamilyFinancesfrom2010to2013 21 Box 7. Retirement Accounts and Plan Participation—continued TableB.MeanretirementsavingsamongthosewithanIRAorDCpension,familiesages35–64, 2007–13surveys Thousandsof2013dollars Conditionalmeanvalue 2007 2010 2013 All 184.4 198.4 194.8 Percentileofusualincome 0–49.9 50.6 40.5 39.1 50–89.9 125.6 126.9 147.3 90–100 485.0 539.3 446.1 1 Foradescriptionoftheusualincomemeasure,seebox2,“UsualversusActualIncome.” Debt, Debt Burden, and Credit Market Experiences Thefractionsof familiesholdinganytypeof debtfellslightlybetween2010and2013,from 74.9percentto74.5percent,representingacontinueddeclineindebtholdingsince2007 (table4).27Theconditionalmedianandmeanvalueof debtheldalsofellbetween2010and 2013.Theconditionalmedianfell20percent,from$75,800in2010to$60,400in2013.The conditionalmeanalsofell,from$140,000in2010to$122,300in2013,adeclineof 13percent. Debt Holdings by Type Between2010and2013,themixof debtheldbyfamiliesalsochanged.Fewerfamiliesheld debtsecuredbyaprimaryresidence,andthosethatdidhavesuchtypesof debtowed smalleramounts.However,morefamiliesheldeducationloansin2013thanin2010,and thosewitheducationloansowedlargeramountsontheloans. Parallelingthedropinhomeownership,ratesof holdingof debtsecuredbyaprimaryresidence(hereafter,home-secureddebt)fellbetween2010and2013.Thefractionof families withmortgagesandotherhome-secureddebtfellfrom47.0percentin2010to42.9percent in2013.Thisdeclinewasmuchlargerthanthe3.3percentdecreaseinhomeownership notedpreviously. However,home-secureddebtcontinuedtobethemostcommontypeof debtheldbyfamilies.Theconditionalmedianandmeanvaluesof home-secureddebtalsofellbetween2010 and2013.Theconditionalmedianvalueof home-secureddebtfell2percent,from $117,500to$115,000.Theconditionalmeanvalueof home-secureddebtfell5percent, from$165,400to$156,700.Thedeclinesinholdingandtheconditionalmeanandmedian valuesof home-secureddebtrepresentedacontinuationof declinesseenbetween2007and 2010.28Thesedeclinesalsoparallelthedeclinesinhomevaluesseenbetween2010and2013 (table3),althoughthedeclinesinthevalueof debtaremuchsmallerthanthedeclinesin homevalues(2percentversus7percent). 27 SeetheappendixforadetaileddefinitionofSCFliabilitycategories. 28 Between2007and2010,thefractionofrespondentsholdingdebtsecuredbyaprimaryresidencefellfrom 48.7percentto47.0percent.Between2007and2010,theconditionalmedianvalueofhome-secureddebtfell 2.2percent,andtheconditionalmeanfell1.2percent.

22 FederalReserveBulletin|September2014 Box 8. Homeownership and Net Housing Wealth Thepercentageoffamiliesthatownedtheirprimaryresidencefellfrom68.6percentin 2007to65.2percentin2013(figureA).ThemostrecenttimetheSurveyofConsumer Financesrecordedahomeownershipratethislowwas1995.1Acrossfamiliesgrouped bypercentileofusualincome,therearelargedifferencesinhomeownershiprates,which tendtoincreasewithusualincome.2Forfamiliesinthebottomhalfoftheincomedistribution,thehomeownershipratewas49.2percentin2013;forthoseinthetop10percentby income,thehomeownershipratewas93.5percentin2013. Between2007and2010,thehomeownershipratefellacrossallusualincomegroups. Between2010and2013,homeownershipratescontinuedtofallforthebottomtwo incomegroups,however,forthetopincomegroup,homeownershipratesrosebetween 2010and2013. FigureA.HomeOwnershipRate,2007–13surveys 100 2007 2010 2013 90 80 70 60 50 40 30 20 10 0 All 0–49.9 50–89.9 90–100 Percentile of usual income Forfamiliesthatowntheirprimaryresidence,meannethousingvalue—definedasthe home’svaluelessanydebtsonthehome—declinedbetween2007and2013(tableB).3In 2007,amonghome-owningfamilies,theaveragenethousingwealth(valueofthehome minusoutstandingmortgages)was$221,000.In2013,thatnumberhadfallento$159,400, adeclineof3.1percentsince2010. Acrossusualincomegroups,themeannetvalueofhousingtendstoincreaseasusual incomerises.In2013,themeanvalueofnethousingwealthamonghomeownersinthe bottomhalfoftheincomedistributionwas$92,400.Forthetopincomegroup,themean netvalueofhousingwasroughlyfivetimeslarger,at$446,500. Between2007and2010,themeannetvalueofhousingfellbetween20and32percentfor allthreeusualincomegroups.Between2010and2013,meannethousingvaluecontinued tofallforallthreegroups,butthemagnitudesofthedeclinesdifferedsubstantially.Forthe upper-middleincomegroup,meannethousingwasessentiallyunchangedbetween2010 and2013,fallingjust$600.Forthebottomincomegroup,nethousingvaluefell11percent between2010and2013,andforthetopincomegroup,nethousingvaluefell4percent. continuedonnextpage

ChangesinU.S.FamilyFinancesfrom2010to2013 23 Box 8. Homeownership and Net Housing Wealth—continued TableB.Meannethousingvalueforhomeowners,2007–13surveys Thousandsof2013dollars Conditionalmeanvalue 2007 2010 2013 All 221.0 164.5 159.4 Percentileofusualincome 0–49.9 131.6 103.8 92.4 50–89.9 186.2 126.7 126.1 90–100 600.8 467.0 446.5 1 Thehomeownershipratein1995was64.7percent;itrosetoapeakof69.1percentin2004. 2 Foradescriptionoftheusualincomemeasure,seebox2,“UsualversusActualIncome.” 3 SurveyofConsumerFinancesrespondentswereaskedtoreportthevalueoftheirhome.Onlyprimaryresidences wereincluded.Debtsonthehomeincludeanymortgagesorhomeequityloansagainsttheprimaryresidence. Linesof creditnotsecuredbyresidentialpropertywerenotwidelyheldbyfamiliesineither the2010or2013surveys,ataround2percentof families.Thedeclineinconditionaldebt outstandingamongthosewithsuchdebtsarequitesubstantial,withboththemedianand meanvaluesfallingbyaboutone-thirdbetween2010and2013. Thefractionof familieswitheducationloans,andtheconditionalmedianandmeanvalue of educationloans,increasedbetween2010and2013,representingacontinuationof the long-termtrendof risingeducationdebt.In2010,19.2percentof familieshadaneducationloan.Thisshareroseto20.0percentof familiesin2013.Theconditionalmedianvalue of educationloansrose15percent,from$13,900in2010to$16,000in2013.Themeanrose 5percent,from$27,500to$28,900.29 Asdiscussedearlier,thefractionof familiesowningavehiclefellslightlybetween2010and 2013,to86.3percent.Atthesametime,thefractionof familieswithvehicleloansincreased slightly,andin2013,30.9percentof familieshadvehicleloans.Thisfindingrepresenteda reversalof thetrendbetween2007and2010,whenthefractionof familieswithavehicle loanfell.Between2010and2013,theconditionalmedianvalueof vehicleloansrose11percentandtheconditionalmeanfell4percent.Thismovementindicatesthatalthoughfewer familieshavevehiclesoverall,familiesarebeginningtotakeoutmoreloansonvehicles. Otherinstallmentloans,oftenassociatedwithpurchasesof furniture,appliances,andother durablegoods,wereheldby11.5percentof familiesin2010,fallingto10.1percentof familiesin2013.Themedianbalancesonsuchloansdecreased9percentbetweenthetwo surveys,andthemeanwaseffectivelyunchanged. Thefractionof familieswithoutstandingbalancesontheircreditcardsfellbetween2010 and2013,representingacontinuationof declinesseenbetween2007and2010.In2010, 39.4percentof familiesheldcreditcarddebt,whilein2013,38.1percentof familiesheld creditcarddebt.Themedianfamilywithacreditcardbalancecarried$2,300in2013,down 29 Seebox10,“EducationDebt,”formoredetails.

24 FederalReserveBulletin|September2014 Box 9. Holdings of Business Equity Thefractionoffamiliesthatownedaprivatelyheldbusinessfell1.6percentagepoints between2010and2013,to11.7percent(figureA).1Thislevelisthelowesteverrecorded intheSurveyofConsumerFinances,datingbacktothe1989survey.Ownershipofbusinessequityalsodecreasedacrossallusualincomegroupsbetween2010and2013.2For thetoptwoincomegroups,thisdecreasewasacontinuationofadeclinefromthelevelsin the2007survey.Familiesinthetopincomegroupsawthelargestpercentagepointdecline inbusinessownership,buttheownershiplevelforthisgroup,36.3percent,remainssubstantiallyhigherthanforothergroups. FigureA.Familieswithholdingsofbusinessequity,2007–13surveys 50 2007 45 2010 40 2013 35 30 25 20 15 10 5 0 All 0–49.9 50–89.9 90–100 Percentile of usual income Forfamilieswithbusinessequity,themeanvalueincreasedsubstantially,goingfrom $844,800in2010to$973,900in2013,butitremainedbelowthe2007level(tableB). Althoughtheoverallmeanvalueofbusinessequityincreasedfrom2010to2013,adifferentpictureemergesacrossusualincomegroups.Onlyfamiliesinthetopincomegroup experiencedanincreaseinthemeanvalueofbusinessequity.Themeanvalueofbusiness equityfortheupper-middleincomegroupwasapproximatelyunchanged,whilethebottom incomegroupexperiencedasubstantialdeclineinthemeanvalue. TableB.Familyholdingsofbusinessequity,2007–13surveys Thousandsof2013dollars Conditionalmeanvalue 2007 2010 2013 All 1062.5 844.8 973.9 Percentileofusualincome 0–49.9 248.9 198.0 152.7 50–89.9 330.2 276.8 274.7 90–100 2672.5 2196.0 2604.0 continuedonnextpage

ChangesinU.S.FamilyFinancesfrom2010to2013 25 Box 9. Holdings of Business Equity—continued 1 Theformsofbusinessinthiscategoryaresoleproprietorships,limitedpartnerships,othertypesofpartnerships, Scorporationsandothertypesofcorporationsthatarenotpubliclytraded,limitedliabilitycompanies,andother typesofprivatebusinesses.Ifthesurveyedfamilylivedonafarmorranchthatwasusedatleastinpartfor agriculturalbusiness,thevalueofthatpart,netofthecorrespondingshareofassociateddebts,isincludedwith otherbusinessassets. 2 Foradescriptionoftheusualincomemeasure,seebox2,“UsualversusActualIncome.” 18percentfrom$2,800in2010.Themeanbalancefellfrom$7,600in2010to$5,700in 2013,a25percentdrop. Debt Burden Theabilityof individualfamiliestoservicetheirloansisafunctionof twofactors:thelevel of theirloanpaymentsandtheincomeandassetstheyhaveavailabletomeetthosepayments.Inplanningtheirborrowing,familiesmakeassumptionsabouttheirfutureabilityto repaytheirloans.Problemsmayoccurwheneventsturnouttobecontrarytothose assumptions.If suchmisjudgmentsaresufficientlylargeandprevalent,abroadpatternof default,restraintinspending,andfinancialdistressinthewidereconomymightensue (suchaswasseenintheperiodafterthe2007survey). TheSCFdatacanbeusedtoconstructthreemeasuresof debtburdens:leverageratios, debt-to-incomeratios,andpayment-to-incomeratios.Leverageratioscomparedebtsto assets,debt-to-incomeratioscomparetotaldebttoincome,andpayment-to-incomeratios comparetotalpaymentsmadeondebttoincome.Allthreeratioscanbeconstructedeither inaggregateorasamedianfordebtors.30 Table4.Holdingandvaluesofdebtitems,2010and2013surveys Thousandsof2013dollarsexceptasnoted Percentholding Conditionalmedianvalue Conditionalmeanvalue Typesofdebts Percentchange Percentchange 2010 2013 2010 2013 2010 2013 2010–13 2010–13 Anydebt 74.9 74.5 75.8 60.4 -20 140.0 122.3 -13 Securedbyresidentialproperty Primaryresidence 47.0 42.9 117.5 115.0 -2 165.4 156.7 -5 Other 5.3 5.2 105.0 90.0 -14 192.4 156.1 -19 Linesofcreditnotsecuredby residentialproperty 2.1 1.9 6.4 4.4 -32 52.7 35.2 -33 Installmentloans Educationloans 19.2 20.0 13.9 16.0 15 27.5 28.9 5 Vehicleloans 30.2 30.9 10.7 11.9 11 15.2 14.6 -4 Otherinstallmentloans 11.5 10.1 3.6 3.3 -9 15.9 15.9 0 Creditcardbalances 39.4 38.1 2.8 2.3 -18 7.6 5.7 -25 Other 6.4 6.6 4.8 4.0 -17 18.0 14.6 -19 Note:SeetheappendixfordefinitionsofliabilitycategoriesusedintheSCF. 30 Theaggregateisdefinedasthetotalamountofdebtheld/paymentsdividedbythetotalassetsheldorincome amongallsurveyrespondents.Themedianfordebtorsisdefinedasthemedianofeachindividualfamilies’ ratioamongthosecarryingdebtonly.

26 FederalReserveBulletin|September2014 Box 10. Education Debt ThelevelofeducationloandebtheldbyU.S.familieshasincreaseddramaticallyoverthe pastdecade.Inthe2010SurveyofConsumerFinances(SCF),educationloandebtsurpassedvehicleloandebtasthelargestsourceofnonmortgagedebtowedbyU.S.families,atrendthatcontinuesinthe2013SCF(seetable4).TheSCFprovidesthedatanecessarytolookatthegrowthofeducationloansbetweenthe2001and2013surveysacross incomeandeducationgroups.Theanalysispresentedherewillfocuson“youngfamilies,” definedasthosewithaheadofhouseholdyoungerthanage40atthetimeofthesurvey.1 Thefractionofyoungfamilieswitheducationdebtincreasedfrom22.4percentto38.8percentbetween2001and2013(tableA).Conditionalonhavingeducationdebt,themean andmedianlevelsofeducationdebtalsoincreasedsubstantiallybetween2001and2013. TableA.Educationdebtoutstandingamongyoungfamilies,2001and2013surveys Thousandsof2013dollarsexceptasnoted 2001 2013 Percentwitheducationdebt 22.4 38.8 Conditionalmeaneducationdebt 16.9 29.8 Conditionalmedianeducationdebt 10.5 16.8 Despitethisgrowthineducationdebt,themajorityofyoungfamilieswitheducationdebt owedlessthan$25,000inboth2001andin2013(figureB),andtheshareoffamilieswith largebalances,thoughgrowing,isstillrelativelysmall. FigureB.Distributionofeducationloanbalancesofyoungfamilies,2001and2013surveys 2001 SCF 2013 SCF 5.6% 0.6% 5.6% 13.2% 15.6% 17.1% 78.2% 64.2% Less than $25,000 Between $50,000 and $100,000 Between $25,000 and $50,000 More than $100,000 In2013,nearly50percentoftheeducationdebtofyoungSCFfamilieswasheldbyfamilieswithusualincomemorethan$60,000(figureC),asharethatwasmostlyunchanged between2001and2013.However,comparedwiththe2001survey,in2013,alargershare ofeducationdebtwasheldbyyoungSCFfamilieswithincomesoflessthan$30,000. About24percentofyoungfamilies’educationdebtisheldbythosemakinglessthan $30,000,nearlydoublethesharethatthesefamiliesheldin2001.2 continuedonnextpage

ChangesinU.S.FamilyFinancesfrom2010to2013 27 Box 10. Education Debt—continued FigureC.Shareofyoungfamilies’educationloandebt,byincomegroup,2001and2013surveys 60 2001 50 2013 40 30 20 10 0 Less than $30,000 $30,000 to $60,000 More than $60,000 Level of usual income Highlyeducatedyoungfamiliescontinuetoholdthemajorityofeducationdebtin2013 (figureD).Nearlythree-fourthsofyoungfamilies’educationdebtisheldbyfamilieswhere atleastonememberhasabachelor’sdegreeorhigher. FigureD.Shareofyoungfamilies’educationloandebt,byhighestdegreeattained,2001and 2013surveys 80 2001 70 2013 60 50 40 30 20 10 0 Bachelor's degree or higher Associate's degree No degree Highest degree attained Althoughfamilieswithoutadegreeinthe2013SCFheldroughlythesameshareofeducationdebtthattheydidin2001,theoverallamountofdebtthattheyheldincreased.Atthe sametime,incomesformanyfamiliesinthisgroup(andothergroups)werelower(see table1).Togetasenseofhowthesetrendsmightaffectrepayment,itisusefultoconsider debtpaymenttoincomeratiosforyoungfamilieswithandwithoutdegrees. continuedonnextpage

28 FederalReserveBulletin|September2014 Box 10. Education Debt—continued YoungSCFfamilieswitheducationdebtandwithabachelor’sdegreeorhigheruseabout 3.8percentoftheirincometorepayeducationdebt(figureE).Debtpaymentsarerelatively loweventhoughdebtlevelsareincreasingbecauseatypicaleducationloanrepayment lengthismuchlongerthanotherdebtterms(themeanrepaymentterminthe2013SCFis 13years).Debtpaymentsarealsolowbecausefamiliescandefereducationloans,astatusthatallowsatemporaryhalttopaymentsontheloan.3Ifthesefamilieshadtostart payingonthesedeferredloans,theywoulduseanother2.7percentofincometorepay educationdebt.4 Youngfamilieswithoutacollegedegreeuse2.3percentofincometorepayeducation debt.However,ifthosefamilieshadtostartrepayingtheirdeferredloans,thentheywould useanadditional3.5percentofincomeoneducationdebtrepayment.Theuseofdefermentsiscurrentlyhelpingthesefamiliestomanagetheireducationdebtduringtougheconomictimes.However,becauseeducationloansarenotgenerallydischargeableinbankruptcy,thesedebtswilleventuallyhavetoberepaid. FigureE.Averagedebtpayment-to-averageincome,byhighestdegreeattained,2013survey 25 Including deferred student Including student Excluding student loan payments loan payments loan payments 2.7 20 1.5 3.8 3.7 15 3.5 2.3 10 15.6 14.5 5 10.3 0 Bachelor's degree or higher Associate's degree No degree Highest degree attained 1 NotethattheSCFdoesnotsampleinstitutionalpopulations,suchascollegedorms,andthusitisnotpossibleto trackwhatishappeningtoeducationdebtinsituationswhereanon-primaryeconomicunitchildissolely responsiblefortheeducationdebt. 2 Youngfamilieswitheducationdebtinthisincomegroupgenerallyhavenocollegedegree,thoughabout one-fourthofthesefamiliesheldabachelor’sdegreeorhigherinboththe2001and2013SCF. 3 Thereareseveralreasonswhyaborrowermayberelievedfrommakingcurrentpaymentsonaneducationloan, thoughthespecificcriteriavaryacrosstypesofloans.Forexample,defermentisgenerallygrantedwhenthe borroweriscontinuinghisorhereducation.Defermentisoftengrantedwhentheborrowerisexperiencing particulartypesoffinancialhardship,suchasunemployment.Therearealsospecialcategoriesofpublicservice, suchasthePeaceCorps,themilitary,orselectedmedicalandteachingpositions,whichqualifytheborrowerfor relieffrommakingcurrentpaymentsandsometimesultimatelyqualifytheborrowerforloanforgiveness. 4 ApaymentisnotreportedformostdeferredloansintheSCF.

ChangesinU.S.FamilyFinancesfrom2010to2013 29 Table5.Debtburdensandcreditmarketexperiences,2001–13surveys Percentorthousandsof2013dollars Measureofdebtburden/interactionwithcredit 2001 2004 2007 2010 2013 markets Debtburden Leverageratio Aggregate 12.0 15.0 14.8 16.4 14.6 Medianfordebtors 29.4 34.7 34.8 41.3 38.6 Debttoincomeratio Aggregate 80.1 111.6 115.2 124.7 104.6 Medianfordebtors 76.7 107.0 111.1 118.8 107.4 Paymenttoincomeratio Aggregate 12.9 14.4 14.6 14.7 12.0 Medianfordebtors 16.7 18.1 18.7 18.1 15.9 Fractionwithpaymenttoincomeratiogreater than40% 8.8 9.4 11.4 10.4 8.2 Creditmarketexperiences Creditconstrained Turneddownforcredit 17.0 17.5 16.7 17.4 16.4 Didnotapplyforcreditforfearofbeing turneddown 15.5 15.8 15.3 18.5 19.0 Eitherturneddownforcreditorfeareddenial 24.9 25.6 24.5 28.3 27.6 Lateonpayments Lateonpayments 14.0 16.3 20.8 17.3 14.9 Lateonpayments60daysormore 5.3 6.9 5.5 8.1 6.9 Tookoutapaydayloaninpastyear n.a. n.a. 2.4 3.9 4.2 Declaredbankruptcyinpast5years 4.3 4.4 3.8 3.6 4.1 Usecreditcardsforconvenienceonly/donotcarrya balance 57.9 56.6 56.2 63.0 64.0 n.a.Notavailable(relevantdatanotcollected). Note:Seetheappendixforadescriptionofmeasuresofdebtburdenandcreditmarketexperiences. Leverageratios,debt-to-incomeratios,andpayment-to-incomeratiosallrosebetween2001 and2010andthenfellbetween2010and2013(table5).31Leverageratiosanddebt-toincomeratioshavenotfallenbacktolevelsseenin2001,butpayment-to-incomeratiosare lowerthanlevelsseenin2001. In2013,themedianleverageratiofordebtorswas38.6percent,downfrom41.3percentin 2010butstillhigherthanthemediansof 29.4percentin2001or34.8percentin2007.In aggregate,theleverageratioin2013was14.6percent,higherthan2001butlowerthanthe 2004–10period. In2013,themediandebt-to-incomeratiofordebtorswas107.4percent,downfromthe levelseenin2010(118.8percent).Thelevelin2013issimilartothatwitnessedin2004,and similartrendscanbeseenfortheaggregate. Payment-to-incomeratiosforthemediandebtorfellfrom18.1percentto15.9percent between2010and2013.32The2013levelislowerthanwhatwasobservedinanyof thesurveyyearsbetween2001and2010.Similartrendsheldintheaggregatepayment-to-income ratios. 31 Fordefinitionsofthecomponentsoftable5,seetheappendix. 32 Analternativeaggregateversionofpayment-to-incomeratiosisthedebtserviceratio.SeeKarenDynan,KathleenJohnson,andKarenPence(2003),“RecentChangestoaMeasureofU.S.HouseholdDebtService,” FederalReserveBulletin,vol.89(October),pp.417–26,www.federalreserve.gov/pubs/bulletin/2003/1003lead .pdf.Adiscussionofhowthismeasurecompareswiththeonepresentedherecanbefoundintheappendix.

30 FederalReserveBulletin|September2014 Alimitationof usingmeasuresof debtburdensforthemediandebtoristhattheymaynot beindicativeof distressbecausetheyreflectthesituationof atypicalfamily.Unlesserrors of judgmentbybothfamiliesandlendersarepervasive,onewouldnotexpecttoseesigns of financialdistressatthemedian.Thus,amorecompellingindicatorof distressistheproportionof familieswithunusuallylargedebtburdens.In2013,8.2percentof debtorshad payment-to-incomeratiosgreaterthan40percent.Thisvaluerepresentsadecreasefrom 2010,when10.4percentof debtorshadpayment-to-incomeratiosof over40percent.The levelsin2013arelowerthanthosewitnessedatanytimebetween2001and2010. Credit Market Experiences TheSCFalsocollectsvariousmeasuresof respondents’recentexperienceswithcreditmarkets,suchasinformationoncreditapplicationsandpaymentbehavior.Overall,SCF respondents’experienceswithcreditmarketsdisplayamixedpicture.Thefractionof respondentswhowerelateonpaymentsfell,whilethefractionwhotookoutapaydayloan rose,andcreditconstraintseasedslightly. TheSCFaskstwoquestionsintendedtocapturewhetherornotfamiliesarelikelycredit constrained:first,if thefamilywasturneddownforcredit,and,second,if thefamilydid notapplyforcreditforfearof beingturneddown.Overall,between2010and2013,the fractionof familiesthatresponded“yes”tooneorbothof thesequestionsfellfrom 28.3percentin2010to27.6percentin2013.Thisdecreaseindicatesthat,bythismeasure, fewerfamilieswerecreditconstrainedin2013thanin2010.Therewasalsoachangein compositionwithinthiscategorybetween2010and2013:Morefamiliesreportednot applyingforfearof beingturneddownin2013thanin2010,whilefewerfamiliesreported beingturneddownforcreditin2013thanin2010.Infact,2010and2013werethefirstsurveyyearsthatmorefamiliesreportednotapplyingforfearof beingturneddown(19percentin2013)thanreportedbeingturneddown(16.4percentin2013). TheSCFalsoasksrespondentsif theyhavetakenoutapaydayloaninthepastyear.Paydayloansareunsecuredloansthataretypicallysmallandshort-term.Becausetheseloans generallycarryinterestratesthatfarexceedthoseforconventionalformsof credit,usageof paydayloansisoftenasignalthatanindividualcannotobtaincreditbyothermeans.In 2013,4.2percentof familiesreportedtakingoutapaydayloan,upfrom3.9percentin 2010and2.4percentin2004,thefirstyeartheSCFaskedrespondentsaboutusageof paydayloans. TheSCFalsocollectsinformationonfamilies’debtpaymentbehavior.Familiesthathave anydebtatthetimeof theirinterviewareaskedwhethertheywerebehindonanyof their loanpaymentsintheprecedingyear.In2013,14.9percentof familiesreportedbeinglate onpaymentsatall,downfrom17.3percentin2010.Thepercentof familieswhoreported beinglateonpayments60ormoredaysdeclinedfrom8.1percentin2010to6.9percent. Comparedwith2001,morefamiliesreportedbeinglateonpaymentsatallin2013,and morereportedbeinglate60ormoredays. Anadditionalmeasureof financialdistressandproblemsmanagingdebtisbankruptcy. TheSCFasksrespondentsif theyhavedeclaredbankruptcyinthepastfiveyears.In2013, 4.1percentof familiesreportedhavingdeclaredbankruptcyinthepastfiveyears,upfrom 3.6percentin2010butdownfrom4.3percentin2001. Afinalmeasureof debtpaymentbehaviorcoveredintheSCFiswhetherafamilyuses creditcardsforconvenienceonly,orcarriesabalancemonthtomonth.In2013,64percent of familiesreportedusingcreditcardsforconvenienceonly(notcarryingabalance),up from57.9percentin2001and63percentin2010.

ChangesinU.S.FamilyFinancesfrom2010to2013 31 Appendix: Survey Procedures and Statistical Measures The2013datausedherearederivedfromthefinalinternalversionof thesurveyinformation.Datafromthissurvey,suitablyalteredtoprotecttheprivacyof respondents,along withadditionaltabulationsof datafromthesurveysbeginningwith1989,areexpectedto beavailableinSeptember2014ontheFederalReserveBoard’swebsite.33 Aspartof thegeneralreconciliationsrequiredforthisarticle,thesurveydatawerecomparedwithmanyexternalestimates.Oneparticularlyimportantcomparisonisbetweenthe Surveyof ConsumerFinances(SCF)andtheFederalReserve’sStatisticalReleaseZ.1, FinancialAccountsof theUnitedStates,forthehouseholdsector.34Thiscomparisonsuggeststhatwhenthedefinitionsof thevariablesinthetwosourcesareadjustedtoacommonconceptualbasis,theestimatesof totalsinthetwosystemstendtobeclose.Thedata seriesintheSCFandinStatisticalReleaseZ.1usuallyshowverysimilargrowthrates.35In general,theincomeandnetworthdatafromtheSCFcanbecomparedwiththoseof other surveysonlyintermsof themediansbecauseof thespecialdesignof theSCFsample.36 Adjustment for Inflation Inthisarticle,alldollaramountsfromtheSCFareadjustedto2013dollarsusingthe“currentmethods”versionof theCPIforallurbanconsumers.Inanongoingefforttoimprove accuracy,theBureauof LaborStatisticshasintroducedseveralrevisionstoitsCPImethodology.Thecurrent-methodsindexattemptstoextendthesechangestoearlieryearsto obtainaseriesasconsistentaspossiblewithcurrentpracticesintheofficialCPI.37To 33 Datafromthe2013SCFaswellaslinkstothedatausedinthisarticleforearlierperiodsandlinkstoworking papersdescribingstatisticalmethodologiesareavailableontheBoard’spublicwebsiteat www.federalreserve.gov/econresdata/scf/scfindex.htm. Resultsreportedinthisarticleforearliersurveysmaydifferfromtheresultsreportedinearlierarticlesbecause ofadditionalstatisticalprocessing,correctionofdataerrors,revisionstothesurveyweights,conceptual changesinthedefinitionsofvariablesusedinthearticles,andadjustmentsforinflation. 34 SeeBoardofGovernorsoftheFederalReserveSystem(2014),StatisticalReleaseZ.1,“FinancialAccountsof theUnitedStates”(June5),www.federalreserve.gov/releases/z1. 35 Fordetailsonhowthesecomparisonsarestructuredandtheresultsofcomparisonsforearliersurveys,see AliceM.HenriquesandJoanneW.Hsu(2013),“AnalysisofWealthUsingMicroandMacroData:AComparisonoftheSurveyofConsumerFinancesandFlowofFundsAccounts,”FinanceandEconomicsDiscussionSeries2013-46(Washington:BoardofGovernorsoftheFederalReserveSystem,May), www.federalreserve.gov/pubs/feds/2013/201346/201346pap.pdf. 36 FamilyincomesareagoodexampleofissuesthatarisewhencomparingSCFmeansandmediansagainstother surveyestimates.Overthe2010–13period,estimatesofinflation-adjustedhouseholdincomefortheprevious yearfromtheCurrentPopulationSurvey(CPS)oftheU.S.CensusBureaushowadecreaseinboththemedian (negative7.3percent)andthemean(negative5.7percent).Thechangeinmedianisslightlylargerinabsolute termsthanthecorrespondingdeclineintheSCF,thoughtheSCFshowsanincreaseinthemean.Themedians for2013aresimilarintheSCF($46,700)andtheCPS($51,000).Typically,theSCFshowsahigherlevelof meanincomethandoestheCPS;for2013,theSCFyieldsanestimateof$87,200,whiletheCPSyieldsanestimateof$71,000.Thetwosurveysdifferintheirdefinitionsoftheunitsofobservationandinotheraspectsof theirmethodologies.MostrelevantisthefactthataCPShouseholdcancontainmorepeoplethanacorrespondingSCFfamily.IftheSCFmeasureisexpandedtoincludetheincomeofhouseholdmembersnot includedintheSCFdefinitionofafamily,themedianfalls5.1percentovertheperiod(from$52,400in2010to $49,700in2013),whilethemeanrises3.2percent(from$86,900in2010to$89,700in2013).Thesubstantial differenceinmeanlevelsislikelytheresultofthetruncationoflargevaluesintheCPSdataaboveacertain amount,whichisdonewiththeintentofminimizingthepossibilitythatparticipantsinthatsurveymightbe identifiable. 37 Fortechnicalinformationabouttheconstructionofthisindex,seeKennethJ.StewartandStephenB.Reed (1999),“ConsumerPriceIndexResearchSeriesUsingCurrentMethods,1978–98,”MonthlyLaborReview, vol.122(June),pp.29–38.

32 FederalReserveBulletin|September2014 adjustassetsandliabilitiesto2013dollarsandtoadjustfamilyincomeforthepreceding calendaryearto2013,thefiguresgiveninthefollowingtablewereapplied: Adjustmentfactorforassetsanddebtsinthe Adjustmentfactorforincomeinthecalendaryear Surveyyear surveyyear beforethesurveyyear 2001 1.3132 1.3501 2004 1.2331 1.2665 2007 1.1228 1.1546 2010 1.0717 1.0894 2013 1.0000 1.0145 Definition of “Family” in the Survey of Consumer Finances Thedefinitionof “family”usedthroughoutthisarticlediffersfromthattypicallyusedin othergovernmentstudies.IntheSCF,ahouseholdunitisdividedintoaprimaryeconomic unit(PEU)—thefamily—andeveryoneelseinthehousehold.ThePEUisintendedtobe theeconomicallydominantsinglepersonorcouple(whethermarriedorlivingtogetheras partners)andallotherpersonsinthehouseholdwhoarefinanciallyinterdependentwith thateconomicallydominantpersonorcouple. Thisreportalsodesignatesaheadof thePEU,nottoconveyajudgmentabouthowan individualfamilyisstructuredbutasameansof organizingthedataconsistently.If a coupleiseconomicallydominantinthePEU,theheadisthemaleinamixed-sexcoupleor theolderpersoninasame-sexcouple.If asinglepersoniseconomicallydominant,that personisdesignatedasthefamilyheadinthisreport. Asset and Liability Categories in the Survey of Consumer Finances Thespecificconceptsof assetandliabilitycategoriesintheSCFarenecessarilytiedtothe surveyquestionwordingandassociatedfieldinterviewerinstructions,bothof whichcanbe foundintheSCFcodebookfortheyear(s)inquestion.38Whatfollowsisageneralexpositionof theassetandliabilitycategoriesreportedinthetables. Transactionaccountsincludechecking,savings,andmoneymarketdepositaccounts; moneymarketfunds;andcallorcashaccountsatbrokerages.Callaccountsincludethose thatholdmoneyreceivedfromthesaleof securitiesuntilthemoneyisreinvested.Thesavingsaccountcategoryincludesarelativelysmallnumberof tax-preferredaccountssuchas medicalorhealthsavingsaccountsandCoverdellor529educationaccounts. Certificateof depositsareaccountsthatareheldforasetperiodof timethatmustbe cashedorrenewedatthematuritydate.SavingsbondsincludeonlyU.S.governmentissues; recentseriesincludeEE,HH,andI,andolderbondsmaybeseriesEandH.Otherbonds includeonlythosehelddirectly(notpartof amanagedinvestmentaccountorbondfund) andincludecorporateandmortgage-backedbonds;federal,state,andlocalgovernment bonds;andforeignbonds.Stocksincludepubliclytradedstocksthataredirectlyheld—that is,corporateequitiesnotheldaspartof amanagedinvestmentaccountormutualfund. Pooledinvestmentfundsincludestockfunds,tax-freebondfunds,governmentbondfunds, otherbondfunds,andanycombinationsthereof,butexcludemoneymarketfundsand indirectlyheldmutualfunds.Thesefundsincludeallothertypesof directlyheldpooled investments,suchastraditionalopen-endandclosed-endmutualfunds,realestateinvestmenttrusts,andhedgefunds. 38 CodebooksforeachSCFwavecanbefoundatwww.federalreserve.gov/econresdata/scf/scfindex.htm.

ChangesinU.S.FamilyFinancesfrom2010to2013 33 RetirementaccountsincludeIRAs,Keoghaccounts,andcertainemployer-sponsored accounts,suchas401(k),403(b),andthriftsavingsaccountsfromcurrentorpastjobs; othercurrentjobplansfromwhichloansorwithdrawalscanbemade;andaccountsfrom pastjobsfromwhichthefamilyexpectstoreceivetheaccountbalanceinthefuture.This definitionof employer-sponsoredplansisintendedtoconfinetheanalysistoaccountsthat areportableacrossjobsandforwhichfamilieswillultimatelyhavetheoptiontowithdraw thebalance.Usually,suchaccountsmaybeinvestedinvirtuallyanyasset,includingstocks, bonds,pooledinvestmentfunds,options,andrealestate.Inprinciple,employer-sponsored plansmaybeinvestedinasimilarlybroadway,but,inpractice,aperson’schoicesfor investmentaresometimeslimitedtoanarrowersetof assets.39 Cashvaluelifeinsuranceisthecurrent(nonzero)valueof anylifeinsurancepolicieswitha cashvaluethatcanbewithdrawn.Thesurveymeasuresthevalueof suchpoliciesaccording totheircurrentcashvalue,nottheirdeathbenefit.Inthisarticle,thecashvalueisincluded asanassetonlywhenthecashvalueatthetimeof theinterviewwasnonzero.Thisdesignationexcludestermlifeinsurancepolicies,whichonlyprovideadeathbenefit. Othermanagedassetsincludepersonalannuitiesandtrustswithanequityinterestand managedinvestmentaccounts.Annuitiesmaybethoseinwhichthefamilyhasanequity interestintheassetorinwhichthefamilypossessesanentitlementonlytoastreamof income.Thewealthfiguresinthisarticleincludeonlytheannuitiesinwhichthefamilyhas anequityinterest.40Thetrustsormanagedinvestmentaccountsincludedinothermanaged assetsarethoseinwhichfamilieshaveanequityinterestandforwhichcomponentswere notseparatelyreported.Typically,suchaccountsarethoseinwhichtheownershipiscomplicatedorthemanagementisundertakenbyaprofessional.41 Otherfinancialassetsincludeoilandgasleases,futurescontracts,royalties,proceedsfrom lawsuitsorestatesinsettlement,andloansmadetoothers.Onespecificfinancialasset excludedfromthiscategoryandanyotherisemployment-relatedstockoptions.Because suchoptionsaretypicallynotpubliclytraded,ortheirexecutionisotherwiseconstrained, theirvalueisuncertainuntiltheexercisedate;untilthen,meaningfulvaluationwould requirecomplexassumptionsaboutthefuturebehaviorof stockprices. 39 Althoughtax-deferredretirementassetsareclearlyanimportantelementinretirementplanning,familiesmay holdavarietyofotherassetsthatareintended,atleastinpart,tofinanceretirement.Twocommonandoften particularlyimportanttypesofretirementplansarenotincludedintheassetsdescribedinthissection:Social Security(thefederallyfundedOld-AgeandSurvivors’Insuranceprogram(OASI))andemployer-sponsored defined-benefitplans.OASIiswelldescribedelsewhere,anditcoversthegreatmajorityofthepopulation(See SocialSecurityAdministration,“OnlineSocialSecurityHandbook:YourBasicGuidetotheSocialSecurity Programs,”Publication65-008,www.ssa.gov/OP_Home/handbook.)Theretirementincomeprovidedby defined-benefitplansistypicallybasedonworkers’salariesandyearsofworkwithanemployer,agroupof employers,oraunion.Unfortunately,futureincomestreamsfromOASIanddefined-benefitplanscannotbe translateddirectlyintoacurrentvaluebecausevaluationdependscriticallyonassumptionsaboutfutureevents andconditions—workdecisions,earnings,inflationrates,discountrates,mortality,andsoon—andnowidely agreed-uponstandardsexistformakingtheseassumptions. 40 In2013,4.8percentoffamiliesreportedhavinganytypeofannuity,andofthesefamilies,80.7percent reportedhavinganequityinterest. 41 In2013,81.5percentoffamilieswithtrustsormanagedinvestmentaccountshadanequityinterestinsuchan account.Thesurveyencouragesrespondentswhohavetrustsormanagedinvestmentaccountsthatareheldin relativelycommoninvestmentstoreportthecomponentsseparately.Ofthe4.3percentoffamiliesthatreported havinganykindoftrustormanagedinvestmentaccountin2013,54.9percentofthemreportedatleastoneof thecomponentassetsseparately.Offamiliesthatdetailedthecomponentsin2013,88.5percentreportedsome typeoffinancialasset,10.8percentreportedaprimaryresidence,11.0percentreportedotherrealestate, 7.5percentreportedabusiness,and0.1percentreportedanothertypeofasset.Thefractionofthesefamilies reportingtheprimaryresidenceasacomponentofatrustdecreased0.5percentagepointsbetween2010and 2013,andthefractionreportingabusinessincreased2.5percentagepoints.

34 FederalReserveBulletin|September2014 Vehiclesincludecars,vans,sportutilityvehicles,trucks,motorhomes,recreationalvehicles, motorcycles,boats,airplanes,andhelicopters.42Primaryresidencesincludemobilehomes andtheirsites,thepartsof farmsandranchesnotusedforfarmingorranchingbusiness, condominiums,cooperatives,townhouses,othersingle-familyhomes,andotherpermanent dwellings.Otherresidentialpropertyincludessecondhomes,time-shares,one-tofourfamilyrentalproperties,andothertypesof residentialproperties.Italsoincludesoutstandingbalancesonloansthatthefamilymayhavemadetofinancethesaleof propertiesthey previouslyownedandwhicharestillowedtothefamily. Nonresidentialrealestateincludesthefollowingtypesof propertiesunlesstheyareowned throughabusiness:commercialproperty,rentalpropertywithfiveormoreunits,farmand ranchland,undevelopedland,andallothertypesof nonresidentialrealestate.Mostoften, nonresidentialrealestatepropertiesarefunctionallymorelikeabusinessthanaresidential property.Theymayhaveseveralowners,theyaretypicallyworthaconsiderableamount, andtheyoftencarrylargemortgages,whichappeartobepaidusingtherevenuesfromthe property,notthefamily’sotherincome.Asinthecaseof privatelyownedbusinesses,the valueof thepropertyinthisanalysisistakentobethenetvalue. Businessequityincludesnetworthinthefollowingformsof business:soleproprietorships, limitedpartnerships,othertypesof partnerships,Scorporationsandothertypesof corporationsthatarenotpubliclytraded,limitedliabilitycompanies,andothertypesof private businesses.If thefamilylivedonafarmorranchthatwasusedatleastinpartforagriculturalbusiness,thevalueof thatpart,netof thecorrespondingshareof associateddebts, isincludedwithotherbusinessassets.Inthesurvey,self-employmentstatusandbusiness ownershipareindependentlydetermined.43 Debtsecuredbyresidentialpropertyconsistsof first-lienandjunior-lienmortgagesand homeequitylinesof credit(HELOCs)securedbytheprimaryresidence.Forpurposesof thisarticle,first-andjunior-lienmortgagesconsistonlyof closed-endloans—thatis,loans typicallywithaone-timeextensionof credit,asetfrequencyof repayments,andarequired repaymentsizethatmaybefixedorvaryovertimeinaccordancewithapre-specified agreementorwithchangesinagivenmarketinterestrate.44Asatypeof open-endedcredit, HELOCstypicallyallowcreditextensionsattheborrower’sdiscretionsubjecttoaprearrangedlimitandallowrepaymentsattheborrower’sdiscretionsubjecttoaprearranged minimumsizeandfrequency. Linesof creditnotsecuredbyresidentialpropertyareanylinesof creditexceptHELOCs andborrowingoncreditcards. Theterm“installmentloan”describesclosed-endconsumerloans—thatis,loansthattypicallyhavefixedpaymentsandafixedterm.Themostcommonexamplesareeducation loans;automobileloans;andloansforfurniture,appliances,andotherdurablegoods. Otherinstallmentloansincludeallclosed-endconsumerloansthatarenotforeducationor avehicle—thatis,loansthattypicallyhavefixedpaymentsandafixedterm.Examples includeloansforfurniture,appliances,andotherdurablegoods. 42 Offamiliesowninganytypeofvehiclein2013,99.7percenthadacar,van,sportutilityvehicle,motorcycle,or truck.Theremainingtypesofvehicleswereheldby12.7percentoffamilies. 43 Amongthe11.7percentoffamilieswithabusinessin2013,68.3percenthadafamilyheadorthespouseor partneroftheheadwhowasself-employed;amongthe11.3percentoffamiliesinwhicheithertheheadorthe spouseorpartneroftheheadwasself-employed,70.5percentownedabusiness. 44 Ofallfamilies,41.0percenthadafirst-lienmortgagein2013(44.6percentin2010),2.7percenthadajuniorlienmortgage(3.9percentin2010),7.5percenthadaHELOC(10.3percentin2010),and5.0percenthada HELOCwithanoutstandingbalance(7.2percentin2010).

ChangesinU.S.FamilyFinancesfrom2010to2013 35 Creditcardbalancesconsistof balancesonbank-typecards(suchasVisa,MasterCard, andDiscoveraswellasOptimaandotherAmericanExpresscardsthatroutinelyallow holderstocarryabalance),storecardsorchargeaccounts,gasolinecompanycards,socalledtravelandentertainmentcards(suchasAmericanExpresscardsthatdonotroutinelyallowholderstocarryabalanceandDinersClub),othercreditcards,andrevolving storeaccountsthatarenottiedtoacreditcard.Balancesexcludepurchasesmadeafterthe mostrecentbillwaspaid. The“other”debtcategorycomprisesloansoncashvaluelifeinsurancepolicies,loans againstpensionaccounts,borrowingonmarginaccounts,andamiscellaneouscategory largelycomprisingpersonalloansnotexplicitlycategorizedelsewhere. Finally,theSCFmeasureof liabilitiesexcludesdebtowedbyfamily-ownedbusinessesand debtowedonnonresidentialrealestate;inthisarticle,suchdebtisnettedagainstthecorrespondingassets. Measures of Debt Burden and Credit Market Experiences in the Survey of Consumer Finances TheSCFincludesseveralquestionsdesignedtocaptureinformationaboutrespondents’ debtburdensandinteractionswithcreditmarkets.Thespecificconceptsaddressedinthe SCFarenecessarilytiedtothesurveyquestionwordingandassociatedfieldinterviewer instructions,whichcanbefoundintheSCFcodebookfortheyear(s)inquestion.45What followsisageneralexpositionof thedebtburdenandcreditmarketexperiencemeasures reportedinthetables. Leverageratioscomparethetotalof alldebtstothetotalof allassets.Theaggregateversionof thismeasureisthesumof alldebtsforallSCFrespondents,dividedbythesumof allassetsforSCFrespondents.Themedianfordebtorsisthemedianof eachindividual family’sleverageratioandiscalculatedforthosewithpositivevaluesof totaldebtonly. Theaggregatedebt-to-incomeratioisthesumof liabilitiesforallSCFrespondents,divided bythetotalincomeforallSCFrespondents.Themedianfordebtorsisthe50thpercentile of anindividualfamily’sdebt-to-incomeratiosandiscalculatedforthosewithpositivevaluesof totaldebtonly. Payment-to-incomeratiosmeasuretotaldebtpaymentsrelativetototalincome.46The aggregateversionof thismeasureisthesumof alldebtpaymentsforallSCFrespondents, dividedbytotalincomeforallSCFrespondents.Themedianfordebtorsisthe50thpercentileof anindividualfamily’spayment-to-incomeratiosandiscalculatedforthosewith positivevaluesof totaldebtonly. Itshouldberecognizedthattheaggregatemeasureof payment-to-incomeratiosthatisreferencedinthisarticlecandifferfromaggregatemeasuresconstructedfromothersources suchasthedebtserviceratio.47Thesurveymeasureof paymentsrelativetoincomecandifferfromtheaggregate-levelmeasureforseveralreasons.First,thedebtpaymentsincluded ineachmeasurearedifferent.Theaggregate-levelmeasureincludesonlydebtsoriginated 45 CodebooksforeachSCFwavecanbefoundatwww.federalreserve.gov/econresdata/scf/scfindex.htm. 46 ThedefinitionofdebtpaymentsintheSCFdoesnotincludepaymentsonleasesorrentalpayments.Thesurveycollectsinformationonvehicleleasepaymentsandrentonprimaryresidences,and,thus,inprinciplea broadermeasureofdebtpaymentscouldbeconstructed,onethatwouldbesimilartothe“financialobligations ratio”estimatedbytheFederalReservestaff. 47 SeeDynanandothers,"U.S.HouseholdDebtService,"innote32.

36 FederalReserveBulletin|September2014 bydepositories,financecompanies,andotherfinancialinstitutions,whereasthesurvey includes,inprinciple,debtsfromallsources.Second,theaggregate-levelmeasureusesan estimateof disposablepersonalincomefromthenationalincomeandproductaccountsfor theperiodconcurrentwiththeestimatedpaymentsasthedenominatorof theratio, whereasthesurveymeasureusestotalbefore-taxincomereportedbysurveyfamiliesforthe precedingyear;thedifferencesinthesetwoincomemeasuresarecomplex.Third,thepaymentsintheaggregate-levelmeasureareestimatedusingaformulathatentailsmany assumptionsaboutminimumpaymentsandthedistributionof loantermsatanygiven time;thesurveymeasureof paymentsisdirectlyaskedof thesurveyrespondentsbutmay alsoincludepaymentsof taxesandinsuranceonrealestateloans.Fourth,becausethesurveymeasuresof paymentsandincomearebasedontheresponsesof asampleof respondents,theymaybeaffectedbothbysamplingerrorandbyvarioustypesof responseerrors. Asmentionedearlierinthisarticle,thesurveyincomemeasuretracksthemostcomparable measureof incomeintheCensusBureau’sCurrentPopulationSurvey(CPS). TheSCFaskstwoquestionsthatareintendedtocapturewhetherornotfamiliesarecredit constrained,whichisbroadlydefinedashavingdifficultyaccessingcredit.Thefirstquestionaskstherespondentif thefamilywasturneddownforcreditatanypointinthepast year.Thesecondasksif,withinthepastyear,thefamilydidnotapplyforcreditforfearof beingturneddown.Acombinationof thesetwoquestionsisusedtomeasureoverallcredit constraints. Delinquencyondebtobligationsiscapturedbyaskingfamiliesthathaveanydebtatthe timeof theirinterviewwhetherornottheyhavebeenbehindinanyof theirloanpayments intheprecedingyear.Thesurveyasksif respondentshavebeenbehindatallandif they havebeenbehindinpaymentsfor60ormoredays. Paydayloansaredefinedasloansthataremeanttoberepaidinfulloutof therespondent’snextpaycheck;theyareunsecuredloansthataretypicallysmall,short-term,and carryabove-averageinterestrates. Bankruptcybehaviorisaretrospectivequestioninwhichtherespondentreportswhetheror nothehaddeclaredbankruptcyatanytimeinthepastfiveyears. Finally,convenienceuseof creditcardsisdeterminedusingquestionsonwhetherornota respondenthadpositivebalancesafterthemostrecentpaymentforbank-typecards(such asVisa,MasterCard,andDiscoveraswellasOptimaandotherAmericanExpresscards thatroutinelyallowholderstocarryabalance),storecards,gasolinecompanycards,socalledtravelandentertainmentcards(suchasAmericanExpresscardsthatdonotroutinelyallowholderstocarryabalanceandDinersClub),andothercreditcards. Percentiles of the Distributions of Income and Net Worth Throughoutthisarticle,referencesaremadetovariouspercentilegroupsof thedistributionsof incomeornetworth.Foragivencharacteristic,apercentilecanbeusedtodefinea family’srankrelativetootherfamilies.Forexample,the10thpercentileof thedistribution of usualincomeistheamountof incomereceivedbyafamilyforwhomlessthan10percentof otherfamilieshavelowerincomesand90percenthavehigherincomes.The

ChangesinU.S.FamilyFinancesfrom2010to2013 37 percentilesof thedistributionsof incomeandnetworthusedtodefinetheincomeandnet worthgroupsintable1andtable2inthearticlearegiveninthefollowingtable: Surveyyear Item 2001 2004 2007 2010 2013 Percentileofusualincome 20 24,300 25,800 25,200 26,200 23,300 40 43,200 44,300 43,300 43,600 40,500 60 67,500 69,700 69,300 67,500 63,100 80 108,000 112,700 110,200 108,900 104,500 90 155,300 164,600 155,900 163,400 154,600 Percentileofnetworth 25 16,800 16,400 15,900 8,900 8,800 50 113,700 114,800 135,400 82,800 81,200 75 377,000 405,900 418,600 323,300 317,300 90 972,000 1,028,400 1,022,100 1,020,800 941,700 Thegroupsthatarecreatedwhenadistributionisdividedatevery10thpercentilearecommonlyreferredtoasdeciles.Similarly,whenadistributionisdividedatevery20th (25th)percentile,thegroupsareknownasquintiles(quartiles).Familiesinthefirstincome decile,forexample,arethosewithincomebelowthe10thpercentile. Racial and Ethnic Identification Inthisarticle,theraceandethnicityof afamilyintheSCFareclassifiedaccordingtothe self-identificationof thatfamily’soriginalrespondenttotheSCFinterview.Thequestions underlyingthemethodof classificationusedinthesurveywerechangedinboth1998and 2004.Startingin1998,SCFrespondentswereallowedtoreportmorethanoneracialidentification;insurveysbeforethen,onlyoneresponsewasrecorded.Formaximumcomparabilitywithearlierdata,respondentsreportingmultipleracialidentificationswereaskedto reporttheirstrongestracialidentificationfirst.Inthe2013SCF,6.1percentof respondents reportedmorethanoneracialidentification,upfrom5.4percentin2007and2.3percentin 2004. Beginningwiththe2004survey,thequestiononracialidentificationisprecededbyaquestiononwhetherrespondentsconsiderthemselvestobeHispanicorLatinoincultureororigin;previously,suchethnicidentificationwascapturedonlytotheextentthatitwas reportedasaresponsetothequestiononracialidentification.Thesequenceof thesetwo questionsinthe2004SCFissimilartothatintheCPS.Whenfamiliesinthe March2004CPSareclassifiedinawaythatismostcompatiblewiththeSCF,theproportionof Hispanicfamiliesis10.5percent;the2004SCFestimateis11.2percent.Differences intheseproportionsareattributabletosamplingerrorandpossiblytodifferencesinthe wordingandcontextof thequestions. ForgreatercomparabilitywithearlierSCFdata,thedatareportedinthisarticleignorethe informationonethnicidentificationavailableinthesurveyssince2004,butrespondents reportingmultipleracialidentificationsinthesurveysstartingwith1998areclassifiedas “non-whiteorHispanic.”Of thosewhorespondedaffirmativelytothequestiononHispanicorLatinoidentificationin2013,88.1percentalsoreported“HispanicorLatino”as oneof theirracialidentifications,and80.1percentreporteditastheirprimaryracialidentification.BecausethequestiononHispanicorLatinoethnicityprecedestheoneonracial

38 FederalReserveBulletin|September2014 identificationinthesurveysfrom2004through2013,theanswertothesecondof thesetwo questionsmayhavebeeninfluencedbytheanswertothefirst.48 The Sampling Techniques Thesurveyisexpectedtoprovideacoresetof dataonfamilyincome,assets,andliabilities. Themajoraspectsof thesampledesignthataddressthisrequirementhavebeenconstant since1989.TheSCFcombinestwotechniquesforrandomsampling.First,astandardmultistagearea-probabilitysample(ageographicallybasedrandomsample)isselectedtoprovidegoodcoverageof characteristics,suchashomeownership,thatarebroadlydistributed inthepopulation. Second,asupplementalsampleisselectedtodisproportionatelyincludewealthyfamilies, whichholdarelativelylargeshareof suchthinlyheldassetsasnoncorporatebusinesses andtax-exemptbonds.Calledthe“listsample,”thisgroupisdrawnfromalistof statistical recordsderivedfromtaxreturns.Theserecordsareusedunderstrictrulesgoverningconfidentiality,therightsof potentialrespondentstorefuseparticipationinthesurvey,andthe typesof informationthatcanbemadeavailable.PersonslistedbyForbesmagazineasbeing amongthewealthiest400peopleintheUnitedStatesareexcludedfromsampling. Of the6,026interviewscompletedforthe2013SCF,4,568werefromthearea-probability sample,and1,458werefromthelistsample;for2010,5,012werefromthearea-probability sample,and1,480werefromthelistsample.Thenumberof familiesrepresentedinthesurveysconsideredinthisarticleisgivenbythefollowingtable: Year Numberoffamiliesrepresented(millions) 2001 106.5 2004 112.1 2007 116.1 2010 117.6 2013 122.5 Overallpopulationgrowthbetween2010and2013was2.4percent,accordingtofigures fromtheCensusBureau,downslightlyfromthe2.5percentgrowthratebetween2007and 2010.AlsoaccordingtoCensusBureauestimates,thenumberof householdsincreased 4.2percentbetween2010and2013—wellabovethegreatlydiminishedrateof household formationbetween2007and2010,whichwas1.3percent.Withthepopulationgrowing moreslowlythanhouseholdformation,theaveragenumberof personsperhouseholdfell slightly,from2.63peoplein2010to2.58in2013. The Interviews Asidefromtheadditionof newquestionsinthe2010surveytoaddressthefinancialrelationshipsof businessesthatarenotpubliclytraded,thesurveyquestionnairehaschanged inonlyminorwayssince1989,exceptinasmallnumberof instancesinwhichthestructure wasalteredtoaccommodatechangesinfinancialbehaviors,intypesof financialarrangementsavailabletofamilies,andinregulationscoveringdatacollection.Inthesecases andinallearlierones,everyefforthasbeenmadetoensurethemaximumdegreeof com- 48 Foracomprehensivediscussionofstandardsfordefiningraceandethnicity,seeExecutiveOfficeofthePresident,OfficeofManagementandBudget(2002),“ProvisionalGuidanceontheImplementationofthe1997 StandardsforFederalDataonRaceAndEthnicity,”guidancedocument(Washington:ExecutiveOfficeofthe President,December15),www.whitehouse.gov/sites/default/files/omb/assets/information_and_regulatory_ affairs/re_guidance2000update.pdf.

ChangesinU.S.FamilyFinancesfrom2010to2013 39 parabilityof thedataovertime.Exceptwherenotedinthearticle,thedataarehighlycomparableovertime. Thegenerosityof familiesingivingtheirtimeforinterviewshasbeencrucialtotheongoing successof theSCF.Inthe2010SCF,themedianinterviewlengthwasabout85minutes. However,insomeparticularlycomplicatedcases,theamountof timeneededwassubstantiallymorethanthreehours.Theroleof theinterviewersinthiseffortisalsocritical.Withouttheirdedicationandperseverance,thesurveywouldnotbepossible. TheSCFinterviewswereconductedlargelybetweenthemonthsof MayandDecemberin eachsurveyyearbyNORC,asocialscienceandsurveyresearchorganizationattheUniversityof Chicago.Themajorityof interviewswereobtainedinperson,althoughinterviewerswereallowedtoconducttelephoneinterviewsif thatwasmoreconvenientforthe respondent.Eachinterviewerusedaprogramrunningonalaptopcomputertoadminister thesurveyandcollectthedata. Theuseof computer-assistedpersonalinterviewinghasthegreatadvantageof enforcing systematiccollectionof dataacrossallcases.Thecomputerprogramdevelopedtocollect thedatafortheSCFwastailoredtoallowthecollectionof partialinformationintheform of rangeswheneverarespondenteitherdidnotknowordidnotwanttorevealanexact dollarfigure. Theresponserateinthearea-probabilitysampleismorethandoublethatinthelistsample. Inboth2010and2013,about70percentof householdsselectedforthearea-probability sampleactuallycompletedinterviews.Theoverallresponserateinthelistsamplewasabout one-third;inthepartof thelistsamplelikelycontainingthewealthiestfamilies,the responseratewasonlyaboutone-half thatlevel. Weighting Toprovideameasureof thefrequencywithwhichfamiliessimilartothesamplefamilies couldbeexpectedtobefoundinthepopulationof allfamilies,ananalysisweightiscomputedforeachcase,accountingbothforthesystematicpropertiesof thesampledesignand fordifferentialpatternsof nonresponse.TheSCFresponseratesarelowbythestandards of someothermajorgovernmentsurveys,andanalysisof thedataconfirmsthatthetendencytorefuseparticipationishighlycorrelatedwithnetworth.However,unlikeothersurveys,whichalmostcertainlyalsohavedifferentialnonresponsebywealthyhouseholds,the SCFhasthemeanstoadjustforsuchnonresponse.Amajorpartof SCFresearchis devotedtotheevaluationof nonresponseandadjustmentsfornonresponseintheanalysis weightsof thesurvey.49 Sources of Error Errorsmaybeintroducedintosurveyresultsatmanystages.Samplingerror—thevariabilityexpectedinestimatesbasedonasampleinsteadof acensus—isaparticularlyimportant sourceof error.Sucherrorcanbereducedeitherbyincreasingthesizeof asampleor,asis doneintheSCF,bydesigningthesampletoreduceimportantsourcesof variability.Samplingerrorcanbeestimated,andforthisarticleweusereplicationmethodstodoso. 49 Theweightsusedinthisarticleareadjustedfordifferentialratesofnonresponseacrossgroups.SeeArthurB. Kennickell(1999),“RevisionstotheSCFWeightingMethodology:AccountingforRace/EthnicityandHomeownership,”workingpaper(Washington:BoardofGovernorsoftheFederalReserveSystem,January), www.federalreserve.gov/econresdata/scf/scf_workingpapers.htm.

40 FederalReserveBulletin|September2014 Replicationmethodsdrawsamples,calledreplicates,fromthesetof actualrespondentsina waythatincorporatestheimportantdimensionsof theoriginalsampledesign.IntheSCF, weightswerecomputedforallof thecasesineachof thereplicates.50Everyvalueforwhich standarderrorsarereportedinthisarticleisaweightedstatisticestimatedusingthereplicatesamples.Toestimatetheoverallstandarderror,ameasureof thevariabilityof these estimatesiscombinedwithameasureof thevariabilitybecauseof imputationformissing data. Othererrorsincludethosethatinterviewersmayintroducebyfailingtofollowthesurvey protocolormisunderstandingarespondent’sanswers.SCFinterviewersaregivenlengthy, project-specifictrainingandongoingcoachingtominimizesuchproblems.Respondents mayintroduceerrorbyinterpretingaquestioninasensedifferentfromthatintended bythesurvey.FortheSCF,extensivepretestingof questionsandthoroughreviewof the datatendtoreducethissourceof error. Nonresponse—eithercompletenonresponsetothesurveyornonresponsetoselecteditems withinthesurvey—maybeanotherimportantsourceof error.Asnotedinmoredetail previously,theSCFusesweightingtoadjustfordifferentialnonresponsetothesurvey.To addressmissinginformationonindividualquestionswithintheinterview,theSCFusesstatisticalmethodstoimputemissingdata;thetechniquemakesmultipleestimatesof missing datatoallowforanestimateof theuncertaintyattributabletothistypeof nonresponse. Errata TheauthorsrevisedthisarticleonSeptember5,2014,tocorrectthefollowing: ‰ Onp.3,infigure2,themeanvalueforthe2010–13rangewascorrectedtozero. ‰ Onp.15,inbox5,tableB,thedaterangeinthetabletitlewascorrectedto2007–13. TheauthorsrevisedthisarticleonOctober24,2014,tocorrectthefollowing: ‰ Onp.10,infigureA,thex-axiswasrelabeledtocorrectlymarkthethirdintervalas 1995. ‰ Onp.11,infigureB,thex-axiswasrelabeledtocorrectlymarkthethirdintervalas1995. ‰ Onp.23,inthelastparagraph,thelastfullsentencewascorrectedto“In2010,39.4percentof familiesheldcreditcarddebt,whilein2013,38.1percentof familiesheldcredit carddebt.” 50 SeeArthurB.Kennickell(2000),“RevisionstotheVarianceEstimationProcedurefortheSCF,”workingpaper (Washington:BoardofGovernorsoftheFederalReserveSystem,October),www.federalreserve.gov/ econresdata/scf/scf_workingpapers.htm.

41 Federal Reserve BULLETIN November 2014 Vol. 100, No. 6 The 2013 Home Mortgage Disclosure Act Data NeilBhuttaandDanielR.Ringo,of theDivisionof ResearchandStatistics,preparedthis article.MaduraWatanagaseprovidedresearchassistance. TheHomeMortgageDisclosureActof 1975(HMDA)requiresmostmortgagelending institutionswithofficesinmetropolitanareastodisclosetothepublicdetailedinformation abouttheirhome-lendingactivityeachyear.TheHMDAdataincludethedispositionof eachapplicationformortgagecredit;thetype,purpose,andcharacteristicsof eachhome mortgagethatlendersoriginateorpurchaseduringthecalendaryear;thecensus-tractdesignationsof thepropertiesrelatedtothoseloans;loanpricinginformation;personaldemographicandotherinformationaboutloanapplicants,includingtheirraceorethnicityand income;andinformationaboutloansales(seeappendixAforafulllistof itemsreported underHMDA).1 HMDAwasenactedtohelpmembersof thepublicdeterminewhetherfinancialinstitutionsareservingthehousingneedsof theirlocalcommunitiesandtreatingborrowersand loanapplicantsfairly,provideinformationthatcouldfacilitatetheeffortsof publicentities todistributefundstolocalcommunitiesforthepurposeof attractingprivateinvestment, andhelphouseholdsdecidewheretheymaywanttodeposittheirsavings.2Thedatahave proventobevaluableforresearchandareoftenusedinpublicpolicydeliberationsrelated tothemortgagemarket.3 Themainobjectiveof thisarticleistoprovideanoverviewof the2013HMDAdataand tohelpdocumentmortgagemarketactivityovertimeascapturedintheHMDAdata. Mortgagedebtisbyfarthelargestcomponentof householddebtintheUnitedStates,and mortgagetransactionscanhaveimportantimplicationsforhouseholds’financialwellbeing.TheHMDAdataarethemostcomprehensivesourceof publiclyavailableinformationontheU.S.mortgagemarket,providinguniquedetailsonhowmuchmortgagecredit getsextendedeachyear,whoobtainssuchcredit,andwhichinstitutionsprovidesuch credit. 1 Inthe2013HMDAdata,propertylocationsincorporatethecensus-tractgeographicboundariescreatedforthe2010 decennialcensus.The2013HMDAdatadonotreflectrecentupdatestothelistofmetropolitanstatisticalareas (MSAs)publishedbytheOfficeofManagementandBudget.HMDAreporterswillusetheupdatedlistofMSAsin preparingtheir2014HMDAdata.Forfurtherinformation,seeFederalFinancialInstitutionsExaminationCouncil (2013),“OMBAnnouncement—RevisedDelineationsofMSAs,”pressrelease,February28,www.ffiec.gov/hmda/ OMB_MSA.htm. 2 AbriefhistoryofHMDAisavailableatFederalFinancialInstitutionsExaminationCouncil,“HistoryofHMDA,” webpage,www.ffiec.gov/hmda/history2.htm. 3 OnJuly21,2011,rulemakingresponsibilityforHMDAwastransferredfromtheFederalReserveBoardtothenewly establishedConsumerFinancialProtectionBureau.TheFederalFinancialInstitutionsExaminationCouncil(FFIEC; www.ffiec.gov)continuestoberesponsibleforcollectingtheHMDAdatafromreportinginstitutionsandfacilitating publicaccesstotheinformation.InSeptemberofeachyear,theFFIECreleasestothepublicsummarydisclosure tablespertainingtolendingactivityfromthepreviouscalendaryearforeachreportinglenderaswellasaggregations ofhome-lendingactivityforeachmetropolitanstatisticalareaandforthenationasawhole.TheFFIECalsomakes availabletothepublicadatafilecontainingvirtuallyallofthereportedinformationforeachlendinginstitutionas wellasafilethatincludeskeydemographicandhousing-relateddataforeachcensustractdrawnfromcensussources.

42 FederalReserveBulletin|November2014 In2013,economicandhousingconditionscontinuedtoimprove,withhousepricesrising significantlyduringthecourseof theyear,particularlyinareaswheretheyhaddeclined sharplyduringtherecession.Mortgageinterestrates,thoughstilllowbyhistorical standards,increasedabout1percentagepointduringtheyear.Whilecreditconditionsstill weretightgoinginto2014,somedata,suchastheFederalReserveBoard’sSeniorLoan OfficerOpinionSurveyonBankLendingPractices,suggestthatcreditstandardsforprime mortgagesmayhaveeasedsomewhatin2013.4Finally,thenewability-to-repayandqualifiedmortgagestandards,whichgenerallyrequirecreditorstomakeareasonable,goodfaith determinationof aconsumer’sabilitytorepayanyconsumercredittransactionsecuredby adwellingandestablishcertainprotectionsfromliabilityunderthisrequirementfor“qualifiedmortgages,”mayhaveinfluencedlendingpatternstosomeextentin2013,eventhough theydidnottakeeffectuntilJanuary2014.5 Thisarticlepresentsdatasince2004describingmortgagemarketactivityandlendingpatterns,includingtheincidenceof higher-pricedornonprimelendingandratesof denialon mortgageapplications,acrossdifferentdemographicgroupsandlendertypes.6Inaddition, weuseauniquedatasetcomposedof HMDArecordsmatchedtoborrowers’credit records,introducedinlastyear’sFederalReserveBulletinarticleonthetopic,toreexamine thefactorsthatmighthelpexplainthelargedifferencesintheincidenceof higher-priced lendingacrossborrowersof differentracesandethnicitiesduringthehousingboom.7 Herearesomeof thekeyfindings: 1. Thenumberof mortgageoriginationsin2013declined11percent,to8.7millionfrom 9.8millionin2012.Thisdecreasewasledbyadropinrefinancemortgagesforone-to four-familyproperties,whichfellbyover1.5million,or23percent,likelybecause mortgageinterestratesincreasedsignificantlyduring2013.Partiallyoffsettingthe decreaseinrefinancing,one-tofour-familyhome-purchaseoriginationsgrewby almost370,000,or13percent,from2012.Thisincreasecameontheheelsof ariseof similarmagnitudeinthepreviousyear.Still,purchaseoriginationsin2013werelowby historicalstandards,standingbelowlevelsasfarbackas1993. 2. Thegovernment-backedshareof first-lienhome-purchaseloansforone-tofour-family,owner-occupied,site-builtproperties(thatis,theshareof loansbackedbyinsurancefromtheFederalHousingAdministration(FHA)orbyguaranteesfromthe Departmentof VeteransAffairs(VA),theFarmServiceAgency(FSA),ortheRural HousingService(RHS))stoodatabout38percentin2013,downfrom45percent in2012andfromapeakof 54percentin2009.Thisdeclinereflectedadecreaseinthe FHAshareof loans,whiletheVAandFSA/RHSshareshaveheldsteadysince2009.A seriesof increases,startingin2010,inthemortgageinsurancepremiums(MIPs)that 4 Formoreinformationoneconomicconditionsduring2013,seeBoardofGovernorsoftheFederalReserve System(2014),MonetaryPolicyReport(Washington:BoardofGovernors,February11), www.federalreserve.gov/monetarypolicy/mpr_default.htm. 5 Foradditionaldetailsontheability-to-repayandqualifiedmortgagerules,seeConsumerFinancialProtection Bureau,“AbilitytoRepayandQualifiedMortgageStandardsundertheTruthinLendingAct(RegulationZ),” webpage,www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-thetruth-in-lending-act-regulation-z. 6 SomelendersfileamendedHMDAreports,whicharenotreflectedintheinitialpublicdatarelease.Afinal HMDAdatasetcontainingthesechangesiscreatedtwoyearsfollowingtheinitialdatarelease.Thedataused topreparethisarticlearedrawnfromtheinitialpublicreleasefor2013andfromthefinalHMDAdataset foryearspriortothat.Consequently,numbersinthisarticlefortheyears2012andearliermaydiffersomewhat fromnumberscalculatedfromtheinitialpublicreleasefiles. 7 Formoreinformationonthedataset,seeNeilBhuttaandGlennB.Canner(2013),“MortgageMarketConditionsandBorrowerOutcomes:Evidencefromthe2012HMDADataandMatchedHMDA–CreditRecord Data,”FederalReserveBulletin,vol.99(November),pp.1–58,www.federalreserve.gov/pubs/bulletin/2013/ default.htm.

The2013HomeMortgageDisclosureActData 43 theFHAchargesborrowersmayhavebeenoneimportantreasonforthefallingshare of FHAloans.Theshareof government-backedhome-purchaseloansdeclinedacross allpopulationgroupsfrom2012to2013.In2013,atthehighend,almost71percentof blackhome-purchaseborrowersand63percentof Hispanicwhitehome-purchase borrowerstookoutanonconventionalloan;atthelowend,16percentof Asianhomepurchaseborrowersusednonconventionalloans. 3. Afterdeclineseachyearfrom2005through2011,home-purchaseoriginationsforonetofour-family,owner-occupied,site-builtpropertiesgrewsignificantlyin2012and 2013.However,thedegreeof growthoverthesetwoyearsvariedsubstantiallyacross demographicgroups.LoanstoAsianandhigh-incomeborrowershavegrownmost quicklyat42percentand50percent,respectively,whileloanstoblackorAfrican Americanandslow-ormoderate-income(LMI)borrowershavegrownmostslowlyat just12percentand7percent,respectively. 4. Thehigher-pricedfractionof first-lienhome-purchaseloansforone-tofour-family, owner-occupied,site-builtproperties(thefractionof loanswithannualpercentage rates(APRs)of atleast1.5percentagepointsabovetheprimeofferrate)morethan doubledin2013from2012,toabout7percent.However,thisincreasewasdrivenbya sharpjumpinhigher-pricedFHAloans,aschangestotheFHA’sMIPsin2013 (includinglengtheningtheperiodoverwhichtheannualinsurancepremiumisrequired tobepaid)ontopof thechangesinpreviousyearsappeartohavepushedtheAPRson manyFHAhome-purchaseloansjustoverthethresholdof 150basispoints. 5. Weuseaspecialdatasetcomposedof HMDAloanrecordsmatchedtoborrowers’ creditrecordstohelpbetterunderstandwhysubstantialdifferencesexistintheincidenceof higher-pricedlendingtodifferentracialandethnicgroups.TheHMDAdata alone—withinformationonborrowerincomeandloanamount—explainverylittleof thesedifferences.Thematcheddataprovideinformationonborrowers’creditscores, anddifferencesinscoresacrossgroupshelpexplainalargeportionof thedifferencesin higher-pricedlending.Somedifferencesstillremainaftercontrollingforcreditscores. Thematcheddatadonotcontainsomeimportantriskcharacteristics(suchasdownpaymentsizeorincomedocumentationlevel),soweareunabletodeterminetheextent towhichtheremainingdiscrepanciesareattributabletotheseunobservedfactorsor discrimination. Mortgage Applications and Originations In2013,7,190institutionsreporteddataonnearly14millionhomemortgageapplications (includingabout1.9millionapplicationsthatwereclosedbythelenderforincompleteness orwerewithdrawnbytheapplicantbeforeadecisionwasmade)thatresultedinabout 8.7millionoriginations.Thenumberof originationsin2013wasdownfrom9.8million originationsin2012(table1).(Dataonthenumberof reportinginstitutionswillbediscussedinmoredetailinthesection“LendingInstitutions.”) Refinancemortgagesforone-tofour-familypropertiesdroppedbyover1.5million,or 23percent,from2012to2013,asmortgageinterestratesincreasedfromhistoriclowsduringtheyear.AccordingtoFreddieMac’sPrimaryMortgageMarketSurvey,theofferrate forprimeconventionalconformingmortgagesincreasedfromanaverageof 3.35percentin December2012to4.46percentinDecember2013. Incontrasttothedeclineinrefinanceactivity,one-tofour-familyhome-purchaseoriginationsgrewbyalmost370,000,or13percent,from2012.Mostone-tofour-familyhomepurchaseloansarefirstliensforowner-occupiedproperties.Inthepasttwoyears,such

44 FederalReserveBulletin|November2014 Table1.Applicationsandoriginations,2004–13 Numbersofloans,inthousands,exceptasnoted Characteristicofloan 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 andofproperty 1–4Family Homepurchase Applications 9,804 11,685 10,929 7,609 5,060 4,217 3,848 3,650 4,025 4,554 Originations 6,437 7,391 6,740 4,663 3,139 2,793 2,547 2,430 2,743 3,112 Firstlien,owneroccupied 4,789 4,964 4,429 3,454 2,628 2,455 2,218 2,073 2,344 2,680 Site-built,conventional 4,107 4,425 3,912 2,937 1,581 1,089 1,005 999 1,251 1,622 Site-built,nonconventional 553 411 386 394 951 1,302 1,151 1,019 1,034 993 FHAshare(percent) 74.6 68.6 66.0 65.8 78.9 77.0 77.4 70.9 68.0 62.7 VAshare(percent) 21.6 26.7 29.0 27.1 15.2 13.9 15.2 18.2 19.9 24.3 FSA/RHSshare(percent) 3.9 4.7 5.0 7.1 5.9 9.0 7.4 10.9 12.1 13.0 Manufactured,conventional 106 100 101 95 68 43 44 40 44 51 Manufactured,nonconventional 24 27 30 29 28 21 17 15 14 14 Firstlien,non-owneroccupied 857 1,053 880 607 412 292 285 314 355 385 Juniorlien,owneroccupied 738 1,224 1,269 552 93 44 42 41 43 45 Juniorlien,non-owneroccupied 53 150 162 50 6 2 2 1 1 1 Refinance Applications 16,085 15,907 14,046 11,566 7,805 9,983 8,433 7,422 10,528 8,549 Originations 7,591 7,107 6,091 4,818 3,491 5,772 4,969 4,330 6,670 5,131 Firstlien,owneroccupied 6,497 5,770 4,469 3,659 2,934 5,301 4,516 3,856 5,932 4,385 Site-built,conventional 6,115 5,541 4,287 3,407 2,363 4,264 3,835 3,315 4,972 3,628 Site-built,nonconventional 297 151 110 180 506 979 646 508 918 713 FHAshare(percent) 68.3 77.3 87.5 91.5 92.2 83.7 79.3 63.2 61.2 61.1 VAshare(percent) 31.4 22.4 12.3 8.3 7.6 15.9 20.3 35.9 37.8 37.7 FSA/RHSshare(percent) .2 .3 .2 .1 .2 .4 .4 .9 .9 1.2 Manufactured,conventional 77 70 60 56 42 36 25 25 31 32 Manufactured,nonconventional 7 8 12 16 22 22 10 9 11 12 Firstlien,non-owneroccupied 618 582 547 474 330 350 359 394 660 671 Juniorlien,owneroccupied 464 729 1,036 661 219 115 88 74 74 70 Juniorlien,non-owneroccupied 13 25 39 23 9 7 6 5 5 5 Homeimprovement Applications 2,200 2,544 2,481 2,218 1,413 832 670 675 779 833 Originations 964 1,096 1,140 958 573 390 341 335 381 425 Multifamily1 Applications 61 58 52 54 43 26 26 35 47 51 Originations 48 45 40 41 31 19 19 27 37 40 Totalapplications 28,151 30,193 27,508 21,448 14,320 15,057 12,977 11,782 15,379 13,987 Totaloriginations 15,040 15,638 14,011 10,480 7,234 8,974 7,876 7,122 9,831 8,707 Memo Purchasedloans 5,142 5,868 6,236 4,821 2,935 4,301 3,229 2,939 3,164 2,794 Requestsforpreapproval2 1,068 1,260 1,175 1,065 735 559 445 429 474 516 Requestsforpreapprovalthat wereapprovedbutnotactedon 167 166 189 197 99 61 53 55 64 72 Requestsforpreapprovalthat weredenied 171 231 222 235 177 155 117 130 149 163 Note:Componentsmaynotsumtototalsbecauseofrounding.Applicationsincludethosewithdrawnandthoseclosedforincompleteness.FHA isFederalHousingAdministration;VAisU.S.DepartmentofVeteransAffairs;FSAisFarmServiceAgency;RHSisRuralHousingService. 1 Amultifamilypropertyconsistsoffiveormoreunits. 2 Consistsofallrequestsforpreapproval.Preapprovalsarenotrelatedtoaspecificpropertyandthusaredistinctfromapplications. Source:Hereandinsubsequenttablesandfigures,exceptasnoted,FederalFinancialInstitutionsExaminationCouncil,datareportedunderthe HomeMortgageDisclosureAct(www.ffiec.gov/hmda).

The2013HomeMortgageDisclosureActData 45 loanshavegrownalmost30per- Figure1.Numberofhome-purchaseandrefinance cent,fromnearly2.1millionin mortgageoriginationsreportedundertheHomeMortgage 2011toalmost2.7millionin2013. DisclosureAct,1993–2013 Still,thevolumeof suchpurchase originationshasnotyetclimbed Home purchase Millions of loans backtothelevelobservedasfar 6.0 backas1993(figure1).8 5.0 Thenumberof first-lienhome-pur- 4.0 chaseloansfornon-owner-occupiedproperties—thatis,purchases 3.0 of rentalpropertiesorvacationand secondhomes—alsoincreasedin 2.0 2013,to385,000from355,000 1.0 in2012.Butrelativetoitspeakin 1993 1997 2001 2005 2009 2013 2005,thenumberof originations fornon-owner-occupiedproperties Refinance Millions of loans isstillabout63percentlower. 15.0 Thegrowthinfirst-lienhome-pur- 12.0 chaselending(includingforboth 9.0 owner-occupiedandnon-owner-occupiedproperties)from2012to 6.0 2013variedacrosstheUnited States(figure2).Inseveralstates, 3.0 home-purchaselendingincreased 0.0 over20percent.Attheotherendof 1993 1997 2001 2005 2009 2013 thespectrum,inseveralstates—includingsomestatescloselyassoci- Note:Mortgageoriginationsforone-tofour-familyowner-occupiedproperties, withjunior-lienloansexcludedin2004andlater. atedwiththehousingboomand bust,suchasNevada,California, andArizona—home-purchase loangrowthwaslessthan10percent. ThedeclineinrefinancelendingalsovariedacrosstheUnitedStates,butthemagnitudesof thesedeclineswerenotcloselycorrelatedwiththestrengthof home-purchaseloangrowth, assuggestedbyfigure2.Finally,figure2alsodisplaysstate-levelhomepricegrowthfrom December2011toDecember2012.Althoughpositivetrendsinhomepricescould potentiallyspurbothhome-purchaseandrefinanceloangrowth,theredoesnotappearto beastrongconnectionatthestatelevel.Forinstance,homepricesgrewmoststronglyin ArizonaandNorthDakota,buttheseincreaseswerenotassociatedwithrelativelyhigh ratesof subsequentgrowthinhome-purchaselending. 8 TheHMDAdatapriorto2004didnotprovidelienstatusforloans,andthusthenumberofloanspriorto2004 includesbothfirst-andjunior-lienloans.Thatsaid,includingjunior-lienhome-purchaseloansin2013does notchangetheconclusionthathome-purchaselendingin2013wasbelowthatin1993.Itshouldalsobenoted that,becauseHMDAcoveragehasexpandedovertime,inpartbecauseofsignificantlymorecountiesbeing includedinmetropolitanstatisticalareasnowthanintheearly1990s,thelowerloanvolumein2013relativeto 1993isunderstated.

46 FederalReserveBulletin|November2014 Figure2.Growthinhome-purchaseandrefinancelending,bystate,2012–13 Idaho Ill. S.C. Mich. N.C. Colo. Ohio Wash. Ore. Fla. Minn. Tex. Wis. N.J. Maine R.I. Tenn. Mo. Ky. Va. Ind. Alaska N.Y. S.D. Vt. Neb. Ga. N.H. Kans. Hawaii Md. Conn. Iowa W.V. Ark. D.C. Miss. Wyo. Ala. Mass. Del. La. Pa. N.M. Okla. Ariz. N.D. Utah Calif. Nev. –40.0 –30.0 –20.0 –10.0 0.0 10.0 20.0 30.0 Percent Home purchase loan growth House price growth Refinance loan growth Note:First-lienmortgageoriginationsforone-tofour-familyproperties.Housepricegrowthismeasuredastherateofchangeinthe ZillowHomeValueIndexforsingle-familyresidencesfromDecember2011toDecember2012;housepricegrowthdatanotavailableforMaine andWyoming. Source:FFIECHMDAdata;Zillow.

The2013HomeMortgageDisclosureActData 47 Inadditiontolienandoccupancy Figure3.Nonconventionalshareofhome-purchase status,theHMDAdataprovide mortgageoriginations,1993–2013 detailsonthetypeof loan(conventionalornot)andthetypeof prop- Percent ertysecuringtheloan(site-builtor 100 manufacturedhome).9Intable1, 90 thevolumeof first-lienlendingfor 80 owner-occupiedpropertiesisfur- 70 therdisaggregatedbyloanand 60 propertytype.Asshown,noncon- 50 ventional,orgovernment-backed, 40 home-purchaseloansforsite-built propertiesdeclinedslightlyin2013, 30 whileconventionalloansincreased 20 about30percent.Thenonconven- 10 tionalshareof first-lienhome-pur- 0 chaseloansforone-tofour-family, 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 owner-occupied,site-builtproper- FSA/RHS VA FHA Conventional tiesstoodatabout38percentin Note:Home-purchasemortgageoriginationsforone-tofour-familyowner-occu- 2013,downfrom45percentin piedproperties,withjunior-lienloansexcludedin2004andlater.Nonconven- 2012andfromitspeakof 54per- tionalloansarethoseinsuredbytheFederalHousingAdministration(FHA)or backedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs(VA),the centin2009.Thatsaid,thenon- FarmServiceAgency(FSA),ortheRuralHousingService(RHS). conventionalshareremainsabove historicallynormallevelsgoing backto1993(figure3). Nonconventionallendingismorecommonamonghome-purchaseloansandusually involvesloanswithhighloan-to-value(LTV)ratios,offeringinvestorsmortgageinsurance protectionagainstlossesduetoborrowerdefault.Theanalogueintheconventionalmarket isinsuranceofferedbyprivatemortgageinsurance(PMI)companies.Infact,PMIorsome othercreditenhancementisrequiredbystatuteforloanswithLTVsabove80percentthat aresoldtothegovernment-sponsoredenterprises(GSEs)FannieMaeandFreddieMac. Anotherhigh-LTValternative,frequentlyusedduringthehousingboom,isforborrowers toobtainajunior-lienloan(a“piggyback”loan)alongsidean80percentfirstlientocollectivelyfinancemorethan80percentof thepurchaseprice.10 Thesharpriseinnonconventionallendingafterthefinancialcrisislikelyreflectsreduced availabilityandrelativelyhighpricesforconventionalhigh-LTVfinancingoptions,particularlyforborrowerswithless-than-excellentcreditscores.11Junior-lienhome-purchaseloans havebeenlimitedinrecentyears,withjust45,000suchloansin2013,comparedwithover 9 Manufactured-homelendingdiffersfromlendingonsite-builthomes,inpartbecausemostofthehomesare soldwithoutlandandaretreatedaschattel-securedlending,whichtypicallycarrieshigherinterestratesand shortertermstomaturitythanthoseonloanstopurchasesite-builthomes(forpricinginformationonmanufactured-homeloans,seetable7).Thisarticlefocusesalmostentirelyonsite-builtmortgageoriginations,which constitutethevastmajorityoforiginations(asshownintable1).Thatsaid,itisimportanttokeepinmind that,becausemanufacturedhomestypicallyarelessexpensivethansite-builthomes,theyprovidealow-cost housingoptionforhouseholdswithmoremoderateincomes. 10 JuniorlienscouldalsobeusedtokeepthefirstlienwithintheGSEs’conformingloan-sizelimitwhilethecombinedLTVratioisatorbelow80percent. 11 Foramoredetaileddiscussionofthepost-crisisriseingovernment-backedlending,seeRobertB.Avery, NeilBhutta,KennethP.Brevoort,andGlennB.Canner(2010),“The2009HMDAData:TheMortgageMarketinaTimeofLowInterestRatesandEconomicDistress,”FederalReserveBulletin,vol.96(December), pp.A39–A77,www.federalreserve.gov/pubs/bulletin/2010/default.htm.

48 FederalReserveBulletin|November2014 550,000in2007andnearly1.3millionin2006(asshownintable1).12Inaddition,PMI issuancedeclinedtohistoriclowsby2010asPMIcompaniestightenedstandardsand raisedpricesandtheGSEsimposedadditionalfeesforhigh-LTVloans(PMIdatanot shownintables).13 Asnotedearlierandasshowninfigure3,thenonconventionalshareof home-purchase loanshasbeendecliningsince2009.Figure3alsoshowsthatthedeclineinthenonconventionalsharereflectsadecreaseintheFHAshareof loans,whiletheVAandFSA/RHS shareshaveheldsteadysince2009.Onefactorthatmayhelpexplainthereductioninthe FHAshareisaseriesof increasesintheannualMIPthattheFHAchargesborrowers, whichwereimplementedtohelpimprovethefinancialhealthof theFHA.BetweenOctober2010andApril2013,theannualMIPforatypicalhome-purchaseloanmorethan doubledfrom0.55percentof theloanamountto1.35percent.14Also,in2013,theFHA extendedtheperiodoverwhichtheannualMIPisrequiredtobepaid.Foratypicalhomepurchaseloan,theannualpremiummustnowbepaidoverthelifeof theloaninsteadof untiltheLTVratiofallsbelow78percent.Althoughthischangehasnoeffectontheinitial costof themortgage,itwouldchangethepotentiallonger-termcostif borrowersheldthe mortgageaftertheLTVratiofellbelow78percent. Theremainderof table1providesadditionaldetailsonthebreakdownof one-tofour-familyhome-purchaseandrefinanceloansbylienandoccupancystatusandbypropertyand loantype.Table1alsoprovidesthenumberof applicationsforandoriginationsof homeimprovementloansforone-tofour-familyproperties,manyof whicharejuniorliensor unsecured,andtotalmultifamilyproperty(consistingof fiveormoreunits)applications andoriginationsacrossallthreeloanpurposes(homepurchase,refinance,andhome improvement).Finally,theHMDAdataincludedetailsaboutpreapprovalrequestsfor home-purchaseloansandloanspurchasedbyreportinginstitutionsduringthereporting year,althoughthepurchasedloansmayhavebeenoriginatedatanypointintime.Table1 showsthat,for2013,lendersreportedinformationonabout2.8millionloansthattheyhad purchasedfromotherinstitutions.Lendersalsoreportedroughly516,000preapproval requests,includingapprovedrequeststhatturnedintoactualloanapplicationsforspecific properties.15 Mortgage Outcomes by Income and by Race and Ethnicity Akeyattributeof theHMDAdataisthattheyhelppolicymakersandthebroaderpublic betterunderstandthedistributionof mortgagecredittodifferentdemographicgroups.The nextsetof tablesprovidesinformationonloanshares,productusage,denialrates,reasons 12 UndertheregulationsthatgovernHMDAreporting,manystandalonejunior-lienloansarenotreported becauseeitherthelenderdoesnotknowthepurposeoftheloanorthereasonscitedfortheloanarenotones thattriggerareportingrequirement.Unlessajuniorlienisusedforhomepurchaseorexplicitlyforhome improvements,ortorefinanceanexistinglien,itisnotreportedunderHMDA.Further,homeequitylinesof credit,manyofwhicharejuniorliensandcouldalsobeusedtohelppurchaseahome,donothavetobe reportedintheHMDAdataregardlessofthepurposeoftheloan. 13 Fortime-seriesdataonPMIissuancethrough2012,seeBhuttaandCanner(2013),“MortgageMarketConditionsandBorrowerOutcomes,”innote7. 14 ChangestotheFHA’supfrontandannualMIPsovertimehavebeendocumentedinUrbanInstitute,Housing FinancePolicyCenter(2014),HousingFinanceataGlance:AMonthlyChartbook(Washington:UrbanInstitute,March),www.urban.org/publications/413061.html.AtypicalFHAhome-purchaseloanhasanLTVof over95percentandaloanterminexcessof15years.Theupfrontpremium,onnet,wasunchangedbetween 2010and2013;itwasbrieflyincreasedfrom1.75percentto2.25percentandloweredbackto1.00percent in2010,andthenitwasraisedbackto1.75percentin2012. 15 Reporterscan,butarenotrequiredto,reportpreapprovalrequeststhattheyapprovebutarenotactedonby thepotentialborrower.

The2013HomeMortgageDisclosureActData 49 fordenial,andmortgagepricingforpopulationgroupsdefinedbyapplicantincome,neighborhoodincome,andapplicantraceandethnicity(tables2–6).Thesetablesfocusonfirstlienhome-purchaseandrefinanceloansforone-tofour-family,owner-occupied,site-built properties.Ascanbeseenfromtable1,suchloansaccountedforabout81percentof all HMDAoriginationsin2013. The Distribution of Home Loans across Demographic Groups Table2showsdifferentgroups’sharesof home-purchaseandrefinanceloansandhow theseshareshavechangedovertime.Forexample,blackborrowers’shareof home-purchaseloans(conventionalandnonconventionalloanscombined)was4.8percentin2013, downfrom5.1percentin2012andfrom8.7percentin2006.Incontrast,thenon-Hispanic whiteshareof home-purchaseloanswas70.2percentin2013,upslightlyover2012and wellabovethe61.2percentmarkin2006. Thebottomof thetableprovidesthetotalloancountsforeachyear,andthusthenumber of loanstoagivengroupinagivenyearcanbeeasilyderived.16From2011to2013,the totalnumberof home-purchaseloansincreasedabout30percent,fromabout2millionto about2.6million,buttherateof growthvariedsignificantlyfordifferentgroups.HomepurchaseloanstoAsianborrowersgrewmostquicklyatabout42percent,whilethoseto blackborrowersgrewleastquicklyatjustunder12percent. Intermsof borrowerincome,theshareof home-purchaseloanstoLMIborrowers declinedsignificantlyin2013from2012,from33.4percentto28.4percent.17Infact,the numberof loanstoLMIborrowersdeclinedslightlyfrom2012despitegrowthintheoverall numberof home-purchaseloans. From2012to2013,home-purchaseloansharesbyneighborhoodorcensus-tractincome groupheldsteady.18Itisimportanttonotethatsharesbyneighborhoodin2012and2013 arenotperfectlycomparabletothosein2011andearlierbecausecensus-tractdefinitions andcensus-tractmedianfamilyincomeestimateswererevisedin2012basedon2010censusdataand2006–10AmericanCommunitySurveydata,whereasthe2004–11datarelied on2000censusincomeandpopulationdata.19 Incontrasttohome-purchaselending,sharesof refinanceloanstoblackandHispanicwhiteborrowersandtoLMIborrowershaveriseninthepasttwoyears.Whileoverallrefinancelendingdeclinedbetween2012and2013from5.9millionloansto4.3millionloans, thenumberof refinanceloanstoblackandHispanic-whiteborrowersnearlyheldsteady. 16 Forexample,thenumberofhome-purchaseloanstoAsiansin2013wasabout149,000,derivedbymultiplying 2.615millionloansby5.7anddividingby100. 17 LMIborrowershaveincomesoflessthan80percentofestimatedcontemporaneousareamedianfamily income(AMFI),middle-incomeborrowershaveincomesofatleast80percentandlessthan120percentof AMFI,andhigh-incomeborrowershaveincomesofatleast120percentofAMFI.ThesedefinitionsareidenticaltothoseadoptedintherulesimplementingtheCommunityReinvestmentAct. 18 DefinitionsforLMI,middle-income,andhigh-incomeneighborhoodsareidenticaltothoseforLMI,middleincome,andhigh-incomeborrowersbutarebasedontheratioofcensus-tractmedianfamilyincometoarea medianfamilyincomemeasuredfromthe2006–10AmericanCommunitySurveydatafor2012and2013and fromthe2000censusfor2004–11. 19 Formoreinformationonthetransitiontothenewcensus-tractdata,seeRobertB.Avery,NeilBhutta, KennethP.Brevoort,andGlennB.Canner(2012),“TheMortgageMarketin2011:HighlightsfromtheData ReportedundertheHomeMortgageDisclosureAct,”FederalReserveBulletin,vol.98(December),pp.1–46, www.federalreserve.gov/pubs/bulletin/2012/default.htm.

50 FederalReserveBulletin|November2014 Table2.Distributionofhomeloans,bypurposeofloan,2004–13 Percentexceptasnoted Characteristicofborrower 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 andofneighborhood A.Homepurchase Borrowerraceandethnicity1 Asian 4.8 5.0 4.5 4.5 4.9 5.3 5.5 5.2 5.3 5.7 BlackorAfricanAmerican 7.1 7.7 8.7 7.6 6.3 5.7 6.0 5.5 5.1 4.8 Otherminority2 1.4 1.3 1.1 1.0 .9 .9 .9 .8 .8 .7 Hispanicwhite 7.6 10.5 11.7 9.0 7.9 8.0 8.1 8.3 7.7 7.3 Non-Hispanicwhite 57.1 61.7 61.2 65.4 67.5 67.9 67.6 68.7 69.9 70.2 Joint 2.3 2.3 2.3 2.5 2.8 2.8 2.7 2.8 2.9 3.1 Missing 19.8 11.5 10.5 10.1 9.6 9.3 9.1 8.6 8.3 8.2 All 100 100 100 100 100 100 100 100 100 100 Borrowerincome3 Lowormoderate 27.7 24.6 23.6 24.7 28.1 36.7 35.5 34.4 33.4 28.4 Middle 26.9 25.7 24.7 25.2 27.1 26.7 25.6 25.2 25.2 25.2 High 41.4 45.5 46.7 47.0 43.1 34.7 37.4 38.8 40.0 44.8 Incomenotusedornotapplicable 4.0 4.2 5.0 3.1 1.8 1.8 1.4 1.5 1.5 1.5 All 100 100 100 100 100 100 100 100 100 100 Neighborhoodincome4 Lowormoderate 14.5 15.1 15.7 14.4 13.1 12.6 12.1 10.8 12.8 12.7 Middle 48.7 49.2 49.5 49.6 49.8 50.2 49.4 48.6 43.6 43.7 High 35.8 34.7 33.7 35.1 35.9 35.8 37.7 38.6 43.2 43.2 All 100 100 100 100 100 100 100 100 100 100 B.Refinance Borrowerraceandethnicity1 Asian 3.5 2.9 3.0 3.1 3.1 4.1 5.2 5.4 5.5 4.7 BlackorAfricanAmerican 7.4 8.3 9.6 8.4 6.0 3.5 2.9 3.1 3.3 4.4 Otherminority2 1.4 1.4 1.3 1.1 .8 .6 .5 .6 .6 .7 Hispanicwhite 6.2 8.6 10.1 8.7 5.3 3.2 3.0 3.3 3.9 5.0 Non-Hispanicwhite 57.2 60.9 59.6 62.7 70.7 74.6 74.3 73.5 72.5 70.5 Joint 2.1 2.1 1.9 2.0 2.2 2.6 2.7 2.8 3.1 3.1 Missing 22.1 15.7 14.6 14.1 11.9 11.4 11.4 11.3 11.1 11.6 All 100 100 100 100 100 100 100 100 100 100 Borrowerincome3 Lowormoderate 26.2 25.5 24.7 23.3 23.5 19.6 19.0 19.2 19.6 21.1 Middle 26.3 26.8 26.1 25.6 25.5 22.5 22.5 21.3 21.8 21.7 High 38.8 40.8 43.7 46.1 44.8 45.8 49.6 48.1 47.7 46.3 Incomenotusedornotapplicable 8.6 6.9 5.4 4.9 6.2 12.1 8.9 11.4 10.9 10.8 All 100 100 100 100 100 100 100 100 100 100 Neighborhoodincome4 Lowormoderate 15.3 16.5 17.9 16.1 11.9 7.7 7.2 7.3 10.1 12.1 Middle 50.0 51.3 52.0 52.2 51.9 47.5 46.1 45.5 41.9 43.8 High 33.9 31.6 29.4 31.0 35.2 43.5 46.0 45.6 47.6 43.9 All 100 100 100 100 100 100 100 100 100 100 Memo Numberofhome-purchaseloans(thousands) 4,660 4,836 4,298 3,331 2,533 2,391 2,157 2,018 2,286 2,615 Numberofrefinanceloans(thousands) 6,412 5,692 4,397 3,588 2,869 5,243 4,481 3,823 5,890 4,341 Note:First-lienmortgagesforone-tofour-familyfamily,owner-occupied,site-builthomes.Rowsmaynotsumto100becauseofroundingor, forthedistributionbyneighborhoodincome,becausepropertylocationismissing. 1 Applicationsareplacedinonecategoryforraceandethnicity.Theapplicationisdesignatedasjointifoneapplicantwasreportedaswhite andtheotherwasreportedasoneormoreminorityracesoriftheapplicationisdesignatedaswhitewithoneHispanicapplicantandone non-Hispanicapplicant.Iftherearetwoapplicantsandeachreportsadifferentminorityrace,theapplicationisdesignatedastwoormore minorityraces.Ifanapplicantreportstworacesandoneiswhite,thatapplicantiscategorizedundertheminorityrace.Otherwise,the applicantiscategorizedunderthefirstracereported.“Missing”referstoapplicationsinwhichtheraceoftheapplicant(s)hasnotbeen reportedorisnotapplicableortheapplicationiscategorizedaswhitebutethnicityhasnotbeenreported. 2 ConsistsofapplicationsbyAmericanIndiansorAlaskaNatives,NativeHawaiiansorotherPacificIslanders,andborrowersreportingtwoor moreminorityraces. 3 Thecategoriesfortheborrower-incomegroupareasfollows:Low-ormoderate-income(orLMI)borrowershaveincomethatislessthan 80percentofestimatedcontemporaneousareamedianfamilyincome(AMFI),middle-incomeborrowershaveincomethatisatleast 80percentandlessthan120percentofAMFI,andhigh-incomeborrowershaveincomethatisatleast120percentofAMFI. 4 Thecategoriesfortheneighborhood-incomegrouparebasedontheratioofcensus-tractmedianfamilyincometoareamedianfamily incomefromthe2006–10AmericanCommunitySurveydatafor2012and2013andfromthe2000censusfor2004–11,andthethree categorieshavethesamecutoffsastheborrower-incomegroups(seenote3).

The2013HomeMortgageDisclosureActData 51 Table3.Nonconventionalshareofhomeloans,bypurposeofloan,2004–13 Percentexceptasnoted Characteristicofborrowerandofneighborhood 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 A.Homepurchase Borrowerraceandethnicity1 Asian 2.9 1.8 2.1 2.6 13.4 26.1 26.6 25.8 21.9 16.0 BlackorAfricanAmerican 21.7 14.3 13.6 21.7 64.1 82.0 82.9 80.3 77.3 70.6 Otherminority2 14.0 9.3 9.4 14.8 48.4 67.6 68.8 65.9 62.3 55.3 Hispanicwhite 13.7 7.5 7.0 12.4 51.4 75.4 77.0 74.1 70.6 62.8 Non-Hispanicwhite 11.1 8.9 9.5 11.5 35.4 52.0 50.3 47.4 42.2 35.3 Joint 16.9 12.8 14.4 17.2 46.4 59.4 56.3 53.6 48.9 41.8 Missing 11.3 5.1 5.7 8.8 32.7 50.6 49.4 45.9 39.5 31.9 Borrowerincome3 Lowormoderate 20.3 15.2 14.9 16.0 46.1 65.3 66.6 64.5 59.8 52.3 Middle 14.3 11.0 12.6 16.8 46.1 60.4 59.3 57.0 51.5 45.5 High 5.3 3.9 4.9 7.5 26.7 38.5 37.2 34.3 29.6 25.0 Neighborhoodincome4 Lowormoderate 15.8 9.7 9.6 13.8 45.5 64.4 65.1 61.1 57.9 49.6 Middle 14.1 10.2 10.8 14.2 42.7 59.8 59.4 56.9 52.1 44.5 High 7.1 5.4 6.1 7.6 27.4 43.4 42.0 39.4 34.7 28.0 Memo:Allborrowers 11.9 8.5 9.0 11.8 37.6 54.4 53.4 50.5 45.2 38.0 B.Refinance Borrowerraceandethnicity1 Asian 1.2 .7 .6 1.0 4.6 5.7 4.7 4.3 6.0 6.7 BlackorAfricanAmerican 11.1 5.8 4.4 10.2 39.2 53.8 42.0 37.8 38.7 37.0 Otherminority2 5.5 3.4 2.4 4.9 20.0 28.3 23.3 21.9 25.5 24.9 Hispanicwhite 5.6 2.6 1.9 3.9 20.5 36.2 28.1 22.9 26.9 25.7 Non-Hispanicwhite 4.0 2.4 2.6 4.9 15.9 16.8 13.6 12.2 14.2 14.8 Joint 7.5 3.7 3.4 6.2 19.5 21.1 16.6 16.3 20.1 20.4 Missing 4.2 1.9 1.7 4.1 18.7 19.0 12.5 13.6 16.5 16.8 Borrowerincome3 Lowormoderate 2.3 1.6 2.9 5.7 18.3 16.6 14.0 11.5 9.3 9.4 Middle 1.7 1.3 2.7 6.2 19.6 13.2 12.2 10.9 9.0 9.6 High .8 .6 1.1 2.7 10.5 7.2 6.7 6.3 5.5 6.2 Neighborhoodincome4 Lowormoderate 5.9 3.2 2.9 6.3 24.6 31.3 23.1 19.6 22.2 22.1 Middle 5.2 3.0 2.9 5.8 20.2 22.3 17.5 16.0 18.4 18.9 High 2.9 1.7 1.6 3.0 11.3 12.1 10.0 9.3 11.7 12.4 Memo:Allborrowers 4.6 2.6 2.5 5.0 17.6 18.7 14.4 13.3 15.6 16.4 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.NonconventionalloansarethoseinsuredbytheFederal HousingAdministrationorbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theFarmServiceAgency,ortheRuralHousing Service. 1 Seetable2,note1. 2 Seetable2,note2. 3 Seetable2,note3. 4 Seetable2,note4. Variation across Demographic Groups in Nonconventional Loan Use Table3showsthatblackandHispanic-whiteborrowersaremuchmorelikelytousenonconventionalloansthanconventionalloanscomparedwithotherracialandethnicgroups. In2013,almost71percentof blackhome-purchaseborrowersand63percentof Hispanic whitehome-purchaseborrowerstookoutanonconventionalloan,comparedwithabout 35percentof non-Hispanicwhitehome-purchaseborrowersandjust16percentof Asian home-purchaseborrowers.Thesenumbershavedeclinedfromtheirpeaksin2009and2010,

52 FederalReserveBulletin|November2014 whenoverthree-fourthsof blackandHispanic-whitehome-purchaseborrowersandover one-half of non-Hispanicwhitehome-purchaseborrowerstookoutnonconventionalloans. Nonconventionalusagealsorisesasborrowerandneighborhoodincomefalls.In2013,the majorityof home-purchaseborrowersandabout50percentof thoseborrowingtopurchasehomesinLMIneighborhoodsusednonconventionalloans,comparedwithabout one-fourthof high-incomeborrowersand28percentof borrowersinhigh-income neighborhoods. Greaterrelianceonnonconventionalloansmayreflecttherelativelylowdown-payment requirementsof theFHAandVAlendingprograms,whichservetheneedsof borrowers whohavefewassetstomeetdown-paymentandclosing-costrequirements.20Thepatterns of productincidencecouldalsoreflectthebehaviorof lenderstosomeextent;forexample, concernshavebeenraisedaboutthepossibilitythatlenderssteerborrowersincertain neighborhoodstowardgovernment-backedloans.21 Withrespecttorefinanceloans,minorityandlower-incomeborrowersareagainmore likelytousenonconventionalthanconventionalloans.But,ingeneral,nonconventional loansarelessprevalentinrefinancelending.22 Denial Rates and Denial Reasons In2013,theoveralldenialrateonapplicationsforhome-purchaseloansof 14.5percent wasaboutthesameasin2012,whilethedenialrateforrefinanceloanapplicationsof 22.7percentwassomewhathigherthanin2012(asshownintable4).23Overlongerhorizons,denialrateshaveexhibitedsignificantvariation.Forexample,thedenialrateforconventionalhome-purchaseloanapplicationsof about13percentin2013wasalmost6percentagepointslowerthanin2006,whilethedenialratefornonconventionalhomepurchaseloanapplicationsof 17percentin2013wasabout5percentagepointshigherthan in2006.Changesinrawdenialratesovertimereflectnotonlychangesincreditstandards, butalsochangesinthedemandforcreditandinthecompositionof borrowersapplyingfor mortgages.Forexample,thesignificantdeclineinthedenialrateonapplicationsforconventionalhome-purchaseloanssincethehousingboomyearsdespitetightenedcreditstandardscouldstemfromarelativelylargedropinapplicationsfromriskierapplicants. Asinpastyears,black,Hispanicwhite,and“otherminority”borrowershadnotablyhigher denialratesin2013thannon-Hispanicwhites,whiledenialratesforAsianborrowerswere moresimilartothosefornon-Hispanicwhiteborrowers.Forexample,thedenialratesfor conventionalhome-purchaseloanswereabout29percentforblacks,22percentforHispanicwhites,23percentforotherminorities,14percentforAsians,and11percentfornon- Hispanicwhites. 20 FindingsoftheFederalReserveBoard’sSurveyofConsumerFinancesfor2010indicatethatliquidassetlevels andfinancialwealthholdingsforminoritiesandlower-incomegroupsaresubstantiallysmallerthantheyarefor non-Hispanicwhitesorhigher-incomepopulations.SeeBoardofGovernorsoftheFederalReserveSystem, “2010SurveyofConsumerFinances,”webpage,www.federalreserve.gov/econresdata/scf/scf_2010.htm. 21 See,forexample,GlennB.Canner,StuartA.Gabriel,andJ.MichaelWoolley(1991),“Race,DefaultRiskand MortgageLending:AStudyoftheFHAandConventionalLoanMarkets,”SouthernEconomicJournal,vol.58 (July),pp.249–62. 22 Thenonconventionalshareofrefinanceloansislowerthanexpectedforthegroupscategorizedbyborrower incomebecause,inmostnonconventionalrefinanceloans,incomeisnotreported.Thus,whenincomeis reportedonarefinanceloan,theloanislikelytobeconventional. 23 Denialratesarecalculatedasthenumberofdeniedloanapplicationsdividedbythetotalnumberofapplications,excludingwithdrawnapplicationsandapplicationfilesclosedforincompleteness.

The2013HomeMortgageDisclosureActData 53 Table4.Denialrates,bypurposeofloan,2004–13 Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ofborrower A.Homepurchase Conventionalandnonconventional1 Allapplicants 14.4 16.0 18.0 18.7 18.0 15.5 15.6 15.8 14.8 14.5 Asian 13.7 15.9 16.9 17.5 19.2 16.3 15.8 16.5 15.7 15.1 BlackorAfricanAmerican 23.6 26.5 30.3 33.5 30.6 25.5 24.8 26.0 25.9 25.5 Otherminority2 19.4 20.8 24.0 26.7 25.5 21.2 21.9 20.9 20.7 21.5 Hispanicwhite 18.3 21.1 25.1 29.5 28.3 22.2 21.8 21.1 20.2 20.5 Non-Hispanicwhite 11.1 12.2 12.9 13.3 14.0 12.8 12.9 13.1 12.4 12.2 Conventionalonly Allapplicants 14.6 16.3 18.5 19.0 18.3 15.8 15.2 15.1 13.6 12.9 Asian 13.7 16.0 17.1 17.5 19.1 15.8 14.8 15.5 14.4 13.9 BlackorAfricanAmerican 25.0 27.8 31.9 35.7 37.6 35.8 33.6 33.2 32.1 28.5 Otherminority2 19.7 21.2 24.8 27.8 29.0 25.9 28.0 24.6 23.7 22.6 Hispanicwhite 18.6 21.4 25.7 30.5 32.5 26.9 24.9 24.2 22.4 21.5 Non-Hispanicwhite 11.2 12.3 13.2 13.3 14.1 13.3 12.9 12.7 11.6 10.9 Nonconventionalonly1 Allapplicants 13.3 12.5 12.1 16.2 17.4 15.3 16.0 16.5 16.3 17.0 Asian 12.6 11.6 10.6 15.5 20.2 17.7 18.6 19.3 20.2 20.7 BlackorAfricanAmerican 17.7 16.8 16.2 22.8 25.3 22.6 22.7 23.9 23.9 24.2 Otherminority2 16.8 16.3 15.2 18.6 20.9 18.7 18.7 18.8 18.8 20.5 Hispanicwhite 16.3 17.2 15.7 20.5 23.1 20.4 20.7 19.9 19.2 20.0 Non-Hispanicwhite 10.7 10.2 10.0 13.1 13.9 12.5 13.0 13.6 13.6 14.4 B.Refinance Conventionalandnonconventional1 Allapplicants 29.5 32.6 35.4 39.6 37.7 24.0 23.3 23.8 19.8 22.7 Asian 18.8 23.5 27.5 32.6 32.5 21.4 19.5 20.1 17.4 20.5 BlackorAfricanAmerican 39.9 42.2 44.1 52.0 56.0 42.2 41.7 40.0 32.8 33.9 Otherminority2 33.7 35.5 40.6 52.0 57.4 37.3 35.3 34.4 30.0 30.5 Hispanicwhite 28.7 30.1 33.2 43.0 49.1 36.4 33.4 33.2 27.4 28.7 Non-Hispanicwhite 24.1 26.9 30.1 33.7 32.2 20.7 20.6 21.3 17.7 20.0 Conventionalonly Allapplicants 30.1 32.9 35.6 39.9 37.0 22.1 21.3 22.3 19.3 22.0 Asian 18.8 23.5 27.5 32.5 31.5 20.2 18.5 19.4 17.0 20.0 BlackorAfricanAmerican 41.7 43.0 44.7 53.3 60.9 48.6 41.4 40.6 34.7 35.1 Otherminority2 34.5 35.7 40.9 52.6 59.4 38.4 34.8 34.4 31.1 31.0 Hispanicwhite 29.3 30.2 33.3 43.2 50.2 38.9 33.6 33.5 28.9 29.8 Non-Hispanicwhite 24.6 27.1 30.4 33.9 31.5 19.1 18.9 20.1 17.4 19.4 Nonconventionalonly1 Allapplicants 15.0 20.1 21.9 31.6 40.9 31.1 33.3 32.2 22.1 25.9 Asian 15.0 20.0 22.0 38.5 48.9 37.2 34.2 32.7 22.1 26.1 BlackorAfricanAmerican 17.5 23.6 24.6 33.7 43.5 35.1 42.2 39.1 29.4 31.6 Otherminority2 15.2 25.8 22.2 34.8 45.4 34.1 37.0 34.4 26.6 28.9 Hispanicwhite 15.7 23.6 26.3 34.6 43.4 31.4 33.0 32.3 23.2 25.4 Non-Hispanicwhite 12.0 17.6 19.7 28.3 36.1 27.4 29.3 29.0 19.6 23.0 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1. 1 NonconventionalloansarethoseinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.Departmentof VeteransAffairs,theFarmServiceAgency,ortheRuralHousingService. 2 Seetable2,note2. Previousresearchandexperiencegainedinthefairlendingenforcementprocessshowthat differencesindenialratesandintheincidenceof higher-pricedlending(thetopicof the nextsubsection)amongracialorethnicgroupsstem,atleastinpart,fromcredit-risk-relatedfactorsnotavailableintheHMDAdata,suchascredithistory(includingcredit scores)andLTVratios.Differentialcostsof loanoriginationandthecompetitiveenviron-

54 FederalReserveBulletin|November2014 mentalsomaybearonthedifferencesinpricing,asmaydifferencesacrosspopulationsin credit-shoppingactivities. Despitetheselimitations,theHMDAdataplayanimportantroleinfairlendingenforcement.Thedataareregularlyusedbybankexaminerstofacilitatethefairlendingexaminationandenforcementprocesses.Whenexaminersforthefederalbankingagenciesevaluate aninstitution’sfairlendingrisk,theyanalyzeHMDApricedataandloanapplication outcomesinconjunctionwithotherinformationandriskfactorsthatcanbedrawndirectly fromloanfilesorelectronicrecordsmaintainedbylenders,asdirectedbytheInteragency FairLendingExaminationProcedures.24Theavailabilityof broaderinformationallowsthe examinerstodrawstrongerconclusionsaboutinstitutioncompliancewiththefairlending laws. Lenderscan,butarenotrequiredto,reportuptothreereasonsfordenyingamortgage application,selectingfromninepotentialdenialreasons(asshownintable5).Among deniedfirst-lienapplicationsforone-tofour-family,owner-occupied,site-builtproperties in2013,79percentof home-purchaseapplicationsandabout77percentof refinanceapplicationshadatleastonereporteddenialreason.Themostfrequentlyciteddenialreasonfor bothhome-purchaseandrefinanceloanswastheapplicant’scredithistory(notethatthe columnsintable5canadduptomorethan100percentbecauselenderscancitemorethan onedenialreason).Forhome-purchaseapplications,thesecond-most-citeddenialreason wasthedebt-to-incomeratio,while,forrefinanceapplications,thesecond-most-citeddenial reasonwascollateral.Forbothhome-purchaseandrefinanceapplications,collateralis morelikelytobecitedasadenialreasononconventionalthannonconventional applications. Denialreasonsvaryacrossracialandethnicgroupstosomedegree.Forexample,among deniedhome-purchaseloanapplicationsin2013,credithistorywascitedasadenialreason for30percentof blackapplicants,21percentof Hispanicwhiteapplicants,23percentof non-Hispanicwhiteapplicants,andjust13percentof Asianapplicants.Thedebt-toincomeratiowascitedmostoftenasadenialreasonforAsianhome-purchaseapplicantsat 27percent,comparedwith21percentfornon-Hispanicwhiteapplicantsatthelowerend. Finally,collateralwascitedmostoftenasadenialreasononhome-purchaseapplications fornon-Hispanicwhitesat15percent,comparedwith10percentforblackapplicants. The Incidence of Higher-Priced Lending Currentprice-reportingrulesunderHMDA,ineffectsinceOctober2009,definehigherpricedfirst-lienloansasthosewithanAPRof atleast1.5percentagepointsabovethe averageprimeofferrate(APOR)forloansof asimilartype(forexample,a30-yearfixedratemortgage).25Thespreadforjunior-lienloansmustbeatleast3.5percentagepointsfor suchloanstobeconsideredhigherpriced.TheAPOR,whichispublishedweeklybythe FederalFinancialInstitutionsExaminationCouncil,isanestimateof theAPRonloans beingofferedtohigh-qualityprimeborrowersbasedonthecontractinterestratesanddiscountpointsreportedbyFreddieMacinitsPrimaryMortgageMarketSurvey.26 24 TheInteragencyFairLendingExaminationProceduresareavailableatwww.ffiec.gov/PDF/fairlend.pdf. 25 Formoreinformationabouttherulechangesrelatedtohigher-pricedlendingandthewaysinwhichtheyaffect theincidenceofreportedhigher-pricedlendingovertime,seeAveryandothers,“The2009HMDAData,”in note11. 26 SeeFreddieMac,“MortgageRatesSurvey,”webpage,www.freddiemac.com/pmms;andFederalFinancial InstitutionsExaminationCouncil,“FFIECRateSpreadCalculator,”webpage,www.ffiec.gov/ratespread/ newcalc.aspx.

The2013HomeMortgageDisclosureActData 55 Table5.Reasonsfordenial,bypurposeofloan,2013 Percent Credit Unveri- Typeofloanand Debt-to- Employ- Insuf- applica- Mortgage No Credit fiable raceandethnicity income ment Collateral ficient tion insurance Other reason history inforofborrower ratio history cash incom- denied given mation plete A.Homepurchase Conventionalandnonconventional1 Allapplicants 22.1 3.7 22.9 14.1 6.3 5.9 11.2 .8 10.3 21.0 Asian 27.2 4.8 13.4 14.3 6.9 9.1 15.1 .6 12.3 15.9 BlackorAfricanAmerican 23.9 2.7 30.0 10.3 6.8 4.8 8.1 .6 9.9 23.1 Otherminority2 23.1 3.4 27.7 11.5 6.7 5.9 9.4 .8 9.4 22.2 Hispanicwhite 24.7 3.8 20.5 12.6 6.6 6.3 8.5 .6 11.0 24.5 Non-Hispanicwhite 21.0 3.9 22.5 15.4 6.1 5.6 11.6 .9 10.1 20.8 Conventionalonly Allapplicants 22.1 3.2 21.7 16.4 6.8 6.2 12.2 1.3 10.1 19.1 Asian 26.3 4.4 11.9 15.4 7.1 9.4 16.5 .8 12.6 14.9 BlackorAfricanAmerican 22.6 2.1 36.3 12.3 7.4 4.1 7.0 1.6 9.3 20.4 Otherminority2 22.8 2.7 30.5 12.2 7.2 5.9 8.6 1.4 8.9 21.8 Hispanicwhite 24.2 3.3 22.5 15.6 7.6 7.0 8.8 1.3 10.9 20.6 Non-Hispanicwhite 21.5 3.3 20.8 17.6 6.7 6.0 12.4 1.4 9.5 19.3 Nonconventionalonly1 Allapplicants 22.1 4.4 24.3 11.4 5.6 5.4 10.0 .2 10.6 23.3 Asian 30.3 5.9 18.5 10.7 6.3 8.0 10.4 .05 11.3 19.3 BlackorAfricanAmerican 24.6 2.9 26.6 9.2 6.4 5.1 8.7 .1 10.2 24.5 Otherminority2 23.4 4.0 25.1 10.8 6.2 6.0 10.2 .2 9.9 22.6 Hispanicwhite 25.1 4.2 19.1 10.5 6.0 5.9 8.3 .1 11.0 27.1 Non-Hispanicwhite 20.4 4.7 24.8 12.3 5.2 5.2 10.5 .2 10.8 22.8 B.Refinance Conventionalandnonconventional1 Allapplicants 16.6 1.1 20.3 18.6 3.4 4.8 12.4 .2 11.5 23.1 Asian 26.0 1.8 14.5 16.3 3.5 8.2 14.2 .3 13.0 16.6 BlackorAfricanAmerican 13.2 .6 25.8 15.6 4.4 3.7 10.7 .2 12.5 25.6 Otherminority2 18.2 1.0 23.2 15.3 3.6 5.5 12.0 .2 13.2 21.2 Hispanicwhite 19.7 1.2 21.8 13.6 4.2 6.0 11.2 .2 14.0 21.6 Non-Hispanicwhite 16.9 1.2 18.8 20.4 3.4 4.8 12.7 .3 11.2 22.7 Conventionalonly Allapplicants 18.9 1.2 21.1 19.6 3.0 5.1 13.1 .3 11.3 19.7 Asian 27.4 1.9 14.5 16.8 3.3 8.4 14.5 .3 12.7 15.1 BlackorAfricanAmerican 16.4 .6 28.5 16.4 3.5 3.7 11.6 .3 11.1 21.6 Otherminority2 21.3 1.1 24.5 15.8 3.0 6.0 12.6 .3 12.4 17.8 Hispanicwhite 22.4 1.2 22.8 14.6 3.2 6.1 11.6 .3 12.8 19.6 Non-Hispanicwhite 18.9 1.3 19.3 21.3 3.1 5.0 13.4 .3 10.9 19.6 Nonconventionalonly1 Allapplicants 7.5 .8 17.2 14.7 5.0 3.7 9.8 .04 12.7 36.6 Asian 12.1 1.2 15.4 12.1 5.6 6.3 10.8 .1 16.0 31.4 BlackorAfricanAmerican 6.8 .5 20.5 13.8 6.3 3.6 9.1 .03 15.3 33.6 Otherminority2 7.9 .6 18.7 13.7 5.6 3.8 10.1 .1 16.0 32.6 Hispanicwhite 10.3 1.0 18.2 10.4 7.7 5.5 9.7 .02 18.2 28.7 Non-Hispanicwhite 7.7 .9 16.1 16.1 4.7 3.7 9.9 .04 12.6 36.4 Note:Denialsonfirst-lienmortgageapplicationsforone-tofour-family,owner-occupied,site-builthomes.Columnssumtomorethan100 becauselendersmayreportuptothreedenialreasons.Foradescriptionofhowborrowersarecategorizedbyraceandethnicity,seetable2, note1. 1 Seetable4,note1. 2 Seetable2,note2. In2013,thefractionof home-purchaseloans(again,firstliensforone-tofour-family, owner-occupied,site-builtproperties)abovethehigher-pricedthresholdincreasedto 7.1percentfrom3.1percentin2012(asshownintable6.A).Thisincreasestemmedfroma riseinthehigher-pricedshareof nonconventionalloansfrom3percenttonearly14percent

56 FederalReserveBulletin|November2014 Table6.A.Incidenceofhigher-pricedlending,bypurposeofloan,2004–13 Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ofborrower A.Homepurchase Conventionalandnonconventional1 Allapplicants 9.8 22.5 23.2 12.7 8.1 4.6 2.2 3.3 3.1 7.1 Asian 5.5 16.3 16.4 7.6 4.0 2.4 1.0 1.5 1.4 3.0 BlackorAfricanAmerican 24.3 46.7 46.4 27.6 14.5 7.1 3.0 5.0 5.3 14.2 Otherminority2 14.4 30.3 30.7 16.1 9.1 5.3 2.3 3.5 3.4 8.7 Hispanicwhite 17.5 42.0 43.3 25.9 15.8 8.1 3.9 6.1 5.9 16.8 Non-Hispanicwhite 7.8 15.5 16.0 9.6 7.2 4.3 2.2 3.1 2.9 6.1 Conventionalonly Allapplicants 11.0 24.5 25.3 14.0 7.3 4.6 3.3 3.8 3.2 2.9 Asian 5.6 16.6 16.7 7.7 3.3 1.9 1.0 1.3 1.2 1.1 BlackorAfricanAmerican 30.6 54.1 53.4 34.0 17.4 8.7 6.1 8.0 6.7 6.1 Otherminority2 16.1 33.3 33.6 18.5 9.5 6.7 4.6 5.5 5.1 4.9 Hispanicwhite 20.0 45.3 46.3 28.9 17.7 11.0 9.6 10.7 8.7 7.3 Non-Hispanicwhite 8.6 16.9 17.5 10.5 6.5 4.8 3.4 3.9 3.2 2.9 Nonconventionalonly1 Allapplicants 1.2 .9 1.8 3.0 9.5 4.6 1.3 2.7 3.0 13.8 Asian 2.4 .6 .8 1.3 8.2 3.9 .8 2.0 1.9 13.1 BlackorAfricanAmerican 1.4 1.6 2.5 4.5 12.8 6.8 2.4 4.3 4.9 17.6 Otherminority2 4.4 .7 2.1 2.4 8.8 4.7 1.2 2.5 2.4 11.7 Hispanicwhite 2.0 1.4 3.5 4.5 14.0 7.1 2.2 4.5 4.7 22.4 Non-Hispanicwhite 1.0 .7 1.5 2.5 8.4 3.9 1.0 2.3 2.5 12.0 B.Refinance Conventionalandnonconventional1 Allapplicants 14.5 25.0 30.3 21.0 10.9 3.8 1.8 2.1 1.5 1.9 Asian 5.8 15.1 19.5 12.5 3.1 .9 .4 .5 .4 .5 BlackorAfricanAmerican 30.0 46.2 50.7 38.1 22.8 9.0 6.5 6.8 4.1 3.8 Otherminority2 17.6 26.9 32.3 23.8 13.9 4.7 2.6 2.6 2.0 2.2 Hispanicwhite 18.2 32.6 36.9 26.5 15.1 7.0 4.4 4.4 2.6 3.1 Non-Hispanicwhite 12.3 20.4 25.0 17.6 10.2 3.7 1.8 2.2 1.5 2.0 Conventionalonly Allapplicants 15.2 25.7 31.0 21.8 10.4 3.1 1.3 1.5 1.2 1.5 Asian 5.8 15.2 19.6 12.5 2.9 .7 .2 .3 .3 .3 BlackorAfricanAmerican 33.7 49.0 52.8 41.5 27.6 9.9 4.0 4.2 2.9 3.3 Otherminority2 18.2 27.7 32.9 24.5 14.7 4.8 1.9 2.2 1.7 2.0 Hispanicwhite 19.2 33.4 37.5 27.3 16.0 7.2 3.3 3.3 2.3 2.4 Non-Hispanicwhite 12.8 20.9 25.6 18.2 9.8 3.1 1.3 1.6 1.2 1.6 Nonconventionalonly1 Allapplicants 1.5 .9 3.1 6.6 13.2 6.7 4.9 5.9 3.2 3.9 Asian 3.6 2.1 2.5 4.9 8.9 4.8 3.1 4.0 1.8 2.6 BlackorAfricanAmerican 1.0 1.2 4.1 7.8 15.2 8.2 9.8 10.9 6.0 4.6 Otherminority2 8.1 3.9 9.6 9.9 10.5 4.5 4.6 4.3 2.9 2.9 Hispanicwhite 2.0 .9 2.6 6.2 11.6 6.6 7.3 7.9 3.6 5.1 Non-Hispanicwhite 1.3 .7 2.8 6.0 12.1 6.5 4.6 5.9 3.3 4.2 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1. 1 Seetable4,note1. 2 Seetable2,note2. (thehigher-pricedshareof conventionalloansdeclinedslightly).Morespecifically,the higher-pricedfractionof FHAhome-purchaseloansspikedfromabout5percentinearly 2013toabout40percentafterMay2013,withanoverallaverageincidencefortheyear

The2013HomeMortgageDisclosureActData 57 Table6.B.Adjustedincidenceofhigher-pricedlending,bypurposeofloan,2004–13 Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ofborrower A.Homepurchase Conventionalandnonconventional1 Allapplicants 7.4 18.3 17.1 6.3 1.3 2.4 .6 .8 .8 .7 Asian 3.8 13.0 11.4 3.1 .5 1.2 .3 .3 .3 .3 BlackorAfricanAmerican 19.3 40.3 38.5 16.7 1.9 3.5 .6 .7 .9 1.1 Otherminority2 10.5 24.7 22.7 8.0 1.5 3.0 .8 .9 1.1 .9 Hispanicwhite 12.3 34.5 32.8 13.0 2.1 4.0 1.0 1.3 1.6 1.6 Non-Hispanicwhite 5.8 12.1 10.9 4.3 1.3 2.3 .7 .8 .8 .7 Conventionalonly Allapplicants 8.2 20.0 18.7 7.1 1.9 3.1 1.3 1.4 1.2 .9 Asian 3.8 13.3 11.6 3.2 .5 1.0 .3 .4 .4 .3 BlackorAfricanAmerican 24.4 46.9 44.5 21.2 4.7 5.8 2.6 2.6 2.7 1.8 Otherminority2 11.6 27.2 25.0 9.3 2.7 4.9 2.3 2.5 2.6 1.7 Hispanicwhite 14.0 37.2 35.2 14.8 3.9 6.9 3.9 4.1 4.5 2.8 Non-Hispanicwhite 6.5 13.2 12.0 4.9 1.9 3.2 1.3 1.5 1.2 .8 Nonconventionalonly1 Allapplicants .9 .3 .2 .3 .4 1.8 .1 .2 .3 .5 Asian 2.2 .3 .1 .2 .2 1.6 .1 .2 .2 .3 BlackorAfricanAmerican 1.0 .5 .3 .6 .4 3.0 .2 .3 .3 .8 Otherminority2 3.9 .3 .2 .2 .3 2.1 .1 .1 .2 .3 Hispanicwhite 1.6 .3 .3 .2 .5 3.1 .1 .3 .3 .8 Non-Hispanicwhite .8 .2 .2 .2 .3 1.5 .1 .2 .3 .5 B.Refinance Conventionalandnonconventional1 Allapplicants 11.3 20.1 21.3 12.7 4.3 2.0 .6 .8 .7 .7 Asian 4.1 12.2 12.1 5.4 .8 .4 .1 .2 .1 .1 BlackorAfricanAmerican 24.3 38.5 39.0 26.4 10.6 5.3 2.6 3.3 2.5 1.6 Otherminority2 13.2 22.0 22.3 14.5 7.1 3.0 .9 1.1 1.1 .8 Hispanicwhite 13.4 27.0 25.8 14.8 5.6 3.8 1.8 1.8 1.1 .9 Non-Hispanicwhite 9.5 15.9 16.9 10.3 4.1 2.0 .6 .8 .7 .7 Conventionalonly Allapplicants 11.8 20.7 21.9 13.3 5.1 1.9 .5 .6 .4 .4 Asian 4.1 12.3 12.1 5.4 .9 .3 .1 .1 .0 .0 BlackorAfricanAmerican 27.3 40.8 40.7 29.4 17.1 7.5 2.0 1.8 1.0 1.0 Otherminority2 13.6 22.6 22.7 14.9 8.3 3.4 .9 .9 .7 .7 Hispanicwhite 14.1 27.7 26.2 15.4 6.9 4.5 1.4 1.3 .8 .7 Non-Hispanicwhite 9.9 16.3 17.3 10.9 4.8 1.9 .5 .6 .4 .5 Nonconventionalonly1 Allapplicants 1.0 .6 .7 .5 .4 2.6 1.2 2.5 2.3 1.8 Asian 2.9 1.8 1.3 1.4 .5 1.6 .5 1.5 1.4 1.1 BlackorAfricanAmerican .6 .8 1.2 .6 .5 3.5 3.5 5.9 4.9 2.6 Otherminority2 6.3 3.4 7.8 6.3 1.9 1.9 1.1 2.0 2.2 1.3 Hispanicwhite 1.4 .4 .3 .6 .7 2.7 2.8 3.5 1.9 1.3 Non-Hispanicwhite .8 .4 .4 .3 .4 2.4 1.0 2.4 2.5 2.1 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1.Seetextfordetailsonhowadjustedincidencesarecalculated. 1 Seetable4,note1. 2 Seetable2,note2. of about22percent(table7).27Incontrast,lessthan1percentof VAandFSA/RHSloans werehigherpricedin2013.Theriseinhigher-pricedFHAlendingreflects,atleastinpart, 27 Lendersreportthedateonwhichtheytookactiononanapplication,althoughthisinformationisnotreleased inthepublicHMDAdatafiles.Fororiginations,the“actiondate”istheclosingdateordateoforiginationfor theloan.Thisdateisusedtocompiledataatthemonthlylevel.

58 FederalReserveBulletin|November2014 Table7.Distributionofpricespread,2013 Percentexceptasnoted LoanswithAPORspreadabovethethreshold1 Purposeandtypeofloan Totalnumber Number Distribution,bypercentagepointsofAPORspread Percent 1.5–1.99 2–2.49 2.5–2.99 3–3.99 4–4.99 5ormore Site-builthomes Homepurchase Conventional 1,622,487 47,481 2.9 49.8 20.8 11.6 10.6 3.8 3.3 FHA2 622,826 135,429 21.7 75.6 20.6 2.9 .8 .05 .02 VA/RHS/FSA3 370,117 1,741 .5 76.6 19.0 1.7 1.3 1.0 .4 Refinance Conventional 3,627,767 55,700 1.5 53.0 19.4 9.9 10.8 4.2 2.7 FHA2 435,666 27,064 6.2 41.6 10.6 10.7 33.2 3.7 .3 VA/RHS/FSA3 277,397 1,101 .4 94.1 3.6 .5 1.0 .4 .4 Manufacturedhomes Homepurchase Conventional 50,855 34,934 68.7 5.1 5.6 5.5 14.0 14.0 55.8 FHA2 11,003 4,308 39.2 52.8 24.6 6.9 6.1 9.3 .3 VA/RHS/FSA3 3,052 30 1.0 76.7 13.3 6.7 0 3.3 0 Refinance Conventional 32,322 8,309 25.7 22.2 14.0 12.0 20.8 12.8 18.2 FHA2 9,117 832 9.1 54.0 10.3 4.9 25.0 5.5 .2 VA/RHS/FSA3 2,567 17 .7 94.1 0 5.9 0 0 0 Note:First-lienmortgagesforone-tofour-familyowner-occupiedhomes. 1 Averageprimeofferrate(APOR)spreadisthedifferencebetweentheannualpercentagerateontheloanandtheAPORforloansofasimilar typepublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil.Thethresholdforfirst-lienloansisaspreadof 1.5percentagepoints. 2 LoansinsuredbytheFederalHousingAdministration. 3 LoansbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theRuralHousingService,ortheFarmServiceAgency. theslightincreaseintheFHAannualMIPinApril2013(ontopof increasesin2010,2011, and2012),inadditiontotheFHA’slengtheningtheperiodoverwhichtheannualMIPis requiredtobepaidbeginninginJune2013.28Forexample,ona30-yearloanwithaninitial LTVover90percent(thevastmajorityof FHAloans),theannualMIPisnowrequiredto bepaidoverthelifeof theloan(asdiscussedearlier),whereasthepreviouspolicywasto automaticallycancelpremiumpaymentsoncetheLTVreached78percent.29Thesechanges appeartohavepushedmanyFHAhome-purchaseloansjustoverthereportingthreshold; asshownintable7,over75percentof higher-pricedFHAhome-purchaseloanswere within0.5percentagepointof thehigher-pricedthreshold. Therewaslittleincreaseinthehigher-pricedfractionof refinancemortgages(asshownin table6.A).Incontrasttononconventionalhome-purchaseloans,thehigher-pricedshareof nonconventionalrefinanceloansincreasedonlyslightly.Perhapsanimportantfactorhere isthat,in2012,theFHAreducedtheannualMIPonstreamlinerefinancesof FHAloans endorsedbeforeJune2009to0.55percent.30 28 Asshownintable7,almostnoVAorFSA/RHSloanswerehigherpricedin2013. 29 WhilelengtheningthetermoverwhichtheMIPmustbepaiddoesnotaffectthemonthlycostaborrowerfaces initially,itdoeschangethepotentiallifetimecostoftheloanandthustheAPR.Theultimatecostoftheloan willdependonhowlongtheborrowerholdstheloan.Ifborrowersendupholdingtheseloansevenafterthe LTVdropsbelow78percent,theloanswillprovetobemoreexpensivethanintheabsenceofthepolicy change. 30 SeeU.S.DepartmentofHousingandUrbanDevelopment(2012),“FHAAnnouncesPriceCutstoEncourage StreamlineRefinancing,”pressrelease,March6,http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2012/HUDNo.12-045.

The2013HomeMortgageDisclosureActData 59 Table6.Aalsoshowsthat,in2013,blackandHispanic-whiteborrowershadthehighest incidencesof higher-pricedloanswithinboththeconventionalandnonconventionalloan types.Table6.Aprovidestherawratesof higher-pricedlendingbygroupfrom2004to 2013,but,asdiscussedindetailinpreviousBulletinarticlesontheHMDAdata,theraw ratesreportedinthepublicHMDAdatacanbedifficulttocompareovertimefortwomain reasons.First,adifferentprice-reportingrulewasinplacepriortoOctober2009.And,second,thepreviousprice-reportingrulecreatedunintendeddistortionsinreportingovertime (whichiswhythereportingrulewaschanged). Underthepreviousrule,lenderswererequiredtocomparetheAPRonamortgagewith theyieldonaTreasurysecuritywithacomparabletermtomaturitytodeterminewhether theloanshouldbeconsideredhigherpriced.If thedifferenceexceeded3percentagepoints forafirst-lienloanor5percentagepointsforajunior-lienloan,theloanwasclassifiedas higherpricedandtheratespread(theamountof thedifference)wasreported.Unfortunately,usingcomparable-termTreasurysecuritiesasthebenchmarkrategenerateddifferencesovertimeintheincidenceof reportedhigher-pricedlendingthatwereindependentof changesinthesupplyof anddemandforriskiermortgageloans. Oneeffectof theoldpricingruleisthat,inperiodswhentheyieldcurveissteep(thatis, whenshorter-termTreasuryratesaresignificantlylowerthanlonger-termTreasuryrates),a loanwouldbelesslikelytobereportedashigherpricedthaninperiodswhentheyield curveisflat,allelsebeingequal.Sincemostmortgagesprepaywellbeforethestatedtermof theloan,lenderstypicallyuserelativelyshorter-terminterestrateswhensettingthepriceof mortgageloans.Forexample,lendersoftenprice30-yearfixed-ratemortgagesbasedonthe yieldsonsecuritieswithmaturitiesof 10yearsorless.Assuch,whenshorter-termTreasury ratesfallrelativetolonger-termrates,mortgageratesgetpulleddownrelativetolongertermTreasuryrates,essentiallyraisingthebarforamortgagetobeclassifiedashigher priced.Whilethecurrentreportingruledefineshigher-pricedloansasthosewithaspread overtheprimemortgagerate,orAPOR,of atleast1.5percentagepoints,in2004,whenthe yieldcurvewasrelativelysteep,a30-yearfixed-ratemortgage’sspreadovertheAPOR wouldhavehadtohavebeenabout2.2percentagepointsovertheAPORtomeetthe thresholdof 300basispointsovertheTreasuryrate.Asimilarsteepeningof theyieldcurve affectedreportedhigher-pricedlendingduring2009priortotherulechange. Asecondeffectof tyingthehigher-priceddefinitiontoTreasuryratesisthat,whenthereis a“flighttoquality,”suchasduringthefinancialcrisis,investorsflocktothesafestsecurities,suchasTreasurysecurities,increasingthespreadbetweenTreasurysecuritiesandother instruments,includingprimemortgages.31Incontrasttothefirsteffect,thisflight-to-qualityeffectlowersthebarforaloantobereportedashigherpriced.Atsomepointsinthe latterhalf of 2008,30-yearfixed-ratemortgageswithspreadsovertheAPORof just1percentagepointwouldhavebeenreportedashigherpriced. Table6.Bprovidesadjustedratesof higher-pricedlendingintendedtobemorecomparable overtime.Usingthedatesof applicationandorigination(whicharenotreleasedinthe publicHMDAdatafiles),wecanestimatetheAPRof loansthatwereoriginatedunderthe oldpricingrule.ThisestimatedAPRcanthenbecomparedwiththeAPORinsteadof with Treasuryrates,asisdoneunderthenewprice-reportingrule.Finally,becausetheimplied thresholdspreadovertheAPORduringthepreviousreportingregimegottoashighas about2.5percentagepoints,table6.Breportsthefractionof loanswithanestimatedAPR 31 Whenthedemandforafixed-incomesecuritysuchasaTreasurybondincreases,thepriceofthebondrisesand itsyieldfalls.Wheninvestors’demandforTreasurysecuritiesrisesmorethantheirdemandformortgagesecurities,theinterestrateonTreasurysecuritiesfallsrelativetotheinterestrateonmortgages,thusincreasingthe spreadbetweenthetwo.

60 FederalReserveBulletin|November2014 spreadovertheAPOR(ortheactualreportedspreadforloansmadeunderthenewrules) of atleast2.5percentagepoints.32 Becauseof thehigheradjustedthresholdimposed,thefrequenciesof higher-pricedmortgagelendingreportedintable6.Baresignificantlylowerthanthoseintable6.A,butthey shouldbemorecomparableovertime.Theratesintable6.Bmayalsoprovideabettersense of theextentof subprimelending,ratherthanacombinationof subprimeandnear-prime lending,sincethethresholdis2.5percentagepointsovertheAPORratherthan1.5percentagepoints.Notably,table6.Bsuggeststhat,by2008,therewasverylittlesubprime lending.Inaddition,whereastable6.Aindicatesthattherateof higher-pricedlendingin 2013hadrisenfrom2012andwasalmostone-thirdtheratein2006,table6.Bshowsthat theadjustedratein2013wasslightlylowerthanin2012andwaslessthanone-twentieth whatitwasin2006.Finally,in2013,thedifferencesacrossracialandethnicgroupsare moremutedthanintable6.A:Almostnoborrowers,regardlessof raceorethnicity,got loanswithaspreadovertheAPORinexcessof 2.5percentagepoints,instarkcontrastto thepatternsduringtheheightof thehousingboomin2005and2006. Oneshortcomingof thisadjustmenttechniqueisthatweassumeallloansare30-year fixed-ratemortgagesbecausetheHMDAdatadonotprovideinformationonthetermor ratestructure.Perhapsthemostsignificantimplicationof thisassumptionisthat,despite ouradjustments,theextentof higher-pricedlendingin2004relativetootheryearsis understated(alternatively,thegrowthinhigher-pricedlendingbetween2004and2005is stilloverstateddespiteouradjustments).Duringthehousingboom,adjustable-ratemortgageswerequiteprevalent,andtheAPRsonsuchloansaretiedtoevenshorter-term Treasuryratesthanfixed-ratemortgages.Thus,whentheyieldcurveisrelativelysteep,asin 2004,thebarforadjustable-ratemortgagestobereportedashigherpricedwouldhavebeen evenhigherthanforfixed-ratemortgages. Analyzing the Incidence of Higher-Priced Lending Using Credit Bureau Data Next,wepresenttheresultsfromananalysisusinganenhancedHMDAdatasetinwhich first-lienhome-purchaseandrefinancemortgagesforowner-occupiedsite-builtproperties reportedintheHMDAdatahavebeenmatchedtoborrowers’consumercreditrecord information.33Asshownintables6.Aand6.B,theHMDAdataexhibitpersistentdifferencesintheincidenceof higher-pricedlendingacrossracialandethniclines.Attheheight of thehousingboomin2006,whenhigher-pricedlendingwasfarmoreprevalentthanitis today,over53percentof conventionalhome-purchaseloanstoblackborrowersandover 46percentof suchloanstoHispanicwhiteborrowerswerehigherpriced,comparedwith lessthan18percentforwhiteborrowers(asshownintable6.A). Itisunclearwhether,ortowhatextent,thesedifferencesareduetodiscrimination,borrowerriskcharacteristics,orotherfactors.Becausetheinformationonborrowerandloan characteristicsintheHMDAdataislimited,onecannotexplaintheobserveddisparities withtheHMDAdataalone.Thematcheddataallowustoaccountforborrowers’credit riskscores,whichareanimportantdeterminantof theinterestratelenderssetonaloan. Asdiscussedinmoredetailinthenextsubsections,thematcheddatarevealsignificantdifferencesinriskscoresacrossracialandethnicgroups.Moreover,thesedifferenceshelp 32 Foramoredetaileddiscussionofthisadjustmenttechnique,seeAveryandothers,“The2009HMDAData,”in note11. 33 Forfurtherinformationaboutcreditrecords,seeRobertB.Avery,PaulS.Calem,GlennB.Canner,and RaphaelW.Bostic(2003),“AnOverviewofConsumerDataandCreditReporting,”FederalReserveBulletin, vol.89(February),pp.47–73,www.federalreserve.gov/pubs/bulletin/2003/0203lead.pdf.

The2013HomeMortgageDisclosureActData 61 explainmuch(butnotall)of thedifferenceintheincidenceof higher-pricedlendingacross groups. Unfortunately,thematcheddatasetdoesnotincludeallof thecharacteristicsof theborrowerandloanthatbanksconsiderwhenpricingaloan,andtheseunobservedcharacteristicscouldbedrivingtheremainingdifferenceinhigher-pricedlending.34Therefore, althoughdifferencesinhigher-pricedlendingbyraceandethnicityremainaftercontrolling forriskscores,onecannotconcludethattheyareevidenceof discrimination. Description of the Matched HMDA–Credit Record Data ThecreditrecordsavailableformatchingcomefromtheFederalReserveBankof New YorkConsumerCreditPanel/Equifaxdata(CCP).35TheCCPisa5percent,nationally representativesampleof allindividualswithacreditrecordandavalidSocialSecurity number.TheCCPisaquarterlypanel,trackingthesameindividualsovertimeandprovidingdetailedinformationontheevolutionof individuals’debtholdingsandpaymenthistory.36TheCCPalsoprovidesacreditriskscore—theEquifaxRiskScore—whichis updatedeachquarter.37Inthisanalysis,weuseriskscoresonequarterpriortothequarter of mortgageorigination. NeithertheHMDAdatanorthecreditrecorddataincludepersonalidentifyinginformation,butborrowersinthetwodatasetscanbematchedbasedonthemortgageloaninformationcommontobothdatasets.38Forthisarticle,wepresentresultsfromthematched 2006HMDAloanrecords,reflectinglendingactivityattheheightof themostrecenthousingboomandwhenhigher-pricedlendingwasprevalent.Becauseof tightenedcreditand therarityof higher-pricedlendinginrecentyearsregardlessof raceorethnicity(asshown, inparticular,intable6.B),theresimplyarenosizablepricingdifferencesobservedinthe HMDAdata,astherewereduringthehousingboom,toexplain.Moreover,thesubsequent housingmarketcrashhasdrawnincreasedscrutinytolenderbehaviorduringthisperiod. Becausethecreditrecorddataarea5percentsampleof thefullpopulation,onlyasmall fractionof HMDAloanrecordswillberepresentedintheCCP.Thatsaid,becausethe HMDAdataconsistof severalmillionloanrecords,theresultingmatcheddatasetisstill quitelarge.Forreasonsdiscussedinthe2013BulletinarticleontheHMDAdata,we 34 Otherresearchershavefoundasimilarblack–whitedifferenceintheselectionintothesubprimelendingmarket aftercontrollingforarichersetofborrowercharacteristics,includingtheLTVratioandthefulldocumentation statusoftheapplication.See,forexample,MarshaJ.Courchane(2007),“ThePricingofHomeMortgage LoanstoMinorityBorrowers:HowMuchoftheAPRDifferentialCanWeExplain?”JournalofRealEstate Research,vol.29(October–December),pp.399–439;andMarvinM.SmithandChristyChungHevener(2014), “SubprimeLendingoverTime:TheRoleofRace,”JournalofEconomicsandFinance,vol.38(April), pp.321–44. 35 Forfurtherdetails,seeDonghoonLeeandWilbertvanderKlaauw(2010),“AnIntroductiontotheFRBNY ConsumerCreditPanel,”FederalReserveBankofNewYorkStaffReports479(NewYork:FederalReserve BankofNewYork,November),www.newyorkfed.org/research/staff_reports/sr479.html. 36 Thesamplingapproachisdesignedtogeneratethesameentryandexitbehaviorasispresentinthepopulation, withyoungindividualsandimmigrantsenteringthesampleanddeceasedindividualsandemigrantsleavingthe sampleeachquarteratthesamerateasintheU.S.population,suchthateachquarterlysnapshotcontinuesto benationallyrepresentative. 37 ThecreditscoreincludedintheCCPisgeneratedfromtheEquifaxRiskScore3.0model.Thiscreditscoreis generatedfromageneral-purposeriskmodelthatpredictsthelikelihoodanindividualwillbecome90daysor moredelinquentonanyaccountwithin24monthsafterthescoreiscalculated.TheEquifaxRiskScore3.0 rangesfrom280to850,withahigherscorecorrespondingtolowerrelativerisk(formoreinformation,see www.equifax.com).Althoughagivenlendermayhaveusedadifferentscoreinunderwritingaloan,itislikely thatthescoresusedherearehighlycorrelatedwiththescoresusedinunderwriting. 38 WedirectreadersinterestedinthedetailsofthematchingprocesstoBhuttaandCanner,“MortgageMarket ConditionsandBorrowerOutcomes,”innote7(seeespeciallyappendixB,“MatchingHMDARecordswith CreditBureauRecords”).

62 FederalReserveBulletin|November2014 Table8.Creditriskscoredistribution,byraceandethnicity,2006 Percentexceptasnoted Blackor White Measureofcreditrisk Asian African Otherminority1 Memo:Total observations American Hispanic Non-Hispanic EquifaxRiskScorerange 500orless .2 2.9 1.0 .9 .5 811 501–550 .7 9.3 1.8 3.6 1.8 2,716 551–600 3.3 22.4 11.1 11.9 6.0 8,225 601–650 9.0 22.2 17.1 21.1 10.8 13,613 651–700 18.8 17.3 20.6 24.6 16.8 19,480 701–750 28.6 14.6 26.2 22.2 24.5 27,122 751ormore 39.3 11.4 22.3 15.7 39.7 43,590 All 100 100 100 100 100 115,557 Memo:Averageriskscore 718 635 680 668 702 … Note:Conventionalfirst-lienhome-purchasemortgagesforowner-occupied,one-tofour-family,site-builthomes.Distributionsmaynotsumto 100becauseofrounding.Foradescriptionofhowborrowersarecategorizedbyraceandethnicity,seetable2,note1. 1 Seetable2,note2. ...Notapplicable. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifaxdata. attemptedtomatchonlythosemortgagesforowner-occupiedpropertiesinmetropolitan statisticalareas.39Of suchloans,wematchedabout300,000in2006.Acomparisonof the characteristicsof thematchedloanswiththecharacteristicsof thefullHMDAdataset indicatesthatthematchedloansprovideagoodrepresentationof allHMDArecordstargetedformatching. Credit Scores and the Racial and Ethnic Disparity in Higher-Priced Lending Creditriskscoresareasummarymetricof therelativecreditriskposedbycurrentandprospectiveborrowers.Genericriskscores(sometimesreferredtoasbureauorcredithistory scores)arederivedusingcreditrecordstopredictthelikelihoodof defaultbasedon individuals’pastexperiences.Lowerscoresindicateagreatercreditrisk.Lendersconsider suchscoreswhenunderwritingloans,andborrowerswithpoorcredit,allelsebeingequal, arelikelytobechargedhigherprices.Totheextentthatcreditscoresdiffersignificantly acrossgroups,thatcouldhelpexplaindifferencesinmortgagepricing. BlackandHispanic-whiteborrowers,thetwogroupswiththehighestincidencesof loans pricedabovethereportingthresholdin2006,alsohadthelowestgroup-averagecredit scoresof 635and668,respectively(table8).Whileabouttwo-thirdsof non-Hispanicwhite borrowershadscoresover700,onlyabout26percentof blackborrowersand38percentof Hispanicwhiteborrowershadsuchscores.Atthesametime,overone-thirdof blackborrowersandabout16percentof Hispanicwhiteborrowershadcreditscoresbelow600, comparedwithlessthan9percentof non-Hispanicwhiteborrowersandlessthan5percent of Asianborrowers. Next,weshowthefrequenciesof higher-pricedlendingbyraceandethnicgroup,broken into“bins”byriskscore(table9).Thethirdrowfromthebottomshowstherawdifference intheincidenceof higher-pricedlendingforeachgroup.40Thesecond-to-lastrowpresents 39 ThereasonsarediscussedinBhuttaandCanner,“MortgageMarketConditionsandBorrowerOutcomes,”in note7. 40 Thesedifferencesaresimilar,butnotidentical,tothoseshownintable6.A.Thedifferencesareattributableto thematcheddatasetnotbeingperfectlyrepresentativeoftheHMDAdata.

The2013HomeMortgageDisclosureActData 63 Table9.Incidenceofhigher-pricedlending,byrace,ethnicity,andcreditriskscore,2006 Percent Blackor White Measureofcreditriskandofdifference Other inhigher-pricedlending Asian African minority1 All American Hispanic Non-Hispanic EquifaxRiskScorerange 500orless 84.6 88.2 73.3 81.0 73.1 79.2 501–550 53.7 83.8 75.9 78.3 75.5 78.6 551–600 53.4 74.9 58.0 74.7 63.2 68.3 601–650 39.0 54.8 39.3 59.9 36.6 44.0 651–700 14.1 29.0 19.1 38.0 14.3 19.4 701–750 5.0 17.0 12.8 20.9 5.6 7.9 751ormore 2.3 12.7 8.8 16.3 2.5 3.4 All 10.8 48.3 25.1 41.8 14.3 20.3 Differenceinincidenceofhigher-pricedlendingrelativetonon-Hispanicwhite Rawdifference -3.5 34.1 10.8 27.5 0 … AdjustedforHMDAcontrols -1.7 31.6 12.4 24.3 0 … AdjustedforHMDAcontrolsandEquifaxRisk Score -1.3 14.1 4.7 15.9 0 … Note:Conventionalfirst-lienhome-purchasemortgagesforowner-occupied,one-tofour-family,site-builthomes.Distributionsmaynotsumto 100becauseofrounding.Foradescriptionofhowborrowersarecategorizedbyraceandethnicity,seetable2,note1. 1 Seetable2,note2. …Notapplicable. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifaxdata. theestimateddifferenceintheincidenceaftercontrollingonlyforthevariablesavailablein theHMDAdata.41Asnotedearlier,controllingforHMDAvariablessuchasincomedoes littletoreducethedisparities. Thefinalrowcontainsestimatesof thedifferencesaftercontrollingforborrowers’risk scores.Accountingforriskscoressignificantlyreducesthediscrepanciesinhigher-priced lending,whichcanalsobeseeninthetoppartof thetable.Withinanygivenscorecategory,differencesintheincidenceof higher-pricedlendingaresmallerthantheoveralldifference.Forexample,withinthehighestscoregroup(751ormore),thedifferenceinthe incidenceof higher-pricedlendingbetweenblackandnon-Hispanic-whiteborrowersis about10percentagepointsratherthan35percentagepoints. Still,theremainingdiscrepanciesarenotimmaterial.Itisimportanttorecognizethatthe matcheddatadonotcontainallof theinformationlendersmighttakeintoaccountwhen makingtheloanpricingdecision,suchastheLTVratio,employmenthistory,otherassets, andthelevelof incomeandassetdocumentation.LackingLTVdatamaybeparticularly problematic,assuchdataareakeymeasureof defaultriskaswellasof thelossthelender wouldincurintheeventof default—ahigherLTVratiomeanslesscollateralforagiven loanamount. RiskfactorslikeLTVratiosarelikelycorrelatedwithbothminoritystatusandcreditscore. Table9couldbeoverstatingthetrueeffectof race,ethnicity,andcreditscoreonhigherpricedlendingif thesevariablesareactingasproxiesforotherriskfactorswedonot 41 Werunstandardmultivariatelinearregressionsinordertocontrolforotherfactorsthatmightbecorrelated withraceandthelikelihoodofgettingahigher-pricedloan.TheHMDAcontrolsincludeindicatorvariables forvariousborrowergroupsdefinedbyincome,loanamount,presenceofaco-applicant,monthoforigination,andlocalmetropolitanstatisticalarea.ThisprocedureissimilartothatusedinRobertB.Avery,Kenneth P.Brevoort,andGlennB.Canner(2007),“The2006HMDAData,”FederalReserveBulletin,vol.93(December),pp.A73–A109,www.federalreserve.gov/pubs/bulletin/2007/07index.htm.

64 FederalReserveBulletin|November2014 Table10.Incidenceofloans60daysdelinquentwithintwoyearsoforigination,2006 Percent Blackor White Measureofcreditriskandofdifference Asian African Otherminority1 All indelinquency American Hispanic Non-Hispanic EquifaxRiskScorerange 500orless 53.9 61.0 33.3 44.4 35.7 45.6 501–550 33.3 51.5 58.6 47.9 38.9 44.1 551–600 25.5 39.2 34.7 38.6 29.9 33.7 601–650 17.8 26.5 25.6 32.3 16.1 20.6 651–700 8.8 12.3 16.0 21.6 6.7 9.6 701–750 3.3 5.6 9.7 13.5 2.6 4.0 751ormore 1.3 2.5 3.7 6.0 .6 .9 All 5.9 24.8 16.3 23.0 6.4 9.9 Differenceinincidenceof60-daydelinquencyrelativetonon-Hispanicwhite Rawdifference -.6 18.3 9.9 16.5 0 … AdjustedforHMDAcontrols -.6 18.0 7.5 14.0 0 … AdjustedforHMDAcontrolsandEquifax RiskScore -.4 8.1 4.1 9.2 0 … Note:Conventionalfirst-lienhome-purchasemortgagesforowner-occupied,one-tofour-family,site-builthomes.Distributionsmaynotsumto 100becauseofrounding.Foradescriptionofhowborrowersarecategorizedbyraceandethnicity,seetable2,note1. 1 Seetable2,note2. …Notapplicable. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifaxdata. observe.Amoretechnicaltreatmentattemptingtofurtherexplaintheracialandethnicdisparitiesinhigher-pricedlendingusingadditionalinformationfromthecreditrecorddata— includingmeasuresof back-endpayment-to-incomeratiosandvariablesthatmightbecorrelatedwithhavingahighLTVratio,suchasfirst-timehomebuyerstatus—isavailablein appendixB.Theseadditionalcontrolsdolittletoreducethedifferences,however. Differences in Delinquency across Groups Assuggestedearlier,lendersuseinformationotherthanriskscorestoassessaborrower’s riskof default.Totheextentthattheseothermeasuresof riskdifferbyraceandethnicity, theresidualincidenceof higher-pricedlendingbygroupcouldbeafunctionof each group’sresidualriskiness(thatis,riskunexplainedbycreditriskscores).Thecreditrecord dataallowustoconstructanarrayof loanperformancemeasures.Onewidelyusedmetric of performance,whichweinvestigatehere,istheshareof mortgageborrowerswhosepaymentsfellbehind60daysormoreatanypointwithintwoyearsof takingouttheirloansin 2006. Wepresentthelikelihoodof 60-daydelinquencywithintwoyearsof origination,bycredit scorebinsandbyraceandethnicity(table10).BlackandHispanic-whiteborrowerswere morelikelytobecomedelinquentthannon-Hispanicwhites,conditionalontheirrisk scoresandothervariablesavailablefromtheHMDAdata,includingmetropolitanstatisticalarea.Apossibleexplanationfortheremainingdifferencesinhigher-pricedlending, then,isthatriskfactors(suchasLTVratio,employmenthistory,otheravailableassets,and soon)differacrossgroupsevenaftercontrollingforscore.Theremainingdisparitiesin loanpricingfoundintable9couldbeareflectionof thedistributionof theseotherfactors. Otherexplanationsfitthedataaswell,however.Somelenderscouldbeunfairlycharging minoritiesmorethansimilarnon-Hispanicwhiteborrowers,and,facedwiththeburdenof

The2013HomeMortgageDisclosureActData 65 highermonthlypayments,minoritieswouldthenbemorelikelytodefault.Essentially,the pricedifferencecouldbecontributingtothedelinquencydifference. Notethatevenif thedifferencesindelinquencyexplainthedifferencesinpricing,suchdata cannotruleoutthepossibilityof “statisticaldiscrimination.”Riskfactorsthatlendersdo notobservecouldbedistributeddisproportionatelyacrossgroupsorbyneighborhood demographics.Somelendersmightuseraceandethnicityasriskproxiesandcharge minoritieshigherpricesasaresult.Thiskindof (illegal)discriminationcanbedifficultto differentiatefrom(legal)pricingontheobservedriskcharacteristicsif theinformation lendersuseinsettingratesisnotpreciselyknown. Finally,readersshouldkeepinmindthattheserealizeddelinquencyratescomefromthe periodfrom2006through2008,whendefaultratesweremuchhigherthanhistoricalaverages.Therefore,theyarenotnecessarilyanaccuraterepresentationof thedelinquencies lendersanticipatedwhentheloanswereoriginated. Lending Institutions In2013,therewere7,190reportinginstitutions:4,216banksandthrifts(hereafter,banks), 127subsidiariesof banksorbankholdingcompanies,2,015creditunions,and832independentmortgagecompanies(table11).Banksaccountedforoverone-half of allreported mortgageoriginations,andindependentmortgagecompaniesaccountedforaboutonethird.Oneof thebiggestchangesintheinstitutionallandscapesincetheheightof the housingboomin2006isthedeclineinoriginationsbymortgagecompanysubsidiariesof banks.In2006,subsidiariesaccountedforover21percentof originations;in2013,they accountedforlessthan6percent. Manyreportinginstitutionsaresmall.Overone-thirdof institutions(2,615outof 7,190) reportedfewerthan100mortgageoriginationsin2013,accountingforonlyabout 111,000originations,or1.3percentof alloriginations.Over10percentof institutions originatedfewerthan25loans,accountingforaboutone-tenthof 1percentof all originations. Table11alsoreportsvariouscharacteristicsof first-lienhome-purchaseandrefinancelendingforone-tofour-family,owner-occupied,site-builtpropertiesbyeachtypeof lending institution.Thetabledocumentssomedegreeof variationinlendingpatternsin2013by lendertype.Forexample,bankoriginationsweresignificantlymoreskewedtowardrefinancingscomparedwithoriginationsbyindependentmortgagecompanies.Inaddition,for bothhome-purchaseandrefinancelending,alargershareof bankoriginationswasconventionalcomparedwithoriginationsbyindependentmortgagecompanies.Thevast majorityof loansbycreditunionswereconventional. Therewerealsosignificantdifferencesinthepropensitytooriginateandthensellloans.42 Banksreportedsellingaboutthree-fourthsof theirhome-purchaseoriginationsand80percentof theirrefinanceoriginations,whereasindependentmortgagecompaniessoldnearly allof theloanstheyoriginated.Creditunionsweretheleastlikelytoselltheloansthey originated. 42 UnderHMDA,lendersreportwhetheraloantheyoriginatedwasalsosoldwithinthecalendaryearandsome informationregardingtheinstitutiontowhichitwassold(forexample,FannieMae,FreddieMac,GinnieMae, abank,alifeinsurancecompany,andsoon;seeappendixAforafulllist).Becauselendersreportaloanas soldonlyifthesaleoccurswithinthesameyearasorigination,theincidenceofloansalestendstodeclinefor loansoriginatedtowardtheendoftheyear.Forthatreason,intables11and12,wereporttheincidenceof loansalesonlyforloansoriginatedwithinthefirstthreequartersoftheyear.

66 FederalReserveBulletin|November2014 Table11.Lendingactivity,bytypeofinstitution,2013 Percentexceptasnoted Typeofinstitution Institutionsandtypeofactivity Independent Bank Bank Creditunion mortgage All subsidiary company Numberofinstitutions 4,216 127 2,015 832 7,190 Applications(thousands) 7,354 780 993 4,860 13,987 Originations(thousands) 4,731 490 611 2,876 8,707 Purchases(thousands) 1,967 397 18 413 2,794 Numberofinstitutionswithfewerthan100loans 1,654 26 874 61 2,615 Originations(thousands) 72.0 .9 36.1 2.4 111.4 Numberofinstitutionswithfewerthan25loans 523 10 296 20 849 Originations(thousands) 6.4 .1 3.6 .2 10.3 Home-purchaseloans(thousands)1 1,152 198 127 1,138 2,615 Conventional 72.0 58.5 91.3 49.3 62.0 Higher-pricedshareofconventionalloans 3.7 1.2 3.9 1.9 2.9 LMIborrower2 26.0 30.6 28.8 30.5 28.4 LMIneighborhood3 11.6 11.9 12.5 14.0 12.7 Non-Hispanicwhite4 72.5 72.4 74.2 67.0 70.2 Minorityborrower4 16.3 16.5 11.8 21.7 18.5 WithinCRAassessmentarea5 67.0 39.1 … … … Sold6 74.1 98.2 55.4 97.6 85.2 Refinanceloans(thousands)1 2,438 227 311 1,364 4,341 Conventional 87.7 78.7 98.8 73.5 83.6 Higher-pricedshareofconventionalloans 1.6 .6 2.5 1.3 1.5 LMIborrower2 22.1 19.1 24.2 19.1 21.1 LMIneighborhood3 11.9 10.8 12.4 12.6 12.1 Non-Hispanicwhite4 71.5 71.0 74.6 67.5 70.5 Minorityborrower4 14.6 13.9 10.9 16.3 14.9 WithinCRAassessmentarea5 67.8 45.1 … … … Sold6 79.0 98.3 44.1 98.1 83.4 1 First-lienmortgagesforone-to-fourfamily,owner-occupied,site-builthomes. 2 Seetable2,note3. 3 Seetable2,note4. 4 Seetable2,note1.“Minorityborrower”referstononwhite(excludingjointormissing)orHispanic-whiteapplicants. 5 LoansoriginatedbybankinginstitutionswithintheirCommunityReinvestmentAct(CRA)assessmentareas,whicharedefinedforthis analysisasthecountieswherethebankhasatleastonebranchoffice.Forsubsidiaries,assessmentareasaredefinedasthecountieswith atleastonebranchofanybankwithinthesamebankingorganization. 6 Excludesoriginationsmadeinthelastquarteroftheyearbecausetheincidenceofloansalestendstodeclineforloansoriginatedtowardthe endoftheyear,aslendersreportaloanassoldonlyifthesaleoccurswithinthesameyearasorigination. …Notapplicable. Finally,therearealsodifferencesacrossinstitutiontypesinthecompositionof theirborrowers.Forexample,nearly22percentof home-purchaseborrowersatindependentmortgagecompanieswereminorities,comparedwithjust12percentof theborrowersatcredit unions. Thenexttableliststhetop25reportinginstitutionsaccordingtotheirtotalnumberof originations,alongwithmostof thelendingcharacteristicslistedintable11(table12). WellsFargoreportedthemostoriginations,withover800,000.Thenext-highesttotalwas forJPMorganChase,followedbyQuickenLoansandBankof America.Overall,thetop 25lendersaccountedforabout41percentof allloanoriginationsin2013.Theyalsopur-

The2013HomeMortgageDisclosureActData 67 Table12.Top25respondentsintermsoftotaloriginations,2013 Percentexceptasnoted Home-purchaseloans1 Total Total origina- Respondent (tho t u io s n a s nds) ( p th u o r u c s h a a n s d es s) N (t a u h n m o d u b s s e ) - r Co ti n o v n e a n l - p H r i i g c h e e d r 2 bo L r e r M r o 3 I w- ne h i L g o M h od b I 4 or- H w i N s h p o i a n te n - 5 ic b M or i r n o o w ri e ty r5 Sold6 WellsFargoBank,NA 819 842 188 71.4 .1 21.3 11.1 69.6 20.2 83.2 JPMorganChaseBank,NA 426 426 59 72.5 .5 25.4 12.3 63.7 24.8 79.1 QuickenLoans,Inc. 376 0 30 56.0 2.7 25.2 12.2 61.7 12.9 100.0 BankofAmerica,NA 359 117 40 77.4 .1 21.5 11.8 59.5 25.1 55.0 Citibank,NA 232 104 19 93.7 .0 13.7 12.3 46.8 25.6 63.6 U.S.Bank,NA 178 166 32 75.1 .6 28.4 11.1 75.5 11.1 79.4 PNCBank,NA 118 1 20 66.0 .0 33.9 13.3 63.8 14.7 90.5 FlagstarBank,FSB 114 42 38 57.9 1.3 26.1 11.7 66.6 26.0 99.6 NationstarMortgage 98 26 9 53.9 .1 25.3 14.4 57.1 33.1 98.5 SunTrustMortgage,Inc. 85 42 18 84.2 .0 19.4 8.8 66.1 16.8 98.7 BranchBankingandTrustCo. 84 95 25 68.5 2.8 30.0 13.1 71.0 11.0 68.8 FifthThirdMortgageCo. 82 25 21 65.1 1.2 32.1 12.1 71.5 13.5 93.1 USAAFederalSavingsBank 77 0 37 36.5 .0 13.1 8.7 64.7 12.7 99.3 FreedomMortgageGroup 63 14 8 46.2 .1 28.8 12.6 69.8 20.2 100.0 NavyFederalCreditUnion 57 0 19 45.2 11.5 20.9 11.7 58.4 17.8 55.9 PrimeLending 56 0 36 52.6 2.1 30.8 12.5 68.7 16.9 99.9 RegionsBank 55 0 17 56.7 4.7 33.5 12.8 74.1 21.3 74.1 GuaranteedRate,Inc. 50 0 23 74.2 .9 23.1 12.5 71.6 13.9 100.0 StearnsLending,Inc. 46 6 18 58.0 .7 35.2 16.3 63.5 24.6 100.0 ShoreMortgage 46 0 18 65.5 2.4 32.5 14.2 64.5 29.2 100.0 EverBank 41 5 8 77.4 .6 21.8 12.6 64.4 20.4 90.4 loanDepot.com 36 2 3 50.6 1.0 18.3 14.0 55.0 32.4 100.0 PHHMortgageCo. 35 49 6 52.9 .8 26.6 10.1 61.3 11.3 99.9 TheHuntingtonNationalBank 34 1 9 74.7 1.3 29.6 10.0 88.5 7.0 75.4 GuildMortgageCo. 32 4 20 37.8 3.8 38.3 19.4 62.0 23.8 99.9 Top25institutions 3,602 1,967 723 65.4 1.0 24.8 12.0 66.6 19.5 85.6 Allinstitutions 8,707 2,794 2,615 62.0 2.9 28.4 12.7 70.2 18.5 85.2 1 Seetable11,note1. 2 Shareofconventionalloansthatarehigherpriced. 3 Seetable2,note3. 4 Seetable2,note4. 5 Seetable2,note1.“Minorityborrower”referstononwhite(excludingjointormissing)orHispanic-whiteapplicants. 6 Seetable11,note6. (continuedonnextpage) chasednearly2millionloansduring2013(theseloanscouldhavebeenoriginatedin2013 orinearlieryears). Notethattheinstitutionslistedintable12maybepartof alargerorganizationwithmultipleHMDAreportingentitiesorhavesubsidiaryinstitutionsthatoriginateorpurchase mortgagesandfileseparateHMDAreports.Usinginformationaboutparentinstitutions availableintheHMDAReporterPanelandHMDATransmittalSheets,someorganizationshavemoreoriginationsorpurchasesthanthe“lead”institutionlistedintable12.43 Mostnotably,WellsFargo&Company,collectively,hadabout841,000originations, includingthe819,000byWellsFargoBank;Citigrouppurchased419,000loans,including the104,000purchasedbyCitibank;FifthThirdBancorporiginated114,000loans,includ- 43 TheReporterPanelandTransmittalSheetsprovideinformationforeachHMDAreportinginstitution andareavailableontheFederalFinancialInstitutionsExaminationCouncil’swebsiteatwww.ffiec.gov/hmda/ hmdaflat.htm.

68 FederalReserveBulletin|November2014 Table12.Top25respondentsintermsoftotaloriginations,2013–continued Percentexceptasnoted Refinanceloans1 Respondent Number LMI LMI Non- (t a h n o d u s s ) - Co ti n o v n e a n l - p H r i i g c h e e d r 2 bor e r r o 3 w- ne h ig o h od b 4 or- H w is h p i a te n 5 ic b M or i r n o o w ri e ty r5 Sold6 WellsFargoBank,NA 467 78.1 .5 16.6 12.6 70.3 18.1 91.6 JPMorganChaseBank,NA 287 85.9 .7 27.1 13.5 68.8 18.1 94.2 QuickenLoans,Inc. 300 76.7 1.9 21.8 13.1 65.5 12.9 99.9 BankofAmerica,NA 249 88.5 .2 27.8 14.5 62.7 21.5 80.1 Citibank,NA 175 97.5 .1 28.1 13.6 64.3 14.2 96.0 U.S.Bank,NA 111 92.7 3.0 25.7 12.3 65.1 9.4 57.5 PNCBank,NA 71 86.5 .0 27.5 13.1 69.3 11.4 61.4 FlagstarBank,FSB 61 79.4 .5 15.6 10.7 66.1 24.0 99.9 NationstarMortgage 67 93.1 3.3 34.5 18.6 66.2 23.6 99.5 SunTrustMortgage,Inc. 52 91.7 .0 22.6 11.3 69.6 14.2 99.6 BranchBankingandTrustCo. 37 90.5 .3 22.7 12.8 75.9 9.5 55.3 FifthThirdMortgageCo. 51 60.5 .9 17.6 12.7 66.9 11.3 98.3 USAAFederalSavingsBank 31 59.5 .1 8.5 8.2 59.7 11.2 98.2 FreedomMortgageGroup 49 18.8 .1 4.7 14.9 59.4 16.9 100.0 NavyFederalCreditUnion 24 44.6 .4 12.6 10.2 58.3 20.3 61.6 PrimeLending 13 85.0 .8 19.8 10.1 75.1 12.1 99.9 RegionsBank 26 91.8 1.2 24.7 12.6 83.5 12.7 45.1 GuaranteedRate,Inc. 20 91.7 .2 13.0 8.8 76.1 10.0 100.0 StearnsLending,Inc. 22 86.0 .1 21.9 12.8 64.8 20.2 100.0 ShoreMortgage 22 89.2 1.1 20.2 10.3 73.2 19.1 100.0 EverBank 24 92.0 .9 28.3 14.5 67.5 18.9 96.1 loanDepot.com 29 74.8 .9 19.1 13.2 72.7 15.2 100.0 PHHMortgageCo. 21 94.0 3.0 33.4 13.9 71.7 11.7 99.9 TheHuntingtonNationalBank 20 88.0 6.6 24.8 9.7 89.0 5.9 52.8 GuildMortgageCo. 6 70.7 1.0 19.7 15.0 65.4 16.9 99.9 Top25institutions 2,237 82.1 .9 22.5 13.1 67.5 16.3 89.2 Allinstitutions 4,341 83.6 1.5 21.1 12.1 70.5 14.9 83.4 ingthenearly82,000originatedbyFifthThirdMortgageCompany;andSunTrustBanks originatedalmost99,000loans,includingthe85,000bySunTrustMortgage. Thetopinstitutionsdiffersignificantlyintheirlendingpatterns.Forexample,nearly 94percentof Citibank’shome-purchaseloanswereconventional,comparedwithmuch lowerpercentagesformanyotherlargelenders.Regardingloansales,Bankof America soldonly55percentof itshome-purchaseoriginations,whereastheaverageacrossthetop 25institutionswasover85percent.Finally,thecompositionof borrowersvariesacrossthe top25institutions.Forsomeinstitutions,one-thirdormoreof home-purchaseborrowers wereLMI,whileatotherinstitutions20percentorlessof borrowerswereinthatcategory.44Itisdifficulttoknowpreciselywhysuchvariationexists.Thesedifferencescould reflectdifferentbusinessstrategies,differentcustomerdemandsinthemarketsandgeographicregionsbeingserved,orsomecombinationof thesetwobroadfactors. 44 Notethatforlenderswithasignificantnonconventionalshareofrefinanceloans(forexample,FreedomMortgageGroup),borrowerincomemaynotbereportedformostloans,thuspushingdowntheLMIshareof borrowers.

The2013HomeMortgageDisclosureActData 69 Appendix A: Requirements of Regulation C TheFederalReserveBoard’sRegulationCrequireslenderstoreportthefollowinginformationonhome-purchaseandhome-improvementloansandonrefinancings: For each application or loan ‰ applicationdateandthedateanactionwastakenontheapplication ‰ actiontakenontheapplication — approvedandoriginated — approvedbutnotacceptedbytheapplicant — denied(withthereasonsfordenial—voluntaryforsomelenders) — withdrawnbytheapplicant — fileclosedforincompleteness ‰ preapprovalprogramstatus(forhome-purchaseloansonly) — preapprovalrequestdeniedbyfinancialinstitution — preapprovalrequestapprovedbutnotacceptedbyindividual ‰ loanamount ‰ loantype — conventional — insuredbytheFederalHousingAdministration — guaranteedbytheDepartmentof VeteransAffairs — backedbytheFarmServiceAgencyorRuralHousingService ‰ lienstatus — firstlien — juniorlien — unsecured ‰ loanpurpose — homepurchase — refinance — homeimprovement ‰ typeof purchaser(if thelendersubsequentlysoldtheloanduringtheyear) — FannieMae — GinnieMae — FreddieMac — FarmerMac — privatesecuritization — commercialbank,savingsbank,orsavingsassociation — lifeinsurancecompany,creditunion,mortgagebank,orfinancecompany — affiliateinstitution — othertypeof purchaser For each applicant or co-applicant ‰ race ‰ ethnicity ‰ sex ‰ incomereliedonincreditdecision

70 FederalReserveBulletin|November2014 For each property ‰ location,bystate,county,metropolitanstatisticalarea,andcensustract ‰ typeof structure — one-tofour-familydwelling — manufacturedhome — multifamilyproperty(dwellingwithfiveormoreunits) ‰ occupancystatus(owneroccupied,non-owneroccupied,ornotapplicable) For loans subject to price reporting ‰ spreadabovecomparableTreasurysecurityforapplicationstakenpriortoOctober1,2010 ‰ spreadaboveaverageprimeofferrateforapplicationstakenonorafterOctober1,2010 For loans subject to the Home Ownership and Equity Protection Act ‰ indicatorof whetherloanissubjecttotheHomeOwnershipandEquityProtectionAct

The2013HomeMortgageDisclosureActData 71 Appendix B: Explaining Differences in Higher-Priced Lending with Additional Data Lendershavemuchmoreinformationontheborrowerandpropertytobepurchasedthan isrepresentedbytheborrower’screditriskscore.UsingtheFederalReserveBankof New YorkConsumerCreditPanel/Equifaxdata(CCP),wecanconstructvariablesthatmight helpcapturesomeof thetypesof informationthatlendersarelikelytoweighinassessing riskandsettinginterestrates.Attheborrowerlevel,thesevariablesincludethefollowing: ‰ Payment-to-income(PTI)ratio:Themergeddatasetallowedustoobserveotherdebts owedinadditiontothemortgagematchedintheenhanceddatabase.PTImeasuresthe yearlydebtservicepaymentsonotherloanstheborrowerhasoutstanding,asafraction of theborrower’sreportedannualincome(theincomereportedundertheHomeMortgageDisclosureActof 1975(HMDA)).Highratiosincreasethelikelihoodtheborrower willhavedifficultyaffordingallof thepaymentsandthusdefault.Thepaymentsdataare basedonwhatlendersandservicersreporttoEquifax,whichtypicallyreflectsthepayment-dueamountonmonthlyaccountstatements.Formortgages,thisamountmay includepaymentsforpropertytaxesandinsurance,if collectedbytheservicer(fornonmortgagedebt,weusethescheduledpaymentamountsinthequarterpriortomortgage origination).45 ‰ First-timeborrower:Thisvariableisanindicatorforthemortgagebeingthefirst recordedmortgageintheborrower’scredithistory,suggestingtheborrowerisafirsttimehomebuyer.First-timehomebuyers,becausetheytendtobeyoungerandhavehad lesstimetobuildsavings,aremorelikelytohaveahigherloan-to-value(LTV)ratio. However,first-timeborrowersmayalsobelessexperiencedfinanciallyandperhapsless likelytoshopforamortgage.Inthiscase,first-timeborrowerscouldpaymore,independentof theirLTV. ‰ “Piggyback”loan:Thematcheddataallowustoobserveallothermortgagestheborrowerhasinadditiontothematchedmortgage.Weidentifypiggybackloansasmortgagesthatwereopenedinthesamemonthasthefirst-lienmortgageandweresmallerin size.Asnotedinthemaintext,manyborrowersduringthehousingboomusedjuniorlienloanstohelpfinancemorethan80percentof thepurchasepriceof thehouse.This variablemaythereforealsohelpindicateahighLTVratio. NotethatthePTIratioswecalculatedarelikelytounderstatethePTIratiosusedinunderwritingfortwomainreasons.First,forjointmortgages,becausewematchedthecredit recordinformationof onlyone(randomlyselected)borrower,theconsumerdebtsandpaymentswecalculatedexcludeindividuallyhelddebtsof other,unmatchedco-borrowers.Second,nondebtobligations,suchaschild-supportoralimonypayments,maybeincludedby underwritersinPTIcalculations,butsuchobligationsarenotavailableincreditrecorddata andthuscouldnotbeincludedinourcalculations. Weregressedabinaryindicatorforahigher-pricedloanagainstindicatorsfortheraceand ethnicityof theborrower,creditscore“bins,”theHMDAcontrols,andtheadditionalvariablesjustdiscussed.Theestimatesareverysimilartothefinalrowintable9,withblack andHispanic-whiteborrowersabout13percentand16percentmorelikely,respectively,to 45 NotethatthePTIratioswecalculatedarelikelytounderstatethePTIratiosusedinunderwritingfortwomain reasons.First,forjointmortgages,becausewematchedthecreditrecordinformationofonlyone(randomly selected)borrower,theconsumerdebtsandpaymentswecalculatedexcludeindividuallyhelddebtsofother, unmatchedco-borrowers.Second,nondebtobligations,suchaschild-supportoralimonypayments,maybe includedbyunderwritersinPTIcalculations,butsuchobligationsarenotavailableincreditrecorddataand thuscouldnotbeincludedinourcalculations.

72 FederalReserveBulletin|November2014 TableB.1.Regressionofhigher-pricedloanonborrowerraceandethnicity,2006 Independentvariable Outcome:indicatorofhigher-pricedloan Minoritystatus1 Asian -0.003 0.005 -0.003 (0.006) (0.007) (0.005) BlackorAfricanAmerican 0.129** 0.120** 0.060** (0.005) (0.007) (0.004) Otherminority2 0.043** 0.039* 0.024* (0.012) (0.016) (0.010) Hispanicwhite 0.164** 0.106** 0.069** (0.004) (0.007) (0.004) Additionalcontrols Borrowercharacteristics Yes Yes Yes Tractfixedeffects No Yes No Lenderfixedeffects No No Yes Note:Tableshowsordinaryleastsquaresregressionresultsusingconventionalfirst-lienhome-purchasemortgagesforowner-occupied,onetofour-family,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyraceandethnicity,seetable2,note1.Standarderrorsin parentheses. 1 Seetable2,note1. 2 Seetable2,note2. *Significantatthe5percentlevel. **Significantatthe1percentlevel. Source:FFIECHMDAdatamatchedtoFRBNYConsumerCreditPanel/Equifaxdata. haveahigher-pricedloan(tableB.1,firstcolumnof estimates).TheadditionalCCPvariablesdidlittletoexplaintheracialandethnicdisparities. Thesecondcolumnincludestheadditionalcontrolvariablesaswellascensus-tractfixed effects.Acomparisonof borrowerswithinthesamecensustractindicatesthatblackand Hispanic-whiteborrowersareover12percentandover10percent,respectively,morelikely thannon-Hispanicwhiteborrowerstogetahigher-pricedloan.Thedifferencesbetween thefirstandsecondcolumnsstemmingfromtheinclusionof census-tractfixedeffects couldreflectthegeographicdistributionof borrowerriskfactorsordifferencesinthelocal supplyof credit(dueeithertomarketforcesortoa“redlining”typeof discrimination). Regardless,asignificantportionof thebetween-groupdifferencesinhigher-pricedlending remainstobeexplained. Thethirdcolumnincludestheborrower-levelcontrolsandalender-levelfixedeffect.The coefficientsonraceandethnicitynowindicatetheaveragedifferenceinpricingbetween groupsborrowingfromthesamelender.Controllingforlenderidentityreducestheblack andHispanic-whitecoefficients,nowestimatedat6.0percentand6.9percent,respectively. Thereductioninthecoefficientsindicatesthatminorityborrowerstendtogetloansfrom institutionsthatoftenmakehigher-pricedloans(regardlessof theraceorethnicityof thegivencustomer). Therecouldbemultiplereasonsthatminoritiestendtoobtainloansfromaparticularset of lenders.Onemightbethat,becauseof differingfinancialcircumstances,minorityborrowersaremorelikelytoprefercertaintypesof loansofferedbyhigher-pricedlenders.Less sanguineexplanationsarealsopossible.Forexample,if thereisdiscriminationintheacceptancedecisionbylower-costlenders,minoritiesmightthenbemorelikelytoturntohigherpricedlenders.Whydifferentgroupstendtousedifferenttypesof lendersisanimportant questionforfurtherresearch.

73 Federal Reserve BULLETIN February 2014 Vol. 100, No. 1 Legal Developments: Fourth Quarter, 2013 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act Ameris Bancorp Moultrie, Georgia OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2013–12(December6,2013) AmerisBancorp(“Ameris”),Moultrie,Georgia,hasrequestedtheBoard’sapprovalunder section3of theBankHoldingCompanyAct(“BHCAct”)1toacquireTheProsperity BankingCompany(“Prosperity”)andtherebyindirectlyacquireitssubsidiarybank,ProsperityBank(“ProsperityBank”),bothof St.Augustine,Florida.Immediatelyfollowing theproposedacquisition,ProsperityBankwouldbemergedintoAmeris’ssubsidiarybank, AmerisBank,Moultrie,astatenonmemberbank.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(78FederalRegister35033(2013)).3Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. Ameris,withconsolidatedassetsof approximately$2.8billion,isthe261stlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$2.4billioninconsolidateddeposits.4AmerisBankoperatesinAlabama,Florida,Georgia,andSouthCarolina.AmerisBankisthe14thlargestdepositoryinstitutioninGeorgia,controllingdeposits of approximately$1.6billion,andisthe88thlargestdepositoryinstitutioninFloridawith approximately$373.3millionindeposits,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsineachof thesestates.5Inaddition,Ameris Bankisthe36thlargestdepositoryinstitutioninSouthCarolinawithapproximately $304.8millionindeposits,andthe60thlargestinAlabamawithapproximately$186.4millionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsineachof thosestates. 1 12U.S.C.§1842. 2 ThemergerofProsperityBankintoAmerisBankissubjecttotheapprovaloftheFederalDepositInsuranceCorporation(“FDIC”)undertheBankMergerAct.12U.S.C.§1828(c).TheFDICapprovedthebankmergeronNovember6,2013(LetterfromJeffreyL.Povlak,AssistantRegionalDirectorofFDICAtlantaRegionalOffice,toJody L.Spencer,Rogers&HardinLLP(Nov.6,2013)). 3 12CFR262.3(b). 4 Assetandnationwidedeposit-rankingdataareasofJune30,2013,unlessotherwisenoted. 5 StatedepositdataareasofJune30,2013.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks, savingsassociations,andsavingsbanks.

74 FederalReserveBulletin|February2014 Prosperity,withtotalconsolidatedassetsof $753million,controlsProsperityBank,which operatesinFlorida.ProsperityBankisthe72ndlargestinsureddepositoryinstitutionin Florida,controllingdepositsof approximately$490million,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,Ameriswouldbecomethe215thlargestdepository organizationintheUnitedStates,withtotalconsolidatedassetsof approximately$3.6billion,whichrepresentlessthan1percentof thetotalamountof assetsof insureddepositoryinstitutionsintheUnitedStates.Ameriswouldhavetotalconsolidateddepositsof approximately$2.9billion.InFlorida,Ameriswouldbecomethe51stlargestdepository organization,controllingdepositsof approximately$868.8million,whichrepresentless than1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActimposescertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbyabankholding companythatiswellcapitalizedandwellmanagedtoacquirecontrolof abankinastate otherthanthehomestateof thebankholdingcompanywithoutregardtowhetherthe transactionisprohibitedunderstatelaw.6However,thissectionfurtherprovidesthatthe Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststatethathasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeorfiveyears.7Inaddition,theBoardmaynot approveanapplicationbyabankholdingcompanytoacquireaninsureddepositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastateotherthanthe homestateof thebankholdingcompanyandthebankholdingcompanycontrolsorwould controlmorethan10percentof thetotaldepositsof insureddepositoryinstitutionsinthe UnitedStates.8 Forpurposesof theBHCAct,thehomestateof AmerisisGeorgia,9andProsperityis locatedinFlorida.10Amerisiswellcapitalizedandwellmanagedunderapplicablelaw. Georgialawhasnominimumrequirementsforperiodof operation,11andProsperityBank hasbeeninexistenceformorethanfiveyears. Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutions,thetotal amountof consolidateddepositsof insureddepositoryinstitutionsintheUnitedStatesis $10.4trillion.Onconsummationof theproposedtransaction,Ameriswouldcontrolless than1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnitedStates.Accordingly,inlightof allthefactsof record,theBoardisnot requiredtodenytheproposalundersection3(d)of theBHCAct. 6 Thestandardwaschangedfromadequatelycapitalizedandadequatelymanagedtowellcapitalizedandwell managedbysection607(a)oftheDodd-FrankWallStreetReformandConsumerProtectionAct(the“Dodd- FrankAct”),Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(d)(1)(A). 7 12U.S.C.§1842(d)(1)(B). 8 12U.S.C.§1842(d)(2)(A). 9 See12U.S.C.§1842(d).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater. 10 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch.See12U.S.C.§§1841(o)(4)-(7);1842(d)(1)(A); and1842(d)(2)(B). 11 SeeGA.CODE§7-1-530(2013)(permitsinterstateacquisitionsbutdoesnotimposearequirementforperiod ofoperation).

LegalDevelopments:FourthQuarter,2013 75 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.12 AmerisandProsperitycompetedirectlyintheJacksonvilleArea,Floridabankingmarket.13TheBoardhasconsideredthecompetitiveeffectsof theproposalinthisbanking marketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;therelativesharesof total depositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)controlledby AmerisandProsperity;14theconcentrationlevelsof marketdepositsandtheincreasein thoselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMerger Guidelines”);15andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesforthismarket.Onconsummationof theproposal,thebankingmarketwouldremainhighlyconcentrated,asmeasuredbythe HHI,andnumerouscompetitorswouldremain.16 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration 12 12U.S.C.§1842(c)(1). 13 TheJacksonvilleArea,FloridabankingmarketisdefinedasBaker,Clay,Duval,andNassaucountiesin Florida;thetownsofFruitCove,PonteVedra,PonteVedraBeach,Jacksonville,St.Johns,andSwitzerlandin St.JohnsCounty,Florida;andthecityofFolkstoninCharltonCounty,Georgia. 14 DepositandmarketsharedataareasofJune30,2013,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,Midwest FinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 15 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines in2010(seePressRelease,DepartmentofJustice(Aug.19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 16 Amerisoperatesthe12thlargestdepositoryinstitutionintheJacksonvilleArea,Floridabankingmarketwith approximately$238millionindeposits,whichrepresentlessthan1percentofmarketdeposits.Prosperityoperatesthe25thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$42.5million,whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction, Ameriswouldoperatethe12thlargestdepositoryinstitutioninthemarket,controllingweighteddepositsof approximately$280.5million,whichrepresentlessthan1percentofmarketdeposits.TheHHIwouldremain unchangedat2937,and39competitorswouldremaininthemarket.

76 FederalReserveBulletin|February2014 of resourcesinthebankingmarketinwhichAmerisandProsperitycompetedirectlyorin anyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. OtherSection3(c)Considerations Section3(c)of theBHCActrequirestheBoardtotakeintoconsiderationanumberof otherfactorsinactingonbankacquisitionapplications.Thesefactorsincludethefinancial andmanagerialresources(includingthecompetence,experience,andintegrityof theofficers,directors,andprincipalshareholders)andfutureprospectsof thecompanyandbanks concerned;theeffectivenessof thecompanyincombattingmoneylaundering;theconvenienceandneedsof thecommunitytobeserved;andtheextenttowhichtheproposal wouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStates bankingorfinancialsystem. TheBoardhasconsideredallof thesefactorsand,asdescribedbelow,hasdeterminedthat theyareallconsistentwithapprovalof theapplication.Thereviewwasconductedinlight of allthefactsof record,includingsupervisoryandexaminationinformationfromvarious U.S.bankingsupervisorsof theinstitutionsinvolved,publiclyreportedandotherfinancial information,informationprovidedbyAmeris,andpubliccommentsreceivedonthe proposal. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhasconsideredthefinancialfactorsof theproposal.AmerisandAmerisBank arewellcapitalizedandwouldremainsoonconsummationof theproposedacquisition, whichisabankholdingcompanymerger,structuredtogiveProsperityshareholdersthe optionof exchangingtheirsharesforsharesinAmerisorreceivingcashconsideration.17 Amerisisinsatisfactoryfinancialcondition,andtheassetquality,earnings,andliquidityof AmerisBankareconsistentwithapproval.Basedonitsreviewof therecord,theBoard findsthattheorganizationhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Ameris,Prosperity,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas 17 IfaholderofProsperitycommonstockelectstoexchangeshares,theProsperityshareswouldbecancelledand convertedintotherighttoreceiveAmeris’scommonstockbasedonafixedexchangeratio.Ifaholderof Prosperitycommonstockelectstoreceivecashconsiderationforshares,theholderwouldreceiveafixedcash amountinexchangeforeachshare.ThenumberofsharesofProsperitycommonstockforwhichcashconsiderationwouldbepaidislimitedto50percentofthetotalnumberofProsperitysharesconvertedinthetransaction.Amerishastheresourcestofundthecashconsiderationportionofthetransaction.

LegalDevelopments:FourthQuarter,2013 77 considereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingand anti-moneylaunderinglaws. Amerisanditssubsidiarydepositoryinstitutionareeachconsideredtobemanagedwell. Ameris’sexistingriskmanagementprogramanditsdirectorateandseniormanagementare consideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof Amerishave substantialknowledgeandexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredAmeris’splansforimplementingtheproposal.Amerisis devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.18Ameriswouldimplementitsriskmanagement policies,procedures,andcontrolsatthecombinedorganization,andtheseareconsidered acceptablefromasupervisoryperspective.Inaddition,Ameris’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafeandsound manner,andAmerisplanstointegrateProsperity’sexistingmanagementandpersonnelin amannerthataugmentsAmeris’smanagement.19 Ameris’ssupervisoryrecord,managerialandoperationalresources,andplansforoperating thecombinedinstitutionsafterconsummationprovideareasonablebasistoconcludethat managerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalandAmeris’smoney-launderingpoliciesareconsistentwithapproval. B.ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).20TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,21and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.22 18 AmerisBankhassupportdivisionswithexperiencedseniormanagementwithspecificareasofexpertiseand responsibilitiestoensureasmoothintegration,includingadedicatedsystemsconversionprojectteamanda specialassetsteam.Inaddition,AmerisBankhasreassigneditsmostexperiencedseniorcreditofficertomanagetheregionthatwillincludethelegacyProsperityBanklocations,andhashiredcomplianceandauditstaff experiencedinbankintegration. 19 CertainseniorexecutiveofficersofProsperityBankareexpectedtoretainmanagementpositionswithinthe mergedbank.Followingthemerger,thecurrentPresidentandChiefExecutiveOfficerofProsperityBankwill serveasRegionalPresidentofAmerisBank,thecurrentExecutiveVicePresidentandChiefLendingOfficerof ProsperityBankwillserveasSeniorVicePresident/CommercialBankingofAmerisBank,thecurrentExecutiveVicePresidentandChiefBankingOfficerofProsperityBankwillserveasSeniorVicePresident/Retail BankingofAmerisBank,andtheExecutiveVicePresidentandChiefCreditOfficerofProsperityBankwill serveasSeniorVicePresident/CreditAdministrationofAmerisBank.Theexecutiveofficersanddirectorsof AmerisandAmerisBankwillcontinuetoserveintheircapacitiesfollowingthemerger. 20 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 21 12U.S.C.§2901(b). 22 12U.S.C.§2903.

78 FederalReserveBulletin|February2014 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof AmerisBankandProsperityBank,datareportedbyAmerisBank andProsperityBankundertheHomeMortgageDisclosureAct(“HMDA”),23otherinformationprovidedbyAmeris,confidentialsupervisoryinformation,andthepubliccommentsreceivedontheproposal.Thecommentersobjectedtotheproposalonthebasisof AmerisBank’sfairlendingrecordasreflectedin2011HMDAdataandthebank’sCRA performancerecord. 1.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitution inlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.24TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.25Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor. CRAPerformanceof AmerisBank.AmerisBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof December7,2009 (“AmerisBankEvaluation”).26ExaminersconsideredAmerisBanktohaveanadequate recordof lendinginsideof itsassessmentareasandanadequaterecordincommunity developmentlending.27AmerisBankreceiveda“lowsatisfactory”ratingfortheLending, Service,andInvestmentTests.28 AsdescribedintheAmerisBankEvaluation,FDICexaminersfoundthatthebank’soverallvolumeof lendingwasgoodandthatithadagoodrecordof servingitsassessment areas’creditneeds.29Thebankhadagoodrecordof lendingtobusinessesof different sizes,especiallysmaller-sizedbusinesses,andanadequaterecordof residentiallendingto borrowersof differentincomes.FDICexaminersnoted,however,thatisolatedinstancesof unfairlendinghadbeenidentifiedinthebank’sDothan,Alabama,assessmentarea.30 Examinersnotedthat,consideringthedifferencesamongthebank’smarketsandtheir 23 12U.S.C.§2801etseq. 24 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 25 12U.S.C.§2906. 26 The2009examinationwasconductedusingtheLargeBankCRAExaminationProcedures.Examinersfocused onthebank’ssmallbusinessandresidentiallendingrecordfor2008. 27 TheAmerisBankEvaluationrevieweddataavailabletotheFDICasofthedateoftheevaluationconcerning all2008and2009loansoriginatedorpurchasedwithintherelevantassessmentareas.Inaddition,examiners reviewedallofthecommunitydevelopmentactivitiesandtheflexibleandinnovativelendingpracticesand productsfromJune30,2003,throughSeptember30,2009. 28 TheAmerisBankEvaluationincludedafull-scopereviewoffourassessmentareas:Albany,GeorgiaMSA; Dothan,AlabamaMSA;Jacksonville,FloridaMSA;andColumbia,SouthCarolinaMSA.Alimitedscope reviewwasperformedintheTifton,GeorgiaNon-MSA.Examinersplacedgreaterweightonthebank’sperformanceinGeorgiathanintheotherthreestatesduetothebank’slongevityinthestateaswellasthenumberof itsofficesandthevolumeofitslendingoperationsinthestate;77percentofthebank’sloansweremadeinthe Georgiamarket. 29 Smallbusinessandresidentialmortgagelendingarethebank’sprimarylendingfocus. 30 Specifically,FDICexaminersidentifiedthreeinstancesofunfairpricingforAfricanAmericanborrowerscomparedtosimilarly-situatedwhiteborrowersintheDothan,Alabamamarket.TheFDICdeterminedthatthese wereisolatedinstances,requiredthebanktotakecorrectiveactionstoaddressdeficienciesinitscompliance managementsystemhighlightedbytheseinstances,andconcludedthatthebank’soverallcompliancemanagementsystemwasadequate.

LegalDevelopments:FourthQuarter,2013 79 respectivedemographics,AmerisBankhadadequatelypenetratedLMIgeographies throughoutitsassessmentareas.Examinersalsonotedthatthebankhadmadegooduseof itsflexiblelendingprogramsandhadoriginatedover$9.2millionincommunitydevelopmentloansinitscombinedassessmentareasduringtheevaluationperiod. WithrespecttotheInvestmentTest,FDICexaminersfoundthatalthoughAmerisBank waspassivetotheinvestmentneedsof itscommunities,itdidparticipateinvariousCRAqualifiedinvestmentvehicles.Inparticular,FDICexaminersnotedthatAmerisBank’s totaloutstandingqualifiedcommunitydevelopmentinvestmentsof $6.9millionrepresented0.31percentof averagetotalassetssincethepreviousexaminationand2.75percent of totalequitycapitalforthesameperiod.Thedollarvolumeof investments,viewedin lightof AmerisBank’scapacityandtheopportunityformakingqualifiedinvestmentsinits assessmentareas,wasakeydriverintheratingassignedtoAmerisBankontheInvestment Test. WithrespecttotheServiceTest,FDICexaminersfocusedontheretailbankingandcommunitydevelopmentservicesprovidedbyAmerisBankthroughoutitsassessmentareas andconcludedthatthebankprovidedareasonablelevelof bothservices.Specifically, FDICexaminersconcludedthatthebank’sdeliverysystemswerereasonablyaccessible overall31andthatthebankprovidedafairlyreasonablenumberof communitydevelopmentservicesinitsareasof operations.32However,examinersfoundthatduringtheevaluationperiodAmerisBankhadonlyanadequatelevelof participationincommunitydevelopmentactivitiesandretailbankingservicesdedicatedtoLMIareasorindividualsinits assessmentareas. CRAPerformanceof ProsperityBank.ProsperityBankwasassigneda“satisfactory”rating atitsmostrecentCRAperformanceevaluationbytheFDIC,asof April18,2011(“ProsperityBankEvaluation”),withratingsof “satisfactory”fortheLendingandCommunity DevelopmentTests.33ExaminersconcludedthatProsperityBank’slendinglevelsdemonstratedexcellentresponsivenesstothecreditneeds,andasatisfactoryresponsivenesstothe communitydevelopmentneeds,of itsassessmentareas,andthatthebankmaintainedasignificantlevelof qualifiedcommunitydevelopmentinvestments.Examinersnoted,however, thatProsperityBankshowedaninadequateresponsivenesstothecreditneedsof smallandstart-upbusinessesinseveralassessmentareas. AmerisBank’sEffortsSincethe2009CRAEvaluation.Amerisrepresentsthatsincethe AmerisBankEvaluation,AmerisBankhasextended43communitydevelopmentloans totaling$52.2million,whichprimarilyfundedaffordablehousinginitiativesandtheprovisionof communityservicesinvariouslocations,includingdistressedcommunities, throughoutitsassessmentareas.Inaddition,Amerisstatedthat,from2010to2013, AmerisBankhasmade$33.8millioninqualifiedinvestments,includinginvestmentsin GinnieMaeMortgageBackedSecuritiesandtheCRAQualifiedInvestmentFund,bothof whichbenefittedallfourstatesinthebank’sassessmentareas.Thebankalsoinvestedin 31 AtthetimeoftheAmerisBankEvaluation,thebankoperated48full-serviceoffices,eightbranchesinmoderate-incomegeographies,25inmiddle-incometracts,and14inupper-incometracts.Ofthe25brancheslocated inmiddle-incometracts,11werelocatedincloseproximitytomoderate-incometracts.AmerisBankalsohad 47ATMlocationsandprovidedcustomerswithfreeinternetandtelephoneaccesstotheiraccounts. 32 TheAmerisBankEvaluationfoundthatthebankparticipatedinatotalof252serviceprojectsin2008and 2009,ofwhich113countedasCRAcommunitydevelopmentservices(e.g.,providingafirst-timehomebuyer workshop). 33 TheProsperityBankEvaluationwasconductedusingtheSmallBankCRAExaminationProcedures,and examinersreviewedthebank’ssmallbusinesslendingactivityforthe2010calendaryearandloansreportedon thebank’s2008HMDALoanApplicationRegister.Theseproductswereselectedforanalysisbecausetheyrepresented86.8percentofthebank’sloanportfolio.

80 FederalReserveBulletin|February2014 schooldistrictbondsinGeorgiaandSouthCarolinaandbondsfromtheAtlantaGeorgia UrbanResidentialFinanceAuthority.AmerisalsonotedthatsincetheAmerisBankEvaluation,thebankhasmadeapproximately$186,000indonations,includingmatchingdollars donatedtothebank’s“FightHungerCampaign”andotherdonationstoorganizations providingcommunityservicestoLMIindividuals,aswellaseconomicdevelopmentand affordablehousing.34 2.FairLendingRecordandPublicCommentsontheApplication TheBoardhasconsideredtherecordsof AmerisBankandProsperityBankincomplying withfairlendingandotherconsumerprotectionlaws.InadditiontoreviewingtheAmeris BankandProsperityBankEvaluationsandAmerisBank’srecordof performanceinprovidingcommunitydevelopmentlendingandservicessinceitsevaluation,asdiscussed above,theBoard’sconsiderationincludesanevaluationof AmerisBank’sfairlendingpoliciesandprocedures.Thisalsoincludesconsiderationof otheragencies’viewsonAmeris Bank’srecordof performanceunderfairlendinglaws.TheBoardalsohastakeninto accountthecommentsontheapplication. Ameris’sFairLendingProgram.Amerishasinstitutedpoliciesandprocedurestohelp ensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.Thecompany’slegalandcomplianceriskmanagementprogramincludesacentralizedmarketingplantoensureconsistencyof marketingandadvertisingbothatthecorporateandthelocal/regionallevels,secondaryreviewof proposedloanpricingtoreduce pricingexceptions,compliancetrainingforapplicableemployeesonaquarterlybasis,and collectionandtrackingof customercomplaintstoensureappropriateresponsesand reportstomanagementortheboardof directorsconcerningindicationsof possiblefair lendingimplications.Amerisisdevelopingacustomer-basedpricingmodelthatwould allowmoreconsistentpricingatthecustomerlevelacrosstheentiretyof AmerisBank.In addition,Amerishasbeguntodevelopacentralizedapprovalandreviewprocesstoenable bank-widesecondaryreviews,includingdenied,withdrawn,approved,ornot-accepted loans,andhasalsocreateda“Chief RiskOfficer”positiontoprovidedirectoversightand managementof thecompany’scomplianceprogram.Ameris’srisk-managementsystems anditspoliciesandproceduresforassuringcompliancewithfairlendinglawswouldbe implementedatthecombinedorganization. PublicCommentsontheApplication.Commentersraisedconcernsaboutthegreaterincidenceof higher-costmortgageloanstominorityandLMIborrowersthantononminority borrowerscomparedtotheaggregateof alllendersinthebank’sruralGeorgiamarkets,as reflectedbydatareportedunderHMDAin2011.Specifically,commentersallegedthat 42.1percentof thebank’shigher-costloanswereissuedtoLMIborrowerscomparedto 33.8percentfortheaggregate.Similarly,commentersallegedthat21.4percentof the bank’shigher-costloanswereissuedtoAfricanAmericanborrowerscomparedto15.7percentfortheaggregate.CommentersalsonotedpricingdisparitiesbetweenAfricanAmericanandwhiteborrowersandbetweenLMIandmiddle-andupper-incomeborrowerswith respecttothebank’shome-improvementandrefinanceloans.Itwasalsoallegedthat AmerisBankissuedfewerprimeloanstoLMIandAfricanAmericanborrowerscompared totheaggregate.ThecommenterscontendedthatthesedisparitiessuggestthatAmeris BankmaybesteeringLMIandAfricanAmericanborrowersintohigher-costloansand thatthebankneededtoimproveitsmarketing,underwriting,andproductdevelopment activities.Inaddition,thecommentersquestionedthepublicbenefitsof theproposal. 34 Theseloans,investments,anddonationshavenotyetbeenevaluatedbytheFDIC.

LegalDevelopments:FourthQuarter,2013 81 Analysisof HMDADataandPricingDisparities.Althoughthecommentersdidnotallege specificdenialdisparities,theygenerallycontendedthatAmerisBankhadapoorrecordof meetingthecreditneedsof LMIandAfricanAmericanborrowersinthecommunitiesthe bankserved.Inresponsetothecomments,theBoardanalyzedAmerisBank’sHMDAdata todevelopaviewof thebank’soveralllendingpatterns.TheBoard’sanalysisincludeda reviewof thebank’s2010,2011,and2012HMDAandsmallbusinesslendingdatain itscombinedStatewideCRAassessmentareas,foreachstatewideassessmentarea,includingtheruralGeorgiaStatewideareas,andinseveralindividualmarketswherethebank receivedasignificantvolumeof applications. TheBoard’sanalysisrevealedthatgenerallyAmerisBank’svolumeof mortgageapplicationsfromandloanstoAfricanAmericanandHispanicindividuals,asapercentof total applicationsandloans,exceededthoseof theaggregateforallthreeyears.Similarly,the bank’srecordof receivingapplicationsfromandmakingloanstomajority-minoritytracts, toLMItracts,andtoLMIindividualsalsoconsistentlyexceededthoseof theaggregate. WithinthecombinedGeorgiamarket,wherethebankderived67percentof itstotalloans for2012,thebank’spercentageof mortgageapplicationsfromandloanstoHispanicindividualsexceededthatof theaggregate,althoughitspercentagesforAfricanAmericanindividualsgenerallylaggedtheaggregateforthethreeyears.However,thebank’spercentages of applicationsfromandloanstomajority-minoritytracts,LMItracts,andLMIindividualsinthecombinedGeorgiamarketgenerallyapproximatedorexceededthoseof theaggregate.Moreover,initsruralGeorgiamarkets,whichwereof particularinteresttothecommenters,AmerisBank’spercentageof applicationsfromandloanstoAfricanAmericans andHispanicindividualsexceededthoseof theaggregate.Thebank’spercentageof applicationsfromandloanstomajority-minoritytracts,LMItractsandLMIindividualsalso consistentlyexceededthoseof theaggregateinthismarket. Inaddition,toaddressthepricingdisparitiesnotedbycommenters,theBoardreviewed AmerisBank’s2011mortgagepricingdataforitsruralGeorgiamarketsaswellasthe bank’s2011and2012HMDAdataforrelevantassessmentareas.AlthoughtheBoardwas notabletoduplicatethespecificdatadisparitiespresentedbythecommenters,theBoard’s analysismoregenerallyconfirmedthecommenters’allegationsthatthebank’svolumeof high-costloans,asapercentageof totalloans,exceededthoseof theaggregateandthatthe bankmadefewerprimeloanstoLMIandAfricanAmericanborrowersthantheaggregate inthemarketsof concerntothecommenters.TheBoard’sanalysisshowedthatAmeris hadahigherpercentageof higher-costloansthantheaggregatein2011and2012.Moreover,thebank’spercentagesof higher-costloanstoAfricanAmericanandHispanicborrowersweresignificantlyhigherthanthoseof theaggregate.Similarly,thebank’spercentagesof higher-costloansforminorityandLMIindividualsandforminorityandLMI censustractsexceededthoseof theaggregate. TheBoardisconcernedbydataindicatingpricingdisparitiesbetweenminorityandwhite borrowersandbetweenLMIandmiddle-andupper-incomeborrowers.TheBoardbelieves thatalllendinginstitutionsareobligatedtoensurethattheirlendingpracticesarebasedon criteriathatensurenotonlysafeandsoundlendingbutalsoequalaccesstocreditby creditworthyapplicantsregardlessof theirraceorethnicity.However,manyelementsfactor intoalender’spricingdecision,andHMDAdataarenotsufficienttoevaluateabank’s compliancewithfairlendinglawsandregulationsbecausethedatadonotincludethekey lendingfactorswhichmayexplaintheobserveddisparities.35FullyevaluatingAmeris Bank’scompliancewithfairlendinglawsandregulationsoverallandwithrespecttoits 35 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis

82 FederalReserveBulletin|February2014 loanpricingpracticeswouldrequireathoroughreviewof thebank’sapplicationand underwritingpoliciesandprocedures,aswellasaccesstoinformationcontainedinthe applicationfiles,todeterminewhethertheobservedpricingdisparitiespersistaftertaking intoaccountlegitimateunderwritingfactors. TheBoardhasconsultedwiththebank’sprimaryfederalregulator,theFDIC,regardingits evaluationof AmerisBank’scompliancewithfairlendinglawsandregulationsoveralland withrespecttoitsloanpricingpracticesinparticular.TheFDICreportedthat,basedona recentreview,itdidnotfindevidencethatAmerisBankengagedindiscriminatoryconduct inmakingitscreditdecisions. Inresponsetothecommenters’concernsaboutracialandincomedisparitiesinthebank’s loanpricingpractices,theFDICconductedanonsitereviewof AmerisBanktodetermine whetherthebankhasbeenpricingmortgageloansfairly,basedonthecreditworthinessof theborrower.36Althoughthereviewconfirmedthedisparitiesnotedbycommenters,FDIC examinersdidnotfindthatthebankdeviatedfromitsestablishedpricingmatrixinthe reviewedcasesorthatloanpriceswerebasedondiscriminatoryreasons.37FDICexaminers concludedthatracewasnotafactorinthebank’spricingof loans.Inaddition,FDIC examinersconductedanunderwritinganalysiscomparingminorityandnonminority deniedandapprovedapplicantsanddidnotfindevidencethatapplicantsweredenied basedonprohibitedfactors.Examinersalsoreviewedthebank’smortgagemarketingpracticesanddidnotfindevidencethatthebankwassteeringortargetingminorityindividuals intohigher-pricedloans.Followingitsreviewof theissuesraisedbythepubliccomments, theFDICconcludedthattherewasnobasisfordenyingthemergerof ProsperityBank intoAmerisBankandhasapprovedthemergerundertheBankMergerAct. 3.ConvenienceandNeedsof CommunitiestoBeServedbytheCombinedOrganization TheBoardhasconsideredtheextenttowhichtheproposalwouldbenefitthecustomersof AmerisBank,ProsperityBank,orboth.38Suchbenefitscanincludemerger-relatedcost savings,improvementsinthequalityof existingproductofferings,andtheavailabilityof productsthatwerenotpreviouslyavailabletocustomersof eitherbank. Amerisrepresentsthattheproposalwouldresultincostsavingsforthecombinedorganizationbyconsolidatingredundantfunctions,includingback-officeoperations.Amerisnotes thatthecombinedorganizationwouldbeabletoprovidecustomerswithbenefitsthrough moreefficientandcost-effectiveprovisionof bankingservicesandwouldbeabletodedicateadditionalresourcestomeetthebankingneedsof theircustomers.Inaddition,Ameris notesthatProsperityBank’scurrentoperationswouldbeevaluatedunderthemorestrenuousrequirementsof thelargebankexaminationprocedures,whichmayfurtherimprove lendingperformanceamonglocalconstituents. foranindependentassessmentofanapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotavailablefromHMDAdata. 36 ThereviewbeganonSeptember16,2013,andexaminersreviewedthebank’sloandatafor2011,2012,and year-to-date2013. 37 Thereviewalsoshowedthatpricingforthebank’ssecondarymarketloansisstandardizedthroughanautomatedunderwritingsystemandthatthebankusesamanualunderwritingsystemanditspricingmatrixtoprice itsnonconformingportfolioloans. 38 Commentersallegedthattheproposalwouldnotprovideaclearorsignificantpublicbenefit.Thecommenters specificallyassertedthattosatisfactorilydemonstratethepublicbenefitsoftheproposal,Amerisshould, amongotherthings,partnerwithlocalcommunityorganizations,includingthecommenters’partners,tooffer housingcounselingandfinancialeducationclassestohelpunderservedborrowersqualifyforaffordablemortgages.Inevaluatingthepublicbenefitsofaproposal,theBoardconsidersallbenefitsoftheproposedtransaction,notjustthosethatbenefitspecificdisadvantagedcommunities.See,e.g.,FirstMeritCorporation,FRB OrderNo.2013-3(March22,2013).

LegalDevelopments:FourthQuarter,2013 83 Amerisalsostatesthatitwouldprovidesubstantiallysimilarretailandcommercialbanking productsandservicesasarecurrentlyprovidedbyProsperityBank.ProsperityBank’scustomerswouldbenefitfromAmerisBank’sstrongerfinancialpositionaswellasitsbanking expertiseandresources,includingmarketing,advertising,productdevelopment,commercialandconsumercredit,employeetrainingandpersonnel,andautomatedbanking. Themergeralsowouldbenefitcurrentcustomersof ProsperityBankthroughaccesstosignificantlylargerbranchandATMnetworks.Thebranchnetworkavailabletocurrent ProsperityBankcustomerswouldincreasefrom12to69branchlocationsthroughout Georgia,Florida,SouthCarolinaandAlabama. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyAmeris,confidential supervisoryinformation,andthepubliccommentsontheproposal.BasedontheBoard’s analysisof theHMDAdata,evaluationof themortgagelendingoperationsandcomplianceprogramsof AmerisBankandProsperityBank,andreviewof examinationreports, theBoardbelievesthattheconvenienceandneedsfactor,includingtheCRArecordof the insureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication.TheBoardencouragesAmeristocontinuetoseekopportunitiestoassistin meetingthecreditneedsof thecommunitiesitserves. C.FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”39 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.40These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.41 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,Ameriswouldhave approximately$3.6billioninconsolidatedassets,andbyanyof anumberof alternative 39 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 40 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 41 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

84 FederalReserveBulletin|February2014 measuresof firmsize,Ameriswouldbeoutsidethe100largestU.S.financialinstitutions. TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan$25billionin totalconsolidatedassetswouldnotposesignificantriskstothefinancialstabilityof the UnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreasein interconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction.Thecompaniesengageandwould continuetoengageintraditionalcommercialbankingactivities.Theresultingorganization wouldexperiencesmallincreasesinthemetricsthattheBoardconsiderstomeasurean institution’scomplexityandinterconnectedness,withtheresultingfirmgenerallyranking outsideof thetop100U.S.financialinstitutionsintermsof thosemetrics.Forexample, Ameris’sintrafinancialassetsandliabilitieswouldcompriseanegligibleshareof the system-widetotal,bothbeforeandafterthetransaction.Theresultingorganizationwould notengageincomplexactivities,norwoulditprovidecriticalservicesinsuchvolumethat disruptioninthoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.42Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyAmeriswithalltheconditionsimposedinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheReserveBank,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveDecember6,2013. 42 ThecommentersrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCAct doesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately presenttheirviews.TheBoardhasconsideredthecommenters’requestsinlightofallthefactsofrecord.Inthe Board’sview,commentershavehadampleopportunitytosubmitcommentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenters’requests donotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbya publichearing.Inaddition,therequestsdonotdemonstratewhythewrittencommentsdonotpresentthe commenters’viewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestsforapublichearingontheproposalaredenied.

LegalDevelopments:FourthQuarter,2013 85 Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsTarullo, Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard United Bankshares, Inc. Charleston, West Virginia OrderApprovingtheAcquisitionof aBankHoldingCompany,Mergerof Banks,and Establishmentof Branches FRBOrderNo.2013–13(December12,2013) UnitedBankshares,Inc.(“United”),Charleston,WestVirginia,anditssubsidiary,George MasonBankshares,Inc.(“GMB”),Fairfax,Virginia(togetherwithUnited,the“Applicants”),haverequestedtheBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1toacquireVirginiaCommerceBancorp,Inc.(“VCB”)andthereby indirectlyacquireitssubsidiarybank,VirginiaCommerceBank(“VCBank”),bothof Arlington,Virginia.Inaddition,Applicants’subsidiarystatememberbank,UnitedBank, Fairfax,Virginia(“FairfaxBank”),hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)tomergewithVCBank,with FairfaxBankasthesurvivingentity.2FairfaxBankalsohasappliedundersection9of the FederalReserveAct(“FRA”)toestablishandoperatebranchesatthemainofficeand branchesof VCBank.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(78FederalRegister40739(2013))andlocallyin accordancewiththerelevantstatutesandtheBoard’sRulesof Procedures.4Asrequiredby theBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfrom theUnitedStatesAttorneyGeneral,andacopyof therequestwasprovidedtotheappropriatebankingagency.Thetimeforsubmittingcommentshasexpired,andtheBoardhas consideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct,andtheFRA. United,withconsolidatedassetsof approximately$8.5billion,isthe108thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$6.6billioninconsolidateddeposits.5Unitedcontrolstwosubsidiarybanks,FairfaxBankandUnitedBank, Inc.,Parkersburg,WestVirginia(“ParkersburgBank”),whichoperateintheDistrictof Columbia,Maryland,Ohio,Pennsylvania,Virginia,andWestVirginia.6UnitedisthesecondlargestdepositoryorganizationinWestVirginia,controllingdepositsof approximately $3.6billion,andisthe13thlargestdepositoryorganizationintheDistrictof Columbia withapproximately$418.7millionindeposits,whichrepresent11.7percentand1.2percent of thetotaldepositsof insureddepositoryinstitutionsinthesejurisdictions,respectively.7 Inaddition,Unitedisthe16thlargestdepositoryorganizationinVirginiawithapproxi- 1 12U.S.C.§1842. 2 12U.S.C.§1828(c).VCBwouldbemergedintoGMB. 3 12U.S.C.§321. 4 12CFR262.3(b). 5 AssetdataareasofJune30,2013,unlessotherwisenoted,andnationwidedeposit-rankingdataareasof June30,2013. 6 FairfaxBankoperatesintheDistrictofColumbia,Maryland,andVirginia.ParkersburgBankoperatesin Maryland,Ohio,Pennsylvania,andWestVirginia. 7 StatedepositandassetdataareasofJune30,2013.Inthiscontext,insureddepositoryinstitutionsinclude commercialbanks,savingsassociations,andsavingsbanks.

86 FederalReserveBulletin|February2014 mately$1.8billionindeposits,the22ndlargestinMarylandwithapproximately $492.3millionindeposits,the101stlargestinPennsylvaniawithapproximately$320.2millionindeposits,andthe216thlargestinOhiowithapproximately$42.6millionindeposits, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthosestates,respectively. VCB,withtotalconsolidatedassetsof $2.8billion,controlsVCBank,whichoperatesin Virginia.VCBankisthe13thlargestinsureddepositoryinstitutioninVirginia,controlling depositsof approximately$2.2billion,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,Unitedwouldbecomethe91stlargestdepositoryorganizationintheUnitedStates,withtotalconsolidatedassetsof approximately$11.6billion.8 Unitedwouldcontroldepositsof approximately$8.8billion,whichrepresentlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnited States.InVirginia,Unitedwouldbetheseventhlargestdepositoryorganization,controllingdepositsof approximately$4.0billion,whichrepresent1.6percentof thetotaldeposits of insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActimposescertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbyabankholding companythatiswellcapitalizedandwellmanagedtoacquirecontrolof abankinastate otherthanthehomestateof thebankholdingcompanywithoutregardtowhetherthe transactionisprohibitedunderstatelaw.9However,thissectionfurtherprovidesthatthe Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststatethathasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeorfiveyears.10Inaddition,theBoardmaynot approveanapplicationbyabankholdingcompanytoacquireaninsureddepositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastateotherthanthe homestateof thebankholdingcompanyandtheapplicantcontrolsorwouldcontrolmore than10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnited States.11 Forpurposesof theBHCAct,thehomestateof UnitedisWestVirginia,12andVCBis locatedinVirginia.13Unitediswellcapitalizedandwellmanagedunderapplicablelaw.Virginialawhasnominimumrequirementsforperiodof operation,14andVCBankhasbeen inexistenceformorethanfiveyears. 8 Proformatotalconsolidatedassetsreflectadjustmentsassociatedwithfairmarketvalueaccountingand goodwill. 9 Thestandardwaschangedfromadequatelycapitalizedandadequatelymanagedtowellcapitalizedandwell managedbysection607(a)oftheDodd-FrankWallStreetReformandConsumerProtectionAct(the“Dodd- FrankAct”),Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(d)(1)(A). 10 12U.S.C.§1842(d)(1)(B). 11 12U.S.C.§1842(d)(2)(A). 12 See12U.S.C.§1842(d).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater. 13 Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobelocatedinthestatesinwhich thebankischarteredorheadquarteredoroperatesabranch.See12U.S.C.§§1841(o)(4)-(7);1842(d)(1)(A); and1842(d)(2)(B). 14 SeeVA.CODE§6.2-704(C)(2013)(permitsinterstateacquisitionsbutdoesnotimposearequirementfor periodofoperation).

LegalDevelopments:FourthQuarter,2013 87 Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutions,thetotal amountof consolidateddepositsof insureddepositoryinstitutionsintheUnitedStatesis $10.4trillion.Onconsummationof theproposedtransaction,Unitedwouldcontrolless than1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnitedStates.Accordingly,inlightof allthefactsof record,theBoardisnot requiredtodenytheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anyattemptto monopolizethebusinessof bankinginanyrelevantmarket.Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.15 UnitedandVCBcompetedirectlyintheWashington,DC-MD-WV-VAbankingmarket.16 TheBoardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketin lightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket,therelativesharesof totaldepositsin insureddepositoryinstitutionsinthemarket(“marketdeposits”)controlledbyUnitedand VCB,17theconcentrationlevelsof marketdepositsandtheincreaseinthoselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBank MergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”),18andother characteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesinthismarket.Onconsummationof the proposal,thebankingmarketwouldremainmoderatelyconcentrated,asmeasuredbythe HHI,andnumerouscompetitorswouldremain.19 15 12U.S.C.§§1842(c)(1)and1828(c)(5). 16 TheWashington,DC-MD-WV-VAbankingmarketincludestheWashington,DC-MD-WV-VARanallyMetro Area(“RMA”);thenon-RMAportionsofthecountiesofCalvert,Charles,Frederick,PrinceGeorge’sandSt. Mary’s,Maryland;FauquierandLoudouncounties,Virginia;JeffersonCounty,WestVirginia;andtheVirginia independentcitiesofAlexandria,Fairfax,FallsChurch,andManassas. 17 DepositandmarketsharedataareasofJune30,2013,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,Midwest FinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 18 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelinesin 2010(seePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 19 Unitedisthe16thlargestdepositoryinstitutionintheWashington,DC-MD-WV-VAbankingmarketwith approximately$2.1billionindeposits,whichrepresentapproximately1.4percentofmarketdeposits.VCBis the14thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$2.1billion, whichrepresentapproximately1.4percentofmarketdeposits.Onconsummationoftheproposedtransaction, Unitedwouldbecometheninthlargestdepositoryinstitutioninthemarket,controllingweighteddepositsof approximately$4.2billion,whichrepresentapproximately2.8percentofmarketdeposits.TheHHIwould increasebyfourpointsto931,and82competitorswouldremaininthemarket.

88 FederalReserveBulletin|February2014 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketsinwhichUnitedandVCBcompetedirectlyorinany otherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitive considerationsareconsistentwithapproval. OtherSection3(c)Considerations Section3(c)of theBHCActandtheBankMergerActrequiretheBoardtotakeintoconsiderationanumberof otherfactorsinactingonbankacquisitionapplications.20These factorsincludethefinancialandmanagerialresources(includingthecompetence,experience,andintegrityof theofficers,directors,andprincipalshareholders)andfutureprospectsof thecompanyandbanksconcerned;theeffectivenessof thecompanyincombattingmoneylaundering;theconvenienceandneedsof thecommunitytobeserved;andthe extenttowhichtheproposalwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem. TheBoardhasconsideredallof thesefactorsand,asdescribedbelow,hasdeterminedthat allconsiderationsareconsistentwithapprovalof theapplication.Thereviewwasconductedinlightof allthefactsof record,includingsupervisoryandexaminationinformationfromvariousU.S.bankingsupervisorsof theinstitutionsinvolved,publicly reportedandotherfinancialinformation,informationprovidedbyUnited,andpublic commentsreceivedontheproposal. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhasconsideredthefinancialfactorsof theproposal.United,FairfaxBank,and ParkersburgBankarewellcapitalizedandwouldremainsoonconsummationof theproposedacquisition,whichisabankholdingcompanymerger,structuredasanexchangeof shares.21Unitedisinsatisfactoryfinancialcondition,andtheassetquality,earnings,and liquidityof bothFairfaxBankandVCBankareconsistentwithapproval.Basedonits 20 12U.S.C.§§1842(c)(2)-(3)and1828(c)(5). 21 Aspartoftheproposedtransaction,eachshareofVCBcommonstockwouldbecancelledandconvertedinto therighttoreceiveUnitedcommonstockbasedonanexchangeratio.Additionally,Unitedwouldassume existingVCBstockoptionsandwouldpaytheUnitedStatesDepartmentoftheTreasuryinfullforallof VCB’sTroubledAssetReliefProgrampreferredstockwarrants.

LegalDevelopments:FourthQuarter,2013 89 reviewof therecord,theBoardfindsthattheorganizationhassufficientfinancialresources toeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of United,VCB,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof their management,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencies withtheorganizationsandtheirrecordsof compliancewithapplicablebankingandantimoneylaunderinglaws. United,VCB,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobemanagedwell.United’sexistingrisk-managementprogramanditsdirectorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof Unitedhavesubstantialknowledgeandexperienceinthebankingandfinancialservices sectors.22Boththechairmanandchief executiveofficerof Unitedwouldcontinueintheir rolesfollowingconsummationof theproposedtransaction. TheBoardalsohasconsideredUnited’splansforimplementingtheproposal.Unitedis devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.23Unitedwouldimplementitsrisk-management policies,procedures,andcontrolsatthecombinedorganization,andtheseareconsidered acceptablefromasupervisoryperspective.24United’smanagementhastheexperienceand resourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner. UnitedplanstointegrateVCBank’sexistingmanagementandpersonnelinamannerthat augmentsUnited’smanagement.25 United’sbankintegrationrecord,managerialandoperationalresources,andplansfor operatingthecombinedinstitutionsafterconsummationprovideareasonablebasistoconcludethatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalandUnited’smoneylaunderingpolicies,areconsistentwithapproval. B.ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandundertheBankMergerAct, theBoardmustconsidertheeffectsof theproposalontheconvenienceandneedsof the communitiestobeservedandtakeintoaccounttherecordsof therelevantdepositoryinsti- 22 Onconsummation,twocurrentVCBdirectorswouldbeappointedtoUnited’sboard,andfourcurrentVC BankdirectorswouldbeappointedtoFairfaxBank’sboard. 23 ThecompanyplanstoestablishvariouscommitteescomprisedofkeyUnitedandVCBexecutiveswithspecific areasofexpertiseandresponsibilitiestoensureasmoothintegration.Inaddition,Unitedhasmadesignificant managementandprocesschangestoaddresstheoperationsofthecombinedorganization,including,for example,increasingthesizeofitsrisk-managementandauditstaff,reorganizingandexpandingtheInformationTechnologydepartment,andengagingconsultantstoreviewandenhancethecompany’sinformationsecurityandloanoperationfunctions. 24 Unitedhasconsolidateditsbank-specificrisk-managementfunctionsintoanenterprise-widesystemandhas increasedthesizeofitsrisk-managementstafftoalevelcommensuratewiththeoperationsofthecombined organization. 25 TheofficersofVCBankareexpectedtoretainsimilarpositionswithinthemergedbank.Thecurrentpresident andchiefexecutiveofficerofFairfaxBankwouldcontinuetoserveinthesepositions,whilethecurrentpresidentandchiefexecutiveofficerofVCBandVCBankwouldbeappointedtoserveas“PresidentEmeritus”of FairfaxBankfollowingthemerger.

90 FederalReserveBulletin|February2014 tutionsundertheCommunityReinvestmentAct(“CRA”).26TheCRArequiresthefederal financialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthe creditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeand soundoperation,27andrequirestheappropriatefederalfinancialsupervisoryagencyto takeintoaccountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,in evaluatingbankexpansionaryproposals.28 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof FairfaxBank,ParkersburgBank,andVCBank,datareportedby FairfaxBankandVCBankundertheHomeMortgageDisclosureAct(“HMDA”),29other informationprovidedbyUnited,confidentialsupervisoryinformation,andthepubliccommentsreceivedontheproposal.Commentersobjectedtotheproposalonthebasisof the smallbusinesslendingrecordof FairfaxBankandVCBank,aswellasthemortgagelendingrecordsof VCBankasreflectedin2011HMDAdata. 1.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitution inlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.30TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.31Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor. CRAPerformanceof FairfaxBank.FairfaxBankwasassigneda“satisfactory”ratingatits mostrecentCRAperformanceevaluationbytheFederalReserveBankof Richmond (“ReserveBank”),asof June3,2013(“FairfaxBankEvaluation”).Examinersconsidered FairfaxBanktohaveanexcellentrecordof lendinginsideitsassessmentareasandnoted thatthebank’scommunitydevelopmentlendingperformancedemonstratedresponsiveness tocommunitycreditneeds.32FairfaxBankreceivedan“outstanding”ratingontheLendingTest,“highsatisfactory”ontheServiceTest,and“lowsatisfactory”ontheInvestment Test.33 AsdescribedintheFairfaxBankEvaluation,ReserveBankexaminersfoundthatFairfax Bankprovidedasignificantlevelof communitydevelopmentloansandanoveralllevelof qualifiedcommunitydevelopmentinvestmentsthatwereresponsivetocommunitycredit 26 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 27 12U.S.C.§2901(b). 28 12U.S.C.§2903. 29 12U.S.C.§2801etseq. 30 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 31 12U.S.C.§2906. 32 TheFairfaxBankEvaluationreviewed(i)loandataandcommunitydevelopmentlendingactivitiesreportedby FairfaxBankfromJanuary1,2011,throughDecember31,2012;(ii)qualifiedcommunitydevelopmentloans andservicesconsummatedorprovidedfromMarch28,2011,throughJune3,2013;and(iii)allqualifiedinvestmentsmadefromMarch28,2011,throughJune3,2013,oroutstandingasofJune3,2013. 33 TheFairfaxBankEvaluationincludedafull-scopereviewofthreeassessmentareas:Washington-Baltimore- NorthernVirginia,DC-MD-VACombinedStatisticalArea(“MultistateCSA”);Harrisonburg,VirginiaMetropolitanStatisticalArea;andAugustaCounty,VirginiaAssessmentArea.Alimitedscopereviewwasperformed intheCharlottesville,VirginiaMSAandtheShenandoahCounty,VirginiaNon-MSA.

LegalDevelopments:FourthQuarter,2013 91 needs.Examinersnotedthatthebank’sdeliverysystemswereaccessibleandconvenientto geographiesandindividualsof differentincomelevelswithinthebank’sassessmentareas. Inaddition,examinersfoundthatFairfaxBankhadagoodrecordof participatingincommunitydevelopmentinitiatives. WithrespecttotheLendingTest,examinersnotedthatthebankisaleaderinmakingcommunitydevelopmentloans.Inparticular,examinersnotedthatthebankhadanexcellent recordof lendingwithinitsassessmentareas,withgooddistributionsof loansacrossgeographiesandamongborrowersof differentincomelevels.Theamountandresponsivenessof communitydevelopmentlendinginthebank’sassessmentareaswerealsokeyfactorsinthe “outstanding”rating.34Duringtheevaluationperiod,FairfaxBankextendedapproximately$39.3millionincommunitydevelopmentloans.Theseloansreflectedavarietyof communitydevelopmentpurposes,suchassupportingaffordablehousingandfunding organizationsthatprovidedcommunityservicesorpromotedeconomicdevelopmentbenefitingpredominatelyLMIcommunitiesandindividualswithinthebank’sassessment areas. IntheFairfaxBankEvaluation,whilethebank’squalifiedcommunityinvestmentactivities wererated“lowsatisfactory,”examinersfoundthatthebank’soverallcommunitydevelopmentinvestmentswereresponsivetocommunitycreditneeds.35FairfaxBank’sinvestments includedanequityinvestmentof $2millionintheCRAFund,whichinvestsincommunity developmentprojectsthatprovideforthedevelopmentof LMIareasandtheimprovement of thequalityof lifeforLMIresidents;a$1.5millioncommitmentintheFranklinCapital Low-IncomeHousingTaxCreditFund,whichprovidesrehabilitationfinancingforseveral multifamilyhousingdevelopmentsinVirginia;andequityinvestmentstotaling$3.1million intheVirginiaCommunityDevelopmentCorporation’sHousingEquityFund,which facilitatesthedevelopmentandfinancingof affordablehousingthroughoutVirginiaand utilizesthefederallow-incomehousingtaxcreditprogram.Inaddition,between March2011andDecember2012,FairfaxBankdonatedapproximately$124,820tosupport numerouscommunitydevelopmentorganizationswhoseoperationsassistLMIindividuals andareas. WithrespecttotheServiceTest,examinersstatedthatthebankhadahighlevelof communitydevelopmentserviceswithinitsprimarymarketareas.ItwasnotedthatFairfax Bankanditsemployeesactivelysoughtout,andparticipatedin,opportunitiesthatwere generallytargetedtoLMIindividualsandareaswithinthecommunitiesthebankserved.In addition,FairfaxBankemployeeshavebeeninvolvedwithorganizationsthatassistsmall businesseswithfunding,providefinancialliteracytraining,promoteaffordablehousing opportunities,orsupporteducation. CRAPerformanceof ParkersburgBank.United’sleadbanksubsidiary,ParkersburgBank, receivedanoverall“satisfactory”ratingatitsmostrecentCRAevaluationbytheReserve BankonJune3,2013(“ParkersburgEvaluation”),withratingsof “highsatisfactory”for theLendingTest,“lowsatisfactory”fortheInvestmentTest,and“outstanding”forthe 34 FairfaxBank’slendingisconsideredhighlyresponsivetocommunitycreditneeds,withanoverwhelming majorityofthebank’sHMDAloans(approximately88percent)andsmallbusinessloans(approximately 85percent)originatedwithinitsassessmentarea. 35 The“lowsatisfactory”ratingontheInvestmentTestwasdrivenbythebank’sperformanceinitslargestassessmentarea,theMultistateCSA,wherethebankheldonlythreeinvestmentstotaling$595,000(or11percentof itstotalqualifiedinvestments).

92 FederalReserveBulletin|February2014 ServiceTest.36Examinersnotedthatahighpercentageof thebank’sHMDA,smallbusiness,andconsumerloanswereoriginatedwithinthebank’sassessmentareas. InassigningParkersburgBanka“highsatisfactory”ratingfortheLendingTest,Reserve Bankexaminersnotedthatthebankparticipatedinavarietyof speciallendingprograms thatbenefitLMIborrowersandcommunities.Forexample,thebankoriginated21loans totalingabout$1.4millionduringtheevaluationperiodundertheAffordableHousing Optionloanprogram,whichoffershomepurchase,refinance,andrehabilitationloanswith upto97percentfinancing,andislimitedtofamilieswhoseincomesdonotexceed80percentof theDepartmentof HousingandUrbanDevelopment’smedianfamilyincomefor theircountyof residence.37ExaminersalsonotedthatParkersburgBankmadeahighlevel of communitydevelopmentloans(originatingorrenewing61suchloanstotalingabout $18.6millionduringthereviewperiod),whichultimatelybenefittedLMIborrowersand communities. Asnoted,ParkersburgBankwasassigneda“lowsatisfactory”ontheInvestmentTest.This ratingwasdrivenbythefactthatduringthereviewperiod,thebankhadonlysixqualifying investmentstotaling$6.8million,whichrepresentedlessthan1percentof thebank’stotal assets. OntheServiceTest,examinersratedthebank’soverallperformance“Outstanding.”The bank’sdeliverysystems,branchlocations,andhoursof operationwereconsidered accessibleandconvenienttoallportionsof theassessmentareas.Of thebank’s63branch offices,16,or31.7percent,werelocatedinLMIareas. CRAPerformanceof VCBank.VCBankwasassigneda“satisfactory”ratingatitsmost recentCRAperformanceevaluationbytheReserveBank,asof October31,2011(“VC BankEvaluation”),38withratingsof “lowsatisfactory”fortheLendingTestand“highsatisfactory”fortheInvestmentandServiceTests.39Examinersalsoconcludedthat,whileVC Bankmaintainedasignificantlevelof qualifiedcommunitydevelopmentinvestments,the bank’sdistributionbyborrowerincomeorrevenuewasonlymarginallyadequate. WithrespecttotheLendingTest,examinersdeterminedthatthebank’sloandistribution byborrowerincomeorrevenuewasmarginallyadequateandthatgeographicdistribution waspoor.However,examinersnotedthatasubstantialmajorityof thebank’sHMDAand smallbusinessloans,bothbynumberandvolume,wereextendedwithinthebank’sassessmentarea.Inaddition,thebankprovidedarelativelyhighlevelof communitydevelop- 36 TheParkersburgEvaluationreviewedHMDA,smallbusiness,andconsumerlendingactivityreportedbythe bankfromJanuary1,2011,throughDecember31,2012.ExaminersalsoconsideredqualifiedcommunitydevelopmentloansoriginatedfromMarch14,2011,throughJune3,2013. 37 Additionally,asnotedintheParkersburgEvaluation,ParkersburgBank(1)hasextended166loanstotaling $1.8millionaspartoftheFHATitle1HomeImprovementloanprogram,whichoffersflexiblenontraditional underwritingcriteriaforhomeimprovementloans;(2)hasbeeninvolvedineightprojectsundertheFederal HomeLoanBank(“FHLB”)AffordableHousingprogram,whichprovidesgrantsandloansfornewandrehabilitatedsingle-andmultifamilyhousingprojects;(3)hasprovidedthreeeligiblesmallbusinesseswithstart-up andexpansionfundingtotaling$320,000undertheFHLBBankingonBusinessprogram;and(4)hasprovided 36veteranswithmorethan$305,000inhomeimprovementassistanceaspartofapartnershipwiththeAtlanta FHLBtoprovidegrantstoLMIveteransforeligiblehomeimprovementloans. 38 TheVCBankEvaluationreviewedloandataandsmallbusinesslendingactivityreportedbyFairfaxBankfrom January1,2009,throughDecember31,2010.Theevaluationalsoconsideredanyqualifiedcommunitydevelopmentloans,investments,orserviceactivitiessincethepreviousevaluation,andallqualifiedinvestmentsoutstandingasofOctober31,2011,regardlessofwhensuchinvestmentsweremade. 39 RatingsfortheLending,Investment,andServiceTestsareassignedtoaninstitutionbasedonitsperformance withinanassessmentarea.ForbothFairfaxBankandVCBank,theLendingTestperformanceaccountsfor halfofthebanks’overallrating,whiletheInvestmentandServiceTestseachaccountedforonequarterofthe banks’overallrating.

LegalDevelopments:FourthQuarter,2013 93 mentloans(16loanstotaling$36.7million)withinitsassessmentareasduringthereview period.Theseloanscontributedsignificantlytotherevitalizationof LMIareas,developmentof affordablehousing,provisionof communitydevelopmentservices,andpromotion of smallbusinesseswithintheassessmentareas. WithrespecttotheInvestmentTest,examinersnotedthatVCBankheld10qualifiedcommunitydevelopmentinvestmentstotaling$29.1million,themajorityof whichwere directedatinitiativestohelpLMIborrowersinVirginiaattainquality,affordablehousing. Examinersalsodeterminedthatthebank’sretailbankingdeliverysystemswereeffective andaccessibletoallportionsof theassessmentarea,includingLMIareasand,consequently,assignedthebanka“highsatisfactory”ratingundertheServiceTest. 2.FairLendingRecord TheBoardhasconsideredtherecordsof FairfaxBank,ParkersburgBank,andVCBankin complyingwithfairlendingandotherconsumerprotectionlaws.Thisincludesareviewof theirperformanceasdetailedintheFairfaxBankandVCBankEvaluations,discussed above.Thisalsoincludesanevaluationof FairfaxBank’sfairlendingpoliciesandprocedures.TheBoardalsohastakenintoaccountthecommentsontheapplication. United’sFairLendingProgram.UnitedhasinstitutedpoliciesandproceduresatFairfax BankandParkersburgBanktohelpensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.Thecompany’slegalandcompliancerisk-managementprogramincludes(1)procedurestoevaluatenewlawsandregulationstodetermine applicabilitytoUnited’smortgageoperations,(2)annualfairlendingriskassessments toanalyzepotentialvulnerabilitiesinloanprocessesandcontrols,(3)fairlendingtraining foralllending-relatedemployees,(4)comparativeloanfilereviews,(5)legalandcompliance reviewsforpotentialfairlendingcomplaints,and(6)policesrequiringasecondreviewof allhomemortgageloanapplicationsinitiallyrecommendedfordenialorforapprovalbased onpolicyexceptions.Unitedalsoengagesinongoingmonitoringandtesting,onaregular basis,toensurecompliancewithfederalandstatelawsandregulationsandinternalpolicies andprocedures.FindingsfromtheseongoingeffortsarereportedtoUnited’sboardand managementandserveasacatalystforadditionaltraining,updatingof policiesandprocedures,andimplementingadditionalcontrols.United’srisk-managementsystemsandits policiesandproceduresforassuringcompliancewithfairlendinglawswouldbeimplementedatthecombinedorganization. 3.HMDAandSmallBusinessLendingAnalysis,andPublicCommentontheApplication BasedonHMDAdatafrom2011,thecommentersallegedthatbothFairfaxBankandVC Bankhadapoorrecordof meetingtheneedsof smallbusinessesinLMIcommunities comparedtotheaggregateof lendersincertainassessmentareas.Thecommentersfurther allegedthatin2011VCBankmadealowerpercentageof mortgageloanstoLMIandAfricanAmericanborrowersandinLMIcensustractscomparedtotheaggregateof lendersin certainassessmentareas.Inaddition,commentersquestionedthepublicbenefitsof the proposal. TheBoardhasreviewedHMDAandCRAsmallbusinesslendingdatafrom2011and2012 reportedbyFairfaxBank,ParkersburgBank,andVCBank,themostrecentpubliclyavailabledata.Inresponsetothecomments,theBoardanalyzeddatarelatedtoallHMDA-reportableloanstodevelopaviewof overalllendingpatternsbyFairfaxBank,Parkersburg Bank,andVCBank,eventhoughthecommentersdidnotcriticizeFairfaxBank’sorParkersburgBank’sHMDAlendingrecords.TheBoardfocuseditsanalysisonthemarketareas

94 FederalReserveBulletin|February2014 addressedinthepubliccomments(NorthernVirginia;Harrisonburg,Winchester,Augusta County,Staunton,andWaynesboroCity,Virginia;andWashington,D.C.MSA). Thecommentersassertedthatin2011FairfaxBankmade4.9percentof itssmallbusiness loansinLMIcensustractsinWinchester,Virginia(comparedto10.6percentfortheaggregate)andextended36.6percentof suchloanstocompanieswithGrossAnnualRevenues (“GARs”)of $1millionorlessintheWashington,D.C.MSA(comparedto45.3percent fortheaggregate).TheBoard’sreviewconfirmedthedisparitynotedbythecommenters.40 However,theBoard’sanalysisalsorevealedthatFairfaxBank’ssmallbusinesslendingin LMIcensustractsimprovedsignificantlyfrom2011to2012inWinchesterandothermarketsof concerntothecommentersandwasconsistentwithorexceededtheaggregate’sin 2012inallbuttheAugusta-Staunton-Waynesboro,Virginiamarket. Inaddition,thepercentageof loanstobusinesseswithGARsof $1millionorlesswasconsistentwithorexceededtheaggregateforboth2011and2012intheWinchester,Harrisonburg,andAugusta-Staunton-Waynesboro,VirginiaMSAs.Suchsmallbusinesslendingalso increasedslightlyintheWashington,D.C.marketin2012,althoughitstilllaggedthe aggregate.Importantly,whensmallbusinesslendingintheWashington,D.C.MSAwas consideredwithoutregardtothesizeof businessrevenue,FairfaxBankcomparedfavorablytotheaggregate,with29.2percentof thebank’sloansmadetosmallbusinesses (regardlessof revenueamount)comparedtojust12.6percentfortheaggregate. TheBoard’sreviewof FairfaxBank’s2011and2012HMDAdatashowedthat,inboth years,thebankexceededtheaggregateinthepercentageof HMDAloansmadeinLMI tractsinitscombinedassessmentarea,aswellasintheWinchesterandHarrisonburg,VirginiaandtheWashington,D.C.MSAs.ThedataalsoshowedFairfaxBank’sHMDAlendingtoLMIborrowerswasconsistentwithorexceededtheaggregateinalltheMSA’s exceptHarrisonburg,Virginiain2012,wherelendingtoLMIborrowersnevertheless showedsignificantimprovementfrom2011to2012. WithrespecttoVCBank,thecommentersassertedthatin2011,comparedtotheaggregate of lendersinNorthernVirginia,thebankmadefewerhomemortgageloanstoLMIborrowers(23.5percentfortheaggregatecomparedtothebank’s12.7percent)andtoLMI neighborhoods(7.4percentfortheaggregatecomparedtothebank’s4.4percent).The commentersalsoassertedthatVCBankmade1.7percentof itshomemortgageloansto AfricanAmericansborrowersinNorthernVirginiaduring2011,comparedto5.2percent fortheaggregate.Furthermore,commentersstatedthatonly4.6percentof VCBank’s smallbusinessloanswereextendedinLMIcensustractsin2011inNorthernVirginiacomparedto8.69percentfortheaggregate.TheBoard’sanalysisconfirmedthatVCBank laggedtheaggregateinmortgagelendingtoLMIandAfricanAmericanborrowersand LMIcommunitiesinNorthernVirginiain2011.Theanalysisalsoshowedthatthebank’s mortgagelendingcontinuedtolagtheaggregatein2012. Thedatashows,however,thattherewassignificantimprovementfrom2011to2012inthe numberof mortgageloanapplicationsfrom,andoriginationsto,LMIandAfricanAmericanborrowers,residentsinminoritycensustracts,andinLMIcensustracts.Forexample, in2011,VCBankreceivedatotalof sixmortgageapplications(or1.4percentof applications)fromAfricanAmericansandoriginatedallsix(or1.5percentof loans).In2012,the bankreceived15mortgageloanapplicationsfromAfricanAmericans(or2.2percentof applications)andoriginated14(or2.2percentof loans).Similarly,in2012,VCBank 40 FairfaxBankconductedaCRASelfEvaluationinJune2012,whichnotedthesamedeficienciesindicatedby thecommenters.Inresponsetothisinternalevaluation,FairfaxBankincreaseditspercentageofsmallbusiness loanstoLMIcensustractsinWinchester,Virginiafrom4.9percentin2011to30.4percentin2012.

LegalDevelopments:FourthQuarter,2013 95 improveditssmallbusinesslendinginminoritycensustractsandcloselyapproximatedthe aggregateinLMIcensustractsandtobusinesseswithGARsof $1millionorless.41 Since2011,VCBankhasmadeanefforttoincreaselendingtoLMIneighborhoodsand smallbusinessinLMIcommunitiesandtoincreasehomemortgagelendingtoLMIand AfricanAmericanborrowers.Inparticular,thebankadoptedthe“InReach”program, whichprovidesportfoliomortgageloansatbelowmarket30-yearfixedratesforowner-occupiedNorthernVirginiaresidencesata97percentloan-to-valueratioforloansupto $417,000,andata95percentloan-to-valueratioforloansupto$500,000,withnoincome limitsforhomeswithinLMIareas.Theprogramhasmorethandoubledthenumberand dollaramountof VCBank’shomeloanstoLMIborrowersinNorthernVirginiabetween 2011(40loanstotaling$8.8million)and2012(93loanstotaling$20.1million).Similarly, VCBankmorethandoubledthenumberanddollaramountof itshomeloansinLMI communitiesbetween2011(15loanstotaling$5.8million)and2012(48loanstotaling $11.8million).42 TheBoardisconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlending andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatensurenotonlysafeandsoundlendingbutalsoequalaccessto creditbycreditworthyapplicantsregardlessof theirraceorethnicity.AlthoughtheHMDA datamightreflectcertaindisparitiesintheratesof loanapplications,originations,and denialsamongmembersof differentracialorethnicgroupsincertainlocalareas,HMDA dataalonedonotprovideasufficientbasisonwhichtoconcludewhetherFairfaxBank andVCBankhaveexcludedordeniedcredittoanygrouponaprohibitedbasis.43 Becauseof thelimitationsof HMDAdata,theBoardalsohasconsideredotherinformation,includingexaminationreportsthatprovideon-siteevaluationsbytheReserveBankof compliancebyFairfaxBank,ParkersburgBank,andVCBankwithfairlendinglawsand regulations.FairfaxBank,ParkersburgBank,andVCBankalsohaveprovidedtheBoard withdetailedinformationontheirtraining,marketing,advertising,andcentralizedunderwritingprograms,whichreflectthecompanies’commitmenttothepreventionof prescreening,discouragement,orexclusionof creditapplicationsonaprohibitedbasis.The Boardalsoconsideredinformationshowingtheactualreasonsforcreditdecisions. TheReserveBank’sanalysisshowedthatthemarketingprogramsof FairfaxBank,ParkersburgBank,andVCBankwereinclusiveandunbiasedanddidnotdiscourageminority applicants.Moreover,theanalysisbytheReserveBankshowedthatthebanksinvolved consistentlyadheredtotheirunderwritingguidelinesandprocedures,whicharedesignedto ensureindividualcreditdecisionsaremadeonanon-discriminatorybasis(e.g.,credithistory,inadequatecollateral,anddebt-to-incomeratio). 41 OnecommenterexpressedcontinuingconcernsaboutVCBank’slendingtoLMIandAfricanAmericanborrowersandassertedthatbothbankshaveworktodotoserveallcommunitiesintheirserviceareas.Thissame commenteracknowledgedandcommendedspecificprogressmadebybothFairfaxBankandVCBankto improvetheirHMDAandsmallbusinesslending.Inparticular,thecommenterpraisedFairfaxBankforitssignificantprogressinimprovingsmallbusinesslendingtobusinesseswithGARsof$1millionorlessinWashington,D.C.andtoLMIcommunitiesoutsideofWashington,D.C. 42 OnecommenterhascommendedVCBankfortheincreaseinlendingtoLMIneighborhoodsandsmallbusinessinLMIcommunities,andtheincreaseinhomemortgagelendingtoLMIandAfricanAmericanborrowersthroughtheadoptionoftheInReachprogram. 43 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)are notavailablefromHMDAdata.

96 FederalReserveBulletin|February2014 TheBoardnotestheprogressthatUnitedmadeinitslendingperformanceagainstthe aggregatefrom2011to2012andencouragesUnitedtocontinuethispositivetrend.Tothat end,Unitedhascommittedthat,atthenextCRAexaminationfollowingconsummationof themergerwithVCBandconsistentwiththecombinedorganization’scapacityandopportunitiesformakingqualifiedlendingandinvestments,thecombinedorganizationwill demonstratethatithasengagedinlevelsof qualifiedlendingandinvestments,homemortgagelending,smallbusinesslending,andcommunitydevelopmentlendingandinvestments inlow-andmoderate-incomecommunitiesintheNorthernVirginiaportionof United’s MultistateCSAassessmentarea,thatexceedUnited’simprovedperformancein2012.In addition,withinthirty(30)daysof consummation,Unitedwilldevelopaprogram,to applyacrossallassessmentareasof thecombinedorganization,withtheobjectiveof producingresultsexceedingUnited’simprovedperformancein2012.Unitedwillsubmitthe programtotheReserveBankforreviewandimplementtheprogramacrossthecombined organization’sassessmentareas. 4.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization TheBoardhasconsideredtheextenttowhichtheproposalwouldbenefitthecustomersof FairfaxBank,VCBank,orboth.44Suchbenefitscanincludemerger-relatedcostsavings, improvementsinthequalityof existingproductofferings,andtheavailabilityof products thatwerenotpreviouslyavailabletocustomersof eitherbank. Unitedrepresentsthattheproposalwouldresultincostsavingsforthecombinedorganizationbyconsolidatingredundantfunctions,includingdataprocessing.Unitednotesthatthe combinedorganizationwouldbeabletoprovidecustomerswithbenefitsthroughmore efficientandcost-effectiveprovisionof bankingservicesandwouldbeabletodedicate additionalresourcestomeetingthebankingneedsof itscustomers. Unitedalsostatesthattheproposalwouldoffercustomersconveniencethroughabroader rangeof financialproducts.ThemergerwouldbenefitVCBank’scustomerswithaccessto newproductsandservicesinthefollowingareas:trustandestateservices,retailchecking andsavings,businesscheckingproductsservices,cashmanagement,creditcards,andconsumerandcommerciallending.Inaddition,themergerwouldenhancethesuiteof secondarymarketloanproductsandportfolioloanofferingstobothFairfaxBank’sandVC Bank’snoncommercialborrowers.Forexample,FairfaxBankwouldintroducetheUnited StatesDepartmentof AgriculturalRuralDevelopmentloanprogramtoVCBankclients, anoptionnotcurrentlyavailabletotheseclients.Likewise,VCBankwouldbringitsCRA loanproductstoFairfaxBank,thusexpandingtheproductsavailabletothelatter’s customers. Themergeralsowouldbenefitcurrentcustomersof VCBankthroughaccesstosignificantlylargerbranchandATMnetworks.ThebranchnetworkavailabletocurrentVC Bankcustomerswouldincreasefrom28to136branchlocationsthroughoutVirginia,West Virginia,Ohio,Maryland,Pennsylvania,andWashington,D.C.Similarly,thenumberof ATMsthatVCBankcustomerscouldaccesswouldincreasefrom29to197locations throughoutthesamejurisdictions.UnitedsuggeststhattheexpandedATMnetworkwould offergreateraccesstocurrentVCBankcustomerslocatedinLMIandmiddleincome 44 Thecommentersallegedthattheproposalwouldnotprovideaclearorsignificantpublicbenefit.Onecommenterspecificallyurgedthattosatisfactorilydemonstratethepublicbenefitsoftheproposal,Unitedshould, amongotherthings,committomakemorecommunitydevelopmentlendingandinvestmentsinLMIcommunitiesinthecombinedorganization’sserviceareas.However,inevaluatingthepublicbenefitsofaproposal, theBoardconsidersallbenefitsoftheproposedtransaction,notjustthosethatbenefitspecificdisadvantaged communities.See,e.g.,FirstMeritCorporation,FRBOrderNo.2013-3(March22,2013).

LegalDevelopments:FourthQuarter,2013 97 areas.Inthisregard,Unitedrepresentsthat28percentof itsATMtransactionsarefrom ATMsinLMIandmiddle-incomedistressedcensustracts.Unitedfurthernotesthatits ATMsofferaSpanishlanguageoption. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyUnited,confidential supervisoryinformation,andthepubliccommentsontheproposal.BasedontheBoard’s analysisof theHMDAdata,itsevaluationof themortgageandsmallbusinesslending operationsandcomplianceprogramsof FairfaxBank,ParkersburgBank,andVCBank, anditsreviewof examinationreports,theBoardbelievesthattheconvenienceandneeds factor,includingtheCRArecordof theinsureddepositoryinstitutionsinvolvedinthis transaction,isconsistentwithapprovalof theapplication.TheBoardencouragesUnited tocontinuetoseekopportunitiestoassistinmeetingthecreditneedsof thecommunitiesit serves. C.FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”45 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.46These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.47 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,Unitedwouldhave approximately$11.6billioninconsolidatedassets,and,byanyof anumberof alternative measuresof firmsize,Unitedwouldbeoutsidethe100largestU.S.financialinstitutions. TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan$25billionin totalconsolidatedassetswillnotposesignificantriskstothefinancialstabilityof the UnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreasein interconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction.Thecompaniesengageandwould 45 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 46 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 47 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

98 FederalReserveBulletin|February2014 continuetoengageintraditionalcommercialbankingactivities.Theresultingorganization wouldexperiencesmallincreasesinthemetricsthattheBoardconsiderstomeasurean institution’scomplexityandinterconnectedness,withtheresultingfirmgenerallyranking outsideof thetop100U.S.financialinstitutionsintermsof thosemetrics.Forexample, United’sintrafinancialassetsandliabilitieswouldcompriseanegligibleshareof the system-widetotal,bothbeforeandafterthetransaction.Theresultingorganizationwould notengageincomplexactivities,norwoulditprovidecriticalservicesinsuchvolumethat disruptioninthoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. OtherConsiderations FairfaxBankalsohasappliedundersection9of theFRAtoestablishandoperate branchesatthelocationsof themainofficeandbranchesof VCBank.TheBoardhas assessedthefactorsitisrequiredtoconsiderwhenreviewinganapplicationundersection9 of theFRAandfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.48Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyUnitedwithalltheconditionsimposedinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheapplication,includingthesubmissionandimplementationof theprogramfor improvedperformance.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheReserveBank,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveDecember12,2013. 48 ThecommentersrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCAct doesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately presenttheirviews.TheBoardhasconsideredthecommenters’requestsinlightofallthefactsofrecord.Inthe Board’sview,commentershavehadampleopportunitytosubmitcommentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenters’requests donotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbya publichearing.Inaddition,therequestsdonotdemonstratewhythewrittencommentsdonotpresentthe commenters’viewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestsforapublichearingontheproposalaredenied.

LegalDevelopments:FourthQuarter,2013 99 Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsTarullo, Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Orders Issued Under Section 4 of the Bank Holding Company Act Investors Bancorp, MHC Short Hills, New Jersey Investors Bancorp, Inc. Short Hills, New Jersey OrderApprovingtheAcquisitionof aMutualSavingsandLoanHoldingCompany FRBOrderNo.2013–16(December23,2013) InvestorsBancorp,MHC(“InvestorsMHC”),andInvestorsBancorp,Inc.(“Investors Bancorp,”andjointlywithInvestorsMHC,“Investors”),bothof ShortHills,NewJersey, haverequestedtheBoard’sapprovalundersection4(c)(8)and4(j)of theBankHolding CompanyActof 1956,asamended(“BHCAct”),andsection225.4of theBoard’sRegulationY1toacquireGatewayCommunityFinancial,MHC(“GatewayMHC”)andits wholly-ownedsubsidiary,GatewayCommunityFinancialCorporation(“GCF,”andjointly withGatewayMHC,“Gateway”),andtherebyindirectlyacquireGateway’ssubsidiarysavingsassociation,GCFBank,allof Sewell,NewJersey.Immediatelyfollowingtheproposed acquisition,GCFBankwouldbemergedintoInvestorsBancorp’ssubsidiarybank,InvestorsBank,ShortHills,NewJersey.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(78FederalRegister35271(2013)).Thetimeforfilingcommentshas expired,andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection4of theBHCAct. Investors,withconsolidatedassetsof approximately$15.4billion,isthe77thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$10billion inconsolidateddeposits.InvestorsBankoperatesinNewJerseyandNewYork.Investors Bankisthe10thlargestdepositoryinstitutioninNewJersey,controllingdepositsof approximately$8.7billion,whichrepresent3percentof thetotaldepositsof insured depositoryinstitutionsinthestate.3InvestorsBankisthe53rdlargestinsureddepository institutioninNewYork,controllingdepositsof approximately$1.3billion,whichrepresent lessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthestate. GCF,withtotalconsolidatedassetsof $301million,controlsGCFBank,whichoperatesin NewJersey.GCFBankisthe77thlargestinsureddepositoryinstitutioninNewJersey, controllingdepositsof approximately$272million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. 1 12U.S.C.§§1843(c)(8)and(j);12CFR225.24. 2 ThemergerofGCFBankintoInvestorsBankissubjecttotheapprovaloftheFederalDepositInsuranceCorporation(“FDIC”)undertheFederalDepositInsuranceAct.TheFDICapprovedthemergeronDecember12, 2013. 3 DepositdataareasofJune30,2013.AssetdataareasofSeptember30,2013.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks.

100 FederalReserveBulletin|February2014 Onconsummationof thisproposal,Investorswouldremainthe77thlargestdepository organizationintheUnitedStates,controllingconsolidatedassetsof approximately $15.7billion,whichrepresentlessthan1percentof thetotalamountof assetsof insured depositoryinstitutionsintheUnitedStates.InNewJersey,InvestorsBankwouldremain theseventhlargestinsureddepositoryinstitution,controllingdepositsof approximately $9billion,whichwouldrepresent3percentof thetotaldepositsof insureddepositoryinstitutionsinthestate. FactorsGoverningBoardReviewof theTransaction TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.4TheBoardrequiresthatsavingsassociationsacquiredbybankholding companiesorfinancialholdingcompaniesconformtheirdirectandindirectactivitiesto thosepermissibleforbankholdingcompaniesundersection4(c)(8)of theBHCAct.5 InvestorshascommittedthatGatewayandthenonbankingsubsidiarythatInvestorsproposestoacquireengageinactivitiesthatwillconformtothosepermissibleundersection4 of theBHCActandRegulationY. Section4(j)(2)(A)of theBHCActrequirestheBoardtoconsiderwhethertheproposed acquisitionof Gateway“canreasonablybeexpectedtoproducebenefitstothepublic,such asgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweighpossible adverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition, conflictsof interest,unsoundbankingpractices,orrisktothestabilityof theUnitedStates bankingorfinancialsystem.”6Aspartof itsevaluationof thesefactors,theBoardreviews thefinancialandmanagerialresourcesof thecompaniesinvolved,theeffectof theproposaloncompetitionintherelevantmarkets,therisktothestabilityof theUnitedStates bankingorfinancialsystem,andthepublicbenefitsof theproposal.7Inactingonanotice toacquireasavingsassociation,theBoardreviewstherecordsof performanceof therelevantinsureddepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).In casesinvolvingtheinterstateacquisitionof aninsureddepositoryinstitutionundersection4(c)(8)of theBHCAct,theBoardmustalsoconsidertheconcentrationof depositson anationwidebasis.8 4 12CFR225.28(b)(4)(ii). 5 Asavingsassociationoperatedbyabankholdingcompanymayengageonlyinactivitiesthatarepermissible forbankholdingcompaniesundersection4(c)(8)oftheBHCAct.12CFR225.28(b)(4).Inthisinstance, InvestorswillimmediatelymergeGCFBankintoInvestorsBankandwillnotoperatethesavingsassociation independently. 6 12U.S.C.§1843(j)(2)(A).Section604(e)oftheDodd-FrankWallStreetReformandConsumerProtectionAct, Pub.L.No.111-203,124Stat.1601(2010),(“Dodd-FrankAct”)addedthe“risktothestabilityoftheUnited Statesbankingorfinancialsystem”tothelistofpossibleadverseeffects. 7 See12CFR225.26;see,e.g.,BankofAmericaCorporation/Countrywide,94FederalReserveBulletinC81 (2008);WachoviaCorporation,92FederalReserveBulletinC138(2006);andBancOneCorporation,83Federal ReserveBulletin602(1997). 8 TheDodd-FrankActamendedsection4oftheBHCActtoprovidethat,ingeneral,theBoardmaynot approveanapplicationbyabankholdingcompanytoacquireaninsureddepositoryinstitutionifthehome stateofthetargetinsureddepositoryinstitutionisastateotherthanthehomestateofthebankholdingcompanyandtheapplicantcontrolsorwouldcontrolmorethan10percentofthetotalamountofdepositsof insureddepositoryinstitutionsintheUnitedStates.Dodd-FrankAct§623(b),codifiedat12U.S.C. §1843(i)(8).ForpurposesoftheBHCAct,thehomestateofbothInvestorsandGatewayisNewJerseyand, therefore,section4(i)(8)oftheBHCActdoesnotapplytothistransaction.Also,asnoted,consummationof theproposalwouldresultinInvestorscontrollinglessthan1percentofthetotalamountofdepositsofU.S. insureddepositoryinstitutions.

LegalDevelopments:FourthQuarter,2013 101 CompetitiveConsiderations Aspartof theBoard’sconsiderationof thefactorsundersection4of theBHCAct,the Boardhasreviewedthecompetitiveeffectsof Investors’acquisitionof Gateway,inlightof allthefactsof record.InvestorsandGatewaycompetedirectlyinthePhiladelphia,Pennsylvaniabankingmarket.9TheBoardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketinlightof allthefactsof record.Inparticular,theBoardhas consideredthenumberof competitorsthatwouldremaininthebankingmarket,therelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarket(“market deposits”)controlledbyInvestorsandGateway,10theconcentrationlevelsof market depositsandtheincreaseinthoselevelsasmeasuredbytheHerfindahl-HirschmanIndex (“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewGuidelines (“DOJBankMergerGuidelines”),11andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsof theDOJBankMergerGuidelinesinthePhiladelphiabankingmarket.On consummationof theproposal,thePhiladelphiabankingmarketwouldremainmoderately concentrated,asmeasuredbytheHHI,andnumerouscompetitorswouldremain.12In addition,theappropriatebankingagencieshavebeenaffordedanopportunitytocomment andhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketinwhichInvestorsandGatewaycompetedirectlyorin anyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsweighinfavorof approval. Financial,Managerial,andOtherSupervisoryConsiderations TheBoardconsideredthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyandaconsolidatedbasis,aswellasthefinancialconditionof thesubsidiary depositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthis evaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,asset 9 ThePhiladelphia,PennsylvaniabankingmarketisdefinedasBucks,Chester,Delaware,Montgomery,and Philadelphiacounties,allinPennsylvania,andBurlington,Camden,Cumberland,Gloucester,andSalemcounties,allinNewJersey(the“Philadelphiabankingmarket”). 10 DepositandmarketsharedataareasofJune30,2012,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,Midwest FinancialGroup,75FederalReserveBulletin386(1989),andNationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 11 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelinesin 2010(seePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 12 Investorsoperatesthe28thlargestdepositoryinstitutioninthePhiladelphiabankingmarket,controlling depositsofapproximately$462million,whichrepresentlessthan1percentofmarketdeposits.GCFoperates the62ndlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$272million,which representlessthan1percentofmarketdeposits.Onconsummation,InvestorsBankwouldoperatethe19th largestdepositoryinstitutioninthemarket,controllingweighteddepositsofapproximately$734million,which representlessthan1percentofmarketdeposits.TheHHIwoulddecreaseby2pointsto1034.

102 FederalReserveBulletin|February2014 quality,andearningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtheproposed integrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoard consistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhasconsideredthefinancialfactorsof theproposal.InvestorsandInvestors Bankarewellcapitalizedandwouldremainsoonconsummationof theproposedacquisition.Theproposedtransactioninvolvestwoholdingcompanymergers.Inthefirstmerger, GatewayMHCwouldmergewithandintoInvestorsMHC.Inthesecondmerger,GCF, GatewayMHC’swholly-ownedsubsidiary,wouldmergewithandintoInvestorsBancorp. Afterthemergerof GCFintoInvestorsBancorp,InvestorsBancorpwillissueanumberof sharesof commonstocktoInvestorsMHCequalinvaluetotheproformamarketvalueof GatewayMHCanditssubsidiaries,asdeterminedbyanindependentappraiser,forthe benefitof GatewayMHC’sdepositors.Investorsisinsatisfactorycondition,andtheasset quality,earnings,andliquidityof InvestorsBankandGCFBankweighinfavorof approval.Basedonitsreviewof therecord,theBoardfindsthattheorganizationshavesufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Investors,InvestorsBank,Gateway,andGCFBank,includingassessmentsof their management,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswith theorganizationsandtheirrecordsof compliancewithapplicablebankingandantimoney-launderinglaws.TheBoardalsohasconsideredInvestors’plansforimplementing theproposal. InvestorsandInvestorsBankareconsideredtobemanagedwell.Investors’existingriskmanagementprogramanditsdirectorateandseniormanagementweighinfavorof approval.Thedirectorsandseniorexecutiveofficersof Investorshavesubstantialknowledgeandexperienceinthebankingandfinancialservicessectors.13Therewillbeno changesintheseniormanagementof Investorsfollowingconsummationof theproposed transaction. OnDecember2,2013,theBoardapprovedInvestorsMHC’sproposaltoacquiretwoother insureddepositoryinstitutionsintheNewJerseyandNewYorkmarkets.Also,in2012, Investorssuccessfullyintegratedthebankingoperationsof twoinsureddepositoryinstitutionslocatedintheNewYork,NewYork,marketintoitsoperations.Investorsisdevoting significantfinancialandotherresourcestoaddressallaspectsof thepost-acquisition integrationprocessforthisproposal.Investorswouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization.Inaddition,Investors’managementhastheexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner,andInvestorsisproposingtointegrateGCFBank’s existingmanagementandpersonnelinamannerthataugmentsInvestorsBank’s management. 13 Onconsummation,Investors’boardofdirectorswillincludethreeadditionaldirectorsfromGCF’scurrent boardofdirectors.Inaddition,InvestorsBankwillformanadvisoryboardconsistingofallofthecurrent GCFBankdirectorsthatwilladviseInvestorsBankontheGCFBankmarketareas,depositandlending activities,andcustomerrelationships.

LegalDevelopments:FourthQuarter,2013 103 Investors’integrationrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsweighinfavorof approval.Basedonallthefactsof record,the Boardhasconcludedthatconsiderationsrelatingtothefinancialandmanagerialresources andfutureprospectsof theorganizationsinvolvedintheproposalonbalanceweighin favorof approval,asdotheothersupervisoryfactors. Recordsof PerformanceundertheCRAandFairLendingLaws TheCRA14requiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeinstitutions’safeandsoundoperation.15TheCRArequiresthe appropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepository institution’srecordof meetingtheconvenienceandneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.16 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof InvestorsBankandGCFBank,datareportedbyInvestorsBankand GCFBankundertheHomeMortgageDisclosureAct(“HMDA”),17otherinformation providedbyInvestors,confidentialsupervisoryinformation,andthepubliccomment receivedontheproposal.Thecommenterobjectedtotheproposalonthebasisof the mortgagelendingrecordsof InvestorsBankandGCFBankasreflectedin2011HMDA data. A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitution inlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.18TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.19Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor. CRAPerformanceof InvestorsBank.InvestorsBankwasassigneda“satisfactory”ratingat itsmostrecentCRAperformanceevaluationbytheFDIC,inAugust2011(“Investors Evaluation”).ExaminersconcludedthatInvestorsBankdemonstratedanadequateresponsivenesstothecreditneedsof itsassessmentareas.20InvestorsBankreceived“highsatisfac- 14 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 15 12U.S.C.§2901(b). 16 12U.S.C.§2903. 17 12U.S.C.§2801etseq. 18 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 19 12U.S.C.§2906. 20 ExaminersputthemostweightonInvestorsBank’s1-4familylendingperformanceintheNewYork/NewJerseyMultistateassessmentareabecauseofInvestorsBank’ssignificantpresenceinthatarea.

104 FederalReserveBulletin|February2014 tory”ratingsontheLendingTest,theInvestmentTest,andtheServiceTest.21TheFDIC assignedInvestorsBankaratingof “highsatisfactory”fortheLendingTest,notingthat thebank’slendingactivitywasgood.ExaminersfoundthatInvestorsBank’sgeographicdistributionof loanswasadequate,emphasizingthebank’sconcentrationwithin theNewYork/NewJerseyMultistateareaandinresidentialrealestatelending.Examiners alsodeterminedthatInvestorsBankhadagoodrecordof lendinginsideitsassessment areasbynumberanddollaramountof loans.ExaminersfoundthatInvestorsBank’scommunitydevelopmentlendingperformancewasexcellent.ExaminersnotedthatInvestors Bankwasaleaderinmakingcommunitydevelopmentloans,originating32development loanstotaling$104.5millionfortheperiodfromJune2008throughAugust2011.Furthermore,examinershighlightedInvestorsBank’sissuanceof communitydevelopmentloansin theNewYork/NewJerseyMultistateMetropolitanassessmentarea,whichhadthegreatest weightof allareasintheanalysis.ExaminersalsonotedthatInvestorsBankengagedin innovativelending,wherethebankoffereddown-paymentassistanceforgivableloansand down-paymentassistancegrantsbelowmarketinterestrate,withoutclosingcostsandwith extendedloanterms. ConcerningtheInvestmentTest,examinershighlightedInvestorsBank’ssignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrantsinitsassessmentareas.Inparticular,examinershighlightedInvestorsBank’spurchaseof mortgage-backedsecurities thatconsistedof underlyingmortgageloansoriginatedtoLMIborrowers,aswellasan equityinvestmentbyInvestorsBanktoestablishtheInvestorsBankCharitableFoundation,whichsupportscharitablecausesandcommunitydevelopmentactivitiesthrough grantsanddonationstocultural,educational,andsocialserviceorganizations. FortheServiceTest,examinersnotedretailbankingserviceswereaccessibletoessentially allsegmentsof InvestorsBank’sassessmentareas,includingLMIgeographies.Examiners furtheremphasizedthatInvestorsBankprovidedarelativelyhighlevelof community developmentservicesthatwereresponsivetoavarietyof communitydevelopmentneeds. CRAPerformanceof GCFBank.TheOfficeof theComptrollerof theCurrency(“OCC”) assignedGCFBankanoverallCRAratingof “satisfactory”withratingsof “satisfactory” fortheLendingTestand“satisfactory”fortheCommunityDevelopmentTestatitsmost recentCRAexaminationonJanuary2,2013.22WithrespecttotheLendingTest,examinersnotedthatthebank’sloan-to-depositratiowasreasonable,andamajorityof home mortgageloans,GCFBank’sprimaryloanproduct,weremadewithinitsassessmentarea. TheexaminersconcludedthatGCFBankhadreasonablepenetrationamongborrowersof differentincomelevels.Becausetherewerenolow-incometractswithintheassessmentarea andonlysixmoderate-incometracts,geographicaldistributionof homemortgageloans wasnotheavilyweightedbytheexaminers.Theexaminersdidnote,however,thattheydid notdetectanyconspicuousorunexplainedgapsinthebank’slendingpatterns. ConcerningtheCommunityDevelopmentTest,examinersfoundthatGCFBank’slevelof communitydevelopmentactivitieswasadequategivenitssize,capacity,andthecommunity developmentneedsandopportunitiesof itsassessmentareas.Examinersnotedthat,during theevaluationperiod,GCFBankprovided$630,000incommunitydevelopmentloans, donated$13,651tocommunitydevelopmentorganizations,andpurchased$2.4millionin 21 TheevaluationperiodfortheLendingTestintheInvestorsEvaluationwasJanuary1,2009toJune30,2011, exceptforcommunitydevelopmentloans,forwhichtheevaluationperiodwasfromJune23,2008through August9,2011.TheevaluationperiodfortheInvestmentandServiceTestswasfromJune23,2008through August9,2011. 22 TheevaluationperiodswerefromJanuary1,2010throughDecember31,2011fortheLendingTestandfrom November23,2009throughJanuary2,2013fortheCommunityDevelopmentTest.

LegalDevelopments:FourthQuarter,2013 105 CRA-qualifiedinvestmentstohelpmeetthecommunitydevelopmentneedsof itsassessmentarea.Inaddition,examinersfoundthatGCFBankpersonnelprovidedleadership and/orfinancialexpertisetofivecommunitydevelopmentorganizationsservingGCF Bank’sassessmentareas. InvestorsBank’sEffortsSincethe2011CRAEvaluation.AccordingtoInvestors,sincethe InvestorsEvaluation,InvestorsBankhasincreaseditsinvestmentinCRA-qualified FNMAMortgageBackedSecurities,servingthecreditneedsof LMIborrowerswithinits assessmentareas.InvestorsBankcurrentlyplanstoinvest1percentof itsassetsinqualified communitydevelopmentinvestmentsandgrantsandhasincreaseditspercentageof assets investedfrom$57million(0.59percentof itsassets)asof March31,2011,to$132million (1.04percentof itsassets)asof February28,2013.23Inaddition,Investorsstatedthat,in 2012,InvestorsBankprovided186smallbusinessloanstotalingalmost$54millioninits assessmentareas.Investorsalsoreportedthat,in2012,InvestorsBankprovided152communitydevelopmentloanstotalingover$435millioninitsassessmentareas.Moreover,the FDICreviewedInvestorsBank’sCRAperformanceinitsreviewof therelatedBank MergerActapplicationandfoundnoinconsistencieswiththepurposesof theCRA. B.FairLendingRecord,HMDAAnalysis,andPublicCommentontheApplication TheBoardhasalsoconsideredtherecordsof InvestorsBankandGCFBankincomplying withfairlendingandotherconsumerprotectionlaws.Thisincludesareviewof theirperformanceasdetailedintheInvestors,Gateway,andGCFBankEvaluations.Thisalso includesanevaluationof InvestorsBank’sfairlendingpoliciesandproceduresandconsiderationof otheragencies’viewsonInvestorsBank’srecordof performanceunderfairlendinglaws.TheBoardalsohastakenintoaccountthecommentontheapplication. InvestorsBank’sFairLendingProgram.TheBoardconsideredinformationaboutInvestors Bank’scomplianceandrisk-managementsystemsandthestepsithastakentoensurecompliancewithfairlendinglaws.InvestorsBankhasinstitutedpoliciesandprocedurestohelp ensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.Givenitsrecentgrowththroughacquisitions,InvestorsBankhasrecognizedtheneed toensurethatitspoliciesandprocedureskeeppacetoensurecontinuedeffectivecompliance,andithasincreaseditscompliancestaff sinceJanuary2013fromtwotofivepeople, whichincludeaDirectorof Compliance,twoComplianceOfficers,andtwoCompliance Analysts. InvestorsBankrecentlyunderwentafairlendingriskassessmenttoanalyzepotentialvulnerabilitiesinloanprocessesandcontrols.InvestorsBank’slegalandcompliancerisk-managementprogramincludes(1)procedurestoevaluatenewlawsandregulationstodetermineapplicabilitytoInvestors’mortgageoperations,(2)ongoingfairlendingtrainingfor lending-relatedpersonnel,(3)consumercompliancetrainingfortheBoardof Directors afterchangesinlaworinInvestorsBank’sproductline,(4)compliancereviewsforallfair lendingcomplaints,(5)asecondreviewandsecondsignatureforallloanapplicationsinitiallyrecommendedfordenial,and(6)aChief LendingOfficerreviewandBoardof Directorsratificationof anyexceptionstotheloanpolicyguidelines.InvestorsBank’srisk-managementsystemsandpoliciesandproceduresforassuringcompliancewithfairlending lawswillbeimplementedatthecombinedorganization. HMDAAnalysisandPublicCommentontheApplication.Thecommentercited2011 HMDAdataandallegedthatInvestorsBankmadefewerconventionalhomepurchase 23 InvestorsrepresentsthatInvestorsBankhasinvestedover1percentofitsassetsinCRA-qualifiedFNMA MortgageBackedSecuritieseachquarterfromJune30,2012throughFebruary28,2013.

106 FederalReserveBulletin|February2014 loanstoAfricanAmericanapplicantsthantowhiteapplicantsandfewerrefinanceloansto AfricanAmericanandHispanicapplicantsthantowhiteapplicantsintheNewYorkand LongIslandMetropolitanStatisticalAreas(“MSAs”).Thecommenteralsoassertedthat, intheNewYorkMSA,InvestorsBankdisproportionatelydeniedapplicationsbyHispanic applicantsforconventionalhomepurchaseloansandrefinanceloans.Inaddition,thecommenterallegedthatGCFBankmadefewerconventionalhomepurchase,refinance,and homeimprovementloanstoAfricanAmericanandHispanicapplicantsthantowhite applicantsintheCamden,NewJerseyMSA.s TheBoardhasreviewedHMDAdatafrom2011reportedbyInvestorsBankandGCF Bank,themostrecentpubliclyavailabledata.Inresponsetothecomment,theBoardanalyzeddatarelatedtoallHMDA-reportableloanstodevelopaviewof overalllendingpatterns,aswellasthesubsetof thatdatarelatedspecificallytoconventionalhomepurchase andrefinanceloans,whichwerethesubjectsof thepubliccommentreceivedontheproposal.Withinthosedatasets,theBoardfocuseditsreviewondatarelatedtoloansmadeor deniedtoborrowersof theracesandethnicitieshighlightedbythepubliccomment,i.e., AfricanAmericansandHispanics. WithrespecttoInvestorsBankandGCFBank,theBoardconfirmedthelevelsof conventionalhomepurchaseloansandthedenialdisparityratiosassociatedwithconventional homepurchaseandrefinanceloansnotedbythecommenter. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatedisparitiesinlending andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatensurenotonlysafeandsoundlendingbutalsoequalaccessto creditbycreditworthyapplicantsregardlessof theirraceorethnicity.AlthoughtheHMDA datamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas,HMDAdata alonedonotprovideasufficientbasisonwhichtoconcludewhetherInvestorsBankor GCFBankhaveexcludedordeniedcredittoanygrouponaprohibitedbasis.24 Becauseof thelimitationsof HMDAdata,theBoardalsohasconsideredotherinformation,includingexaminationreportsthatprovideon-siteevaluationsof complianceby InvestorsBankandGCFBankwithfairlendinglawsandregulations.TheBoardalsohas consultedwiththeOCC,theFDIC,andtheConsumerFinancialProtectionBureau (“CFPB”)aboutthisproposal. WithrespecttothespecificHMDAdataonconventionalhomepurchaseandrefinance mortgagescitedbythecommenter,InvestorsprovidedinformationonInvestorsBank’s nondiscriminatoryreasonsforindividuallendingdecisions(i.e.,credithistory,inadequate collateral,anddebt-to-incomeratio).InvestorsalsoprovidedtheBoardwithdetailedinformationonInvestorsBank’straining,marketing,advertising,andunderwritingguidelines reflectingitsstatedcommitmenttothepreventionof prescreening,discouragement,and exclusionof creditapplicationsonaprohibitedbasis. WithrespecttothespecificHMDAdataonconventionalhomepurchaseorhomeimprovementloanscitedbythecommenter,InvestorsprovidedinformationonGCFBank’snon- 24 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)are notavailablefromHMDAdata.

LegalDevelopments:FourthQuarter,2013 107 discriminatoryreasonsforindividuallendingdecisions(i.e.,credithistoryanddebt-toincomeratio). TheBoardalsoconsultedwiththeFDICandtheCFPBwithrespecttoInvestorsBank’s recordof fairlendingperformancesincetheInvestorsEvaluation.TheFDICreported, basedonitsreviewof supervisoryinformation,thatitdidnotfindevidencethatInvestors BankengagedindiscriminatoryconductduringtheperiodbeforewhichtheCFPB assumedjurisdictionoverfederalconsumerfinanciallaws.25TheFDIChasindicatedthat thebank’soperationsandcomplianceprogramwerecompliantwithfairlendingandother consumerprotectionlawsforthetimeperiodreviewedbytheFDIC. C.ConclusiononCRA,FairLending,andHMDAReview TheBoardhasconsideredallof thefactsof record,informationprovidedbyInvestors, confidentialsupervisoryinformation,andthepubliccommentontheproposal.Basedon theBoard’sanalysisof theHMDAdata,itsevaluationof InvestorsBank’sandGCF Bank’smortgagelendingoperationsandcomplianceprograms,itsreviewof examination reports,theCRArecordsof theinstitutionsinvolved,anditsconsultationswiththeOCC, theFDIC,andtheCFPB,theBoardconcludesthattheCRAandfairlendingrecordsof InvestorsBankandGCFBankonbalanceweighinfavorof approval.TheBoardencouragesInvestorsBanktocontinuetoseekopportunitiestoassistinmeetingthecreditneeds of thecommunitiesitserves. OnDecember2,2013,theBoardapprovedInvestors’acquisitionof RomaFinancialCorporation,MHC,RomaFinancialCorporation,RomaBank,andRomAsiaBank(collectively,“Roma”).Inapprovingtheacquisitionof RomabyInvestors,theBoardconditioned itsapprovalbyrequiringtheauditcommitteeof theboardof directorsof InvestorsBancorptoundertakecertainreviewactions.Inthiscase,theBoardbelievesthatitisalso appropriate,inconnectionwiththeacquisitionof Gateway,forInvestorstoenhanceits consumercomplianceprogramandpoliciestoaccountforthesize,complexity,anddiversificationof thebusinesslinesthatwouldresultfromthisacquisitionandtheacquisitionof Roma.Accordingly,asaconditionof itsapproval,theBoardhasdeterminedthattheaudit committeeof theboardof directorsof InvestorsBancorpmustissueawrittenreportto theboardof directorsof InvestorsBancorpthatshallinclude:anassessmentof Investors Bank’sconsumercompliancerisksystems,processes,andprocedures;anassessmentof compliancewithanyreportsorrecommendationsmadebyanystateorfederalagency issuedinthelastfiveyearswithrespecttoconsumercompliance;andrecommendationsfor improvingtheconsumercomplianceriskprogram,if necessary.Thereportshallbeissued totheboardof directorsof InvestorsBancorpnotlaterthanApril1,2014,withcopiesto InvestorsBankseniormanagementandtheBoardof Governors.Compliancewiththis condition,andwiththerecommendationsmadebytheauditcommittee,willbemonitored aspartof thesupervisoryprocess. FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”tothelistof possibleadverseeffectsthattheBoardmustweighagainstany expectedpublicbenefitsinconsideringproposalsundersection4(j)of theBHCAct.26To 25 See12U.S.C.§5481(14). 26 Dodd-FrankAct,§604(e),codifiedat12U.S.C.§1843(j)(2)(A).OtherprovisionsoftheDodd-FrankAct imposeasimilarrequirementthattheBoardconsiderorweightheriskstofinancialstabilityposedbyamerger, acquisition,orexpansionproposalbyafinancialinstitution.Seesections163,173,and604(d)and(f)ofthe Dodd-FrankAct.

108 FederalReserveBulletin|February2014 assessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.27These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,whichareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.28 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theUnitedStates bankingorfinancialsystem.Afterconsummation,Investorswouldhaveapproximately $15.7billioninconsolidatedassets,andbyanyof anumberof alternativemeasuresof firm size,InvestorsBankwouldbethe77thlargestU.S.insureddepositoryorganization.The Boardgenerallypresumesthatamergerthatinvolvesanacquisitionof lessthan$2billion inassets,orresultsinafirmwithlessthan$25billionintotalconsolidatedassets,willnot posesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthe transactionwouldresultinasignificantincreaseininterconnectedness,complexity,crossborderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthis transaction.TheBoard,therefore,concludesthatfinancialstabilityconsiderationsrelating tothisproposalweighinfavorof approval. AdditionalPublicBenefitsof theProposal TheBoardhasalsoconsideredtheextenttowhichtheproposalwouldbenefitthecustomersof InvestorsBankandGCFBank.Amongotherthings,suchbenefitscaninclude merger-relatedcostsavings,improvementsinthequalityof existingproductofferings,and theavailabilityof productsthatwerenotpreviouslyavailabletocustomersof anyof the parties. ThemergerwouldextendthebranchandATMfootprintsof InvestorsBankandGCF BankwithintheNewJerseymarket,allowingcustomersgreatergeographicflexibilityin accessingbankingservices.Theapplicantsalsohaveplanstoadddrive-upATMsandnight depositoriesatallGatewaybranchlocations,therebyofferingcustomers“24-7”accessto certainbankingservices.Loancustomerswillbeabletobenefitfromlargerloan-to-one borrowerlimitswithInvestorsBank’slargercapitalbase. Investorsexpectsthattheproposalwouldresultincostsavingsforthecombinedorganizationbyeliminatingredundantback-officecosts,professionalexpenses,occupancyexpenses, dataprocessingcharges,marketingcosts,andotherredundantexpenses.Investorshas notedthatthesesavingswouldbereinvestedbackintothecurrentoperationsof various projectsof thecombinedorganization. 27 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 28 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

LegalDevelopments:FourthQuarter,2013 109 Investorsalsoexpectsthat,asaresultof themerger,GCFBank’scustomerswouldhave accesstoavarietyof consumerandbusinessservices,someof whicharenotcurrently offeredbyGCFBankduetoitssmallscale,suchasaClientCareCenterandcertain mobileandonlinebankingproducts.Investorsisalsoplanningarobustclientoutreachfor theGCFBankmarkettosupportthetransitionof theclientbaseandidentifyadditional creditanddepositneedsthatarenotcurrentlyavailableinthatmarketfromGCFBank. TheBoardhasdeterminedthattheconductof theproposednonbankingactivitieswithin theframeworkof RegulationY,Boardprecedent,andthisorderarenotlikelytoresultin significantadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interest,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.Onthebasisof theentirerecord,includingthe commitmentsmadeinthiscaseandtheconditionsnotedinthisorder,andforthereasons discussedabove,theBoardbelievesthatthefactorsrelatedtocompetition,financialand managerialresources,convenienceandneeds,andfinancialstabilityweighinfavorof approvalof thiscase.Accordingly,theBoardhasdeterminedthatthebalanceof thepublic benefitsunderthestandardof section4(j)(2)of theBHCActisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalshouldbe,andherebyis,approved.29Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyInvestorswithalltheconditionsimposedinthisorderandthecommitments madetotheBoardinconnectionwiththeapplication,includingreceiptof allrequired regulatoryapprovals.TheBoard’sapprovalalsoissubjecttoalltheconditionssetforthin RegulationY,includingthoseinsections225.7and225.25(c),30andtotheBoard’sauthoritytorequiresuchmodificationorterminationof theactivitiesof abankholdingcompany oranyof itssubsidiariesastheBoardfindsnecessarytoensurecompliancewith,andto preventevasionof,theprovisionsof theBHCActandtheBoard’sregulationsandorders issuedthereunder.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedlaterthanthreemonthsaftertheeffectivedateof thisOrder,unlesssuchperiodisextendedforgoodcausebytheBoardortheFederal ReserveBankof NewYork,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveDecember23,2013. 29 ThepubliccommenterrequestedthattheBoardholdapublichearingontheproposal.TheBoard’sregulations provideforahearingonanoticefiledundersection4oftheBHCActiftherearedisputedissuesofmaterial factthatcannotberesolvedinsomeothermanner.12CFR225.25(a)(2).Underitsrules,theBoardalsomay,in itsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelypresenttheirviews.TheBoardhasconsidered thecommenter’srequestinlightofallthefactsofrecord.IntheBoard’sview,commentershavehadample opportunitytosubmitcommentsontheproposaland,infact,submittedawrittencommentthattheBoardhas consideredinactingontheproposal.Thecommenter’srequestdoesnotidentifydisputedissuesoffactthatare materialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublichearing.Inaddition,therequestdoes notdemonstratewhythewrittencommentdoesnotpresentthecommenter’sviewsadequatelyorwhyahearing otherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoard hasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestfora publichearingontheproposalisdenied. 30 12CFR225.7and225.25(c).

110 FederalReserveBulletin|February2014 Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsTarullo, Stein,andPowell.Abstainingfromthisaction:GovernorRaskin. RobertdeV.Frierson Secretaryof theBoard Orders Issued Under Bank Merger Act First Farmers Bank & Trust Converse, Indiana OrderApprovingtheAcquisitionof Assets,Assumptionof Liabilities,andEstablishmentof Branches FRBOrderNo.2013–8(October4,2013) FirstFarmersBank&Trust(“FirstFarmers”),Converse,Indiana,1astatememberbank, hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsurance Act2(“BankMergerAct”)toacquirecertainassetsandassumecertainliabilitiesof the Bankof Indiana(“Bankof Indiana”),NationalAssociation,Dana,Indiana.Inaddition, FirstFarmershasappliedundersection9of theFederalReserveAct(“FRA”)3toestablish andoperatebranchesatthelocationsof thefouracquiredbranchesof Bankof Indiana.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.5Thetimeforfilingcommentshasexpired.AsrequiredbytheBankMergerAct,a reportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral.TheBoardhasconsideredtheapplicationandallcommentsreceivedinlight of thefactorssetforthintheBankMergerActandtheFRA. FirstFarmersisthe25thlargestinsureddepositoryinstitutioninIndiana,controlling depositsof approximately$778.5million,whichrepresentlessthan1percentof thetotal amountof depositsininsureddepositoryinstitutionsinIndiana(“statedeposits”).6First Farmersproposestoacquireallof Bankof Indiana’sdeposits,whichrepresentlessthan 1percentof statedeposits.Onconsummationof theproposal,FirstFarmerswould becomethe23rdlargestinsureddepositoryinstitutioninIndiana,controllingdepositsof approximately$861.9million,representinglessthan1percentof statedeposits.7 CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.8TheBankMergerActalsoprohibitstheBoardfromapprovinga 1 FirstFarmersisasubsidiaryofFirstFarmersFinancialCorporation(“FFFC”),alsoofConverse,Indiana,a financialholdingcompany. 2 12U.S.C.§1828(c). 3 12U.S.C.§321. 4 BankofIndianabranchestobeacquiredarelocatedat(1)129MapleStreet,Dana,(2)42SouthStateRoad 135,Bargersville,(3)100EastShortStreet,Hamlet,and(4)302KellerAvenue,NorthJudson,allinIndiana. 5 12CFR262.3(b). 6 DataareasofJune30,2012.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks, savingsbanks,andsavingsassociations. 7 AtJune30,2013,BankofIndianacontrolledapproximately$83.4millionindeposits. 8 12U.S.C.§1828(c)(5)(A).

LegalDevelopments:FourthQuarter,2013 111 proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof communitiestobeserved.9 FirstFarmersandBankof IndianacompetedirectlyintheIndianabankingmarketsof StarkeCounty,TerreHaute,andIndianapolis.10TheBoardhasreviewedthecompetitive effectsof theproposalinthosebankingmarketsinlightof allthefactsof record.In particular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthe bankingmarkets,therelativeshareof thetotaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatFirstFarmerswouldcontrol,11theconcentrationlevelsof marketdepositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJBankMergerGuidelines”),12andothercharacteristicsof the markets. IntheTerreHauteandIndianapolisbankingmarkets,consummationof theproposal wouldbeconsistentwithBoardprecedentandwithinthethresholdsintheDOJ BankMergerGuidelines.Onconsummationof theproposal,theTerreHauteandIndianapolisbankingmarketswouldremainunconcentrated,asmeasuredbytheHHI,and numerouscompetitorswouldremaininthebankingmarket.13 IntheStarkeCountybankingmarket,FirstFarmersisthethirdlargestinsureddepository institution,controllingdepositsof approximately$54.3million,whichrepresentapproxi- 9 12U.S.C.§1828(c)(5)(B). 10 TheStarkeCountybankingmarketisdefinedasStarkeCounty,Indiana.TheTerreHautebankingmarketis definedasClay,Vigo,andSullivanCounties;ClintonandHelttownshipsinVermillionCounty;andFlorida, Racoon,andJacksontownshipsinParkeCounty,allinIndiana.TheIndianapolisbankingmarketisdefinedas Boone,Hamilton,Hancock,Hendricks,Johnson,Marion,Morgan,andShelbyCounties,andGreenTownship inMadisonCounty,allinIndiana. 11 Depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryof depositsdataasofJune30,2012,andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsare includedat50percent.TheBoardhaspreviouslyindicatedthatthriftinstitutionshavebecome,orhavethe potentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,the Boardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See, e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin53(1991).NosavingsassociationsoperateintheStarke Countybankingmarket. 12 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionhaveissuedrevisedHorizontalMerger Guidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.PressRelease,DepartmentofJustice(August19,2010),availableat www.justice.gov/opa/pr/2010/August/10-at-938.html. 13 IntheTerreHautebankingmarket,FirstFarmersoperatestheeighthlargestinsureddepositoryinstitution, controllingdepositsofapproximately$31.4million,whichrepresent1.4percentofmarketdeposits.The branchFirstFarmersproposestoacquirecurrentlycontrols$39.2millionindeposits.Afterconsummation, FirstFarmerswouldbecometheseventhlargestinsureddepositoryinstitutioninthemarket,controllingdepositsofapproximately$70.6million,whichrepresent3.0percentofmarketdeposits.TheHHIwouldincreaseby fourpoints,from3298to3302.Onconsummationoftheproposal,ninecompetitorswouldremaininthemarket. IntheIndianapolisbankingmarket,FirstFarmersoperatesthe35thlargestinsureddepositoryinstitution,controllingdepositsofapproximately$31.1million,whichrepresentlessthan1percentofmarketdeposits.The branchFirstFarmersproposestoacquirecurrentlycontrols$38.1millionindeposits.Afterconsummation, FirstFarmerswouldbecomethe30thlargestinsureddepositoryinstitutioninthemarket,controllingdeposits ofapproximately$69.1million,whichrepresentlessthan1percentofmarketdeposits.TheHHIwouldnot increaseinthismarket.Onconsummationoftheproposal,43competitorswouldremaininthemarket.

112 FederalReserveBulletin|February2014 mately21.9percentof marketdeposits.Bankof Indianaisthefifthlargestinsureddepositoryinstitutioninthemarket,controllingdepositsof approximately$14.8million,which representapproximately6percentof marketdeposits.Onconsummationof theproposal, FirstFarmerswouldbecomethesecondlargestdepositoryinstitutionintheStarkeCounty bankingmarket,controllingdepositsof approximately$69.1million,whichwouldrepresent27.9percentof marketdeposits.TheHHIwouldincrease262points,from2170to 2432. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitioninthemarket.14Inthismarket,thereareseveralsuchfactors.Onconsummation,fourotherinsureddepositoryinstitutions,includingthreeinstitutionsthateachcontrolmorethan10percentof themarketdeposits,wouldcontinuetooperateinthemarket, includingthemarket’slargestcompetitor,1stSourceBank,with28.4percentof market deposits. TheBoardalsohasconsideredthefinancialconditionof Bankof Indiana.Bankof Indiana’sfinancialconditionhasdeterioratedinrecentyears.Bankof Indianaispartytoaformalagreementwithitsprimaryfederalsupervisor,theOfficeof theComptrollerof the Currency(“OCC”).15Asaresult,Bankof Indianamaybeexertinglesscompetitivepressurethanitsmarketsharewouldindicate,andconsummationof thistransactionwouldnot substantiallylessencompetitionintheStarkeCountybankingmarket. TheDOJconductedareviewof thepotentialcompetitiveeffectsof theproposalandhas advisedtheBoardthatconsummationwouldnotbelikelytohaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheStarkeCounty,TerreHaute,orIndianapolisbankingmarkets,orinany otherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitive considerationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryFactors InreviewingthisproposalundertheBankMergerAct,theBoardhasconsideredthefinancialandmanagerialresourcesandfutureprospectsof theinstitutionsinvolvedandthe organizations’nonbankingoperations.Initsevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.The Boardevaluatesthefinancialconditionof theproformaorganization,includingitscapital position,assetquality,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecost of theproposalandtheproposedintegrationof theoperationsof theinstitutions.In assessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobe especiallyimportant. 14 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreaseinandresultinglevelofconcentrationinabankingmarket.SeeNationsBankCorp.,84FederalReserveBulletin129(1998). 15 IndianaBankCorp.,theparentbankholdingcompanyofBankofIndiana,hasfiledforchapter11bankruptcyintheUnitedStatesBankruptcyCourtfortheSouthernDistrictofIndiana.OnMay30,2013,thecourt approvedthesaleofcertainassetsandliabilitiesofBankofIndianatoFirstFarmers.

LegalDevelopments:FourthQuarter,2013 113 FirstFarmersiswellcapitalizedandwouldremainsoonconsummationof theproposal. FFFCwillincurasmallamountof debtthatwillbeinjectedintotheresultingbankasnew capital.TheBoardhasconcludedthatFFFChastheresourcestoensuretimelyrepayment of thedebt.Futureprospectsareconsideredconsistentwithapproval.Basedonitsreview of therecord,theBoardfindsthatFirstFarmershassufficientfinancialresourcestoeffect theproposal. TheBoardalsohasconsideredthemanagerialresourcesof FirstFarmersandhasreviewed theexaminationrecordsof FirstFarmers,includingassessmentsof itsmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisory experiencesandFirstFarmers’recordof compliancewithapplicablebankingandantimoney-launderinglaws.TheBoardalsohasconsideredFirstFarmers’plansforimplementingtheproposal.FirstFarmersisconsideredtobewellmanaged,anditsboardof directorsandseniormanagementhavesignificantbankingexperience.FirstFarmerswould operatetheacquiredbranchesunderitsexistingpoliciesandprocedures,whichareconsideredtobeadequate.Inaddition,theBoardhasconsideredtheintegrationof FirstFarmers’2012acquisitionof asimilarlysizedorganizationwiththeacquisitionof problem assetsinIllinois.Examinersnotedthatmanagementwascapableof addressingthe increasedproblemassetsinatimelyandeffectivemanner. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof FirstFarmersareconsistent withapproval,asaretheothersupervisoryfactors. ConvenienceandNeedsConsiderations TheBankMergerActalsorequirestheBoardtoconsidertheconvenienceandneedsof the communitiestobeservedandtotakeintoaccounttherecordsof therelevantdepository institutionsundertheCommunityReinvestmentAct(“CRA”).16TheCRArequiresthe federalfinancialsupervisoryagenciestoencouragefinancialinstitutionstomeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeinto accountaninstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankacquisition proposals.Accordingly,theBoardhasconsideredtheconvenienceandneedsfactorandthe CRAperformancerecordsof FirstFarmersandBankof Indianainlightof allthefactsof record. AsprovidedintheCRA,theBoardhasevaluatedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorsof theCRAperformancerecords of therelevantinsureddepositoryinstitutions.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailedon-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.17 FirstFarmersreceivedanoverallratingof “satisfactory”atitsmostrecentCRAperformanceexaminationbytheFederalReserveBankof Chicago,asof February2012.Examinersdeterminedthatthebank’sloan-to-depositratiowasreasonablegiventhebank’ssize, financialcondition,andassessmentareacreditneeds.Inaddition,thegeographicdistribu- 16 12U.S.C.§2901etseq. 17 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642at 11,665(2010).

114 FederalReserveBulletin|February2014 tionof loansreflectedreasonabledispersionthroughouttheassessmentarea,andthedistributionof loansrepresentsreasonablepenetrationamongborrowersof differentincome levelsandbusinessesof differentsizes.Examinersfurtherdeterminedthatthebankdemonstratedadequateresponsivenesstothecommunitydevelopmentneedsof itsassessment area.Bankof Indianareceivedanoverallratingof “satisfactory”atitsmostrecentCRA performanceexaminationbytheOCC,asof November2011.FirstFarmershasrepresentedthatitwouldimplementitspoliciesattheacquiredbranches.Thisproposalwould resultincustomerscontinuingtohaveaccesstobankingservicesintheirimmediate communities. Basedonallthefactsof recordandforthereasonsdiscussedabove,theBoardconcludes thatconsiderationsrelatingtoconvenienceandneeds,includingtheCRAperformance recordsof therelevantdepositoryinstitutions,areconsistentwithapprovalof theproposal. FinancialStability TheBoardhasconsideredinformationrelevanttorisktothestabilityof theUnitedStates bankingorfinancialsystem.TheBoardgenerallypresumesthatamergerthatinvolvesan acquisitionof lessthan$2billioninassets,orresultsinafirmwithlessthan$25billionin totalconsolidatedassets,willnotposesignificantriskstothefinancialstabilityof the UnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreasein interconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthiscase.TheBoard,therefore,concludesthatfinancialstabilityconsiderationsinthisproposalareconsistentwithapproval. Establishmentof Branches Asnoted,FirstFarmershasappliedundersection9of theFRAtoestablishbranchesat thecurrentlocationsof theBankof Indiana,andtheBoardhasconsideredthefactorsitis requiredtoconsiderwhenreviewinganapplicationunderthatsection.18Specifically,the BoardhasconsideredFirstFarmers’financialcondition,management,capital,actionsin meetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance, andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfinds thosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyFirstFarmerswithallthecommitmentsmadeinconnectionwiththisproposalandtheconditionssetforthinthisorder.Thecommitmentsandconditionsare deemedtobeconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Acquisitionof thebranchesmaynotbeconsummatedbeforethefifteenthcalendarday aftertheeffectivedateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederal ReserveBankof Chicago,actingpursuanttodelegatedauthority. 18 12U.S.C.§322;12CFR208.6.

LegalDevelopments:FourthQuarter,2013 115 Byorderof theBoardof Governors,effectiveOctober4,2013. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsTarullo, Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Green Dot Bank Provo, Utah OrderApprovingtheAcquisitionof AssetsandAssumptionof Liabilities FRBOrderNo.2013–10(November22,2013) GreenDotBankDBABonnevilleBank,Provo,Utah,astatememberbank,hasapplied undersection18(c)of theFederalDepositInsuranceAct1(“BankMergerAct”)topurchasecertainassetsandassumecertaindepositliabilitiesof GECapitalRetailBank (“GECRB”),Draper,Utah,afederalsavingsbank. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.2Thetimeforfilingcommentshasexpired.AsrequiredbytheBankMergerAct,a reportonthecompetitiveeffectsof themergerwasalsorequestedfromtheUnitedStates AttorneyGeneralandtheFederalDepositInsuranceCorporation(“FDIC”).TheBoard hasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthin theBankMergerAct. GreenDotBank’sprimarybusinessactivityistheissuanceof general-purposereloadable prepaiddebitcards(“GPRcards”)andprovisionof settlementservicesforprepaiddebit cards.3GreenDotBankisasubsidiaryof GreenDotCorporation(“GreenDot”), Pasadena,California,afinancialholdingcompanythatprovidesservicesrelatedtotheprovisionof GPRcards.GreenDotBankproposestoacquireassetsandassumeliabilities relatedtoGPRcardsissuedbyGECRB,soldatU.S.-basedWal-Martstoresandonline throughawebsitefortheprepaiddebitcards,andservicedbyGreenDotpursuanttoan agreementamongthepartiesinitiallyenteredintoin2006(“Wal-MartCards”).4Asaresult of theproposedtransaction,GreenDotBankwouldreplaceGECRBastheissuerof Wal- MartCards.GreenDotwouldprovidethesameservicestoGreenDotBankthatitcurrentlyprovidestoGECRBforthecards. GreenDotBankisthe37thlargestinsureddepositoryinstitutioninUtah,controlling depositsof approximately$183million,whichrepresentlessthan1percentof thetotal amountof depositsininsureddepositoryinstitutionsinUtah(“statedeposits”).5Green DotBankproposestoacquireapproximately$276millionintotaldepositsfromGECRB, representinglessthan1percentof statedeposits.Onconsummationof theproposal,Green DotBankwouldbecomethe30thlargestinsureddepositoryinstitutioninUtah,controllingdepositsof approximately$459million,representinglessthan1percentof state deposits. 1 12U.S.C.§1828(c). 2 12CFR262.3(b). 3 GPRcardsissuedbyGreenDotBankarenetworkbrandedandlinkedtoFDIC-insuredaccounts. 4 AlargemajorityofGreenDot’sGPRcardsaresoldthroughWal-Mart.GreenDot’spercentageofrevenue derivedfromsalesthroughWal-Martstoreswas64.1percentfor2012. 5 DepositdataareasofJune30,2012,andreflectmergeractivitythroughAugust1,2013,includingGreenDot Bank’sacquisitionofapproximately$150millionofdepositliabilitiesofSynovusBankinNovember2012.

116 FederalReserveBulletin|February2014 CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.6TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof communitiestobeserved.7 GreenDotBankandGECRBdonotoperatebranchesinanycommongeographicbankingmarket.8ThistransactionwouldnotraiseconcernsregardingcompetitionamongGPR cardissuers,whosemarketforcompetitionisnationalinscope.9Moreover,GreenDot alreadyservicesthecardsthatarethesubjectof thistransaction.Basedonallthefactsof record,theBoardhasconcludedthatconsummationof theproposalwouldhavenosignificantadverseeffectsoncompetitionorontheconcentrationof bankingresourcesinany relevantbankingmarketandthatcompetitivefactorsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryFactors InreviewingthisproposalundertheBankMergerAct,theBoardhasconsideredthefinancialandmanagerialresourcesandfutureprospectsof theinstitutionsinvolvedandcertain othersupervisoryfactors.Initsevaluation,theBoardconsidersavarietyof information, includingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof theproformaorganization,includingitscapitalposition, assetquality,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostof the proposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespecially important. GreenDotBankiswellcapitalizedandwouldremainsoonconsummationof theproposal.Asnoted,theproposedtransactionisstructuredasanacquisitionof assetsand assumptionof liabilities.GreenDotBankhasrepresentedthatthetransactiondoesnot requireGreenDotorGreenDotBanktoprovidefundstoGECRB.Basedonitsreviewof therecord,theBoardfindsthattheorganizationhassufficientfinancialresourcestoeffect theproposal. TheBoardalsohasconsideredthemanagerialresourcesof GreenDotBankandreviewed theexaminationrecordof GreenDotBank,includingassessmentsof itsmanagement, risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandGreenDotBank’srecordof compliancewithapplicablebanking andanti-money-launderinglaws.GreenDotBankisconsideredtobewellmanaged,and itsboardof directorsandseniormanagementhavesignificantexperienceintheprepaid cardindustryandincommunitybanking.TheBoardalsohasconsideredGreenDot 6 12U.S.C.§1828(c)(5)(A). 7 12U.S.C.§1828(c)(5)(B). 8 GreenDotBankoperatesonebranchintheProvo-Orem,UTbankingmarket,whileGECRBoperatesone branchineachoftheSaltLakeCity,UTandMetroNewYorkCity,NY-NJ-CT-PAbankingmarkets. 9 TheBoardestimatesthatanationalGPRcardmarketwouldbeconsideredmoderatelyconcentratedandthat thetransactionwouldcauseonlyasmallchangeinmarketconcentration.

LegalDevelopments:FourthQuarter,2013 117 Bank’ssuccessfulimplementationof asimilarproposal10anditsplansforimplementing thisproposal,includingitsplansformanagingtheintegrationof theacquiredassetsand assumedliabilitiesintothebank. Inaddition,theBoardhasconsideredthefutureprospectsof GreenDotBankinlightof thefinancialandmanagerialresourcesandthebank’sbusinessplan.Asnoted,GreenDot Bank’sbusinessactivityisfocusednarrowlyontheissuanceof GPRcards.Abusinessplan thatfocusesonanarrowbusinessactivityanddependsonalimitednumberof keybusiness partnerscarriessignificantlygreaterrisksthanabusinessplanthatemploysbroaddiversificationof activitiesandcounterparties.AsindicatedinitsorderapprovingGreenDot’s acquisitionof GreenDotBank,theBoardexpectsbankingorganizationswithanarrow focustoaddresstheseincreasedriskswithfinancialresources,managerialsystems,and expertisecommensuratewiththatadditionallevelof risk.11TheriskmitigantstheBoard reliedonwhenitapprovedGreenDot’sacquisitionof GreenDotBankwouldcontinueto beinplaceaftertheproposedtransaction,andtheproposalwouldnotappeartoadversely affectthefutureprospectsof GreenDotBank.GreenDotBankwouldcontinuetomaintainatier1leverageratioof atleast15percent,whichisappropriateinlightof thenarrow focusof GreenDotBank’sactivity.GreenDotBankhascommittedthatdepositsassociatedwithgeneralpurposereloadablecards,includingdepositsassociatedwithWal-Mart Cards,wouldcontinuetobebalancedwithequallevelsof cashorcashequivalents.12Green DotBankalsohascommittedtorefrainfrompayingdividendsforacertainperiodof time. Moreover,theBoardhasconsideredGreenDot’sandGreenDotBank’sriskmanagement systemsandtheBoard’ssupervisoryexperiences,includingexaminationsconductedat GreenDotandGreenDotBankandcommitmentsmadebyGreenDotandGreenDot Bankdesignedtomaintainenhancedaudit,governance,andriskmanagementprograms regardingitscardbusiness.13 Inconsideringthesefactors,theBoardhasalsoconsultedwiththeFDICregardingthe proposal.Basedonallthefactsof record,includingsupervisoryandexaminationinformationfromvariousU.S.bankingsupervisors,publiclyreportedandotherfinancialinformation,andinformationandcommitmentsprovidedbyGreenDotBank,theBoardhas concludedthatconsiderationsrelatingtothefinancialandmanagerialresourcesandfuture prospectsinvolvedintheproposalareconsistentwithapproval,asaretheothersupervisory factors. ConvenienceandNeedsConsiderations TheBankMergerActalsorequirestheBoardtoconsidertheconvenienceandneedsof the communitiestobeservedandtotakeintoaccounttherecordsof therelevantdepository institutionsundertheCommunityReinvestmentAct(“CRA”).14TheCRArequiresthe federalfinancialsupervisoryagenciestoencouragefinancialinstitutionstomeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeinto accountaninstitution’srecordof meetingthecreditneedsof itsentirecommunity,includ- 10 TheFederalReserveBankofSanFrancisco,pursuanttoauthoritydelegatedbytheBoard,approvedGreen DotBank’sproposaltoacquirecertainassetsandassumecertainliabilitiesofSynovusBank,Columbus,Georgia,onOctober4,2012.ThetransactionwascompletedinNovember2012. 11 GreenDotCorporation,(orderdatedNov.23,2011),98FederalReserveBulletin29,32(4thQuar.2011). 12 ThefullamountofrequisitecashorcashequivalentswillbeheldintheaccountofGreenDotBank. 13 GreenDotBankalsohascommittedtomaintainastrongauditprogramandstrongcorporategovernanceand toobtainthepriorregulatoryapprovaloftheFederalReserveforanyproposedmajordeviationormaterial changefromthebusinessplansubmittedwiththisproposalbeforeconsummationofthechange. 14 12U.S.C.§2901etseq.

118 FederalReserveBulletin|February2014 inglow-andmoderate-incomeneighborhoods,inevaluatingbankacquisitionproposals. Accordingly,theBoardhasconsideredtheconvenienceandneedsfactorandtheCRAperformancerecordsof GreenDotBankandGECRBinlightof allthefactsof record. AsprovidedintheCRA,theBoardhasevaluatedtheconvenienceandneedsfactorinlight of theevaluationsbytheappropriatefederalsupervisorsof theCRAperformancerecords of therelevantinsureddepositoryinstitutions.Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocess becauseitrepresentsadetailedon-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.15 GreenDotBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFederalReserveBankof SanFrancisco,asof June4,2012, whichwasconductedusingtheInteragencySmallInstitutionExaminationProcedures.On March26,2013,theBoardapprovedthebank’srequesttooperateunderaCRAStrategic Planfortheperiodof 2012through2014.16GECRBreceivedanoverallratingof “Outstanding”atitsmostrecentCRAperformanceexaminationbytheOfficeof theComptrollerof theCurrency,asof December31,2012.Afterconsummationof theproposal,Green DotBankwouldcontinuetooperateunderitscurrentCRApolicies. CardholderswhoseWal-MartCardaccountsareacquiredfromGECRBwouldhavecontinuousaccesstotheiraccountfundsthroughoutthetransitiontoGreenDotBank.17 GreenDotBankwouldexpandthefeaturesavailabletoWal-MartCardcardholdersnot currentlysupportedbyGECRB.Inparticular,GreenDotBankwouldprovideatraditionalbillpaymentfeature,inwhichthecardholdercouldpaybillsviaautomatedclearinghousefundtransfers,andacheck-writingfeature,inwhichthecardholdercouldelectronicallycompletechecksthatGreenDotBankwouldprintandmailtoanypayeedesignated bythecardholder.18GreenDotBankisdevelopingadditionalfeaturesfortheWal-Mart Cards,includingabudgetmanagementfeaturethatwouldallowcardholderstosetaside fundsloadedontotheWal-MartCard. Basedonallthefactsof recordandforthereasonsdiscussedabove,theBoardconcludes thatconsiderationsrelatingtoconvenienceandneeds,includingtheCRAperformance recordsof therelevantdepositoryinstitutions,areconsistentwithapprovalof theproposal. FinancialStability TheBoardhasconsideredinformationrelevanttorisktothestabilityof theUnitedStates bankingorfinancialsystem.TheBoardgenerallypresumesthatamergerthatinvolvesan acquisitionof lessthan$2billioninassets,orresultsinafirmwithlessthan$25billionin totalconsolidatedassets,willnotposesignificantriskstothefinancialstabilityof the UnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreasein interconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchaddi- 15 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642at 11,665(2010). 16 Under12CFR228.27,depositoryinstitutionsmaychoosetobeevaluatedunderastrategicplanforCRApurposesasanalternativetothetraditionalandmorecomprehensiveCRAevaluation.Thestrategicplansetsmeasurablegoalsforthedepositoryinstitution’sperformance,subjecttoapprovalbyitsprimarysupervisorpriorto thedepositoryinstitution’sCRAevaluation. 17 GreenDotBankwillprovideWal-MartCardcardholderswithnoticesanddisclosuresexplainingthechanges totheircardagreementsandissuingbank.GreenDotwillprovideafullrefundtocardholderswhoelectnotto agreetoGreenDotBankasthecardissuer. 18 GreenDotBankstatesthatthecheck-writingfeatureisespeciallyhelpfulforpaymentstopayeesthatpreferto receivepaperchecks,suchaspaymentsforrent.

LegalDevelopments:FourthQuarter,2013 119 tionalriskfactorsarenotpresentinthiscase.TheBoard,therefore,concludesthatfinancialstabilityconsiderationsinthisproposalareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerAct.Approvalof theapplicationisspecificallyconditionedoncomplianceby GreenDotBankwithallthecommitmentsmadeinconnectionwiththisproposalandthe conditionssetforthinthisorder.Thecommitmentsandconditionsaredeemedtobe conditionsimposedinwritingbytheBoardand,assuch,maybeenforcedinproceedings underapplicablelaw. Thetransactionmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffectivedateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder, unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederalReserveBank of SanFrancisco,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveNovember22,2013. Votingforthisaction:ChairmanBernanke,ViceChairYellen,andGovernorsTarullo, Raskin,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Orders Issued Under International Banking Act Banco BPI, S.A. Porto, Portugal OrderApprovingEstablishmentof RepresentativeOffices FRBOrderNo.2013–9(November18,2013) BancoBPI,S.A.(“Bank”),Porto,Portugal,aforeignbankwithinthemeaningof theInternationalBankingAct(“IBA”),hasappliedundersection10(a)of theIBA1toestablishrepresentativeofficesinNewark,NewJersey,andNewBedford,Massachusetts.TheForeign BankSupervisionEnhancementActof 1991,whichamendedtheIBA,providesthataforeignbankmustobtaintheapprovalof theBoardtoestablisharepresentativeofficeinthe UnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytosubmitcomments,hasbeenpublishedinanewspaperof generalcirculationinNewark,NewJersey (NewJerseyStarLedger,August22,2012),andinNewBedford,Massachusetts(NewBedfordStandard-Times,August21,2012).Thetimeforfilingcommentshasexpired,andall commentsreceivedhavebeenconsidered. Bank,withtotalconsolidatedassetsof approximately$56.2billion,isthefourthlargest bankinPortugal.2Bankengagesinarangeof commercialandretailbankingactivitiesin 1 12U.S.C.§3107(a). 2 DataareasofJune30,2013.

120 FederalReserveBulletin|February2014 Portugalandinternationally.OutsidePortugal,BankoperatesbranchesinSpain,France, Macau,andtheCaymanIslands,andrepresentativeofficesinCanada,Venezuela,Germany,France,theUnitedKingdom,Switzerland,andSouthAfrica.Bankoperatesbanks intheCaymanIslands,Angola,andMozambique.Bankalsooperatesasubsidiarybankin PortugalthatoperatesbranchesinSpainandSwitzerland.IntheUnitedStates,Bankoperatesamoneyremittersubsidiary.3 Bank’slargestshareholder,CaixaBank,S.A.(“CaixaBank”),asubsidiaryof CajadeAhorrosyPensionesdeBarcelona(“LaCaixa”),bothof Barcelona,Spain,ownsapproximately 46percentof Bank.LaCaixaisanintegratedfinancialgroupwithbanking,insurance, pension,andinvestmentfundactivities,aswellasholdingsininternationalbanks.Outside Spain,CaixaBankhasbranchesinMorocco,Poland,andRomania.CaixaBankoperates fiverepresentativeofficesinEurope,threeinAsia,fourintheMiddleEast,andonein SouthAmerica.CaixaBankhasnooperationsintheUnitedStates.4Bank’ssecondlargest shareholder,PrestaçãodeServiços,S.A.(“SantoroFinance”),asubsidiaryof Santoro FinancialHoldings,SGPS,bothof Lisbon,Portugal,ownsapproximately19.5percentof Bank.SantoroFinanceprovidesconsultingservices,includingeconomicconsulting, accounting,marketing,advertising,andbusinessmanagement.AllianzEurope,Amsterdam,TheNetherlands,andCompanhiadeSegurosAllianzPortugal,Lisbon,Portugal, subsidiariesof AllianzSE,Munich,Germany,collectivelyownapproximately8.8percent of Bank.AllianzSEisaninternationalfinancialservicescompanythatoffersarangeof insuranceandassetmanagementproductsandservices.Noothershareholderowns5percentormoreof Bank’sshares. TheproposedrepresentativeofficeswouldserveasliaisonsbetweenBankanditscustomers.Theproposedrepresentativeofficeswouldalsoconductresearchandassemblecredit information,solicitbankingbusinessforBank,performback-officefunctions,provide informationtocustomers,andperformloanservicingfunctions.5 InactingonanapplicationundertheIBAandRegulationKbyaforeignbanktoestablish arepresentativeoffice,theBoardmustconsiderwhether(1)theforeignbankhasfurnished totheBoardtheinformationitneedstoassesstheapplicationadequately,(2)theforeign bankandanyforeignbankparentengagedirectlyinthebusinessof bankingoutsideof the UnitedStates,and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.6TheBoard 3 TheBankwillclosethemoneyremitteruponcommencementofbusinessattheBank’srepresentativeoffices. 4 CaixaBankownsapproximately16.4percentofthesharecapitaloftheBankofEastAsiaLimited(“BEA”), HongKong,whichisabankholdingcompanyforthepurposesoftheBankHoldingCompanyActof1956 (“BHCAct”),asamended.CaixaBankexecutedpassivitycommitmentstodemonstratetotheBoardthat CaixaBank’sownershipinBEAcoupledwithitsbusinessrelationshipswouldnotenableCaixaBankandits affiliatestoexerciseacontrollinginfluenceoverBEAforthepurposesoftheBHCAct.InJuly2013,Caixa- BanksubmittedanapplicationtoopenarepresentativeofficeinNewYork. 5 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates,performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions.A representativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinany otherbankingactivity.12CFR211.24(d)(1). 6 12U.S.C.§3107(a)(2);12CFR211.24(d)(2).Inassessingthesupervisionstandard,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichhomecountrysupervisors (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandtherelationship betweenthebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthat areconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancial

LegalDevelopments:FourthQuarter,2013 121 mayalsoconsideradditionalstandardssetforthintheIBAandRegulationK.7TheBoard mayconsiderthatthesupervisionstandardhasbeenmetif itdeterminesthattheapplicant bankissubjecttoasupervisoryframeworkthatisconsistentwiththeactivitiesof theproposedrepresentativeoffice,takingintoaccountthenatureof suchactivities.Thisisalesser standardthanthecomprehensive,consolidatedsupervisionstandardapplicabletoapplicationstoestablishbranchoragencyofficesof aforeignbank.TheBoardconsidersthe lesserstandardsufficientforapprovalof representativeofficeapplicationsbecauserepresentativeofficesmaynotengageinbankingactivities.8Thisapplicationhasbeenconsideredunderthelesserstandard. Asnotedabove,BankandCaixaBankengagedirectlyinthebusinessof bankingoutside theUnitedStates.BankhasprovidedtheBoardwithinformationnecessarytoassessthe applicationthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,theBoardhasconsideredthat BankissupervisedbytheBankof Portugal.TheBoardpreviouslyhasconsideredthe supervisoryregimeinPortugalforfinancialinstitutionsinconnectionwithapplications involvingotherPortuguesebanks.9BankissupervisedbytheBankof Portugalonsubstantiallythesametermsandconditionsasthoseotherbanks.Basedonallthefactsof record, ithasbeendeterminedthatBankissubjecttoasupervisoryframeworkthatisconsistent withtheactivitiesof theproposedrepresentativeoffices,takingintoaccountthenatureof suchactivities.TheBankof Portugalhasnoobjectiontotheproposedrepresentative offices. Withrespecttosupervisionof LaCaixaandCaixaBank,theBoardpreviouslyhasconsideredthesupervisoryregimeinSpainforfinancialinstitutionsinconnectionwithapplicationsinvolvingotherSpanishbanks.10LaCaixaandCaixaBankaresupervisedbytheir homecountrysupervisor,theBankof Spain,onsubstantiallythesametermsandconditionsasthoseotherbanks.Basedonallthefactsof record,ithasbeendeterminedthatLa CaixaandCaixaBankaresubjecttoasupervisoryframeworkconsistentwiththeactivities of theproposedrepresentativeoffices. Withrespecttothefinancialandmanagerialresourcesof Bank,takingintoconsideration Bank’srecordof operationinitshomecountry,itsoverallfinancialresources,andits standingwithitshomecountrysupervisor,financialandmanagerialfactorsareconsistent conditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacy andriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformthe Board’sdetermination. 7 See12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2).Thesestandardsinclude:whetherthebank’shomecountry supervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesofthebank; whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthe homecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateral effortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebankanditsU.S.affiliatesareincompliancewith U.S.law;theneedsofthecommunity;andthebank’srecordofoperation.TheBoardmayalso,inthecaseof aforeignbankthatpresentsarisktothestabilityoftheUnitedStates,takeintoaccount,totheextent appropriate,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogress towardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountry tomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 8 See12CFR211.24(d)(2). 9 See,e.g.,BancoEspíritoSantodeInvestimento,S.A.,95FederalReserveBulletinB53(2009);BancoSantander Totta,S.A.,93FederalReserveBulletinC71(2007);andCaixaEconómicaMontepioGeral,86FederalReserve Bulletin700(2000). 10 See,e.g.,Bankia,S.A.(orderdatedDecember16,2011),98FederalReserveBulletin42(4thQuar.2011);Caja deAhorrosdeValencia,CastellónyAlicante,Bancaja,etal.(orderdatedDecember17,2010),97Federal ReserveBulletin4(4thQuar.2010);andCajadeAhorrosyMontedePiedaddeMadrid,etal.,95Federal ReserveBulletinB23(2009).

122 FederalReserveBulletin|February2014 withapprovalof theproposedrepresentativeoffices.Bankappearstohavetheexperience andcapacitytosupporttheproposedrepresentativeofficesandhasestablishedcontrols andproceduresfortheproposedrepresentativeofficestoensurecompliancewithU.S.law, aswellascontrolsandproceduresforitsworldwideoperationsgenerally. Portugalisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaundering.Inaccordancewiththeserecommendations,Portugalhasenactedlawsanddevelopedregulatorystandardstodetermoneylaundering,terroristfinancing,andotherillicitactivities.Moneylaunderingisacriminal offenseinPortugal,andPortuguesefinancialinstitutionsarerequiredtoestablishinternal policies,procedures,andsystemsforthedetectionandpreventionof moneylaundering throughouttheirworldwideoperations.Bankhaspoliciesandprocedurestocomplywith theselawsandregulationsthataremonitoredbygovernmentalentitiesresponsibleforantimoney-launderingcompliance. WithrespecttoaccesstoinformationaboutBank’soperations,therestrictionsondisclosureinrelevantjurisdictionsinwhichBankoperateshavebeenreviewed,andrelevantgovernmentauthoritieshavebeencommunicatedwithregardingaccesstoinformation.Bank andLaCaixahavecommittedtomakeavailabletotheBoardsuchinformationontheir operationsandonanyof theiraffiliatesthattheBoarddeemsnecessarytodetermineand enforcecompliancewiththeIBA,theBankHoldingCompanyAct,andotherapplicable federallaw.Totheextentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylaworotherwise,BankandLaCaixahavecommittedtocooperatewiththe Boardtoobtainanynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosureof suchinformation.Inaddition,subjecttocertainconditions,theBank of PortugalmayshareinformationonBank’soperationswithothersupervisors,including theBoard.Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow,ithasbeendeterminedthatBankhasprovidedadequateassurances of accesstoanynecessaryinformationthattheBoardmayrequest. Informationrelevanttothestandardregardingrisktothestabilityof theUnitedStates financialsystemhasbeenreviewed.Inparticular,considerationhasbeengiventotheabsoluteandrelativesizeof Bankinitshomecountry,thescopeof Bank’sactivities,including thetypesof activitiesitproposestoconductintheUnitedStatesandthepotentialfor thoseactivitiestoincreaseortransmitfinancialinstability,andtheframeworkinplacefor supervisingBankinitshomecountry.Basedontheseandotherfactors,financialstability considerationsinthisproposalareconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttocommitmentsmadebyBankandLa Caixa,Bank’sapplicationtoestablishtherepresentativeofficesisherebyapprovedbythe Directorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneralCounsel,pursuanttotheauthoritydelegatedbytheBoard.11Shouldany restrictionsonaccesstoinformationontheoperationsoractivitiesof BankanditsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineand enforcecompliancebyBankoritsaffiliateswithapplicablefederalstatutes,theBoardmay requireterminationof anyof Bank’sdirectorindirectactivitiesintheUnitedStates. Approvalof thisapplicationalsoisspecificallyconditionedoncompliancebyBankwith theconditionsimposedinthisorderandthecommitmentsmadetotheBoardinconnectionwiththisapplication.12Forpurposesof thisaction,thesecommitmentsandconditions 11 12CFR265.7(d)(12). 12 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedrepresentativeofficesparallelsthecontinuingauthorityofthestatesofMassachusettsandNewJerseytolicenseofficesofaforeignbank.TheBoard’s approvalofthisapplicationdoesnotsupplanttheauthorityofthestatesofMassachusettsandNewJerseyor

LegalDevelopments:FourthQuarter,2013 123 aredeemedtobeconditionsimposedbytheBoardinwritinginconnectionwiththisdecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveNovember18, 2013. MargaretMcCloskeyShanks DeputySecretaryof theBoard Canara Bank Bangalore, India OrderApprovingEstablishmentof aBranch FRBOrderNo.2013–14(December13,2013) CanaraBank(“Canara”),aforeignbankwithinthemeaningof theInternationalBanking Act(“IBA”),hasappliedundersection7(d)of theIBA1toestablishabranchinNewYork, NewYork.TheForeignBankSupervisionEnhancementActof 1991,whichamendedthe IBA,providesthataforeignbankmustobtaintheapprovalof theBoardtoestablisha branchintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculation(NewYorkDailyNews,March30, 2012).Thetimeforfilingcommentshasexpired,andtheBoardhasconsideredallcommentsreceived. Canara,withtotalconsolidatedassetsof approximately$77billion,isthesixthlargest commercialbankinIndia.2Thegovernmentof Indiaownsapproximately67.7percentof Canara.Noothershareholderownsmorethan5percentof thesharesof Canara. Canaraengagesinawiderangeof activities,includingcorporateandretailbanking,trade finance,venturecapital,investmentbanking,insurance,informationsystemconsulting,and assetfinance.OutsideIndia,CanaramaintainsbranchesorofficesintheUnitedKingdom, thePeople’sRepublicof China,UnitedArabEmirates,andtheKingdomof Bahrain. CanarahasajointventureinMoscowwithStateBankof India,Mumbai,India,andalso managestwoexchangecompaniesintheMiddleEast,whichfacilitateremittancesof nonresidentIndiansintheregion.TheproposedbranchwouldbeCanara’sinitiallocationin theUnitedStates.3Canarawouldbeaqualifyingforeignbankingorganizationunder RegulationK.4 TheproposedNewYorkbranchwouldofferarangeof bankingproductsandservices, includingpermissibledepositaccounts,aswellassmall-businesslending,remittanceservices,advisoryservices,andtradefinance.5 theiragents,theMassachusettsOfficeofConsumerAffairsandBusinessRegulationandtheNewJerseyDivisionofBanking,tolicensetheproposedofficesofBankinaccordancewithanytermsorconditionsthatthose agentsmayimpose. 1 12U.S.C.§3105(d). 2 AssetandrankingdataareasofMarch31,2013. 3 Uponestablishmentoftheproposedbranch,Canara’shomestateundertheIBAandRegulationKwouldbe NewYork. 4 12CFR211.23(a). 5 Depositsoftheproposedbranchwouldnotbeinsured.

124 FederalReserveBulletin|February2014 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhethertheforeignbank(1)engagesdirectlyinthe businessof bankingoutsidetheUnitedStates,(2)hasfurnishedtotheBoardtheinformationitneedstoassesstheapplicationadequately,and(3)issubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisors.6TheBoardalsoconsiders additionalstandardsassetforthintheIBAandRegulationK.7 TheIBAincludesalimitedexceptiontothegeneralstandardrelatingtocomprehensive, consolidatedsupervision.8Thisexceptionprovidesthat,if theBoardisunabletofindthat aforeignbankseekingtoestablishabranch,agency,orcommerciallendingcompany,is subjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbytheappropriateauthoritiesinitshomecountry,theBoardmayneverthelessapprovetheapplication, providedthat(i)theappropriateauthoritiesinthehomecountryof theforeignbankare activelyworkingtoestablisharrangementsfortheconsolidatedsupervisionof suchbank, and(ii)allotherfactorsareconsistentwithapproval.9Indecidingwhethertoexerciseits discretiontoapproveanapplicationunderauthorityof thisexception,theBoardmustalso considerwhethertheforeignbankhasadoptedandimplementedprocedurestocombat moneylaundering.10TheBoardalsomaytakeintoaccountwhetherthehomecountryof theforeignbankisdevelopingalegalregimetoaddressmoneylaunderingorisparticipatinginmultilateraleffortstocombatmoneylaundering.11Thisisthestandardappliedin thiscase. Asnotedabove,Canaraengagesdirectlyinthebusinessof bankingoutsidetheUnited States.CanaraalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplicationthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,theBoardpreviouslyhasdetermined,inconnectionwithapplicationsinvolvingotherbanksinIndia,thatthosebanks’ homecountryauthoritieswereworkingtoestablisharrangementsfortheconsolidated supervisionof thebanks.12CanaraissupervisedbytheReserveBankof India(“RBI”)on substantiallythesametermsandconditionsasthosebanks. Indiaparticipatesininternationalforumsthataddressthepreventionof moneylaundering andterroristfinancing.Indiaisamemberof theFinancialActionTaskForce(“FATF”). Indiaisapartytothe1988U.N.ConventionAgainstIllicitTrafficinNarcoticDrugsand PsychotropicSubstancesandtheU.N.InternationalConventionfortheSuppressionof the Financingof Terrorism.13 6 12U.S.C.§3105(d)(2);12CFR211.24.Inassessingthisstandard,theBoardconsiders,amongotherindiciaof comprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors(i)ensurethatthe bankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformation ontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,audit reports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetweenthebankandits affiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasis,orcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 7 12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2). 8 12U.S.C.§3105(d)(6). 9 12U.S.C.§3105(d)(6)(A). 10 12U.S.C.§3105(d)(6)(B). 11 Id. 12 ICICIBankLimited,94FederalReserveBulletinC26(2008)(OrderdatedOctober19,2007);StateBankof India,94FederalReserveBulletinC69(2008)(OrderdatedJanuary25,2008). 13 IndiabecameafullmemberoftheFATFinJuneof2010.

LegalDevelopments:FourthQuarter,2013 125 Sincebecomingamemberof FATF,Indiahassubmittedfivefollow-upreportsdetailingan actionplantofurtherimproveitsregimeforanti-money-launderingactivitiesandtocombatthefinancingof terrorism(“AML/CFT”),withthelatestreportpresentedatthe June2013plenarysessionof FATF.Inearly2013,Indiaenactedlegislationtoaddress issuesrelatingtomoneylaunderingandthefinancingof terrorism,andtheimplementation of effectiveconfiscationandprovisionalmeasures.Inaddition,theRBIhasissued“Know YourCustomer(KYC)Guidelines–Anti-MoneyLaunderingStandards”(“Guidelines”), whichrequirefinancialinstitutionstoestablishsystemsforthepreventionof moneylaundering.IndianbankswererequiredtobefullycompliantwiththeGuidelinesbyDecember31,2005.TheRBIissuedfurtherguidelinesinFebruary2006providingclarificationon reportingcashandsuspicioustransactionstoIndia’sFinancialIntelligenceUnit. CanarahaspoliciesandprocedurestocomplywithIndianlawsandregulationsandthe RBI’sGuidelinesonthepreventionof moneylaundering.Canarahasalsotakenadditional stepsonitsowninitiativetocombatmoneylaunderingandotherillegalactivities.Canara statesthatitiscommittedtoimplementingtherelevantrecommendationsof theFATFand thatithasputinplaceanti-money-launderingpoliciesandprocedurestoensureongoing compliancewithstatutoryandregulatoryrequirements,includingdesignatingbranch-level andregionalofficersresponsibleforimplementingCanara’santi-money-launderingpoliciesandprocedures.14Canara’scompliancewithanti-money-launderingrequirementsis monitoredbytheRBIandbyCanara’sinternalandexternalauditors. Basedonallthefactsof record,theBoardhasdeterminedthatCanara’shomecountry authoritiesareactivelyworkingtoestablisharrangementsfortheconsolidatedsupervision of CanaraandthatconsiderationsrelatingtothestepstakenbyCanaraanditshome countrytocombatmoneylaunderingareconsistentwithapprovalunderthisexemption. TheBoardhasalsotakenintoaccounttheadditionalstandardssetforthinsection7of the IBAandRegulationK.15TheRBIhasapprovedtheestablishmentof theproposedbranch. Thefinancialandmanagerialfactorsinthiscasehavebeenconsideredandareconsistent withapprovalof theproposedbranch.India’srisk-basedcapitalstandardsareconsistentwiththoseestablishedbytheBaselCapitalAccord.Canara’scapitalisinexcessof the minimumlevelsthatwouldberequiredbytheAccordandisconsideredequivalenttocapitalthatwouldberequiredof aU.S.bankingorganization.Managerialandotherfinancial resourcesof Canaraareconsistentwithapproval,andCanaraappearstohavetheexperienceandcapacitytosupporttheproposedbranch.Inaddition,Canarahasestablished controlsandproceduresfortheproposedbranchtoensurecompliancewithU.S.law. WithrespecttoaccesstoinformationaboutCanara’soperations,therestrictionsondisclosureinrelevantjurisdictionsinwhichCanaraoperateshavebeenreviewed,andrelevant governmentauthoritieshavebeencontactedregardingaccesstoinformation.Canarahas committedtomakeavailabletotheBoardsuchinformationonitsoperationsandthoseof anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliance withtheIBA,theBankHoldingCompanyAct,andotherapplicablefederallaw.Tothe 14 CanarastatesthattheAML/CFTpolicydocumentstobeutilizedbytheproposedbranchwillbeconsistent withtheFATFfinancialinstitutionspecificrecommendations. 15 See12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2).Thesestandardsinclude:(i)whetherthebank’shome countrysupervisorhasconsentedtotheestablishmentoftheoffice;(ii)thefinancialandmanagerialresources ofthebank;(iii)whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregime inplaceinthehomecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatingin multilateraleffortstocombatmoneylaundering;(iv)whethertheappropriatesupervisorsinthehomecountry mayshareinformationonthebank’soperationswiththeBoard;(v)whetherthebankanditsU.S.affiliatesare incompliancewithU.S.law;(vi)theneedsofthecommunity;and(vii)thebank’srecordofoperations.

126 FederalReserveBulletin|February2014 extentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylawor otherwise,CanarahascommittedtocooperatewiththeBoardtoobtainanynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosureof suchinformation.Inlightof thesecommitmentsandotherfactsof record,andsubjecttothecondition describedbelow,ithasbeendeterminedthatCanarahasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest. Section173of theDodd-FrankWallStreetReformandConsumerProtectionAct amendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbankthatpresents arisktothestabilityof theUnitedStatesfinancialsystem,whetherthehomecountryof theforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,an appropriatesystemof financialregulationforthefinancialsystemof suchhomecountryto mitigatesuchrisk.16Informationrelevanttothisstandardhasbeenreviewed.Inparticular, considerationhasbeengiventotheabsoluteandrelativesizeof Canarainitshomecountry;thescopeof Canara’sactivities,includingthetypeof activitiesitproposestoconduct intheUnitedStatesandthepotentialforthoseactivitiestoincreaseortransmitfinancial instability;andtheframeworkinplaceforsupervisingCanarainitshomecountry.Based ontheseandotherfactors,financialstabilityconsiderationsinthisproposalareconsistent withapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyCanaraas wellasthetermsandconditionssetforthinthisorder,Canara’sapplicationtoestablisha branchinNewYork,NewYork,isherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneralCounsel,pursuanttoauthoritydelegatedbytheBoard.17Shouldanyrestrictionsonaccesstoinformation ontheoperationsoractivitiesof Canaraanditsaffiliatessubsequentlyinterferewiththe Board’sabilitytoobtaininformationtodetermineandenforcecompliancebyCanaraor itsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof Canara’sdirectorindirectactivitiesintheUnitedStates.Approvalof thisapplicationalso isspecificallyconditionedoncompliancebyCanarawiththecommitmentsmadeinconnectionwiththisapplicationandwiththeconditionsinthisorder.18Thecommitmentsand conditionsreferredtoabovearedeemedtobeconditionsimposedinwritingbytheBoard inconnectionwiththisdecisionandmaybeenforcedinproceedingsunder12U.S.C.§1818 againstCanaraanditsaffiliates. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveDecember13, 2013. MargaretMcCloskeyShanks DeputySecretaryof theBoard 16 12U.S.C.§3105(d)(3)(E). 17 12CFR265.7(d)(12). 18 Theauthoritytoapprovetheestablishmentoftheproposedbranchparallelsthecontinuingauthorityofthe StateofNewYorktolicenseofficesofaforeignbank.Theapprovalofthisapplicationdoesnotsupplantthe authorityoftheNewYorkStateDepartmentofFinancialServices(“Department”)tolicensetheproposed officeofCanarainaccordancewithanytermsorconditionsthattheDepartmentmayimpose.

LegalDevelopments:FourthQuarter,2013 127 RBC Investor Services Bank S.A. Esch-sur-Alzette, Luxembourg OrderApprovingEstablishmentof aRepresentativeOffice FRBOrderNo.2013–15(December17,2013) RBCInvestorServicesBankS.A.(“InvestorBank”),Esch-sur-Alzette,Luxembourg,aforeignbankwithinthemeaningof theInternationalBankingAct(“IBA”),hasappliedunder section10(a)of theIBA1toestablisharepresentativeofficeinNewYork,NewYork.The ForeignBankSupervisionEnhancementActof 1991,whichamendedtheIBA,provides thataforeignbankmustobtaintheapprovalof theBoardtoestablisharepresentative officeintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork Times,December4,2012).Thetimeforfilingcommentshasexpired,andallcomments receivedhavebeenconsidered. InvestorBank,withtotalconsolidatedassetsof approximately$18.3billion,isaglobalcustodianbankorganizedunderthelawsof LuxembourgprimarilyservingfundslocatedoutsidetheUnitedStates.2Itsbankingactivitiesarerelatedtoitsoverallcustody-relatedactivities.InvestorBank,withapproximately$1.0trillioninassetsundermanagement,offers institutionalinvestorsworldwideanintegratedarrayof productsandservices,including globalcustody,fundsadministration,securitieslending,shareholderservices,analytics,and otherrelatedinvestorservices.InvestorBankacceptsdepositsthatareincidentaltofacilitatingliquidityforthetrading,investing,andsettlementactivitiesof itsclients.IthassubsidiariesandbranchesinIreland,France,Spain,Switzerland,Italy,Belgium,Singapore, andHongKong. InvestorBank’sparentcompany,RoyalBankof Canada(“RBC”–consolidatedassetsof $827billion),Montreal,Canada,isCanada’slargestcommercialbank,3providingpersonal andcommercialbanking,wealthmanagement,insurance,investmentbanking,andtransactionprocessingservicesonaglobalbasis.4RBCowns100percentof InvestorBank throughawholly-ownedholdingcompany,RoyalBankHoldingsInc.,Toronto,Canada (“RBH”).RBC’scustodialandfundsmanagementoperationsareconductedmainly throughitsCanadiansubsidiaryRBCInvestorServicesTrust,InvestorBank,andtheir affiliatesandbranchesaroundtheworld.5TheLuxembourgCommissiondeSurveillance duSecteurFinancier(“CSSF”)isthesupervisorof InvestorBank. TheproposedrepresentativeofficewouldmarketInvestorBank’sproductsandservicesto customersintheUnitedStatesandengageincertainliaisonactivities.Theofficewould 1 12U.S.C.§3107(a). 2 AssetdataareasofJune30,2013. 3 AssetandrankingdataareasofJuly31,2013. 4 IntheUnitedStates,RBCoperatesbranchesinNewYorkCity,Miami,andPortland(Oregon),agenciesin DallasandHouston,andrepresentativeofficesinSanFrancisco,Houston,Wilmington(Delaware),and Seattle.InMarch2012,RBCsolditsretailbankingoperationsintheUnitedStatestoPNCFinancialServices Group,Inc.,butretainedabanksubsidiary,RBCBankGeorgia,N.A.,Atlanta,Georgia,whichprimarily maintainsasecuritiesportfoliocomprisedofmortgage-backed,asset-backed,andotherdebtsecurities. Inaddition,thebankhasseveralnonbankingsubsidiariesintheUnitedStatesengagedinassetmanagement andcapitalmarketactivities. 5 RBCInvestorServicesTrustprovidesservicestoclientsonlyinCanada,whileservicesprovidedtotherestof theworldareconductedthroughInvestorBank.RBCInvestorServicesTrustisthelargestcustodianandfund administratorinCanada,andissupervisedbyCanada’sOfficeoftheSuperintendentofFinancialInstitutions (“OSFI”).

128 FederalReserveBulletin|February2014 provideinformationconcerningthebank’sproductsandservices,suchascustody,fund administration,andtransferagencyservices,toU.S.fundmanagerswhohaveorareseekingtoestablishoffshoreinvestmentfunds,primarilyinIrelandandLuxembourg.Specific activitiesof therepresentativeofficewouldincludeidentifyingnewbusinessopportunities, respondingtorequestsforproposals,andmakingpresentationsregardingavailableproductsandservicestoexistingandprospectiveclients.Theproposedrepresentativeoffice wouldalsoengageinotheractivitiespermissibleforarepresentativeoffice.6 InactingonanapplicationundertheIBAandRegulationKbyaforeignbanktoestablish arepresentativeoffice,theBoardmustconsiderwhether(1)theforeignbankhasfurnished totheBoardtheinformationitneedstoassesstheapplicationadequately,(2)theforeign bankandanyforeignbankparentengagedirectlyinthebusinessof bankingoutsideof the UnitedStates,and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.7TheBoard alsotakesintoaccountadditionalstandardssetforthintheIBAandRegulationK.8The Boardwillconsiderthatthesupervisionstandardhasbeenmetif itdeterminesthatthe applicantbankissubjecttoasupervisoryframeworkthatisconsistentwiththeactivitiesof theproposedrepresentativeoffice,takingintoaccountthenatureof suchactivities.Thisis alesserstandardthanthecomprehensive,consolidatedsupervisionstandardapplicableto proposalstoestablishbranchoragencyofficesof aforeignbank.TheBoardconsidersthe lesserstandardsufficientforapprovalof representativeofficeapplicationsbecauserepresentativeofficesmaynotengageinbankingactivities.9Thisapplicationhasbeenconsideredunderthelesserstandard. Asnotedabove,InvestorBankengagesdirectlyinthebusinessof bankingoutsidethe UnitedStates.InvestorBankalsohasprovidedtheBoardwiththeinformationnecessary toassesstheapplicationthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,theBoardhasconsideredthat InvestorBankissupervisedbytheCSSF.Inconnectionwithanapplicationfromanother 6 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates,performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions.A representativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinany otherbankingactivity.12CFR211.24(d)(1). 7 12U.S.C.§3107(a)(2);12CFR211.24(d)(2).Inapplyingthesupervisionstandard,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandtherelationship betweenthebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthat areconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancial conditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacy andriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformthe Board’sdetermination. 8 See12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2).Thesestandardsinclude:whetherthebank’shomecountrysupervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesofthe bank;whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplacein thehomecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateral effortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebankanditsU.S.affiliatesareincompliancewith U.S.law;theneedsofthecommunity;andthebank’srecordofoperation.TheBoardmayalso,inthecaseof aforeignbankthatpresentsarisktothestabilityoftheUnitedStates,takeintoaccount,totheextent appropriate,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogress towardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountry tomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 9 See12CFR211.24(d)(2).

LegalDevelopments:FourthQuarter,2013 129 Luxembourgbankingorganization,CedelBank,S.A.,toestablisharepresentativeofficein theUnitedStates,theBoardpreviouslyhasdeterminedthatCedelBankwassubjecttoa supervisoryframeworkbythepredecessortotheCSSF,theInstitutMonetaireLuxembourgeois,consistentwiththelimitedrepresentativeofficestandard.10Sincethatdetermination,thesupervisionof banksinLuxembourgbytheCSSFhasprogressedinlinewith othercountriesintheEuropeanUnion.Basedonallthefactsof record,includingthe supervisoryregimeapplicabletoInvestorBankandthefactthatInvestorBankisseeking toestablisharepresentativeoffice,ithasbeendeterminedthatInvestorBankissubjecttoa supervisoryframeworkthatisconsistentwiththeactivitiesof theproposedrepresentative office,takingintoaccountthenatureof suchactivities. RBC’shomecountrysupervisoristheOSFI.Withrespecttosupervisionof RBC,the BoardpreviouslyhasdeterminedinconnectionwithapplicationstoestablishU.S.operationsthatseveralCanadianbankingorganizationssupervisedbytheOSFI,includingRBC, aresubjecttocomprehensivesupervisiononaconsolidatedbasis.11SincethelastBoard determination,theOSFIhasenhanceditssupervisoryframeworkbyimprovingrequirementsintheareasof liquidity,riskmanagement,stresstesting,fundingdiversification,and corporategovernance.Basedonallthefactsof record,theBoardhasconcludedthatRBC continuestobesubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshome countrysupervisor. Theadditionalstandardssetforthinsection7of theIBAandRegulationKalsohavebeen takenintoaccount.12TheCSSFandtheOSFIhavenoobjectiontotheestablishmentof theproposedrepresentativeoffice. Withrespecttothefinancialandmanagerialresourcesof InvestorBank,takingintoconsiderationInvestorBank’srecordof operationsinitshomecountry,itsoverallfinancial resources,anditsstandingwithitshomecountrysupervisor,financialandmanagerialfactorsareconsistentwithapprovalof theproposedrepresentativeoffice.InvestorBank appearstohavetheexperienceandcapacitytosupporttheproposedrepresentativeoffice andhasestablishedcontrolsandproceduresfortheproposedrepresentativeofficetoensure compliancewithU.S.law,aswellascontrolsandproceduresforitsworldwideoperations generally. Luxembourgisamemberof theFinancialActionTaskForce(“FATF”)andsubscribesto theFATF’srecommendationsregardingmeasurestocombatmoneylaunderingandinternationalterrorism.Inaccordancewiththeserecommendations,Luxembourghasenacted lawsandcreatedlegislativeandregulatorystandardstodetermoneylaundering,terroristfinancing,andotherillicitactivities.MoneylaunderingisacriminaloffenseinLuxembourg,andfinancialservicesbusinessesarerequiredtoestablishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheir worldwideoperations.InvestorBankhaspoliciesandproceduresinplacetocomplywith theselawsandregulations,andthesepoliciesandproceduresaremonitoredbygovernmentalentitiesresponsibleforanti-money-launderingcompliance. WithrespecttoaccesstoinformationaboutInvestorBank’soperations,therestrictionson disclosureinrelevantjurisdictionsinwhichInvestorBankoperateshavebeenreviewed, andrelevantgovernmentalauthoritieshavebeencommunicatedwithregardingaccessto suchinformation.InvestorBankhascommittedtomakeavailabletotheBoardsuchinfor- 10 SeeCedelBank,S.A.,82FederalReserveBulletin591(1996). 11 SeeBankofMontreal,97FederalReserveBulletin24(2011);RoyalBankofCanada,94FederalReserveBulletin C45(2008). 12 Seesupranote5.

130 FederalReserveBulletin|February2014 mationontheoperationsof InvestorBankandanyof itsaffiliatesthattheBoarddeems necessarytodetermineandenforcecompliancewiththeIBA,theBankHoldingCompany Actof 1956,asamended,andotherapplicablefederallaw.Totheextentthatproviding suchinformationtotheBoardmaybeprohibitedbylaworotherwise,InvestorBankhas committedtocooperatewiththeBoardtoobtainanynecessaryconsentsorwaiversthat mightberequiredfromthirdpartiesforthedisclosureof suchinformation.Inaddition, subjecttocertainconditions,theCSSFmayshareinformationonInvestorBank’soperationswithothersupervisors,includingtheBoard.Inlightof thesecommitmentsandother factsof record,andsubjecttotheconditiondescribedbelow,ithasbeendeterminedthat InvestorBankhasprovidedadequateassurancesof accesstoanynecessaryinformation thattheBoardmayrequest. Informationrelevanttothestandardregardingrisktothestabilityof theUnitedStates financialsystemhasalsobeenreviewed.Inparticular,considerationhasbeengiventothe absoluteandrelativesizeof InvestorBankinitshomecountry,thescopeof Investor Bank’sactivities,includingthetypesof activitiesitproposestoconductintheUnited Statesandthepotentialforthoseactivitiestoincreaseortransmitfinancialinstability,and theframeworkinplaceforsupervisingInvestorBankinitshomecountry.Basedonthese andotherfactors,financialstabilityconsiderationsinthisproposalareconsistentwith approval. Basedontheforegoingandallthefactsof record,InvestorBank’sapplicationtoestablish theproposedrepresentativeofficeisherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneralCounsel,pursuanttoauthoritydelegatedbytheBoard.13Shouldanyrestrictionsonaccesstoinformation ontheoperationsoractivitiesof InvestorBankanditsaffiliatessubsequentlyinterferewith theBoard’sabilitytoobtaininformationtodetermineandenforcecompliancebyInvestor Bankoritsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof InvestorBank’sdirectorindirectactivitiesintheUnitedStates.Approvalof this applicationalsoisspecificallyconditionedoncompliancebyInvestorBankwiththeconditionsimposedinthisorderandthecommitmentsmadetotheBoardinconnectionwith thisapplication.14Forpurposesof thisaction,thesecommitmentsandconditionsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwiththisdecision and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveDecember17, 2013. MargaretMcCloskeyShanks DeputySecretaryof theBoard 13 12CFR265.7(d)(12). 14 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedrepresentativeofficeparallelsthecontinuingauthorityoftheStateofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthis applicationdoesnotsupplanttheauthorityoftheStateofNewYorkoritsagent,theNewYorkDepartment ofFinancialServices,tolicensetheproposedofficeofInvestorBankinaccordancewithanytermsorconditionsthatitmayimpose.

131 Federal Reserve BULLETIN May 2014 Vol. 100, No. 2 Legal Developments: First Quarter, 2014 Order Issued Under Bank Holding Company Act Order Issued Under Section 3 of the Bank Holding Company Act Community & Southern Holdings, Inc. Atlanta, Georgia OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2014–5(March31,2014) Community&SouthernHoldings,Inc.(“CSH”),Atlanta,Georgia,hasrequestedthe Board’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1to acquireVerityCapitalGroup,Inc.(“Verity”)andtherebyindirectlyacquireitssubsidiary bank,VerityBank(“VerityBank”),bothof Winder,Georgia.Followingtheproposed acquisition,VerityBankwouldbemergedintoCSH’ssubsidiarybank,Community& SouthernBank(“C&SBank”),Atlanta,astatenonmemberbank.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(78FederalRegister61352(October3,2013)).3 Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposal andallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. CSH,withconsolidatedassetsof approximately$2.8billion,isthe265thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$2.2billioninconsolidateddeposits.4C&SBank,whichoperatesonlyinGeorgia,isthe11thlargestdepositoryinstitutioninGeorgia,controllingdepositsof approximately$2.0billion,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthat state.5 Verity,withconsolidatedassetsof approximately$162million,controlsVerityBank,which operatesonlyinGeorgia.VerityBankisthe119thlargestinsureddepositoryinstitutionin Georgia,controllingdepositsof approximately$145million,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,CSHwouldbecomethe248thlargestdepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$3.0billion,which 1 12U.S.C.§1842. 2 ThemergerofVerityBankintoC&SBankissubjecttotheapprovaloftheFederalDepositInsuranceCorporation (“FDIC”)undertheFederalDepositInsuranceAct.12U.S.C.§1828(c). 3 12CFR262.3(b). 4 Assetandnationwidedeposit-rankingdataareasofDecember31,2013,unlessotherwisenoted. 5 StatedepositdataareasofJune30,2013.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks, savingsassociations,andsavingsbanks.

132 FederalReserveBulletin|May2014 representlessthan1percentof thetotalamountof assetsof insureddepositoryinstitutionsintheUnitedStates.CSHwouldcontrolconsolidateddepositsof approximately $2.4billion.CSHwouldremainthe11thlargestdepositoryorganizationinGeorgia,controllingdepositsof approximately$2.1billion,whichrepresentapproximately1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.6 CSHandVeritycompetedirectlyintheAtlantaArea,Georgiabankingmarket.7The Boardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketinlight of allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;therelativesharesof totaldepositsin insureddepositoryinstitutionsinthemarket(“marketdeposits”)controlledbyCSHand Verity8;theconcentrationlevelsof marketdepositsandtheincreaseinthoselevels,as measuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Justice BankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”)9;andother characteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesforthismarket.Onconsummationof theproposal,thebankingmarketwouldremainmoderatelyconcentrated,asmeasuredby theHHI,andnumerouscompetitorswouldremain.10 6 12U.S.C.§1842(c)(1). 7 TheAtlantaArea,GeorgiabankingmarketisdefinedasBartow,Cherokee,Clayton,Cobb,Coweta,DeKalb, Douglas,Fayette,Forsyth,Fulton,Gwinnett,Hall,Henry,Newton,Paulding,Rockdale,andWaltoncounties; andthetownsofAuburnandWinderinBarrowCountyandLuthersvilleinMeriwetherCounty,excludingthe townofClermontinHallCounty,allinGeorgia. 8 DepositandmarketsharedataareasofJune30,2013,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,Midwest FinancialGroup,75FederalReserveBulletin386(1989),andNationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 9 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines in2010(seePressRelease,DepartmentofJustice(Aug.19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 10 CSHoperatesthe15thlargestdepositoryinstitutionintheAtlantaArea,Georgiabankingmarketwith approximately$1billionindeposits,whichrepresentlessthan1percentofmarketdeposits.Verityoperatesthe 53rdlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$122million, whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,CSH wouldoperatethe13thlargestdepositoryinstitutioninthemarket,controllingweighteddepositsofapproximately$1.1billion,whichrepresentlessthan1percentofmarketdeposits.TheHHIwouldremainunchanged at1517and97competitorswouldremaininthemarket.

LegalDevelopments:FirstQuarter,2014 133 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal.11 Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketinwhichCSHandVeritycompetedirectlyorinany otherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitive considerationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Section3(c)of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resources(includingthecompetence,experience,andintegrityof theofficers,directors,and principalshareholders)andfutureprospectsof thecompanyandbanksconcerned,aswell astheeffectivenessof thecompanyincombattingmoneylaundering. Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhasconsideredthefinancialfactorsof theproposal.CSHandC&SBankare wellcapitalizedandwouldremainsoonconsummationof theproposedacquisition,which isabankholdingcompanymerger,structuredasacashtransaction.12CSHisinsatisfactoryfinancialcondition,andtheassetquality,earnings,andliquidityof C&SBankand VerityBankareconsistentwithapproval.Basedonitsreviewof therecord,theBoardfinds thatCSHhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of CSH,Verity,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof their managementteams,risk-managementsystems,andoperations.Inaddition,theBoardhas considereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingand 11 AcommenterassertedthattheproposedtransactionshouldnotbepermittedunderGeorgialawbecauseVerity Bankisadenovobank,establishedonOctober27,2008.However,underGeorgialaw,aregisteredGeorgia bankholdingcompanyispermittedtodirectlyorindirectlyacquireownershipofanybankprovidedthatthe bankhasbeeninexistence,andcontinuallyoperatingorincorporatedasabank,foraperiodofthreeyearsor morepriortothedateofacquisition.SeeGA.CODE§7-1-608(2013).BecauseVerityBankhasbeeninexistenceforlongerthanthreeyears,theproposalwouldnotbeinviolationofGeorgialaw.Inthatregard,the GeorgiaDepartmentofBankingandFinanceapprovedtheproposalonJanuary8,2014.LetterfromMurali Ramachandran,CorporateManager,FinancialInstitutions,GeorgiaDepartmentofBankingandFinance,to PatrickM.Frawley,ChiefExecutiveOfficer,Community&SouthernHoldings,Inc.(Jan.8,2014). 12 AllVeritycommonstockwillbeacquiredforcashconsideration.TheBoardhasconfirmedthatCSHhasthe resourcestofundthetransaction.

134 FederalReserveBulletin|May2014 anti-moneylaunderinglaws. CSH,Verity,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewell managed.CSH’sexistingrisk-managementprogramanditsdirectorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof CSH havesubstantialknowledgeof,andexperiencein,thebankingandfinancialservicessectors.13 TheBoardalsohasconsideredCSH’splansforimplementingtheproposal.CSHisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisition integrationprocessforthisproposal.CSHwouldimplementitsrisk-managementpolicies, procedures,andcontrolsatthecombinedorganization,andtheseareconsideredacceptable fromasupervisoryperspective.CSH’smanagementhastheexperienceandresourcesto ensurethatthecombinedorganizationoperatesinasafeandsoundmanner.14 CSH’ssupervisoryrecord,managerialandoperationalresources,andplansforoperating thecombinedinstitutionafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalandCSH’smoneylaunderingpoliciesareconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).15TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,16and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.17 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof C&SBankandVerityBank,datareportedbyC&SBankandVerity BankundertheHomeMortgageDisclosureAct(“HMDA”),18C&SBank’ssmallbusiness lendingdata,otherinformationprovidedbyCSH,confidentialsupervisoryinformation, 13 CSH’sboardofdirectorsandseniormanagementteamwouldremainthesameafterconsummatingthe acquisition. 14 AcommenterallegedthatC&SBankhasimproperlyhandledforeclosuresonassetspreviouslyacquiredfrom theFDICthroughthefailedbankresolutionprocess.Theseassetsaresubjecttolosssharingagreementswith theFDIC.CSHrepresentsthatC&SBankisrequiredtoexploreloanmodificationandotherloanworkout alternativesbeforeinitiatingtheforeclosureprocessonassetssubjecttothelosssharingagreements.C&SBank hasestablisheda“ResolutionManagementGroup”inwhichdedicatedworkoutofficersworkwithborrowers toexploreavailableresolutionstrategiesfortroubledassets.C&SBankissubjecttooversightandmonitoring bytheFDICinconnectionwithitscompliancewiththelosssharingagreements.TheBoardhasconsultedwith theFDIC,thebank’sprimaryfederalregulator,whichexpressednoconcernswithC&SBank’scompliance withthelosssharingagreementsregardingforeclosures. 15 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 16 12U.S.C.§2901(b). 17 12U.S.C.§2903. 18 12U.S.C.§2801etseq.

LegalDevelopments:FirstQuarter,2014 135 andthepubliccommentsreceivedontheproposal.ThecommenterobjectedtotheproposalbygenerallyallegingthatC&SBankhasfailedtoadequatelylendwithinitsassessmentareas,andgenerallyquestioningthepublicbenefitsof theproposal. 1.Recordsof PerformanceUndertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.19TheCRArequiresthattheappropriatefederalfinancialsupervisoryagencyforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.20Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationprocessbecauseitrepresentsadetailed,onsiteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor. CRAPerformanceof C&SBank.C&SBankwasassignedanoverall“satisfactory”ratingat itsmostrecentCRAperformanceevaluationbytheFDIC,asof January28,2011(“C&S BankEvaluation”).21ExaminersconsideredC&SBanktohaveareasonablerecordof lendinginsideof itsassessmentareasandareasonablerecordinsmallbusinesslending.22 AsdescribedintheC&SBankEvaluation,FDICexaminersfoundthatthebankhada goodrecordof servingitsassessmentareas’creditneeds.23Thebankhadareasonable recordof lendingtobusinessesof differentsizes,especiallysmaller-sizedbusinesses,anda reasonablerecordof residentiallendingtoborrowersof differentincomes.Examiners notedthat,consideringthedifferencesamongthebank’smarketsandtheirrespective demographics,C&SBankhadadequatelypenetratedLMIgeographiesthroughoutits assessmentareas.Examinersalsonotedthatthebank’spenetrationamonglow-income borrowerswasgoodwithregardtoboththepercentageof originationsandthepercentage of totaldollarvolume. CRAPerformanceof VerityBank.VerityBankwasassigneda“satisfactory”ratingatits mostrecentCRAperformanceevaluationbytheFDIC,asof October26,2009(“Verity BankEvaluation”).24ExaminersconcludedthatVerityBank’slendingperformancerepre- 19 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (March11,2010). 20 12U.S.C.§2906. 21 TheC&SBankEvaluationwasconductedusingtheSmallBankCRAExaminationProcedures.Examiners focusedonthebank’ssmallbusinessandresidentiallendingrecordfromthetimeC&SBankbeganoperations onJanuary29,2010,throughJanuary28,2011.CSHprovidedacopyofthepublicevaluationportionofthe C&SBankEvaluationtothecommenteratthecommenter’srequest.Priortoreceivingthepublicevaluation portion,thecommentererroneouslyallegedthattheFDIChadfailedtoperformaCRAexaminationofC&S Bank. 22 TheC&SBankEvaluationrevieweddataavailabletotheFDICasofthedateoftheevaluationconcerning residentialmortgageandsmallbusinessloansoriginatedorpurchasedwithintherelevantassessmentareas.The C&SBankEvaluationincludedafull-scopereviewoftheAtlanta-SandySprings-Marietta,GeorgiaMSA assessmentarea(the“AtlantaMSAAssessmentArea”)andFannin,Gilmer,Union,andLumpkincountiesin Georgia(the“Non-MSAAssessmentArea”).Limited-scopereviewswereperformedintheAthens-Clarke CountyMSA,GainesvilleMSA,andDaltonMSAassessmentareas,allinGeorgia.Examinersplacedgreater weightonthebank’sperformanceintheAtlantaMSAAssessmentAreathanintheotherassessmentareasdue tothebank’ssignificantconcentrationofloanoriginationsandloanpurchasesinthatMSA;95percentofthe bank’sloansandloanpurchasesweremadeinthatmarket. 23 Smallbusinessandresidentialmortgagelendingwerethebank’sprimarylendingfocus. 24 TheVerityBankEvaluationwasconductedusingtheSmallBankCRAExaminationProcedures.Examiners reviewedVerityBank’ssmallbusinessandconstructionandlanddevelopmentlendingactivityfromOctober27,2008,toSeptember30,2009.Theseproductswereselectedforanalysisbecausetheyrepresented approximately70percentofthebank’sloanportfolio.

136 FederalReserveBulletin|May2014 sentsreasonableresponsivenesstocommunitycreditneeds.ExaminersalsonotedthatVerityBankshowedexcellentpenetrationinitsconstructionandlanddevelopmentlending, andinitssmallbusinesslendinginmoderate-incomecensustractsinitsassessmentareas.25 C&SBank’sEffortsSincethe2011CRAEvaluation.CSHhasprovidedinformationonthe recordof performanceof C&SBanksincetheC&SBankEvaluation.CSHrepresentsthat in2013,C&SBankextendedsixcommunitydevelopmentloansinitsassessmentareas totaling$23.5million,whichfundedaffordablehousingfacilities,achurchandservicecenter,andaregionalfoodbank.Inaddition,C&SBankhasfunded,orcommittedtofund, $11.1millioninqualifiedinvestmentsinaffordablehousingprojectsinthebank’sassessmentareas,andhaspurchased$1.1millionof mortgage-backedsecuritiesguaranteedby theFederalNationalMortgageAssociationandtheFederalHomeLoanMortgageCorporationtoLMIborrowerswithinitsassessmentareas.CSHalsonotedthatthebankhas providedseveralcommunitydevelopmentdonationsandsponsorshipstoorganizationsservingprimarilywomen-ownedmicrobusinessesandLMIentrepreneurs,aswellas youthfinancialliteracyprograms.26 2.FairLendingRecordandPublicCommentsontheApplication TheBoardhasconsideredC&SBank’srecordincomplyingwithfairlendingandother consumerprotectionlaws.InadditiontoreviewingtheC&SBankEvaluationandC&S Bank’srecordof performanceinprovidingcommunitydevelopmentlendingandservices sinceitsevaluation,asdiscussedabove,theBoard’sconsiderationincludesanevaluationof C&SBank’sfairlendingpoliciesandprocedures.Thisalsoincludesconsiderationof other agencies’viewsonC&SBank’srecordof performanceunderfairlendinglaws,otherconfidentialsupervisoryinformation,andthepubliccommentsontheproposal. C&SBank’sFairLendingProgram.C&SBankhasinstitutedpoliciesandproceduresto helpensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.C&SBankmaintainsaFairLendingComplianceProgram,whichispartof its ConsumerComplianceProgram,which,inturn,isacomponentof thebank’soverallRisk ManagementProgram.Thetwoprimarycomponentsof C&SBank’sfairlendingmonitoringprogramareongoingmonitoringandperiodictesting.Thebankhascreateda“Directorof EnterpriseRiskManagement”positiontoprovidedirectoversightoverC&SBank’s ConsumerComplianceUnit,whichalsoincludesaconsumercompliancemanagerwith oversightof fourcomplianceofficers.Eachcomplianceofficerhasresponsibilityforoverseeingspecificbankfunctions,includinglending,CRA,andfairlendingcompliance,as wellasinternalcompliancemonitoring.Thebankmaintainsapolicyof secondaryreviews foralldenialsof consumer,mortgage,andcommercialloans,andtheConsumerComplianceUnitreviewsalladvertisements,websitecontent,signage,andcustomercommunicationstoensurecompliancewithfairlendingandotherconsumerprotectionlawsandregu- ThecommenterobjectedtotheproposalonthebasisthattheFDIChadfailedtoperformatimelyCRA examinationofVerityBank.However,theFDIC’sexaminationofVerityBankwasperformedinaccordance withthetimeframeprovidedintheFDICcompliancemanualforexaminations.ThemanualrequirestheFDIC toperformaCRAevaluationfornewlycharteredandinsuredinstitutionsaftertheinstitutionhasbeenin operationfrom0-12months,andthenagainbetween48-60months.SeeFDICComplianceManual,ComplianceExaminations–ExaminationandVisitationFrequency(December2013).TheFDICopenedanewconsumercomplianceandCRAexaminationofVerityBankinDecember2013.TheBoardhasconferredwiththe FDICregardingtheexamination. 25 TheVerityBankEvaluationincludedafull-scopereviewoftheAtlantaMSAAssessmentAreaandtheNon- MSAAssessmentArea. 26 Theseloans,investments,anddonationshavenotyetbeenevaluatedbytheFDIC,andtheCRAdoesnot requireanyspecificlevelortypeoflending,investment,orservice.ThenextCRAexaminationforC&SBank isscheduledforthesecondquarterof2014.ThebankwillbeevaluatedundertheLargeBankCRAExaminationProcedures.

LegalDevelopments:FirstQuarter,2014 137 lations.RegularreportsareprovidedtoC&SBank’sAuditCommitteeandboardof directors,whichreviewanddiscussvariouscompliancematters,includingdevelopmentof newpoliciesandprocedures,specialprojects,resultsof monitoringprograms,customer complaints,training,andregulatoryexaminationstatus.C&SBank’srisk-managementsystems,anditspoliciesandproceduresforassuringcompliancewithfairlendinglaws,would beimplementedatthecombinedorganization. PublicCommentontheApplicationandAnalysisof HMDAandCRAData.Althoughthe commenterdidnotallegespecificdiscriminatorylendingpracticesorcitetoHMDAdata disparitiesinlendingtominorities,thecommentergenerallyassertedthatC&SBankfailed toadequatelylendwithinitsassessmentareas,particularlytoLMIborrowers.27In responsetothecomments,theBoardanalyzedC&SBank’sHMDAandCRAdata.The Board’sanalysisincludedareviewof C&SBank’s2011and2012HMDAdatainitscombinedassessmentareas,intheAtlantaMSAAssessmentArea,inVerityBank’sassessment area,andinBarrowCounty.28TheBoardalsoconsultedwiththeFDICandconsidered examinationreportsof onsiteevaluationsbytheFDICregardingC&SBank’scompliance withfairlendinglawsandregulations. C&SBankextendedapproximately80percentof itsmortgage-relatedloanswithinitscombinedassessmentareain2011and2012,anditsHMDAapplicationandoriginationvolumenearlydoubledbetween2011and2012.Similarly,ananalysisof CRAsmallbusiness lendingdataindicatesthatthebankoriginatedagreaterpercentageof itstotalloansandof itsloans,tobusinesseswithgrossannualrevenuesof $1millionorless,inLMItractsthan theaggregateof alllenders. C&SBankreceivedagreaterpercentageof applicationsfrom,andextendedagreaterpercentageof itsloansto,Hispanicindividualsinallmarketsunderreviewcomparedtothe aggregate,exceptBarrowCounty,wherethebankreceivednoapplicationsfromHispanic individuals.However,therearenominoritycensustractsinBarrowCounty.29Although C&SBankmadesignificantprogressinincreasingthenumberof mortgageapplications fromAfricanAmericansandfrompredominantlyminoritycensustractsfrom2012to 2013,theBoardnotesthatthebankcontinuestolagtheaggregateinbothrespects.30The datadonotsuggestthatC&SBankissystematicallyexcludingAfricanAmericanorpredominantlyminoritygeographies.TheBoardencouragesC&SBanktocontinueitsprogressbyseekingopportunitiestoincreaseitsoutreachinthesecommunities. TheBoardalsoreviewedC&SBank’sCRAsmallbusinessandsmallfarmlendingdatafor 2012andfromJanuary1,2013,toSeptember30,2013,initscombinedassessmentareas,in theAtlantaMSAAssessmentArea,inVerityBank’sassessmentarea,andinBarrow County,Georgia.31C&SBankextendedmorethan30percentof itssmallbusinessloans andloanstobusinesseswithgrossannualrevenuesof $1millionorlessinLMIcensus tracts,inbothcasesexceedingtheaggregate’spercentageof suchloansin2012,oftensig- 27 ThecommenteralsoallegedthatC&SBankfailedtocomplywithHMDAdatareportingrequirements.The FDICpreviouslyreviewedC&SBank’s2011HMDAdata,andCSHrepresentsthatC&SBankhasfiledall HMDAandCRAdataasrequiredbylaw.TheBoardconsultedwiththeFDIC,whichdidnotexpressanyconcernsinthisregard. 28 HMDAdatadonotprovideabasisforanindependentassessmentofanapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateralarenotavailablefromHMDAdata. 29 ForBarrowCounty,theaggregatereportedasmallpercentage(approximately3percent)ofmortgageapplicationsfromandoriginationstoHispanicindividuals. 30 CSHprovidedC&SBank’s2013HMDAdatatotheBoard,whichispreliminaryandhasnotbeenverified. 31 C&SBankwasnotrequiredtoreportsmallbusinessorsmallfarmlendingdatafor2011.Thebankmakesfew smallfarmloans,andtheBoarddoesnotconsiderthemtobeamajorproductofthebank.

138 FederalReserveBulletin|May2014 nificantly.Moreover,C&SBankextendedalmost60percentof itssmallbusinessloansto businesseswithgrossannualrevenuesof $1millionorlessinitscombinedassessmentareas andtheAtlantaMSAAssessmentArea.ThedatadonotsuggestthatC&SBankisfailing tolendtosmallbusinesses. TheBoardnotesthatC&SBank’spercentageof loanapplicationsandoriginationsfor propertieslocatedinLMIcensustracts,andinvolvingLMIindividuals,aswellasof its smallbusinessloansandloanstobusinesseswithgrossannualrevenuesof $1millionor lessinLMIcensustracts,hasgenerallymetorexceededtheaggregate. 3.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.CSHstatedthatitwouldprovideexpandedretailandcommercialbankingproductsandservicestoVerityBank’scustomers,includingabroaderrangeof depositandloan products,enhancedonlineandmobilebanking,andahigherlendinglimittoitscustomers. Thecapitalandhumanresourcesof thecombinedentitywouldenableittobeastronger competitorinVerityBank’sassessmentareasthanispresentlythecase.Themergeralso wouldbenefitcurrentcustomersof VerityBankthroughaccesstosignificantlylarger branchandATMnetworks.ThebranchnetworkavailabletocurrentVerityBankcustomerswouldincreasefrom2to41branchlocationsthroughoutGeorgia. Thecommenterallegedthattheproposalwouldnotprovideaclearorsignificantpublic benefitandassertedthatC&SBankplanstoclosebothexistingVerityBankbranches, whichwouldresultinalossof jobsinthecommunity.32Contrarytothecommenter’s assertion,CSHrepresentsthatitplanstocontinueoperatingbothVerityBankbranches followingcompletionof thebankmerger.Anyfuturebranchclosingsorconsolidations wouldbecompletedinaccordancewithC&SBank’sbranchclosingpolicy,whichincludes proceduresformitigatinganypotentialnegativeimpactsonthecommunitywhichmay resultfromthebranch’sclosure.TheBoardconsultedwiththeFDIC,whichdidnot expressanyconcernsregardingthebank’sbranchclosingpolicy. InordertoensurethatCSHcontinuestomeetitsobligationsundertheCRAandfairlendinglaws,CSHhascommittedthat,withinthirty(30)daysfollowingconsummationof the mergerwithVerity,CSHwilldevelopandadoptastatementof goalsandobjectives,consistentwithCSH’sstrategicbusinessplanandthecombinedorganization’ssizeand complexity,tocontinuemeetingthecreditneedsof thecommunitiesthatthecombined organizationserves,includinglow-andmoderate-incomeneighborhoodsandsmall businesses. 32 ThecommenteralsoassertedthattheFDIClosssharingagreementstowhichC&SBankissubjectcreate “negativelendingincentives”thatencourageC&SBanktoforecloseonassetsacquiredfromtheFDICrather thanextendnewcredit.ThecommenterfurtherassertedthatVerityBankistheonlyremainingcommunity bankinthelocalmarketnotsubjecttoanFDIClosssharingagreement,thelossofwhichwouldreducethe overallavailabilityofcredittoLMIborrowers.Finally,thecommenterassertedthatCSH’sprofitswouldnot bereinvestedinitsassessmentareasbecauseitisaDelawarecorporationwithtop-tierinvestorsthatarelocated outsideofGeorgia.TheBoardnotesthatthecurrentproposaldoesnotinvolvealosssharingagreementwith theFDIC.Additionally,C&SBankhasabusinessmodelthatencouragesextendingnewcreditandtherecord doesnotsuggestthattheproposalwouldreducetheoverallavailabilityofcredittoLMIborrowers.TheBoard alsonotesthatC&SBankissubjecttotheprovisionsoftheCRA,whichrequireabanktomeetthecredit needsofthecommunitiesinwhichitoperates,withoutregardtothelocationoftheholdingcompany’sregistration,investors,orboardmembers.

LegalDevelopments:FirstQuarter,2014 139 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyCSH,confidential supervisoryinformation,andthepubliccommentsontheproposal.BasedontheBoard’s analysisof theHMDAdata,evaluationof themortgageandsmallbusinesslendingoperationsandcomplianceprogramsof C&SBankandVerityBank,reviewof examination reports,andconsultationwiththeFDIC,theBoardbelievesthattheconvenienceand needsfactor,includingtheCRArecordof theinsureddepositoryinstitutionsinvolvedin thistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”33 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.34These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,whichareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.35 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,CSHwouldhave approximately$3.0billioninconsolidatedassets,andbyanyof anumberof alternative measuresof firmsize,CSHwouldbeoutsidethe100largestU.S.financialinstitutions.The Boardgenerallypresumesthatamergerresultinginafirmwithlessthan$25billionintotal consolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnited Statesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalrisk factorsarenotpresentinthistransaction.Thecompaniesengageandwouldcontinue toengageintraditionalcommercialbankingactivities.Theresultingorganizationwould experiencesmallincreasesinthemetricsthattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,withtheresultingfirmgenerallyrankingoutside of thetop100U.S.financialinstitutionsintermsof thosemetrics.Forexample,CSH’s intrafinancialassetsandliabilitieswouldcompriseanegligibleshareof thesystemwide total,bothbeforeandafterthetransaction.Theresultingorganizationwouldnotengagein 33 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 34 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 35 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

140 FederalReserveBulletin|May2014 complexactivities,norwoulditprovidecriticalservicesinsuchvolumethatdisruptionin thoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof the UnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.36Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyCSHwithalltheconditionsimposedinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheReserveBank,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveMarch31,2014. Votingforthisaction:ChairYellen,andGovernorsTarullo,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Orders Issued Under International Banking Act Banque Centrale Populaire Casablanca, Morocco OrderApprovingEstablishmentof aRepresentativeOffice FRBOrderNo.2014–4(March28,2014) BanqueCentralePopulaire(“BCP”),Casablanca,Morocco,aforeignbankwithinthe meaningof theInternationalBankingAct(“IBA”),hasappliedundersection10(a)of the 36 ThecommenterrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCAct doesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately presenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.Inthe Board’sview,commentershavehadampleopportunitytosubmitcommentsontheproposaland,infact,the commentersubmittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthat wouldbeclarifiedbyapublichearing.Inaddition,therequestdoesnotdemonstratewhythewrittencomments donotpresentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingis notrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

LegalDevelopments:FirstQuarter,2014 141 IBA1toestablisharepresentativeofficeinWashington,D.C.TheForeignBankSupervisionEnhancementActof 1991,whichamendedtheIBA,providesthataforeignbankmust obtaintheapprovalof theBoardtoestablisharepresentativeofficeintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinWashington,D.C.(Washington Post,October12,2012).Thetimeforfilingcommentshasexpired,andallcomments receivedhavebeenconsidered. TenregionalMoroccanbanks,theBanquePopulairesRegionales(“BPRs”),eachown betweenapproximately2.8and4.9percentof BCP’svotingsharesandtogethercontrol 45.7percent.Approximately17.5percentof thevotingsharesof BCPisowned,directly andindirectly,bythegovernmentof Morocco.2Additionally,theInternationalFinance Corporation,aninternationalfinancialinstitution,owns5percentof BCP’sshares.No othershareholderowns5percentormoreof BCP’sshares. BCP(assetsof $21.1billion)3engagesinretailandcommercialbanking;corporate,project andtradefinance;investmentbanking;correspondentbanking;andforeignexchange activities.OutsideMorocco,BCP’ssubsidiaryChaabiBank,Paris,France,has35branches andofficesacrossEurope.BCPalsoownssubsidiarybanksinWesternAfricaandholdsa 50percentinterestinAtlanticBankInternational,Abidjan,IvoryCoast,whichhas bankingoperationsinsevenAfricancountries.BCPhasrepresentativeofficesinsixjurisdictions.BCPhasnooperationsintheUnitedStates. BCPispartof anassociationof banksoriginallycharteredin1926underMoroccanlaw. Thatassociation,CréditPopulaireduMaroc(“CPM”),Casablanca,Morocco,includes BCPandthe10BPRs.4CPMwasformedtocreateanationwidebankingnetworkof BCP andtheBPRs.Eachof BCPandtheBPRsprovidesservicestocustomersinaspecificgeographicregionof Morocco,withBCPservingtheCasablancaregion.BCPservesasthe centralbankingbodyfortheBPRs. Asnotedabove,BCPandtheBPRsoperateasanationwidebankingnetwork.5TheproposedrepresentativeofficewouldactasaliaisonbetweenBCPandtheBPRsandtheir respectivecustomers.Theproposedrepresentativeofficewouldalsoconductresearch, solicitbankingbusinessforBCPandtheBPRs,performback-officeandadministrative 1 12U.S.C.§3107(a). 2 ThegovernmentofMoroccoholdsapproximately6percentofBCP’sshares.Approximately5.1percentof BCP’ssharesareheldbyGroupOfficeCherifiendesPhosphates,aMoroccanphosphateminingandexport company,94percentofthesharesofwhichareheldbythegovernmentofMorocco.Approximately6.4percent ofBCP’ssharesareownedbythestate-runpensionfund. 3 DataareasofDecember31,2013.BCPispartofGroupeBanquePopulaire(“GBP”),whichalsoincludes BCP’sbankingandspecializedsubsidiaries,the10BPRs,andBCP’sfoundationsofpublicutility.TheGBP entitiestogetherhaveassetsof$35.1millionandarethesecondlargestfinancialorganizationinMorocco. 4 TheBPRsareindependentbanksoperatingasbankingcooperativesthatareownedbytheircustomers. 5 CPMisnotanincorporatedorganization.However,theIBAdefinesa“foreignbank”as“anycompanyorganizedunderthelawsofaforeigncountry,...whichengagesinthebusinessofbanking,oranysubsidiaryor affiliate,organizedundersuchlaws,ofsuchcompany.”12U.S.C.§3101(7).TheIBAdefines“company”to havethesamemeaningasintheBankHoldingCompanyActof1956,asamended(“BHCAct”).12U.S.C. §3101(13).Section2(b)oftheBHCActdefinesacompanytoinclude,amongotherthings,any“associationor similarorganization.”12U.S.C.§1841(b).Inothercontexts,theBoardhasregardedagroupofentitiesthat areboundtogetherinaformalizedstructuretoconstitutea“company.”BecauseofthelegallymandatedstructureoftheCPM,theBoardistreatingitasasinglebankingentityforthepurposesofprovidingrepresentative functions.

142 FederalReserveBulletin|May2014 functions,provideinformationaboutproductsandservicestocustomers,andperformpreliminarystepsinconnectionwithlending,suchasassemblingcreditinformation.6 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablisharepresentativeoffice,theBoardmustconsiderwhether(1)theforeignbankhas furnishedtotheBoardtheinformationitneedstoassesstheapplicationadequately,(2)the foreignbankandanyforeignbankparentengagedirectlyinthebusinessof bankingoutsideof theUnitedStates,and(3)theforeignbankandanyforeignbankparentaresubject tocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.7 TheBoardalsoconsidersadditionalstandardssetforthintheIBAandRegulationK.8 Inthecaseof anapplicationtoestablisharepresentativeoffice,theBoardhasbyrule determinedthatthesupervisionstandardmaybemetif theBoarddeterminesthatthe applicantbankissubjecttoasupervisoryframeworkthatisconsistentwiththeactivitiesof theproposedrepresentativeoffice,takingintoaccountthenatureof suchactivities.9Thisis alesserstandardthanthecomprehensive,consolidatedsupervisionstandardapplicableto applicationstoestablishbranchoragencyofficesof aforeignbank.TheBoardconsiders thelesserstandardsufficientforapprovalof representativeofficeapplicationsbecauserepresentativeofficesmaynotengageinbankingactivities.Thisapplicationhasbeenconsideredunderthelesserstandard. Inconnectionwiththisapplication,BCPhasprovidedcertaincommitmentsthatlimitthe activitiesof theproposedrepresentativeoffice.Ithascommittedtoengageonlyinactivities permissibleforarepresentativeofficeunderRegulationK.Inparticular,BCPhascommittedthattheproposedrepresentativeofficewouldnotmakecreditdecisionsnoranyother decisionsthatwouldbindBCP,orengageinactivitiesrelatedtosecuritiestrading,foreign exchange,ormoneytransmission.Therepresentativeofficewouldengageonlyintheactivi- 6 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates,performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions.A representativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinany otherbankingactivity.12CFR211.24(d)(1). 7 12U.S.C.§3107(a)(2);12CFR211.24(d)(2).Inassessingthesupervisionstandard,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichhomecountrysupervisors (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandtherelationship betweenthebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthat areconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancial conditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacy andriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformthe Board’sdetermination. 8 See12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2).Thesestandardsinclude:whetherthebank’shomecountrysupervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesofthe bank;whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplacein thehomecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateral effortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebankanditsU.S.affiliatesareincompliancewith U.S.law;theneedsofthecommunity;andthebank’srecordofoperation.TheBoardmayalso,inthecaseof aforeignbankthatpresentsarisktothestabilityoftheUnitedStates,takeintoaccount,totheextent appropriate,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogress towardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountry tomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 9 See12CFR211.24(d)(2).Inadoptingtheregulationsgoverningapplicationstoestablishrepresentativeoffices, theBoardnotedthat“[a]lesserstandardappliesbecauserepresentativeofficesdonotconductabankingbusiness,suchastakingdepositsormakingloans,andthereforepresentlessrisktoU.S.customersthando branchesoragencies.”66Fed.Reg.54365(October26,2001).

LegalDevelopments:FirstQuarter,2014 143 tiesindicatedinitsapplicationtotheBoardandwouldnotbestaffedbymorethanfive employees. Asnotedabove,BCPengagesdirectlyinthebusinessof bankingoutsidetheUnitedStates. BCPhasprovidedtheBoardwithinformationnecessarytoassesstheapplicationthrough submissionsthataddresstherelevantissues. Inevaluatingwhetherthescopeof supervisionof BCPbyhomecountryauthoritiesmeets thestandardsrequiredforopeningarepresentativeoffice,anumberof factorshavebeen takenintoconsideration.TheMoroccancentralbank,BanqueAl-Maghrib(“BAM”), supervisesbanksandfinancecompanies,includingBCPanditssubsidiaries.BAMsupervisesandregulatesBCP,theBPRs,CPM,andtheGBPthroughacombinationof regular on-siteexaminationsandoff-sitemonitoring.On-siteexaminationscoverthemajorareas of operation,capitaladequacy,riskmanagement,assetquality,andinternalcontrols.Offsitemonitoringisconductedthroughthereviewof requiredperiodicreports,whichare submitteddaily,monthly,biannually,andannually.BCP,BCP’ssubsidiaries,theBPRs, CPM,andtheGBPeachsubmitperiodicreportstoBAM,includingaccounting,prudential,andfinancialreports.TheGeneralInspectorateof CPM,whichischargedwithits internalauditfunction,submitstoBAMannualreportsoninternalcontrols,riskmanagement,compliance,businesscontinuity,andforeignbranchactivity. BAMsetsthescopeforannualauditsof BCP,theBPRs,andtheGBPandrequiresthat theauditsbeperformedbyexternalauditors.Theexternalauditorsannuallysubmita reporttoBAMontheinternalcontrolsystemsof BCP,theBPRs,andtheGBP. Basedonallthefactsof record,includingthecommitmentsprovidedbyBCPlimitingthe activitiesof theproposedoffice,ithasbeendeterminedthatBCPissubjecttoasupervisoryframeworkthatisconsistentwiththeactivitiesof theproposedrepresentativeoffice, takingintoaccountthenatureof suchactivities. BCPappearstohavetheexperienceandcapacitytosupporttheproposedrepresentative officeandhasestablishedcontrolsandproceduresfortheproposedrepresentativeofficeto ensurecompliancewithU.S.law,aswellascontrolsandproceduresforitsworldwide operationsgenerally.TakingintoconsiderationBCP’srecordof operationinitshome country,itsoverallfinancialresources,anditsstandingwithitshomecountrysupervisor, financialandmanagerialfactorsareconsistentwithapprovalof theproposedrepresentativeoffice. Moroccoisnotamemberof theFinancialActionTaskForce(“FATF”).Moroccoisa memberof theMiddleEastandNorthAfricaFinancialActionTaskForce,oneof several associatemembersof FATF,andsubscribestoitsrecommendationsonmeasurestocombatmoneylaundering.Inaccordancewiththeserecommendations,Moroccohasenacted lawsanddevelopedregulatorystandardstodetermoneylaundering,terroristfinancing, andotherillicitactivities.MoneylaunderingisacriminaloffenseinMorocco,andMoroccanfinancialinstitutionsarerequiredtoestablishinternalpolicies,procedures,andsystems forthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.BCPhaspoliciesandprocedurestocomplywiththeselawsandregulationsthatare monitoredbygovernmentalentitiesresponsibleforanti-money-launderingcompliance. BCPhascommittedtomakeavailabletotheBoardsuchinformationonBCP’soperations andonanyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeIBA,theBHCAct,andotherapplicablefederallaw.Totheextentthat providingsuchinformationtotheBoardmaybeprohibitedbylaworotherwise,BCPhas committedtocooperatewiththeBoardtoobtainanynecessaryconsentsorwaiversthat

144 FederalReserveBulletin|May2014 mightberequiredfromthirdpartiesfordisclosureof suchinformation.Inaddition,subjecttocertainconditions,BAMmayshareinformationonBCP’soperationswithother supervisors,includingtheBoard.Inlightof thesecommitmentsandotherfactsof record, andsubjecttotheconditiondescribedbelow,ithasbeendeterminedthatBCPhasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmay request. TheproposalwouldnotappeartoaffectfinancialstabilityintheUnitedStates.Inparticular,theabsoluteandrelativesizeof BCPinitshomecountry;thescopeof BCP’sactivities, includingthetypesof activitiesitproposestoconductintheUnitedStatesandthepotentialforthoseactivitiestoincreaseortransmitfinancialinstability;andtheframeworkin placeforsupervisingBCPinitshomecountrydonotappeartocreatesignificantriskto thefinancialstabilityof theUnitedStates.Basedontheseandotherfactors,financialstabilityconsiderationsinthisproposalareconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttocommitmentsmadebyBCP,BCP’s applicationtoestablishtherepresentativeofficeisherebyapprovedbytheDirectorof the Divisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneral Counsel,pursuanttoauthoritydelegatedbytheBoard.10Shouldanyrestrictionsonaccess toinformationontheoperationsoractivitiesof BCPanditsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineandenforcecomplianceby BCPoritsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof BCP’sdirectorindirectactivitiesintheUnitedStates.Approvalof thisapplication alsoisspecificallyconditionedoncompliancebyBCPwiththeconditionsimposedinthis orderandthecommitmentsmadetotheBoardinconnectionwiththisapplication.11For purposesof thisaction,thesecommitmentsandconditionsaredeemedtobeconditions imposedbytheBoardinwritinginconnectionwiththisdecisionand,assuch,maybe enforcedinproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveMarch28,2014. RobertdeV.Frierson Secretaryof theBoard Wing Lung Bank Limited Hong Kong SAR, People’s Republic of China OrderApprovingEstablishmentof Branches FRBOrderNo.2014–1(January13,2014) WingLungBankLimited(“WingLung”),HongKongSAR(“HongKong”),People’s Republicof China,aforeignbankwithinthemeaningof theInternationalBankingAct (“IBA”),hasappliedundersection7(d)of theIBA1toestablishafederalbranchinSan Francisco,California,andtoupgradeitsexistinglimitedfederalbranchinAlhambra, 10 12CFR265.7(d)(12). 11 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedrepresentativeofficeparallelsthecontinuingauthorityoftheDistrictofColumbiatolicenseofficesofaforeignbank.TheBoard’sapprovalofthis applicationdoesnotsupplanttheauthorityoftheDistrictofColumbiaoritsagent,theDistrictofColumbia DepartmentofInsurance,SecuritiesandBanking,tolicensetheproposedofficeofBCPinaccordancewith anytermsorconditionsthattheymayimpose. 1 12U.S.C.§3105(d).

LegalDevelopments:FirstQuarter,2014 145 California,toafull-servicebranch.2TheForeignBankSupervisionEnhancementActof 1991,whichamendedtheIBA,providesthataforeignbankmustobtaintheapprovalof theBoardtoestablishabranchintheUnitedStates.3 Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinbothSanFrancisco(TheRecorder, August27,2012)andAlhambra(SanGabrielValleyTribune,August23,2012).Thetime forfilingcommentshasexpired,andtheBoardhasconsideredallcommentsreceived. WingLung,withtotalconsolidatedassetsof approximately$27.2billion,isthe10largest bankinHongKong.4ChinaMerchantsBankCo.,Limited(“CMB”),Shenzhen,People’s Republicof China,ownsallof thesharesof WingLung.5 WingLungisacommercialbankandengagesinretailandcommercialbanking.Outside HongKong,WingLungoperatesbranchesinShenzhenandShanghai,People’sRepublic of China,andabranchintheCaymanIslands.IntheUnitedStates,WingLungoperatesa limitedfederalbranchinAlhambra,California,asnoted.WingLungisaqualifyingforeign bankingorganizationunderRegulationK.6 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhether:(1)theforeignbankandanyforeignbank parentengagedirectlyinthebusinessof bankingoutsideof theUnitedStates;(2)theforeignbankhasfurnishedtotheBoardtheinformationitneedstoassesstheapplication adequately;and(3)theforeignbankandanyforeignbankparentaresubjecttocompre- 2 Asalimitedbranch,theAlhambrabranchisprohibitedfromacceptingdepositsfromsourcesotherthanthose permittedbysection25AoftheFederalReserveAct.Undersection25AoftheFederalReserveAct,anEdge corporationmayreceivedepositsoutsidetheUnitedStatesandonlysuchdepositswithintheUnitedStatesthat areincidentaltoorforthepurposeofcarryingouttransactionsinforeigncountries.12U.S.C.§615(a).RegulationKdefinestheextentofpermissibledeposit-takingactivitiesofEdgecorporations.12CFR211.6(a)(1). Upgradingthelimitedbranchtoafull-servicebranchwouldpermitthebranchtoacceptwholesaledomestic deposits. 3 UndertheBoard’sRegulationK,upgradingalimitedbranchtoafull-servicebranchrequiresBoardapproval. 12CFR211.21(l)(4)and(f). 4 AssetandrankingdataareasofJune30,2013,andarebasedontheexchangerateasofthatdate. 5 CMB,withtotalconsolidatedassetsofapproximately$620billion,istheseventhlargestbankinChina.CMB isindirectlycontrolledbythegovernmentofChinathroughanumberofwholly-ownedcompanies.Oneof thesecompanies,ChinaMerchantsGroup,Limited,Shenzhen,People’sRepublicofChina,indirectlyowns approximately18.6percentofCMB’stotaloutstandingsharesandisconsideredtocontrolCMBforpurposes oftheBankHoldingCompanyAct.ChinaMerchantsBankCo.,Limited,94FederalReserveBulletinC24 (2008)(“CMBOrder”),atn.3.Anothergovernment-ownedcompany,ChinaOceanShipping(Group)Company,owns6.2percentofthesharesofCMB.HKSCCNomineesLimitedholdsapproximately17.9percentof thesharesofCMBastheregisterednomineeofothershareholders.Noothershareholderownsmorethan 5percentofthesharesofCMB.ShareholderdataareasofJune30,2013. 6 12CFR211.23(a).

146 FederalReserveBulletin|May2014 hensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.7TheBoard alsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.8 TheIBAincludesalimitedexceptiontothegeneralstandardrelatingtocomprehensive, consolidatedsupervision.9Thisexceptionprovidesthat,if theBoardisunabletofindthat aforeignbankseekingtoestablishabranch,agency,orcommerciallendingcompanyis subjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbytheappropriateauthoritiesinitshomecountry,theBoardmayneverthelessapprovetheapplication providedthat:(i)theappropriateauthoritiesinthehomecountryof theforeignbankare activelyworkingtoestablisharrangementsfortheconsolidatedsupervisionof suchbank; and(ii)allotherfactorsareconsistentwithapproval.10Asdiscussedbelow,thisisthestandardappliedbytheBoardinthiscase.Indecidingwhethertoexerciseitsdiscretionto approveanapplicationunderauthorityof thisexception,theBoardmustalsoconsider whethertheforeignbankhasadoptedandimplementedprocedurestocombatmoney laundering.11TheBoardalsomaytakeintoaccountwhetherthehomecountryof theforeignbankisdevelopingalegalregimetoaddressmoneylaunderingorisparticipatingin multilateraleffortstocombatmoneylaundering.12 Asnotedabove,WingLungengagesdirectlyinthebusinessof bankingoutsidetheUnited States.CMBalsoengagesdirectlyinthebusinessof bankingoutsidetheUnitedStates. WingLunghasprovidedtheBoardwithinformationnecessarytoassesstheapplication throughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,theBoardpreviouslyhasdetermined,inconnectionwithapplicationsinvolvingotherbanksinHongKong,thatthose banksweresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhome 7 12U.S.C.§3105(d)(2);12CFR211.24.RegulationKprovidesthataforeignbankissubjecttoconsolidated homecountrysupervisioniftheforeignbankissupervisedorregulatedinsuchamannerthatitshomecountry supervisorreceivessufficientinformationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoanaffiliate)toassesstheforeignbank’soverallfinancialconditionandcompliance withlawandregulation.12CFR211.24(c)(1)(ii).Inassessingthisstandard,theBoardconsiders,amongother indiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors(i)ensure thatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,audit reports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetweenthebankandits affiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 8 12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2)-(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing:(i) whetherthebank’shomecountrysupervisorhasconsentedtothe establishmentoftheoffice;(ii)thefinancialandmanagerialresourcesofthebank;(iii)whetherthebankhas procedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountryto addressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombat moneylaundering;(iv)whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthe bank’soperationswiththeBoard;(v)whetherthebankhasprovidedtheBoardwithadequateassurancesthat itwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofitsaffiliates thattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeIBAandotherapplicablefederal bankingstatutes;(vi)whetherthebankanditsU.S.affiliatesareincompliancewithU.S.law;(vii)theneedsof thecommunity;and(viii)thebank’srecordofoperation.TheBoardalsoconsiders,inthecaseofaforeign bankthatpresentsarisktothestabilityoftheUnitedStates,whetherthehomecountryoftheforeignbank hasadopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountrytomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 9 12U.S.C.§3105(d)(6). 10 12U.S.C.§3105(d)(6)(A). 11 12U.S.C.§3105(d)(6)(B). 12 Id.

LegalDevelopments:FirstQuarter,2014 147 jurisdictionsupervisor,theHongKongMonetaryAuthority(“HKMA”).13WingLungis supervisedbytheHKMAonsubstantiallythesametermsandconditionsasthoseother banks.Inthiscase,however,WingLungispartof alargefinancialgroupheadquarteredoutsideof HongKong.Asdescribedabove,WingLungiswhollyownedbyCMB, whichisinturncontrolledbyChinaMerchantsGroup,Limited.In2007,theBoard approvedanapplicationbyCMBtooperateabranchinNewYork.Inactingonthatapplication,theBoarddeterminedthatCMB’shomecountrysupervisorwasactivelyworkingto establisharrangementsfortheconsolidatedsupervisionof CMB,consistentwiththediscretionarystandardintheIBA.Consequently,theBoardhasdeterminedtoapplythesame standardinactingonthisapplicationbyCMB’ssubsidiarybank. HongKongisamemberof theFinancialActionTaskForce(“FATF”)andsubscribesto theFATF’srecommendationsonmeasurestocombatmoneylaunderingandterrorist financing.Inaccordancewiththeserecommendations,HongKonghasenactedlawsand developedregulatorystandardstodetermoneylaunderingandterroristfinancing.Money launderingisacriminaloffenseinHongKong,andHongKongfinancialinstitutionsare requiredtoestablishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingandterroristfinancingthroughouttheirworldwideoperations. WingLunghaspoliciesandproceduresinplacetocomplywiththeselawsandregulations, andthesepoliciesandproceduresaremonitoredbygovernmentalentitiesresponsiblefor anti-moneylaunderingcompliance.Basedonallthefactsof record,ithasbeendetermined thatWingLung’shomejurisdictionsupervisorisactivelyworking,inconjunctionwiththe relevantsupervisoryauthoritiesof thePeople’sRepublicof China,toestablisharrangementsfortheconsolidatedsupervisionof WingLung,andthatconsiderationsrelatingto thestepstakenbyWingLunganditshomejurisdictiontocombatmoneylaunderingare consistentwithapprovalunderthisstandard. TheBoardpreviouslyhasdeterminedthatCMB’shomecountrysupervisorisactively workingtoestablisharrangementsfortheconsolidatedsupervisionof CMBandthatconsiderationsrelatingtothestepstakenbyCMBanditshomejurisdictiontocombatmoney launderingareconsistentwithapprovalunderthisstandard.14Basedonthisfindingandall thefactsof record,theBoardhasconcludedthatCMB’shomecountrysupervisory authorityremainsactivelyworkingtoestablisharrangementsfortheconsolidatedsupervisionof CMBandthatconsiderationsrelatingtothestepstakenbyCMBanditshome countrytocombatmoneylaunderingareconsistentwithapprovalunderthisstandard. Theadditionalstandardssetforthinsection7of theIBAandRegulationKhavealsobeen takenintoaccount.TheHKMAhasnoobjectiontotheestablishmentof theproposed branches. TheBoardhasalsoconsideredthefinancialandmanagerialfactorsinthiscase.Hong Kong’srisk-basedcapitalstandardsareconsistentwiththoseestablishedbytheBaselCapitalAccord(“Accord”).WingLung’scapitalisinexcessof theminimumlevelsthatwould berequiredbytheAccordandisconsideredequivalenttocapitalthatwouldberequiredof aU.S.bankingorganization.Managerialandotherfinancialresourcesof WingLungare consideredconsistentwithapproval,andWingLungappearstohavetheexperienceand capacitytosupporttheproposedbranches.Inaddition,WingLunghasestablished 13 Seeletter,datedMay14,2007,fromtheFederalReserveBankofNewYorktoTheHongkongandShanghai BankingCorporationLimited;CiticKaWahBankLimited,89FederalReserveBulletin435(2003);TheBankof EastAsia,Limited,84FederalReserveBulletin886(1998);LiuChongHingBank,81FederalReserveBulletin 905(1995);HongKongandShanghaiBankingCompany,81FederalReserveBulletin902(1995);andDahSing Bank,Ltd.,80FederalReserveBulletin182(1994). 14 CMBOrder,atC24.

148 FederalReserveBulletin|May2014 controlsandproceduresfortheproposedbranchestoensurecompliancewithU.S.lawand foritsoperationsingeneral. WithrespecttoaccesstoinformationonWingLung’soperations,therestrictionsondisclosureinrelevantjurisdictionsinwhichWingLungoperateshavebeenreviewed,andrelevantgovernmentauthoritieshavebeencontactedregardingaccesstoinformation.Wing LunghascommittedtomakeavailabletotheBoardsuchinformationonitsoperationsand onthoseof anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforce compliancewiththeIBA,theBankHoldingCompanyAct,andotherapplicablefederal law.Totheextentthattheprovisionof suchinformationtotheBoardmaybeprohibitedby laworotherwise,WingLunghascommittedtocooperatewiththeBoardtoobtainany necessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosureof suchinformation.15Inaddition,subjecttocertainconditions,theHKMAmayshareinformationonWingLung’soperationswithothersupervisors,includingtheBoard.Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow, ithasbeendeterminedthatWingLunghasprovidedadequateassurancesof accesstoany necessaryinformationthattheBoardmayrequest. Section173of theDodd-FrankWallStreetReformandConsumerProtectionAct amendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbankthatpresents arisktothestabilityof theUnitedStatesfinancialsystem,whetherthehomecountryof theforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,an appropriatesystemof financialregulationforthefinancialsystemof suchhomecountryto mitigatesuchrisk.16Informationrelevanttothestandardregardingrisktothestabilityof theUnitedStatesfinancialsystemhasalsobeenreviewed.Inparticular,considerationhas beengiventotheabsoluteandrelativesizeof WingLunginitshomejurisdiction;the scopeof WingLung’sactivities,includingthetypeof activitiesitproposestoconductin theUnitedStatesandthepotentialforthoseactivitiestoincreaseortransmitfinancial instability;andtheframeworkinplaceforsupervisingWingLunginitshomejurisdiction. Basedontheseandotherfactors,financialstabilityconsiderationsinthisproposalareconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyWing LungandCMB,aswellasthetermsandconditionssetforthinthisorder,WingLung’s applicationtoestablishabranchinSanFranciscoandtoupgradeitslimitedbranchin Alhambratoafull-servicebranchisherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneralCounsel,pursuanttoauthoritydelegatedbytheBoard.17Shouldanyrestrictionsonaccesstoinformation ontheoperationsoractivitiesof WingLunganditsaffiliatessubsequentlyinterferewith theBoard’sabilitytoobtaininformationtodetermineandenforcecompliancebyWing Lungoritsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof WingLung’sdirectorindirectactivitiesintheUnitedStates,orinthecaseof any suchoperationslicensedbytheOfficeof theComptrollerof theCurrency(“OCC”), recommendterminationof suchoperation.Approvalof thisapplicationalsoisspecifically conditionedoncompliancebyWingLungandCMBwiththecommitmentsmadeinconnectionwiththisapplicationandwiththeconditionsinthisorder.18Thecommitmentsand 15 CMBpreviouslymadethesecommitments.CMBOrder,atC26. 16 12U.S.C.§3105(d)(3)(E). 17 12CFR265.7(d)(12). 18 TheBoard’sauthoritytoapprovetheestablishmentofthebranchesparallelsthecontinuingauthorityofthe OCCtolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplantthe authorityoftheOCCtolicensetheproposedofficesofWingLunginaccordancewithanytermsorconditions thattheOCCmayimpose.

LegalDevelopments:FirstQuarter,2014 149 conditionsreferredtoaboveareconditionsimposedinwritingbytheBoardinconnection withthisdecisionandmaybeenforcedinproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveJanuary13, 2014. MargaretMcCloskeyShanks DeputySecretaryof theBoard

151 Federal Reserve BULLETIN August 2014 Vol. 100, No. 3 Legal Developments: Second Quarter, 2014 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act Cullen/Frost Bankers, Inc. San Antonio, Texas OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2014–10(May14,2014) Cullen/FrostBankers,Inc.(“Cullen/Frost”),SanAntonio,Texas,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tomergewith WNBBancshares,Inc.(“WNBBancshares”),andtherebyacquireitssubsidiarybank, WesternNationalBank,bothof Odessa,Texas.Inaddition,Cullen/Frost’ssubsidiarystate memberbank,FrostBank,SanAntonio,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)2tomergewithWesternNationalBank,withFrostBankasthesurvivingentity.FrostBankalsohasapplied undersection9of theFederalReserveAct(“FRA”)toestablishandoperatebranchesat themainofficeandthebranchesof WesternNationalBank.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(78FederalRegister54647(September5, 2013)).4AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof the bankmergerwasrequestedfromtheUnitedStatesAttorneyGeneral,andacopyof the requestwasprovidedtotheappropriatebankingagency.Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedin lightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct,and theFRA. Cullen/Frost,withconsolidatedassetsof approximately$24.4billion,isthe55thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$20.8billionindeposits.5Cullen/FrostcontrolsFrostBank,whichoperatesonlyinTexas.Frost BankisthesixthlargestdepositoryinstitutioninTexas,controllingdepositsof $19.1billion,whichrepresent2.9percentof thetotaldepositsof insureddepositoryinstitutionsin thatstate.6 1 12U.S.C.§1842. 2 12U.S.C.§1828(c). 3 12U.S.C.§321.Theselocationsarelistedintheappendix. 4 12CFR262.3(b). 5 Assetandnationwidedeposit-rankingdataareasofDecember31,2013,unlessotherwisenoted. 6 StatedepositdataareasofJune30,2013,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutions includecommercialbanks,savingsassociations,andsavingsbanks.

152 FederalReserveBulletin|August2014 WNBBancshares,withtotalconsolidatedassetsof $1.5billion,controlsWesternNational Bank,whichoperatesinTexas.WesternNationalBankisthe45thlargestinsureddepositoryinstitutioninTexas,controllingdepositsof approximately$1.2billion,whichrepresent lessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,Cullen/Frostwouldbecomethe53rdlargestinsured depositoryorganizationintheUnitedStates,controllingconsolidatedassetsof approximately$25.9billion.Cullen/Frostwouldcontroltotalconsolidateddepositsof approximately$22.2billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InTexas,FrostBankwouldremainthe sixthlargestinsureddepositoryorganization,controllingdepositsof approximately $20.3billion,whichrepresent3.1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.7 Cullen/FrostandWNBBancshareshavesubsidiarydepositoryinstitutionsthatcompete directlyintheSanAntonio,Texas,bankingmarket.8TheBoardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketinlightof allthefactsof record.In particular,theBoardhasconsideredtherelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarkets(“marketdeposits”)controlledbyCullen/FrostandWNB Bancshares;9theconcentrationlevelsof marketdepositsandtheincreaseintheselevels,as measuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Justice BankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);10thenumberof competitorsthatwouldremaininthebankingmarket;andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesforthismarket.Onconsummationof 7 12U.S.C.§§1842(c)(1)and1828(c)(5). 8 TheSanAntoniobankingmarketisdefinedasBexar,Comal,Guadalupe,Kendall,andWilsoncounties,allin Texas. 9 DepositandmarketsharedataareasofJune30,2013,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989),andNationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 10 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines in2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html.

LegalDevelopments:SecondQuarter,2014 153 theproposal,thebankingmarketwouldremainhighlyconcentrated,asmeasuredbythe HHI,andnumerouscompetitorswouldremain.11 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinthebankingmarketinwhichCullen/FrostandWNBBancsharescompete directlyorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdetermined thatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andaconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepository institutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation, theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant.Further,theBoardhasconsideredthe futureprospectsof theorganizationsinvolvedintheproposalinlightof thefinancialand managerialresourcesandtheproposedbusinessplan. TheBoardhasconsideredthefinancialfactorsof theproposal.Cullen/FrostandFrost Bankarebothwellcapitalizedandwouldremainsoonconsummationof theproposed acquisition.Theproposedtransactionisabankholdingcompanymerger,structuredasan exchangeof shares.12Theassetquality,earnings,andliquidityof FrostBankandWestern NationalBankareconsistentwithapproval,andCullen/Frostappearstohaveadequate resourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Basedonitsreviewof therecord,theBoardfindsthattheorganization hassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Cullen/Frost,WNBBancshares,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, 11 Cullen/FrostoperatesthesecondlargestdepositoryinstitutionintheSanAntoniobankingmarket,with approximately$7.1billionindeposits,whichrepresent13.4percentofmarketdeposits.WNBBancsharesoperatesthe34thlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$44.9million, whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,Cullen/ Frostwouldcontinuetooperatethesecondlargestdepositoryinstitutioninthemarket,controllingdepositsof approximately$7.1billion,whichrepresent13.4percentofmarketdeposits.TheHHIwouldincreasebytwo pointsto3061,and52competitorswouldremaininthemarket. 12 ApplicantswouldeffecttheacquisitionbymergingSpecialPrairieHoldingCo.,awhollyownedsubsidiaryof Cullen/Frost,withandintoWNBBancshares(withWNBBancsharesasthesurvivor).Atthetimeofthe merger,eachshareofWNBBancsharescommonstockwouldbeconvertedintoarighttoreceiveCullen/Frost commonstockandcash,basedonanexchangeratio.Immediatelyafterthismerger,WNBBancshareswould mergewithandintoCullen/Frost(withCullen/Frostasthesurvivor).

154 FederalReserveBulletin|August2014 theBoardhasconsidereditssupervisoryexperiencesandthoseof otherbanksupervisory agencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebanking andanti-money-launderinglaws. Cullen/Frost,WNBBancshares,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewellmanaged.Cullen/Frost’sexistingrisk-managementprogramanditsdirectorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsandsenior executiveofficersof Cullen/Frosthavesubstantialknowledgeof andexperienceinthe bankingandfinancialservicessectors.13 TheBoardalsohasconsideredCullen/Frost’splansforimplementingtheproposal.Cullen/ Frostisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof thepostacquisitionintegrationprocessforthisproposal.Cullen/Frostwouldimplementitsriskmanagementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseare consideredacceptablefromasupervisoryperspective.Inaddition,Cullen/Frost’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperates inasafeandsoundmanner,andCullen/FrostisproposingtointegrateWesternNational Bank’sexistingmanagementandpersonnelinamannerthataugmentsCullen/Frost’s management. Cullen/Frost’ssupervisoryrecord,managerialandoperationalresources,andplansfor operatingthecombinedinstitutionsafterconsummationprovideareasonablebasistoconcludethatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellastherecordsof effectivenessof Cullen/FrostandWNBBancshares incombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandundertheBankMergerAct, theBoardmustconsidertheeffectsof theproposalontheconvenienceandneedsof the communitiestobeservedandtakeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).14TheCRArequiresthefederal financialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthe creditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeand soundoperation,15andrequirestheappropriatefederalfinancialsupervisoryagencyto takeintoaccountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,in evaluatingbankexpansionaryproposals.16 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof FrostBankandWesternNationalBank,datareportedbyFrost BankandWesternNationalBankundertheHomeMortgageDisclosureAct(“HMDA”),17 otherinformationprovidedbyCullen/Frost,confidentialsupervisoryinformation,andthe publiccommentreceivedontheproposal.Acommenterobjectedtotheproposaland 13 BoththechairmanandthechiefexecutiveofficerofCullen/Frostwouldcontinueintheirrolesfollowingconsummationoftheproposedtransaction. 14 12U.S.C.§§1842(c)(2)and1828(c)(5);12U.S.C.§2901etseq. 15 12U.S.C.§2901(b). 16 12U.S.C.§2903. 17 12U.S.C.§2801etseq.

LegalDevelopments:SecondQuarter,2014 155 allegedthatFrostBankhadengagedindiscriminatorylendingpracticesintheHouston, Texas,area. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.18TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.19Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,onsiteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof FrostBank.FrostBankwasassigneda“satisfactory”ratingatits mostrecentCRAperformanceevaluationbytheOfficeof theComptrollerof theCurrency (“OCC”),asof August11,2008(“FrostBankEvaluation”).ExaminersnotedthatFrost Bank’slendinglevelsreflectedgoodresponsivenesstoitsdepositmarketshareandarea creditneeds,particularlyregardingloanstosmallbusinesses,andthatFrostBank’slevelof communitydevelopmentloanswashigh.20FrostBankreceived“highsatisfactory”ratings onboththeLendingTestandInvestmentTestanda“lowsatisfactory”ratingontheServiceTest.21 FortheLendingTest,examinersnotedthatFrostBank’slendinglevelsreflectedgood responsivenesstoitsdepositmarketshareandareacreditneeds,particularlyregarding loanstosmallbusinesses.22Examinersalsoobservedthatthebank’sdistributionof all CRA-reportableloansbyincomelevelof geographywasgood.Examinersdidnotidentify anyconspicuousgapsinthegeographicdistributionof homemortgageloansandsmall loanstobusinessesduringtheevaluationperiod,andtheynotedthatthebank’sdistributionof loansinsideitsassessmentareaswasexcellent.ExaminersfoundthatFrostBank’s distributionof allCRA-reportableloansbyincomelevelof theborrowerwasadequate. ExaminersnotedthatFrostBank’sperformanceincommunitydevelopmentlendinghada positiveimpactonFrostBank’sLendingTestperformanceinthreeof thebank’sfour full-scopeassessmentareasandanoverallpositiveimpactontheLendingTestconclusions. Duringtheevaluationperiod,FrostBankoriginatedthreeloanstotaling$90,000withinthe 18 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (March11,2010). 19 12U.S.C.§2906. 20 TheevaluationperiodfortheLendingTestintheFrostBankEvaluationwasJanuary1,2005,throughDecember31,2007,exceptforcommunitydevelopmentloans,whichhadanevaluationperiodfromJanuary1,2005, throughAugust10,2008.TheevaluationperiodfortheInvestmentTestandServiceTestwasfromJanuary1, 2005,throughAugust10,2008. 21 TheFrostBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProceduresandincluded afull-scopeassessmentreviewoffourareas:theAustin-RoundRock,TexasMetropolitanStatisticalArea (“MSA”)(“AustinMSA”);theHouston,TexasAssessmentArea(“HoustonAA”);theSanAntonio,Texas AssessmentArea(“SanAntonioAA”);andtheTarrantCounty,TexasAssessmentArea(“Tarrant CountyAA”).Alimited-scopereviewwasperformedintheBrownsville-Harlingen,TexasandMcAllen-Edinburg-Mission,TexasMSAs;theCorpusChristi,TexasAssessmentArea;theDallasCounty,TexasAssessment Area;andtheWillacyCounty,TexasAssessmentArea.Examinersplacedapproximatelyequalweightonthe bank’sperformanceintheHoustonAA,theSanAntonioAA,andtheTarrantCountyAAbasedontheir respectivesharesofdepositsandloans.Examinersplacedlessweightonthebank’sperformanceintheAustin MSAgivenitssmallermarketshareofloansanddeposits. 22 InevaluatingtheLendingTest,examinersplacedgreaterweightonFrostBank’ssmallbusinesslending,which represented74percentofthebank’sCRA-reportableloansoriginatedorpurchasedduringtheevaluation period.

156 FederalReserveBulletin|August2014 AustinMSA,14communitydevelopmentloanstotalingapproximately$24.4millioninthe HoustonAA,17loanstotalingapproximately$82.8millionintheSanAntonioAA,and 16loanstotalingapproximately$42.5millionintheTarrantCountyAA.Examinersnoted that,intheHoustonAA,FrostBankoriginatedan$8.5millionloanfortheconstruction andshort-termfinancingof facilitiesforanonprofitorganizationthatprovidedservices relatedtothetreatmentandpreventionof alcoholanddrugabuse.Examinersnotedthat themajorityof thebeneficiariesof theorganization’sserviceswereLMIindividuals. InevaluatingFrostBank’sperformanceundertheInvestmentTest,examinersfoundthat FrostBank’sinvestmentswerebeneficialto,andmettheidentifiedneedsof,thebank’s assessmentareas.Duringtheevaluationperiod,FrostBankmade103investments,grants, anddonationstotalingapproximately$9.4millionwithintheAustinMSA;103investments,grants,anddonationstotalingapproximately$8.8millionwithintheHoustonAA; 147investments,grants,anddonationstotalingapproximately$15.7millionwithintheSan AntonioAA;and62investments,grants,anddonationstotalingapproximately$9.5millionwithintheTarrantCountyAA.IntheHoustonAA,FrostBank’sinvestments includedmortgage-backedsecuritiestotalingapproximately$8.6millionandincluded donationstocommunityorganizationsthatpromotedthegrowthof smallbusinessesand thatsupportedtheneedsof LMIindividuals. InevaluatingFrostBank’sperformanceundertheServiceTest,examinersfoundthatthe bank’sdistributionof branchesandtheaccessibilitytoitsproductsandservicesinall assessmentareaswereadequate.ExaminersnotedthatFrostBankofferedapayrollcard producttolargecommercialcustomerstoassistthemwithmeetingtheneedsof theunderservedandthatminimum-andlow-wageworkerswhodidnothaveabankingrelationship oracheckingaccountbenefitedfromtheproduct.ExaminersobservedthatFrostBank providedarelativelyhighlevelof communitydevelopmentservicesintheassessmentareas receivingafull-scopereview. Duringthecourseof theFrostBankEvaluation,examinersdidnotfindanyevidencethat FrostBankengagedindiscriminatoryorotherillegalcreditpractices. CRAPerformanceof WesternNationalBank.WesternNationalBankwasassigneda“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheOCC,asof October15,2009(“WesternNationalBankEvaluation”).23ExaminersnotedthatWestern NationalBankmadeasubstantialmajorityof itsloanstoborrowerswithinitsCRA assessmentareas,asmeasuredbybothnumberof loansanddollaramount.24 AsdescribedintheWesternNationalBankEvaluation,thebank’sperformanceunderthe LendingTestwasrated“satisfactory.”Examinersfoundthatasubstantialmajorityof the bank’sloanssampledbyexaminers(78percentof thenumberof loansand68percentof thedollaramountof theloans)weremadewithinitsassessmentareas.Examinersfound thatthebank’sdistributionof loansmadetoindividualsandfamiliesof differentincome levelsandtobusinessesof differentsizeswasreasonableandthatthegeographicdispersion of WesternNationalBank’ssmallbusinessloanswasreasonablethroughouttheassessment areas. 23 TheWesternNationalBankEvaluationwasconductedusingtheIntermediateSmallBankCRAExamination Procedures,andexaminersreviewedasampleofthebank’ssmallbusinessloansfromJanuary1,2007,through August31,2009,andasampleofthebank’sresidentialrealestatelendingfromJanuary1,2005,through August31,2009.TheevaluationperiodfortheWesternNationalBankEvaluationwasApril20,2005,through October15,2009. 24 TheWesternNationalBankEvaluationincludedafull-scopeassessmentreviewoftwoareas:theMidland, TexasMSA(“MidlandMSA”)andtheOdessa,TexasMSA.Alimited-scopereviewwasperformedinthe BexarCounty,TexasAssessmentArea.

LegalDevelopments:SecondQuarter,2014 157 WesternNationalBank’sperformanceundertheCommunityDevelopmentTestwasrated “satisfactory.”Examinersfoundthatthebank’scommunitydevelopmentperformance reflectedanadequateresponsivenesstocommunitydevelopmentneedswithintheassessmentareas.Duringtheevaluationperiod,WesternNationalBankmade15loanstotaling approximately$1.5milliontopurchaselotsand/orconstructone-to-four-familyresidences forLMIpersonsinLMIcensustractswithintheMidlandMSA.WesternNationalBank’s qualifiedcommunitydevelopmentinvestmentsincludeddonationsto19organizations totalingapproximately$4.2million.WesternNationalBankalsopurchasedequityinvestmentsof whichapproximately$1.7millionqualifiedasbenefitingLMIhouseholds.Examinersnotedthatthebank,throughitsemployees,wasinvolvedinavarietyof community developmentservicesthatreflectedanadequateresponsivenesstothecommunities’needs. FrostBank’seffortssincethe2008CRAEvaluation.TheFederalReserveBankof Dallas (“ReserveBank”)beganaCRAexaminationof FrostBankinthesecondquarterof 2013.25Overall,examinersfoundthatFrostBank’sCRAperformanceremainedsatisfactory.26ExaminersfoundthatFrostBank’slendingactivityreflectedgoodresponsivenessto thebank’sassessmentareacreditneeds.Thegeographicdistributionof loansreflected goodpenetrationthroughouttheassessmentareas,andthedistributionof borrowers reflectedgoodpenetrationamongcustomersof differentincomelevelsandbusinessesof variousrevenuesizes.Thebank’slevelof communitydevelopmentloanswasadequate,and itsqualifiedcommunitydevelopmentinvestmentsandgrantsinitsassessmentareaswere significant.FrostBank’sretailserviceswerefoundtobereasonablyaccessibletothebank’s geographiesandtoindividualsof differentincomelevels,andthebankprovidedarelatively highlevelof communitydevelopmentservices. IntheHoustonAA,examinersfoundthatthegeographicdistributionof FrostBank’s HMDAloanswasgoodandborrowerdistributionwasadequate.Thegeographicdistributionof thebank’ssmallbusinessloanswasgood.Duringthereviewperiod,thepercentage of thebank’ssmallbusinessloansoriginatedinLMIcensustractsandthepercentageof thebank’ssmallbusinessloanstobusinesseswithrevenuesof $1millionorlessexceeded theaggregateof allreportersof suchdata.Examinersfoundthatduringthereviewperiod, FrostBankoriginatedsixcommunitydevelopmentloanstotalingover$39million,includingtwocommunitydevelopmentloansthatprovidedeconomicdevelopmenttoalowincomeareaandaloantoaSmallBusinessInvestmentCompanythatspecializesinprovidinglong-termdebtandequitycapitaltosmallbusinesses.Inaddition,FrostBankmade79 separateinvestmentstotalingover$11millionduringthereviewperiod,includinginvestmentsinmultiplebondsdesignatedforaffordablehousing.Thebankprovidednumerous investmentstoACCIONTexas,whichprovidescreditandservicestosmallbusinessesand entrepreneurswhoareunabletoobtainfinancingfromtraditionalsources.Examiners notedthatFrostBankwasalsoparticularlyresponsiveinteachingfinancialliteracyand assistingtheHoustonareainvariouswaysafterHurricaneIke. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordof FrostBankincomplyingwithfairlendingand otherconsumerprotectionlaws.Aspartof thisconsideration,theBoardreviewedthe FrostBankEvaluationandFrostBank’srecordof performanceinhelpingtomeetthe creditneedsof itscommunitiessincetheFrostBankEvaluation,consideredtheReserve Bank’srecentevaluationof FrostBank’scompliancewithfairlendinglaws,evaluatedFrost 25 ThereviewperiodfortheLendingTestwasJanuary1,2010,throughDecember31,2011.Thereviewperiodfor theInvestmentTestandServiceTestwasAugust11,2008,throughDecember31,2011. 26 Thefindingsandconclusionsareintheprocessofbeingfinalized.

158 FederalReserveBulletin|August2014 Bank’sfairlendingpoliciesandprocedures,andconsideredthecommentonthe application. HMDADataandFairLendingAnalysis.TheReserveBankrecentlyconductedareviewof FrostBank’sfairlendingperformanceinHarrisCounty,Texas,whereHoustonislocated, andinDallasCounty,Texas.27AcommenterallegedthatFrostBankdisfavorsAfrican AmericanneighborhoodsintheHoustonareainHarrisCountywithrespecttoaccessto itsbankingproductsandservicesandthatthebankhasengagedinredlining.TheReserve Bankconsideredthecommentinconnectionwithitsreviewof FrostBank’sfairlending performance.TheReserveBankanalyzedFrostBank’slendingdata,assessmentareadefinitions,geographicdistributionof branches,andmarketingandoutreachefforts,andthe analysisdidnotconfirmthecommenter’sassertionof redlining. Withrespecttomortgagelending,Cullen/FrostrepresentsthatFrostBank’spercentageof HMDA-reportableapplicationsinminoritycensustractsintheHouston,TexasMSA (“HoustonMSA”)approximatedorexceededthatof theaggregateof alllendersin2010, 2011,and2012,andthatFrostBank’spercentageof HMDA-reportableapplicationsin AfricanAmericancensustractsintheHoustonMSAexceededthatof theaggregateinall threeyears.28 TheBoardbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlending practicesarebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequalaccesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity. AlthoughtheHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,HMDAdataalonedonotprovideasufficientbasisonwhichtoconclude whetherFrostBankexcludedordeniedcredittoanygrouponaprohibitedbasis.29Fully evaluatingFrostBank’scompliancewithfairlendinglawsandregulationswouldrequirea thoroughreviewof thebank’sapplicationandunderwritingpoliciesandprocedures,as wellasaccesstoinformationcontainedintheapplicationfiles,todeterminewhetherthe observedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwriting factors. ReserveBankexaminersreviewedFrostBank’sHMDAdataintheHoustonareaforthe period2010-13.30Thedatarevealedthatthebankismakingmortgageloansavailablein areasof HarrisCountyinwhichthemajorityof residentsareeitherAfricanAmericanor Hispanic.FrostBankgenerallyoutperformedorwasapproximatelycomparabletoitspeer institutionsintermsof receivingapplicationsfromandoriginatingHMDAloansinAfricanAmericanorHispaniccensustractsinHarrisCountyfortheperiod2010-13.Frost 27 TheReserveBankconsidereddatafromJanuary1,2010,throughDecember31,2013. 28 FrostBankalsorepresentsthatitceasedoriginationofone-to-four-familyconventionalresidentialmortgage loansin2000.Homeimprovementlendingcurrentlyisthebank’sprimaryHMDA-reportableproduct. ThecommenteralsoallegedthatFrostBankdiscriminatesagainstAfricanAmericansinitsprovisionoffactoringservices.FrostBankrepresentsthatitdoesnotactivelymarketfactoringservicesandprovidessuchservices toalimitednumberofcustomersasanaccommodation. 29 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data. 30 The2013HMDApeerdataarepreliminary.

LegalDevelopments:SecondQuarter,2014 159 Bank’spercentageof applicationsfromsuchtractsincreasedbetween2010and2013.Frost Bank’spercentageof originationsinsuchtractsalsoincreasedbetween2010and2013.31 TheReserveBankreviewedthegeographicdistributionof FrostBank’sbranches,the bank’smarketingactivities,andothercommunityoutreachefforts.Theexamination showedthattherearenodifferencesbetweenservicesavailableatFrostBankbranchoffices locatedinareaswithconcentrationsof minorityresidentsandotherareas.Examiners, usingaradiusbasedoncompetitionfromotherfinancialinstitutions,foundthatFrost Bank’sbranchesreachedamajorityof theneighborhoodsintheHoustonareaidentified bythecommenter.Thebranchesinthoseneighborhoodsdonothaveshorteroperating hours.Inaddition,FrostBankprovidesmobilebranchvansinHarrisCountythatare equippedtosupportavarietyof financialproducts.FrostBank’smarketingactivitiesand communityoutreacheffortsincludepartneringwithlocalnonprofitorganizationstoprovideoutreachtoLMIcommunitiesandprovidingfinancialeducationtoindividualsand smallbusinesses. Anunderwritingandpricingreviewwasalsoperformedaspartof thefairlendingexamination.TheReserveBankreviewedHMDAdataforallloanapplicationsreceivedbyFrost Bankbetween2010and2012.Thereviewfoundthatthebankfolloweditsarticulated underwritingguidelinesandfoundnoevidenceof illegalcreditdiscrimination. TheBoardalsoreviewedFrostBank’ssmallbusinesslendinginHarrisCountyforthe period2010-13.Thedatarevealedthatthebankismakingsmallbusinessloansavailablein areasinwhichthemajorityof residentsareeitherAfricanAmericanorHispanic.Frost Bank’spercentageof smallbusinessloanoriginationsinAfricanAmericanorHispaniccensustractsdecreasedbylessthanapercentagepointbetween2010and2013and exceededorwasapproximatelycomparabletoitspeers’originationof smallbusinessloans insuchtractsbetween2010and2012.In2013,FrostBank’spercentageof smallbusiness loanoriginationsinAfricanAmericanorHispaniccensustractstraileditspeers.32 FrostBank’sFairLendingProgram.FrostBankhasinstitutedpoliciesandproceduresto helpensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations,andtheBoardhasreviewedthesepolicies.Thecompany’slegalandcompliance risk-managementprogramincludesanannualfairlendingriskassessmenttoanalyze potentialvulnerabilitiesinloanprocessesandcontrolsandannualcompliancetrainingfor applicableemployees.FrostBankanalyzesitsHMDAdataatleastannuallyfordisparities inunderwritingandpricing.FrostBank’srisk-managementsystemsanditspoliciesand proceduresforensuringcompliancewithfairlendinglawswouldbeimplementedatthe combinedorganization.33 31 FrostBankoriginatedmortgageloansforthereviewperiodinzipcodesofHarrisCountyinwhichthemajorityofresidentsareAfricanAmerican,includingsomeinorneartheparticularzipcodesnotedbythecommenter.Examinersnotedthathomemortgagelendingopportunitiesmaybelimitedinthezipcodesnotedby thecommenterbyfactorssuchastherelativelyhighpercentageofrenters,theproportionofresidentsliving belowthepovertylevel,andtherelativelyhighunemploymentrate. 32 FrostBankoriginatedsmallbusinessloansforthereviewperiodinzipcodesofHarrisCountyinwhichthe majorityofresidentsareAfricanAmerican,includingsomeinorneartheparticularzipcodesnotedbythe commenter.TheReserveBank’sreviewofDallasCounty,likethereviewofHarrisCounty,didnotdisclose illegalcreditdiscriminationbasedonitsreviewofFrostBank’sassessmentarea,branching,lending,and marketing. 33 Cullen/Frosthascommittednottoengageinanyexpansionaryactivities,includingbranchingwithinitsexistingmarketareas,untilsuchtimethattheBoardhasdeemedCullen/Frosttohaveclearlydevelopedapolicyto supportfutureexpansioninitscomplianceprogram,includingfairlending,andtohireadditionalstaffwith requisiteknowledgeandexperiencetomanageandcontrolthebank’sfairlendingrisk,whichmightbeheightenedbyexpansion.

160 FederalReserveBulletin|August2014 C.AdditionalInformationonConvenienceandNeedsof CommunitiestobeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. Cullen/Frostrepresentsthattheproposalwouldprovideopportunitiestoachievecostsavingsforthecombinedorganizationbyconsolidatingredundantfunctions,includingdata processing.Cullen/Frostnotesthatthecombinedorganizationwouldbeabletoprovide customerswithbenefitsthroughmoreefficientandcost-effectiveprovisionof bankingservicesandwouldbeabletodedicateadditionalresourcestomeetingthebankingneedsof itscustomers.Cullen/Frostalsostatesthatthegreaterresourcesof thecombinedorganizationwouldincreasecreditavailabilitytoconsumersandbusinessesinthecommunitiesthat WesternNationalBankservestoday. Cullen/Frostalsostatesthattheproposalwouldoffercustomersconveniencethrougha broaderrangeof financialproductsandservices.Cullen/Frostrepresentsthatcustomersof WNBBancshareswouldhaveaccesstoadditionalleasing,factoring,andasset-basedlendingservices;improvedonline-bankingcashmanagementservices;additionaltreasurymanagementproductsforbusinesses;insuranceproductsandservices;trust,custody,and wealthmanagementproductsandservices;andadditionalproductsforindividuals,suchas personallinesof credit,homeequityloans,homeimprovementloans,andhomeequity linesof credit.Cullen/FroststatesthatWNBBancsharescustomerswouldhaveaccessto Cullen/Frost’scallcenterandmobileapplication,whichwouldincreaseaccesstobanking services. Inaddition,Cullen/Frostrepresentsthatthemergerwouldbenefitcurrentcustomersof WesternNationalBankthroughaccesstosignificantlylargerbranchandATMnetworks. ThebranchnetworkavailabletoCullen/FrostandWNBBancsharescustomerswould increasefrom115and8,respectively,to122locationsthroughoutTexas.34Customersof WesternNationalBankwouldalsogainaccesstoCullen/Frost’snetworkof 132bankownedATMsandfreeaccesstoValeroCornerStoreATMsinTexasthroughFrostBank’s partnershipwithathird-partyATMnetworkoperator. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyCullen/Frost,confidentialsupervisoryinformation,thepubliccommentontheproposal,andthecommitments madebyCullen/Frost.Basedontheabove,theBoardbelievesthattheconvenienceand needsfactor,includingtheCRArecordsof theinsureddepositoryinstitutionsinvolvedin thistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcen- 34 Cullen/FrostproposestocloseonebranchofWesternNationalBankinSanAntonioonconsummationofthe mergertoconsolidateoverlappinglocationswithinthebranchstructureofthecombinedorganization.The branchisnotlocatedinanLMIarea.

LegalDevelopments:SecondQuarter,2014 161 tratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”35TheDodd- FrankActalsoamendedtheBankMergerActtorequiretheBoardtoconsider“theriskto thestabilityof theUnitedStatesbankingorfinancialsystem.”36 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.37These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.38 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,Cullen/Frostwouldhaveapproximately$25.9billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firmsize, wouldbebetweenthe50thand75thlargestU.S.financialinstitution.TheBoardgenerally presumesthatamergerthatinvolvesanacquisitionof lessthan$2billioninassets,or resultsinafirmwithlessthan$25billioninconsolidatedassets,willnotposesignificant riskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransaction wouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Thecompaniesengageandwouldcontinuetoengageintraditionalcommercialbanking activities.Theresultingorganizationwouldexperiencesmallincreasesinthemetricsthat theBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,with theresultingfirmgenerallyrankingoutsideof thetop50U.S.financialinstitutionsin termsof thosemetrics.Forexample,Cullen/Frost’sintrafinancialassetsandliabilities wouldconstituteanegligibleshareof thesystemwidetotal,bothbeforeandafterthetransaction.Theresultingorganizationwouldnotengageincomplexactivitiesorprovidecritical servicesinsuchvolumethatdisruptioninsuchserviceswouldhaveagreatimpactonthe macroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreased resolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. 35 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 36 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1602,codifiedat12U.S.C. §1828(c)(5). 37 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 38 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

162 FederalReserveBulletin|August2014 OtherConsiderations Cullen/Frostalsohasappliedundersection9of theFRAtoestablishandoperatebranches atthelocationsof themainofficeandbranchesof WesternNationalBank.39TheBoard hasassessedthefactorsitisrequiredtoconsiderwhenreviewinganapplicationundersection9of theFRAandfindsthosefactorstobeconsistentwithapproval.40 Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.TheBoard’s approvalisspecificallyconditionedoncompliancebyCullen/Frostwithalltheconditions imposedinthisorder,includingreceiptof allregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplications.Forpurposesof thisaction, theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbythe Boardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsafterthedateof thisorder,unlesssuchperiod isextendedforgoodcausebytheBoardortheReserveBank,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveMay14,2014. Votingforthisaction:ChairYellenandGovernorsTarullo,Stein,andPowell. RobertdeV.Frierson Secretaryof theBoard Appendix BranchesinTexastoBeEstablishedbyFrostBank Odessa 801N.TexasAvenue 2700WestCountyRoad 2710Grandview 3501FaudreeRoad Midland 508W.WallStreet 800WestWadley 4101NorthMidlandDrive SanAntonio 12800SanPedroAvenue 39 Asdiscussedabove,Cullen/FrostproposestocloseonebranchofWesternNationalBankinSanAntonio. 40 12U.S.C.§322;12CFR208.6(b).

LegalDevelopments:SecondQuarter,2014 163 First Interstate BancSystem, Inc. Billings, Montana OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2014–11(June30,2014) FirstInterstateBancSystem,Inc.(“FIB”),Billings,Montana,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tomergewith MountainWestFinancialCorp.(“MWF”)andtherebyindirectlyacquireitssubsidiary bank,MountainWestBank,NationalAssociation(“MountainWestBank”),bothof Helena,Montana. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(79FederalRegister15344(2014)).2Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. FIB,withconsolidatedassetsof approximately$7.6billion,isthe115thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$6.1billionin deposits.3FIB’sbanksubsidiary,FirstInterstateBank,operatesinMontana,South Dakota,andWyoming.FirstInterstateBankisthesecondlargestdepositoryinstitutionin Montana,controllingdepositsof approximately$3.0billion,whichrepresent15.2percent of totaldepositsof insureddepositoryinstitutionsinthatstate.4 MWF,withtotalconsolidatedassetsof approximately$639.6million,controlsMountain WestBank,whichoperatesonlyinMontana.MountainWestBankisthesixthlargest insureddepositoryinstitutioninMontana,controllingdepositsof approximately $529.0million,whichrepresent2.7percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,FIBwouldbecomethe110thlargestdepositoryorganizationintheUnitedStates,withtotalconsolidatedassetsof approximately$8.2billion, whichrepresentlessthan1percentof thetotalamountof assetsof insureddepository institutionsintheUnitedStates.FIBwouldhavetotaldepositsof approximately$6.7billion.InMontana,FIBwouldbecomethelargestdepositoryorganization,controlling depositsof approximately$3.5billion,whichrepresent17.9percentof thetotaldepositsof insureddepositoryinstitutionsinthestate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity 1 12U.S.C.§1842. 2 12CFR262.3(b). 3 AssetdataareasofMarch31,2014,andnationwidedeposit-rankingdataareasofDecember31,2013,unless otherwisenoted. 4 StatedepositdataareasofJune30,2013.Inthiscontext,insureddepositoryinstitutionsincludecommercial banks,savingsandloanassociations,cooperativebanks,industrialbanks,andsavingsbanks.

164 FederalReserveBulletin|August2014 tobeserved.5FIBandMWFhavesubsidiarydepositoryinstitutionsthatcompetedirectly intheMontanabankingmarketsof Bozeman,GreatFalls,Helena,Kalispell,and Missoula. A.CompetitiveEffectsintheBankingMarkets TheBoardhasreviewedthecompetitiveeffectsof theproposalineachof thebankingmarketsinwhichFirstInterstateBankandMountainWestBankcompete.Inparticular,the Boardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket; therelativesharesof totaldepositsindepositoryinstitutionsinthemarket(“marketdeposits”)controlledbyFIBandMWF;6theconcentrationlevelsof marketdepositsandthe increaseinthoselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)under theDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBank MergerGuidelines”);7andothercharacteristicsof themarket. BankingMarketswithinEstablishedGuidelines.Consummationof theproposalwouldbe consistentwithBoardprecedentandwithinthethresholdsintheDOJBankMerger GuidelinesintheBozeman,GreatFalls,Kalispell,andMissoulabankingmarkets.8On consummationof theproposal,theBozeman,GreatFalls,andMissoulabankingmarkets wouldremainmoderatelyconcentratedandthechangesinmarketconcentrationswouldbe wellwithintheDOJBankMergerGuidelinesandBoardprecedent.TheKalispellbanking marketwouldremainhighlyconcentrated,asmeasuredbytheHHI,andthechangeinthe HHIinthemarketwouldbesmall.Ineachof thesebankingmarkets,numerouscompetitorswouldremain. BankingMarketWarrantingSpecialScrutiny.Thestructuraleffectsthatconsummationof theproposalwouldhaveontheHelenabankingmarket9warrantadetailedreviewbecause theconcentrationlevelonconsummationwouldexceedthethresholdlevelsintheDOJ BankMergerGuidelines.FirstInterstateBankisthefifthlargestdepositoryinstitutionin themarket,controllingapproximately$69.7millionindeposits,whichrepresent5.7percent of marketdeposits.MountainWestBankisthethirdlargestdepositoryinstitutioninthe market,controllingapproximately$247.0millionindeposits,whichrepresent20.1percent of marketdeposits.Onconsummation,thecombinedentitywouldbethelargestdepositoryinstitutionintheHelenabankingmarket,controllingapproximately$316.7millionin 5 12U.S.C.§1842(c)(1). 6 DepositandmarketsharedataareasofJune30,2013,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percentweightanddepositsheldbycreditunionsareassignedzeroweight. TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386, 387(1989)andNationalCityCorporation,70FederalReserveBulletin743,744(1984).TheBoardregularlyhas includedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian, Inc.,77FederalReserveBulletin52,55(1991). 7 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines in2010(seePressRelease,DepartmentofJustice(Aug.19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 8 Thesefourbankingmarketsandthecompetitiveeffectsoftheproposalinthesemarketsaredescribedinthe appendix. 9 TheHelenabankingmarketisdefinedasLewisandClark,Meagher,andBroadwatercounties,theBoulder DivisioninJeffersonCounty,andtheeasternhalfoftheAvon-EllistonDivisioninPowellCounty,allin Montana.

LegalDevelopments:SecondQuarter,2014 165 deposits,whichwouldrepresentapproximately25.8percentof marketdeposits.TheHHI inthismarketwouldincreaseby229points,from1640to1869. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheHelenabankingmarket.10Severalfactorsindicatethattheincreasein concentrationintheHelenabankingmarket,asmeasuredbytheHHIandmarketshare, overstatesthepotentialcompetitiveeffectsof theproposalinthemarket.Afterconsummationof theproposal,11commercialbankcompetitorswouldremain,somewithasignificantpresenceinthemarket.Thesecondandthirdlargestbankcompetitorsinthemarket wouldcontrolapproximately21.1percentand19.7percentof marketdeposits,respectively, andanotherbankcompetitorinthemarketwouldcontrolapproximately6.6percentof marketdeposits. Inaddition,theBoardhasevaluatedthecompetitiveinfluenceof AmericanFederalSavingsBank(“AmericanFederal”),athriftinstitutionoperatingintheHelenabankingmarket.11AmericanFederal’scommercialandindustrialloanportfoliosaresimilartothoseof commercialbanksinthemarket,asmeasuredintermsof theratiosof thosetypesof loans tototalloansandassets.12Moreover,AmericanFederalprovidesabroadrangeof banking servicessimilartothosenormallyprovidedbycommercialbanks.Inaddition,American Federalhasrecentlyannouncedplanstoconverttoastate-charteredcommercialbank. Accordingly,theBoardhasconcludedthatdepositscontrolledbythisinstitutionshouldbe weightedat100percentinthemarket-sharecalculations. Inaddition,twocommunitycreditunionsintheHelenabankingmarket,HelenaCommunityCreditUnionandRockyMountainCreditUnion,eachoffersawiderangeof consumerbankingproducts,operatesstreet-levelbranches,andhasbroadmembershipcriteria thatincludealmostallof theresidentsintheHelenabankingmarket.Accordingly,the Boardfindsthatthesecircumstanceswarrantincludingthedepositsof thesecreditunions ona50percentweightedbasis.13 If thedepositsheldbythecompetitivelyactivethriftarereweightedfrom50percentto 100percent,andthedepositsheldbyeachof thecompetitivelyactivecreditunions arereweightedfromzeropercentto50percent,theproformadepositshareof FirstInterstateBankintheHelenabankingmarketwouldbe22.7percent,andtheHHIwould 10 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998). 11 TheBoardpreviouslyhasindicatedthatitmayconsiderthecompetitivenessofathriftinstitutionatalevel greaterthan50percentofitsdepositswhenappropriateifcompetitionfromtheinstitutioncloselyapproximatescompetitionfromacommercialbank.See,e.g.,BanknorthGroup,Inc.,75FederalReserveBulletin703 (1989).Where,ashere,thefactsandcircumstancesofabankingmarketindicatethataparticularthriftserves asasignificantsourceofcommercialloansandprovidesabroadrangeofconsumer,mortgage,andother bankingproducts,theBoardhasconcludedthatcompetitionfromsuchathriftcloselyapproximatescompetitionfromacommercialbankandthatdepositscontrolledbytheinstitutionshouldbeweightedat100percent inmarket-sharecalculations.See,e.g.,RiverValleyBancorp,FRBOrderNo.2012-10(October17,2012); RegionsFinancialCorporation,93FederalReserveBulletinC16(2007);andBanknorthGroup,Inc.,supra. 12 AmericanFederalhasaratioofcommercialandindustrialloanstoassetsofapproximately6percent,whichis comparableto,orgreaterthan,theratioforsomecommercialbanksinthemarketandgreaterthantheratio forsomethriftinstitutionsthattheBoardhaspreviouslyfoundtobefullcompetitorsofcommercialbanks. 13 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionswiththosefeaturesasa mitigatingfactor.See,e.g.,MitsubishiUFJFinancialGroup,Inc.,FRBOrderNo.2012-12(November14,2012); OldNationalBancorp,FRBOrderNo.2012-9(August30,2012);UnitedBankshares,Inc.(orderdatedJune20, 2011),97FederalReserveBulletin19(2ndQuar.2011);ThePNCFinancialServicesGroup,Inc.,94Federal ReserveBulletinC38(2008);ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65(2007); RegionsFinancialCorporationsupra,;PassumpsicBancorp,92FederalReserveBulletinC175(2006);Wachovia Corporation,92FederalReserveBulletinC183(2006).

166 FederalReserveBulletin|August2014 increaseby177pointsto1548.Reweightingthedepositsharesof competitivelyactive thriftsandcreditunionsinthismannerisconsistentwithpastBoardprecedent.TheBoard hasconcludedthattheactivitiesof theseorganizationsexertacompetitiveinfluencethat mitigates,inpart,thepotentialeffectsof theproposalontheHelenabankingmarket.In addition,numerouscompetitorswouldremainintheHelenabankingmarket. B.Viewsof OtherAgenciesandConclusiononCompetitiveConsiderations TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketinwhichFirstInterstateBankandMountainWest Bankcompetedirectlyorinanyotherrelevantbankingmarket.Accordingly,theBoardhas determinedthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andaconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepository institutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation, theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of thecombinedorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant.Further,theBoardhas consideredthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. TheBoardhasconsideredthefinancialfactorsof theproposal.FIBandFirstInterstate Bankarewellcapitalizedandwouldremainsoonconsummationof theproposedtransaction.Theproposedtransactionisabankholdingcompanymerger,structuredasacashand shareexchange.14Theassetquality,earnings,andliquidityof FirstInterstateBankare consistentwithapproval,andFIBappearstohaveadequateresourcestoabsorbthecosts of theproposalandtocompletetheintegrationof FIB’sandMWF’soperations.Basedon itsreviewof therecord,theBoardfindsthattheorganizationhassufficientfinancial resourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of FIB,MWF,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof their management,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswith 14 EachoutstandingshareofMWFcommonstockwouldbecanceledandconvertedintoarighttoreceivecash andFIB’sClassAcommonstockbasedonanexchangeratio.FIBhastheresourcestofundthecashconsiderationportionofthetransaction.

LegalDevelopments:SecondQuarter,2014 167 theorganizationsandtheirrecordsof compliancewithapplicablebankingandantimoney-launderinglaws. FIBanditssubsidiarydepositoryinstitutionareeachconsideredtobewellmanaged.FIB’s existingrisk-managementprogramanditsdirectorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof FIBhavedemonstratedknowledgeof andexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredFIB’splansforimplementingtheproposal.FIBisdevoting sufficientfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.FIBwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseareconsideredacceptable fromasupervisoryperspective.Inaddition,FIB’smanagementhastheexperienceand resourcesthatshouldallowthecombinedorganizationtooperateinasafeandsound manner. FIB’ssupervisoryrecord,managerialandoperationalresources,andplansforoperating thecombinedorganizationafterconsummationprovideareasonablebasistoconcludethat managerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellastherecordsof effectivenessof FIBandMFWincombatting money-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).15TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,16and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.17 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof FirstInterstateBankandMountainWestBank,informationprovidedbyFIB,andconfidentialsupervisoryinformation. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancebasedonthe CRAevaluationcompletedbythatinstitution’sprimaryregulator.18TheCRArequires thattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommu- 15 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 16 12U.S.C.§2901(b). 17 12U.S.C.§2903. 18 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010).

168 FederalReserveBulletin|August2014 nity,includingLMIneighborhoods.19Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailed,onsiteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof FirstInterstateBank.FirstInterstateBankwasassignedanoverall “outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheFederal ReserveBankof Minneapolis(“ReserveBank”)inJuly2013(“FirstInterstateBankEvaluation”).FirstInterstateBankreceived“outstanding”ratingsfortheLendingTest,the InvestmentTest,andtheServiceTest.20Inadditiontotheoverall“outstanding”ratingthat FirstInterstateBankreceived,thebankreceivedseparateoverall“outstanding”ratingsin thestatesreviewed.21 InevaluatingtheLendingTest,ReserveBankexaminersfoundthatthebank’soveralllendingactivitywasexcellent.Thebankoriginatedasubstantialmajorityof loanswithinits Montana,Wyoming,andSouthDakotaassessmentareasandshowedexcellentresponsivenesstocreditneedsthroughoutitsassessmentareas.Examinersnotedthatthebankhadan excellentrecordof lendingtoborrowersof differentincomelevelsandtobusinessesand farmsof differentsizes.Further,FirstInterstateBank’soverallgeographicdistributionof loanswasexcellentthroughoutthebank’sassessmentareas,includingLMIgeographies, andtherewerenounexplainedgapsinthebank’slendingpatterns. ExaminersalsonotedthatFirstInterstateBankisaleaderinmakingcommunitydevelopmentloansinsideitsassessmentareasandusesflexibleandinnovativelendingpracticesto servecreditneeds,especiallyprogramsthatsupportaffordablehomeownership.Sincethe previousevaluation,thebankoriginated71communitydevelopmentloanstotaling approximately$69.0million,whichrepresentedanapproximately$22.2millionincreasein communitydevelopmentlendingfromthepreviousevaluation.22 InevaluatingtheInvestmentTest,ReserveBankexaminersfoundthatFirstInterstate Bankhadanoverallexcellentlevelof qualifiedinvestmentsthatdemonstratedexcellent responsivenesstocommunitydevelopmentneeds.ExaminershighlightednumerousCRAqualifiedinvestmentsthatthebankmade,aswellasdonationstoorganizationswitha communitydevelopmentfocus.ThebankalsoparticipatedinvariousCRA-qualified investmentvehiclesandmadeextensiveuseof innovativeandcomplexinvestments,oftenin aleadershipposition,whenopportunitiesexisted.ExaminersnotedthatFirstInterstate Bank’sCRA-qualifiedinvestmentsincreasedfromapproximately$70.5milliontoapproximately$75.1millionsincethepriorevaluation. 19 12U.S.C.§2906. 20 TheevaluationperiodwasfromJanuary1,2011,throughDecember31,2012. 21 TheFirstInterstateBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures andincludedfull-scopereviewsofatleastoneassessmentareawithineachstatewhereFirstInterstateBank hasanoffice.TheFirstInterstateBankEvaluationincludedafull-scopereviewoffourassessmentareas:the Billings,MontanaMetropolitanStatisticalArea(“MSA”);theMissoula,MontanaMSA;theCasper,Wyoming MSA;andtheRapidCity,SouthDakotaMSA.AlimitedscopereviewwasperformedintheGreatFalls,MontanaMSA;theBozeman,MontanaAssessmentArea(“AA”);theHamilton,MontanaAA;theHardin/Miles City,MontanaAA;theHelena,MontanaAA;theKalispell,MontanaAA;theCheyenne,WyomingMSA;the Jackson,WyomingAA;theLaramie,WyomingAA;theRiverton,WyomingAA;theSheridan,WyomingAA; theSpearfish/BelleFourche,SouthDakotaAA;andtheHotSprings/Edgemont/Custer,SouthDakotaAA. Examinersplacedthegreatestweightonthebank’sperformanceinMontanabecausemostofthebank’slendingoccursinthisstate. 22 Thebankalsooriginatedfiveloanstotalingapproximately$18.9millionthatbenefittedareasoutsideofthe bank’sMontanaandWyomingassessmentareas.Becausethebank’sactivitiesadequatelyaddressthecommunitydevelopmentneedsofitsassessmentareas,loansthatbenefitgeographiesoutsideofthebank’sassessment areascanbeconsideredintheevaluationofthebank’scommunitydevelopmentlending.

LegalDevelopments:SecondQuarter,2014 169 InevaluatingtheServiceTest,examinersnotedthatthebank’sretailserviceswereaccessibletoallportionsof thebank’sassessmentareas,includingLMIcensustracts.Examiners alsonotedthatFirstInterstateBank’sopeningandclosingof brancheshadnotadversely affectedtheaccessibilityof itsproductsandservicesthroughouttheassessmentareas. Examinersalsofoundthatthebank’sservicesweretailoredtotheconvenienceandneeds of LMIcensustractsandindividuals.Further,examinershighlightedthatFirstInterstate Bankwasaleaderinprovidingcommunitydevelopmentservicesthroughoutitsassessment areas. CRAPerformanceof MountainWestBank.MountainWestBankwasassignedanoverall “satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheOfficeof the Comptrollerof theCurrencyinDecember2011(“MountainWestBankEvaluation”),with ratingsof “satisfactory”fortheLendingTestandtheCommunityDevelopmentTest.23 InevaluatingtheLendingTest,examinersnotedthatthebankoriginatedasubstantial majorityof itsloanswithinitsassessmentareas.24Examinersalsofoundthatthebank’s geographicdispersionof loansreflectedreasonablepenetrationthroughoutitsassessment areasandthebank’sdistributionof loansbyrevenueandincomelevelsreflectedareasonablepenetrationamongindividualsof differentincomelevelsandbusinessesof different sizes.Further,examinersconcludedthatMountainWestBank’sloan-to-depositratiowas morethanreasonablegivenMountainWestBank’ssize,financialcondition,andtheassessmentareas’creditneeds. InevaluatingtheCommunityDevelopmentTest,examinersnotedthatMountainWest Bank’slevelof communitydevelopmentactivitiesrepresentedsatisfactoryresponsiveness tocommunitydevelopmentneedsinitsassessmentareasthroughqualifiedinvestmentsand communitydevelopmentservices.ExaminersalsofoundthatMountainWestBankprovidedanexcellentlevelof communitydevelopmentservicesthroughitsemployeeinvolvementincommunitybasedorganizationsthatbenefitLMIindividuals. B.AdditionalInformationonConvenienceandNeedsof CommunitiestobeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. FIBrepresentsthattheproposedtransactionwouldprovideMountainWestBank’scustomerswithaccesstoadditionalwealthmanagementservices,cashmanagementservices, dealerfinancing,in-housemortgageproducts,adjustableratemortgageproducts,and broadercreditcardprograms.FIBalsostatesthatFIB’shigherlegallendinglimitwould allowittoprovideadditionalcreditavailabilityandflexibilitytomeetthelargercredit needsof MountainWestBank’scustomers. Inaddition,FIBrepresentsthatthemergerwouldbenefitcurrentcustomersof Mountain WestBankthroughaccesstoabroadernetworkof branchesandATMs.AlthoughFIB 23 TheMountainWestBankEvaluationwasconductedusingtheIntermediateSmallBankCRAExamination Procedures,andexaminersreviewedthebank’scommercialandresidentialrealestatelendingactivityfrom August19,2008,toSeptember30,2011,fortheLendingTest.Commercialandresidentialrealestateloanswere selectedforanalysisbecausetheyrepresented63percentand18percent,respectively,ofthebank’sloanportfolio.TheevaluationperiodfortheCommunityDevelopmentTestwasfromAugust19,2008,toDecember8, 2011. 24 TheMountainWestBankEvaluationreviewedthebank’sHelena,Montananon-MSAAA;theGreatFalls, MontanaMSA;andtheMissoula,MontanaMSA.

170 FederalReserveBulletin|August2014 planstoconsolidateorcloseseveralbranchesfollowingthemerger,astherearesome MountainWestBankbranchesthatarelocatedwithintwomilesof FirstInterstateBank branches,MountainWestBankcustomerswillcontinuetohaveaccesstoservicesineach of thecommunitiescurrentlyservedbyMountainWestBank.25Inaddition,FIBrepresentsthatthesecustomerswouldgainaccesstoservicesatbranchesandATMsineachof thecommunitiesservedbyFirstInterstateBank,includingcommunitiesinMontana,Wyoming,andSouthDakota.FIBalsonotesthatitsincreasedmarketpresenceinMountain WestBank’smarketswouldresultinincreasedcommunityserviceprojectsandphilanthropiceffortsinthosemarkets. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyFIB,andconfidential supervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceand consumercomplianceprogramsof FirstInterstateBankandMountainWestBank,its reviewof examinationreports,anditsconsultationswithotheragencies,theBoardconcludesthattheconvenienceandneedsfactor,includingtheCRArecordsof theinsured depositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”26 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.27These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.28 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,FIBwouldhave approximately$8.2billioninconsolidatedassetsandwouldbethe122ndlargestfinancial 25 AlthoughFIBhasnotdeterminedwhichbrancheswillbeclosed,FIBrepresentsthattheclosureswillbemade inaccordancewithFIB’sbranchclosurepoliciesandgoverninglawandregulations. 26 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 27 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 28 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

LegalDevelopments:SecondQuarter,2014 171 institutionintheUnitedStatesasmeasuredbyassets.TheBoardgenerallypresumesthata mergerresultinginafirmwithlessthan$25billionintotalconsolidatedassetswouldnot posesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthe transactionwouldresultinasignificantincreaseininterconnectedness,complexity,crossborderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthis transaction.Thecompaniesengageandwouldcontinuetoengageintraditionalcommercialbankingactivities.Theresultingorganizationwouldexperiencesmallincreasesinthe metricsthattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,withtheresultingfirmgenerallyrankingoutsideof thetop100U.S.financialinstitutionsintermsof thosemetrics.Forexample,FIB’sintrafinancialassetsandliabilities wouldcompriseanegligibleshareof thesystemwidetotal,bothbeforeandafterthetransaction,andtheresultingfirmwouldcontrollessthan0.1percentof theassetsof allU.S. depositoryinstitutions.Theresultingorganizationwouldnotengageincomplexactivities, norwoulditprovidecriticalservicesinsuchvolumethatdisruptioninthoseserviceswould haveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyFIBwithalltheconditionsimposedinthisOrder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheReserveBank,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveJune30,2014. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo,Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

172 FederalReserveBulletin|August2014 Appendix FIB/MWFbankingmarketsinMontanaconsistentwithBoardprecedentandDOJBankMerger Guidelines Remaining Amountof Marketdeposit Status Rank ResultingHHI ChangeinHHI numberof deposits shares(percent) competitors Bozeman,Montana—includesGallatinandParkcounties,bothinMontana. FIBpre-consummation 2 $381.9M 17.1 1190 44 17 MWF 13 $28.6M 1.3 1190 44 17 FIBpost-consummation 2 $410.5M 18.4 1190 44 17 GreatFalls,Montana—includesTeton,Cascade,JudithBasin,Glacier,Toole,andPonderacounties;andFortBentonandGeraldine divisionsinChouteauCounty,allinMontana. FIBpre-consummation 4 $257.8M 12.5 1465 168 14 MWF 6 $139.5M 6.7 1465 168 14 FIBpost-consummation 1 $397.3M 19.2 1465 168 14 Kalispell,Montana—includesLincolnandFlatheadcounties;theBigFork-SwanRiverDivision;andthenorthernportionofFlathead DivisionthatincludesthecommunitiesofPolson,FinleyPoint,BigArm,ElmoandDaytoninLakeCounty,allinMontana. FIBpre-consummation 2 $349.1M 16.3 2907 68 15 MWF 7 $44.7M 2.1 2907 68 15 FIBpost-consummation 2 $393.8M 18.4 2907 68 15 MissoulaMontana—includesMissoulaCounty;theSuperiorandAlbertondivisionsinMineralCounty;Helmvilleandthewesternhalfof Avon-EllistondivisionsinPowellCounty;thesouthernhalfofFlatheadDivisioninSandersCounty;thesouthernportionofFlathead DivisionthatincludesthecommunitiesofPablo,KickingHorse,PostCreek,Moiese,Ravalli,Arlee,Charlo,Ronan,andSaintIgnatiusin LakeCounty;theDrummondDivisioninGraniteCounty;andRavalliCounty(minustheeasternthirdofSula-EdwardsDivision),allin Montana. FIBpre-consummation 1 $643.0M 24.2 1525 125 17 MWF 8 $69.2M 2.6 1525 125 17 FIBpost-consummation 1 $712.1M 26.8 1525 125 17 Note:DepositdataareasofJune30,2013.Allrankings,marketdepositshares,andHHIsarebasedonthriftdepositsweightedat50percent. MB Financial Inc. Chicago, Illinois OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2014–12(June30,2014) MBFinancial,Inc.(“MBFinancial”),Chicago,hasrequestedtheBoard’sapprovalunder section3of theBankHoldingCompanyAct(“BHCAct”)1tomergewithTaylorCapital Group,Inc.(“TaylorCapital”),Rosemont,andtherebyindirectlyacquireitssubsidiary bank,ColeTaylorBank,Chicago,allof Illinois.Followingtheproposedacquisition,Cole TaylorBankwouldbemergedintoMBFinancial’ssubsidiarybank,MBFinancialBank, NationalAssociation(“MBFinancialBank”),Chicago.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(78FederalRegister59938(September30, 2013)).Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredthe proposalandallcommentsreceivedinlightof thefactorssetforthinsection3of the BHCAct. MBFinancial,withconsolidatedassetsof approximately$9.6billion,isthe101stlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$7.4billion 1 12U.S.C.§1842. 2 ThemergerofColeTaylorBankintoMBFinancialBankissubjecttotheapprovaloftheOfficeoftheComptrolleroftheCurrency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C. §1828(c).

LegalDevelopments:SecondQuarter,2014 173 inconsolidateddeposits.3MBFinancialBankoperatesinIllinois,Indiana,andPennsylvania.MBFinancialBankisthe12thlargestdepositoryinstitutioninIllinois,controlling depositsof approximately$7.5billion,whichrepresent1.8percentof thetotaldepositsof insureddepositoryinstitutionsinthestate.4Inaddition,MBFinancialBankisthe199th largestdepositoryinstitutioninPennsylvania,controllingdepositsof $46.7million,andis the168thlargestdepositoryinstitutioninIndianawithapproximately$3.0millionin deposits,whichrepresentlessthan1percentof thetotaldepositsof insureddepository institutionsineachof thosestates. TaylorCapital,withtotalconsolidatedassetsof $5.7billion,controlsColeTaylorBank, whichoperatesinIllinois.ColeTaylorBankisthe18thlargestinsureddepositoryinstitutioninIllinois,controllingdepositsof approximately$3.8billion,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,MBFinancialwouldbecomethe81stlargestinsured depositoryorganizationintheUnitedStates,withtotalconsolidatedassetsof approximately$15.3billion.MBFinancialwouldhavetotalconsolidateddepositsof approximately$11.0billion.InIllinois,MBFinancialwouldbecometheninthlargestdepository organization,controllingdepositsof approximately$11billion,whichrepresent2.8percent of thetotaldepositsof insureddepositoryinstitutionsinthatstate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.5 MBFinancialandTaylorCapitalhavesubsidiarydepositoryinstitutionsthatcompete directlyintheChicago,Illinois,bankingmarket.6TheBoardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthe bankingmarket;therelativesharesof totaldepositsininsureddepositoryinstitutionsin themarkets(“marketdeposits”)controlledbyMBFinancialandTaylorCapital;7theconcentrationlevelsof marketdepositsandtheincreaseinthoselevels,asmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”);8andothercharacteristicsof themarket. 3 Assetandnationwidedeposit-rankingdataareasofDecember31,2013,unlessotherwisenoted. 4 StatedepositdataareasofJune30,2013,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks. 5 12U.S.C.§1842(c)(1). 6 TheChicagobankingmarketisdefinedasCook,DuPage,andLakecounties,allinIllinois. 7 DepositandmarketsharedataareasofJune30,2013,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989)andNationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 8 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcen-

174 FederalReserveBulletin|August2014 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesforthismarket.Onconsummationof theproposal,thebankingmarketwouldremainmoderatelyconcentrated,asmeasuredby theHHI,andnumerouscompetitorswouldremain.9 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketinwhichMBFinancialandTaylorCapitalcompete directlyorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdetermined thatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andaconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepository institutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation, theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant.Further,theBoardhasconsideredthe futureprospectsof theorganizationsinvolvedintheproposalinlightof thefinancialand managerialresourcesandtheproposedbusinessplan. TheBoardhasconsideredthefinancialfactorsof theproposal.MBFinancialandMB FinancialBankarebothwellcapitalizedandwouldremainsoonconsummationof the proposedacquisition.Theproposedtransactionisabankholdingcompanymergerthatis structuredasacashandshareexchange.10Theassetquality,earnings,andliquidityof both MBFinancialBankandColeTaylorBankareconsistentwithapproval,andMBFinancial appearstohaveadequateresourcestoabsorbthecostsof theproposalandtocomplete integrationof theinstitutions’operations.Basedonitsreviewof therecord,theBoard findsthattheorganizationhassufficientfinancialresourcestoeffecttheproposal. tratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines in2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html. 9 MBFinancialoperatesthe10thlargestdepositoryinstitutionintheChicagobankingmarketwithapproximately$7.3billionindeposits,whichrepresent2.6percentofmarketdeposits.TaylorCapitaloperatesthe14th largestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$3.8billion,which represent1.3percentofmarketdeposits.Onconsummationoftheproposedtransaction,MBFinancialwould operatetheseventhlargestdepositoryinstitutioninthemarket,controllingweighteddepositsofapproximately $11.0billion,whichrepresent3.9percentofmarketdeposits.TheHHIwouldincreasebysevenpointsto1016, and147competitorswouldremaininthemarket. 10 Aspartoftheproposedtransaction,eachshareofTaylorCapitalcommonstockwouldbeconvertedintoa righttoreceivecashandMBFinancialcommonstockbasedonanexchangeratio.

LegalDevelopments:SecondQuarter,2014 175 TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of MBFinancial,TaylorCapital,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbank supervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingandanti-money-launderinglaws. MBFinancial,TaylorCapital,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewellmanaged.MBFinancial’sexistingrisk-managementprogramanditsdirectorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsandsenior executiveofficersof MBFinancialhavesubstantialknowledgeandexperienceinthebankingandfinancialservicessectors. TheBoardhasalsoconsideredMBFinancial’splansforimplementingtheproposal.MB Financialisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof the post-acquisitionintegrationprocessforthisproposal.MBFinancialwouldimplementits risk-managementpolicies,procedures,andcontrolsatthecombinedorganization,and theseareconsideredacceptablefromasupervisoryperspective.Inaddition,MBFinancial’s managementhastheexperienceandresourcestoensurethatthecombinedorganization operatesinasafeandsoundmanner,andMBFinancialplanstointegrateColeTaylor Bank’sexistingmanagementandpersonnelinamannerthataugmentsMBFinancial’s management. MBFinancial’ssupervisoryrecord,managerialandoperationalresources,andplansfor operatingthecombinedinstitutionsafterconsummationprovideareasonablebasistoconcludethatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellastherecordsof effectivenessof MBFinancialandTaylorCapitalin combattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).11TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,12and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.13 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof MBFinancialBankandColeTaylorBank,datareportedbyMB FinancialBankandColeTaylorBankundertheHomeMortgageDisclosureAct 11 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 12 12U.S.C.§2901(b). 13 12U.S.C.§2903.

176 FederalReserveBulletin|August2014 (“HMDA”),14otherinformationprovidedbyMBFinancial,confidentialsupervisoryinformation,andthepubliccommentreceivedontheproposal.Thecommenterdoesnot opposeapprovalof theproposalbutexpressedconcernsaboutColeTaylorBank’slending recordtominorityandLMIborrowersasreflectedin2011HMDAdata. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.15TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.16Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,onsiteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof MBFinancialBank.MBFinancialBank,theleadbankfortheApplicant,wasassignedanoverall“outstanding”ratingatitsmostrecentCRAperformance evaluationbytheOCC,asof August12,2013(“MBFinancialBankEvaluation”).17MB FinancialBankreceived“outstanding”ratingsonboththeLendingTestandtheInvestmentTestanda“highsatisfactory”ratingontheServiceTest.18 InevaluatingtheLendingTest,examinersobservedthatthebank’soveralllendingactivity intheChicagoAAwasexcellent.Examinersfoundthatthegeographicaldistributionof the bank’shomemortgagelendingandsmallbusinesslendingintheChicagoMulti-State MSAwasadequateandexcellent,respectively.19Examinersfoundthatthebank’sdistributionof homemortgageloansbyincomelevelof borrowerintheChicagoMulti-StateMSA wasadequate,giventheproductlinesofferedbytheinstitution,anditsdistributionof smallloanstobusinesseswithgrossannualrevenuesof $1millionorlesswasadequate basedoneconomicconditionsandthecompetitivemarketinwhichthebankoperates. ExaminersfoundthatMBFinancialBank’scommunitydevelopmentlendingintheChicagoAAwassignificant,andthatthebankoriginatedanexcellentlevelof community developmentloansduringtheevaluationperiod.Examinersalsonotedthatthebankisa 14 12U.S.C.§2801etseq. 15 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (March11,2010). 16 12U.S.C.§2906. 17 TheMBFinancialBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The evaluationperiodfortheLendingTestwasfromJanuary1,2010,throughDecember31,2012,exceptforcommunitydevelopmentloans,whichhadanevaluationperiodfromApril28,2010,throughAugust12,2013.The evaluationperiodfortheInvestmentTestandtheServiceTestwasApril28,2010,throughAugust12,2013. 18 TheMBFinancialBankEvaluationincludedafull-scopereviewofthreeassessmentareas:theChicago,Illinois,AssessmentArea(“ChicagoAA”);theLaSalleCounty,Illinois,AssessmentArea;andthePhiladelphia, Pennsylvania,AssessmentArea.Alimited-scopereviewwasperformedintheLakeCounty,Illinois,AssessmentAreaandtheIndianaAssessmentArea.Examinersplacedgreaterweightonthebank’sperformancein itsassessmentareasfallingwithintheChicago-Naperville-JolietMulti-StateMetropolitanStatisticalArea (“ChicagoMulti-StateMSA”),whichcomprisestheChicagoAAandtheassessmentareasselectedforlimitedscopereview,becausetheseareasrepresentedthebank’smostsignificantmarketintermsofdepositconcentrations,branchdistributions,andCRA-reportableloans. 19 Examinersplacedmoreemphasisonthebank’sdistributionofsmallbusinessloansthanthedistributionof homemortgageloansbecauseofMBFinancialBank’shighermarketshareinsmallbusinesslending.MB FinancialBank’smarketshareasofJune30,2011,intheChicagoAAwas0.9percentand0.2percentforsmall loanstobusinessesandmortgagelending,respectively.Withinthehomemortgageloancategory,greaterweight wasplacedonhomerefinanceloansbecausetheycomposedmorethanhalfofMBFinancialBank’shome mortgagelending.

LegalDevelopments:SecondQuarter,2014 177 participantinanumberof governmentalandprivatelysponsoredprogramsthatare designedtoprovidemoreflexibleloantermstoLMIindividualsandtosmallbusinesses. InevaluatingtheInvestmentTest,examinersfoundthatMBFinancialBank’sresponsivenesstothecommunitydevelopmentneedsintheChicagoAAwasexcellent.Duringthe evaluationperiod,thebankmadeinvestmentsandgrantsintheChicagoAAtotaling approximately$42million.Examinersnotedthat76percentof thebank’squalifying investmentsweretoorganizationsthatfocusonaffordablehousing,acriticalneedinthe ChicagoAA;15percentweremadetoorganizationsthatsupportcommunitydevelopment financingbyfinancingsmallbusinesses;and9percentwenttoorganizationsthatsupport therevitalizationof LMIgeographies. FortheServiceTest,examinersfoundthatMBFinancialBank’sperformanceintheChicagoAAwasgood.Examinersobservedthatthebank’sbranchdistributionintheseareas wasadequate,andthatthebank’srecordof openingandclosingbrancheshadnot adverselyaffectedtheaccessibilityof itsdeliverysystems,particularlyinLMIgeographies ortoLMIindividuals.ExaminersfoundthatMBFinancialBankprovidedanexcellent levelof communitydevelopmentservices,whichhadasignificantlypositiveimpactonthe ServiceTestrating,andthatthebankisaleaderinprovidingcommunitydevelopmentservices,whicharehighlyresponsivetocommunityneeds. CRAPerformanceof ColeTaylorBank.ColeTaylorBankwasassignedanoverall“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserve Bankof Chicago(“ReserveBank”),asof April9,2012(“ColeTaylorBankEvaluation”). ExaminersnotedthatColeTaylorBank’slendinglevelsreflectedgoodresponsivenessto assessmentareacreditneeds,andthatthebankwasaleaderinmakingcommunitydevelopmentloans.20ColeTaylorBankreceiveda“highsatisfactory”ratingfortheLending Test,andan“outstanding”ratingonboththeInvestmentTestandtheServiceTest. FortheLendingTest,examinersnotedthatColeTaylorBank’slevelof homemortgage, smallbusiness,andconsumerlendingactivityreflectedgoodresponsivenesstoassessment areacreditneedsconsideringthebank’sresources,businessstrategy,communityneedsand opportunities,aswellasstrainedeconomicconditionsduringtheevaluationperiod.21 ReserveBankexaminersnotedthatthebank’slendinglevelsreflectedgoodresponsiveness toassessmentareacreditneeds.Examinersfoundthatthebank’sgeographicdistributionof loansreflectedexcellentpenetrationthroughouttheassessmentarea,andtheborrowerdistributionreflectedadequatedistributionamongborrowersof differentincomelevelsand businessesof differentrevenuesizes.Examinersobservedthatthebank’s2011performance inhomemortgagelendingtoLMIborrowersrepresentedanimprovementover2009and 2010. ExaminersnotedthatColeTaylorBankisaleaderinmakingcommunitydevelopment loans.Forexample,duringtheevaluationperiod,thebankoriginated57qualifiedcommunitydevelopmentloanstotalingapproximately$173million. 20 TheevaluationperiodfortheLendingTestintheColeTaylorBankEvaluationwasfromJanuary1,2009, throughDecember31,2011,exceptforcommunitydevelopmentloans,whichhadanevaluationperiodfrom January19,2010,throughApril9,2012.TheevaluationperiodfortheInvestmentTestandtheServiceTestwas fromJanuary19,2010,throughApril9,2012.ConsumerloandatafortheperiodfromJanuary1,2009, throughDecember31,2010,werealsoconsidered. 21 WithrespecttotheLendingTest,examinersplacedmoreweightonColeTaylorBank’shomemortgagelending activityandlessweightonitsperformanceinconsumerlendingbecauseofthebank’srelativelylowvolumeof consumerlendingactivity.Duringtheevaluationperiod,ColeTaylorBankoriginatedapproximately$2.8billionand$19.7millioninhomemortgageloansandconsumerloans,respectively.

178 FederalReserveBulletin|August2014 InevaluatingtheInvestmentTest,examinersobservedthatthebankmadeanexcellentlevel of qualifiedcommunitydevelopmentinvestmentsandgrants,ofteninaleadershipposition.ExaminersalsofoundthatColeTaylorBankexhibitedexcellentresponsivenessto creditandcommunitydevelopmentneedsbysupportingorganizationsthatprovidefinancingtosmallbusinessesandaffordablehousingforLMIindividuals. InevaluatingtheServiceTest,examinersfoundthatthebank’sdeliverysystemswerereadilyaccessibletothebank’sgeographiesandindividualsof differentincomelevelsinits assessmentarea.ExaminersobservedthatColeTaylorBankwasaleaderinproviding communitydevelopmentserviceswithinitsassessmentarea,andthatthebankprovided communitydevelopmentservicesthroughemployeeandofficerinvolvement,mostnotably inleadershipcapacities,relatingtobankingandfinancialservices. Duringthecourseof theColeTaylorBankEvaluation,examinersdidnotfindanyevidencethatColeTaylorBankengagedindiscriminatoryorotherillegalcreditpractices. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof MBFinancialBankandColeTaylorBankin complyingwithfairlendingandotherconsumerprotectionlaws.22Aspartof thisconsideration,theBoardreviewedtheMBFinancialBankEvaluationandtheColeTaylorBank Evaluation,assessedColeTaylorBank’sHMDAdata,andconsideredthecommentonthe applicationcriticizingColeTaylorBank’slendingrecord.TheBoardalsoconsideredMB FinancialBank’sfairlendingpoliciesandproceduresandconfidentialsupervisory information. HMDADataandFairLendingAnalysis.ThecommenterfocusedonColeTaylorBank’s lendingrecord,alleging,basedon2011HMDAdata,thatColeTaylorBankmadea lowerpercentageof itsmortgageloanstoAfricanAmericans,Hispanics,andLMIborrowersthanalllendersintheChicago,Illinois,area.Thecommenterexpressedconcernthat ColeTaylorBank’sunderperformanceinunderservedmarketswouldcompromiseMB FinancialBank’sabove-averagerecordof homelendingtoLMIborrowersandborrowers of color. MBFinancialrepresentsthat2012HMDAdatashowthatColeTaylorBankmadea largerpercentageof HMDA-reportableloanstoHispanicborrowersthantheaggregateof alllendersandthatColeTaylorBank’spercentageof HMDAloanstoAfricanAmerican borrowersincreasedwhencomparedtothe2011percentage. TheBoardreviewedColeTaylorBank’sHMDAdataintheChicagoareafortheperiod 2010–13.TheBoard’sanalysisconfirmedthedisparitiesnotedbythecommenterfor2011. ThedatarevealedthatColeTaylorBankimprovedthenumberandpercentageof itsmortgageloanstoAfricanAmericansin2012and2013butcontinuedtolagtheaggregateof all 22 TheBoardhasenteredintoaConsentOrderwithColeTaylorBankforviolationsofsection5oftheFederal TradeCommissionAct,15U.S.C.§45(a)(1)(“FTCAct”),relatedtodisbursementsofstudentloanfundsfor collegesanduniversitiesbyaninstitution-affiliatedparty.ColeTaylorBankterminatedthisarrangementin August2013.AspartoftheConsentOrder,ColeTaylorBankhasagreedthat,intheeventitentersintoasimilarrelationshipwithanotherthird-partystudentlender,itwilldevelopaplan,acceptabletotheFederal Reserve,toenhanceitsconsumercompliancerisk-managementprogramtoensurethatthesoliciting,marketing,andservicingoftheconsumerdepositproductinconnectionwiththethirdpartycomplywithallconsumerprotectionlawsandregulations,includingsection5(a)(1)oftheFTCAct.ColeTaylorBankalsoagreed topayacivilmonetarypenaltyof$3.51million.MBFinancialhascommittedthattheprovisionsoftheCease andDesistOrderbetweenColeTaylorBankandtheBoardthatprovideforrestitutionshallbebindingupon MBFinancialasasuccessortoTaylorCapital,takingintoconsiderationMBFinancial’splantomergeCole TaylorBankintoMBFinancialBank.

LegalDevelopments:SecondQuarter,2014 179 lenders.ForHispanicborrowers,thebankimprovedthenumberandpercentageof its mortgageloanoriginationsin2012,exceedingtheaggregate.Inaddition,comparedto 2011,thedatashowthatin2012,thenumberandpercentageof ColeTaylorBank’smortgageloanoriginationstoLMIborrowersandtheborrowersinLMIcensustractsimproved andwereconsistentwiththeaggregate.The2013datashowedthatthebank’shomeloan originationstoHispanicborrowersandtoLMIborrowersandcommunitiesweregenerally consistentwiththeaggregate.23 TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequal accesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.Although theHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialandethnicgroupsincertainlocal areas,HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhether ColeTaylorBankexcludedordeniedcredittoanygrouponaprohibitedbasis.24 Inresponsetothelendingdisparitiesidentifiedbythecommenter,theReserveBankconductedacombinationonsiteandoffsiteexaminationof ColeTaylorBankcoveringthe portionof theChicago-Naperville-Joliet,Illinois,MetropolitanDivisionthatColeTaylor Bankdelineatesasitsassessmentarea,whichconsistsof Cook,DuPage,andLakecounties,allinIllinois.Asaninitialmatter,ReserveBankexaminersfoundthatColeTaylor Bank’sassessmentareadidnotpresentevidenceof redlining,observingthatmajority-minoritycensustractswerenotarbitrarilyexcluded.TheReserveBank’sexaminationalso focusedonthebank’shome-mortgagelendingpatterns,marketingmaterials,andlending strategies. Inevaluatinghome-mortgagelendingpatterns,ReserveBankexaminersreviewedthe bank’slendingdatafrom2010–12anddidnotfindatrendof increasinglendingdisparities.Examinersnotedthatthebank’slendingvolumestominoritieshadincreasedandthat ColeTaylorBank’soriginationsexceededtheaggregate.Inreviewingthebank’smarketing, examinersnotedthatthebank’smarketingcampaignsincludedtheentireassessmentarea, andthebank’smarketingpracticesandmaterialsdidnotshowevidenceof redlining. ReserveBankexaminersfoundthatthebank’sloanandunderwritingandpricingpolicies wereneutralregardingthetreatmentof applicants.ReserveBankexaminersalsoreviewed thebank’spolicies,procedures,forms,creditapplications,andlendingpracticesforevidenceof discriminationandtoensurecompliancewithfairlendinglaws. Aspartof thescopingprocessfortheColeTaylorBankEvaluation,underwritingandpricinganalyseswereperformedusing2010homemortgagedatatoanalyzedisparitiesbygenderandethnicity.Theanalysisfoundnostatisticallysignificantdifferencesindenialratesor pricingfactorsbasedongenderorethnicity. MBFinancial’sFairLendingProgram.MBFinancialhasinstitutedpoliciesandprocedures tohelpensurecompliancewithallfairlendingandotherconsumerprotectionlawsand regulations.Thecompany’slegalandcompliancerisk-managementprogramincludesafair lendingriskassessmentthatisupdatedannually,ormorefrequentlybasedonmaterial 23 The2013HMDApeerdataarepreliminary. 24 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data.

180 FederalReserveBulletin|August2014 changestothebank’sstrategy,operations,productsorservices;fairlendingtrainingfor employeesinvolvedinallstagesof thecreditprocess;pricinganalysesanddataaccuracy reviewsbythecompliancedepartment;marketingmaterialreviews;andregularmonitoring of complaints. MBFinancial’sinternalauditdepartmentconductedacomparativefilereviewof residentialrealestateloanapplicationsreceivedfortheperiod2011through2012,andnoevidence of discriminatorypracticeswasfound.Inaddition,OCCexaminersfoundnoevidenceof discriminatoryorotherillegalcreditpracticesaspartof theMBFinancialBank Evaluation. Onconsummationof thetransaction,MBFinancialhascommittedtoimplementacompliancemanagementsystemthatcombinesthestrengthsof itsandColeTaylorBank’sfair lendingprogramsandwouldincreasethenumberof compliancestaff.MBFinancialwould maintainthededicatedmortgagecomplianceunitandthefairlendingprogrammanagementfunctionatColeTaylorBank’smortgagesubsidiary,ColeTaylorMortgage,LLC, andwouldupdateMBFinancial’sannualfairlendingriskassessmenttoincorporatethe scaleandsizeof ColeTaylorBank’smortgagebusiness,aswellasitsloanservicingactivities.MBFinancialplanstoestablishaFairLendingActionCommittee,currentlyinuseat ColeTaylorBank,tomanagefairlendingrisk.ThecommitteewouldreporttoMBFinancial’sOperationalandComplianceRiskCommittee,whichreportstoexecutivemanagementandMBFinancial’sEnterpriseRiskCommittee. MBFinancialhascommittedthat,followingconsummationof themergerof MBFinancialBankwithColeTaylorBankandconsistentwiththecombinedorganization’scapacity andopportunitiesformakingqualifiedlendingandinvestments,thecombinedorganizationwilldemonstratethatithasengagedinlevelsof qualifiedlendingandinvestments, homemortgagelending,includinglendingtoLMIcommunitiesandminorityandLMI borrowers,smallbusinesslending,andcommunitydevelopmentlendingandinvestmentsin LMIcommunitiesinthecombinedorganization’sassessmentareathatarecommensurate withorthatexceedMBFinancialBank’sandColeTaylorBank’simprovedperformancein 2012. C.AdditionalInformationonConvenienceandNeedstobeServedbytheCombined Organization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Thecommenterallegedthattheproposalwouldnotprovideaclearorsignificant publicbenefit. MBFinancialrepresentsthattheproposalwouldresultincostsavingsforthecombined organizationbyconsolidatingredundantfunctions,includingdataprocessing.MBFinancialnotesthatthecombinedorganizationwouldbeabletoprovidecustomerswithbenefits throughmoreefficientandcost-effectiveprovisionof bankingservicesandwouldbeable todedicateadditionalresourcestomeetingthebankingneedsof itscustomers. MBFinancialalsostatesthattheproposalwouldoffercustomersconveniencethrougha broaderrangeof financialproducts.MBFinancialrepresentsthatcustomersof Taylor Capitalwouldhaveaccesstoadditionalsavingsaccountproducts;general-useprepaid cards,giftcards,andsecuredcreditcards;lower-costremittancestoMexico;wealthmanagementproducts;andadditionalproductsandservicesforbusinesscustomers,suchas capitalmarketsservices,internationalbankingservices,andtreasurymanagement products.

LegalDevelopments:SecondQuarter,2014 181 Inaddition,MBFinancialrepresentsthatthemergerwouldbenefitcurrentcustomersof ColeTaylorBankthroughaccesstolargerbranchandATMnetworks.ThebranchnetworkavailabletoMBFinancialandTaylorCapitalcustomerswouldincreasefrom85and 9,respectively,to94branches.Customersof ColeTaylorBankwouldalsogainaccessto MBFinancial’snetworkof 121bank-ownedATMs. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyMBFinancial,confidentialsupervisoryinformation,andthepubliccommentontheproposal.Basedonthe Board’sanalysisof theHMDAdata,itsevaluationof thelendingoperationsandcomplianceprogramsof MBFinancialBankandColeTaylorBank,itsreviewof examination reports,anditsconsultationswithotheragencies,theBoardbelievesthattheconvenience andneedsfactor,includingtheCRArecordsof theinsureddepositoryinstitutionsinvolved inthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”25 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.26These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.27 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,MBFinancialwouldhaveapproximately $15.3billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firm size,wouldnotbeamongthe75largestU.S.financialinstitutions.TheBoardgenerallypresumesthatamergerthatinvolvesanacquisitionof lessthan$2billioninassets,orresults inafirmwithlessthan$25billioninconsolidatedassets,willnotposesignificantrisksto thefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresult inasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orother 25 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 26 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 27 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012).

182 FederalReserveBulletin|August2014 riskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction.Thecompanies engageandwouldcontinuetoengageintraditionalcommercialbankingactivities.The resultingorganizationwouldexperiencesmallincreasesinthemetricsthattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,withtheresulting firmgenerallyrankingoutsideof thetop50U.S.financialinstitutionsintermsof those metrics.Forexample,MBFinancial’sintrafinancialassetsandliabilitieswouldconstitutea negligibleshareof thesystemwidetotal,bothbeforeandafterthetransaction.Theresultingorganizationwouldnotengageincomplexactivitiesorprovidecriticalservicesinsuch volumethatdisruptioninsuchserviceswouldhaveagreatimpactonthemacroeconomic conditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolution difficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyMBFinancialwithalltheconditionsimposedinthisorder,includingreceipt of allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitments aredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardorReserveBank,actingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveJune30,2014. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo,Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Old National Bancorp Evansville, Indiana OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2014–6(April7,2014) OldNationalBancorp(“OldNational”),Evansville,Indiana,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tomergewith TowerFinancialCorporation(“Tower”)andtherebyindirectlyacquireitssubsidiarybank, TowerBankandTrustCompany(“TowerBank”),bothof FortWayne,Indiana.Immedi- 1 12U.S.C.§1842.

LegalDevelopments:SecondQuarter,2014 183 atelyfollowingtheproposedmerger,TowerBankwouldbemergedintoOldNational’s subsidiarybank,OldNationalBank,Evansville.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(78FederalRegister69680(2013)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. OldNational,withconsolidatedassetsof approximately$9.6billion,isthe104thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$7.2billion indeposits.4OldNationalBankoperatesinIndiana,Michigan,Illinois,Kentucky,and Ohio.OldNationalisthefourthlargestdepositoryinstitutioninIndiana,controlling depositsof approximately$5.4billion,whichrepresent5.2percentof totaldepositsof insureddepositoryinstitutionsinthatstate.5 Tower,withtotalconsolidatedassetsof $691million,controlsTowerBank,whichoperates onlyinIndiana.Toweristhe29thlargestinsureddepositoryinstitutioninIndiana,controllingdepositsof approximately$600million,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,OldNationalwouldbecomethe101stlargestdepositoryorganizationintheUnitedStates,withtotalconsolidatedassetsof approximately $10.3billion,whichrepresentlessthan1percentof thetotalamountof assetsof insured depositoryinstitutionsintheUnitedStates.OldNationalwouldhavetotaldepositsof approximately$7.8billion.InIndiana,OldNationalwouldremainthefourthlargest depositoryorganization,controllingdepositsof approximately$6billion,whichrepresent 5.7percentof thetotaldepositsof insureddepositoryinstitutionsinthestate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.6 OldNationalandTowercompetedirectlyintheFortWayne,Indianabankingmarket.7 TheBoardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketin lightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;therelativesharesof totaldepositsin 2 ThemergerofTowerBankintoOldNationalBankissubjecttotheapprovaloftheOfficeoftheComptroller oftheCurrency(“OCC”)undertheBankMergerAct. 3 12CFR262.3(b). 4 Assetandnationwidedeposit-rankingdataareasofDecember31,2013,unlessotherwisenoted. 5 StatedepositdataareasofJune30,2013.Inthiscontext,insureddepositoryinstitutionsincludecommercial banks,nondeposittrustcompanies,savingsandloanassociations,cooperativebanks,industrialbanks,andsavingsbanks. 6 12U.S.C.§1842(c)(1). 7 TheFortWayne,IndianamarketisdefinedasAllen,DeKalb,andWhitleycounties;Preble,Root,andUnion townshipsinAdamsCounty;UnionandJeffersontownshipsinWellsCounty;JacksonandUniontownshipsin HuntingtonCounty;Noble,Green,andSwantownshipsinNobleCounty,allinIndiana;andCarryalltownshipinPauldingCountyandHicksvilletownshipinDefianceCounty,bothinOhio.

184 FederalReserveBulletin|August2014 insureddepositoryinstitutionsinthemarket(“marketdeposits”)controlledbyOld NationalandTower;8theconcentrationlevelsof marketdepositsandtheincreaseinthose levels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);9 andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesforthismarket.Onconsummationof theproposal,thebankingmarketwouldremainmoderatelyconcentrated,asmeasuredby theHHI,andnumerouscompetitorswouldremain.10 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketinwhichOldNationalandTowercompetedirectlyorin anyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant.Further,theBoardhasconsideredthe 8 DepositandmarketsharedataareasofJune30,2013,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,Midwest FinancialGroup,75FederalReserveBulletin386(1989);andNationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 9 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines in2010(seePressRelease,DepartmentofJustice(Aug.19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 10 OldNationaloperatesthe24thlargestdepositoryinstitutionintheFortWayne,Indianabankingmarketwith approximately$14millionindeposits,whichrepresentlessthan1percentofmarketdeposits.Toweroperatesthefifthlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$538million, whichrepresentapproximately7.8percentofmarketdeposits.Onconsummationoftheproposedtransaction, OldNationalwouldbecomethefifthlargestdepositoryinstitutioninthemarket,controllingdepositsof approximately$552million,whichrepresent8percentofmarketdeposits.TheHHIwouldincreaseby3points to1280,and28competitorswouldremaininthemarket.

LegalDevelopments:SecondQuarter,2014 185 futureprospectsof theorganizationsinvolvedintheproposalinlightof thefinancialand managerialresourcesandproposedbusinessplan. TheBoardhasconsideredthefinancialfactorsof theproposal.OldNationalandOld NationalBankarewellcapitalizedandwouldremainsoonconsummationof theproposed transaction.Theproposedtransactionisabankholdingcompanymerger,structuredasa cashandshareexchange.11Theassetquality,earnings,andliquidityof OldNationalBank areconsistentwithapproval,andOldNationalappearstohaveadequateresourcesto absorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Basedonitsreviewof therecord,theBoardfindsthattheorganizationhassufficient financialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of OldNational,Tower,andtheirsubsidiarydepositoryinstitutions,includingassessments of theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoard hasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisory agencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebanking andanti-money-launderinglaws. OldNationalanditssubsidiarydepositoryinstitutionareeachconsideredtobewellmanaged.OldNational’sexistingrisk-managementprogramanditsdirectorateandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof OldNationalhavesubstantialknowledgeof andexperienceinthebankingandfinancial servicessectors. TheBoardalsohasconsideredOldNational’splansforimplementingtheproposal.Old Nationalisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof the post-acquisitionintegrationprocessforthisproposal.OldNationalwouldimplementits risk-managementpolicies,procedures,andcontrolsatthecombinedorganization,and theseareconsideredacceptablefromasupervisoryperspective.Inaddition,OldNational’s managementhastheexperienceandresourcestoensurethatthecombinedorganization operatesinasafeandsoundmanner.Furthermore,OldNationalhasdemonstrateda recordof successfullyintegratingotherbankingorganizationsintoitsoperationsandriskmanagementsystemsafteracquisitions. OldNational’ssupervisoryrecord,managerialandoperationalresources,andplansfor operatingthecombinedinstitutionsafterconsummationprovideareasonablebasistoconcludethatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,andOldNational’santi-money-launderingpolicies,areconsistentwith approval.12 11 EachoutstandingshareofTowercommonstockwouldbeexchangedfor$6.75incashand1.2sharesofOld National’scommonstock.Theanticipatedaggregatecashconsiderationtobepaidinconnectionwiththe mergerisapproximately$31.6million.OldNationalhastheresourcestofundthecashconsiderationportionof thetransaction. 12 OnJune4,2012,OldNationalBankenteredintoastipulationandconsentorderwiththeOCCrelatingtoits BankSecrecyAct/anti-money-launderingcomplianceprogram.OldNationalBank,OCCOrderNo.2012-126 (June4,2012).OnJanuary14,2014,theOCClifteditsorderafterverifyingcompliancewiththeorder.

186 FederalReserveBulletin|August2014 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).13TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,14and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.15 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof OldNationalBankandTowerBank,datareportedbyOldNational BankandTowerBankundertheHomeMortgageDisclosureAct(“HMDA”),16other informationprovidedbyOldNational,confidentialsupervisoryinformation,andthepubliccommentreceivedontheproposal.TheBoardreceivedonecommentthatobjectedto theproposalonthebasisof OldNational’sfairlendingrecordasreflectedin2012HMDA data. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitution inlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.17TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.18Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,onsiteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor. CRAPerformanceof OldNationalBank.OldNationalBankwasassignedanoverall“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheOCCinDecember2012(“OldNationalBankEvaluation”).OldNationalBankreceivedanoverall“outstanding”ratingfortheLendingTestandoverall“highsatisfactory”ratingsforboththe InvestmentandServiceTests.19Inadditiontotheoverall“outstanding”ratingthatOld NationalBankreceived,thebankreceivedseparateoverall“outstanding”or“satisfactory” ratingsineachmultistatemetropolitanareaandstatereviewed.20 13 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 14 12U.S.C.§2901(b). 15 12U.S.C.§2903. 16 12U.S.C.§2801etseq. 17 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 18 12U.S.C.§2906. 19 TheevaluationperiodfortheOldNationalBankEvaluationwasJuly1,2008,throughDecember31,2012. 20 TheOldNationalBankEvaluationincludedfull-scopereviewsofatleastoneassessmentareawithineachstate whereOldNationalBankhadanofficeandofmultistatemetropolitanareaswhereOldNationalBankoperatedbranchesinatleasttwostates.ThestatesreviewedwereIllinois,Indiana,Kentucky,andOhio,andthe multistatemetropolitanareasreviewedweretheEvansville(Indiana-Kentucky)andLouisville(Kentucky-Indiana)metropolitanareas.

LegalDevelopments:SecondQuarter,2014 187 AsdescribedintheOldNationalBankEvaluation,OCCexaminersfoundthatthebank’s overalllendingactivitywasexcellent.Thebankoriginatedasignificantmajorityof loans insideitsassessmentareasandhadanexcellentoverallrecordof lendingtoborrowersof differentincomelevels.Examinersnotedthatthebankhadanexcellentrecordof lending tohomemortgageborrowersof differentincomelevels,whileitsdistributionof loansto businessesandfarmswithdifferentrevenuesizeswasgood.Further,OldNationalBank’s overallgeographicdistributionof loanswasadequate.Specifically,thebank’sgeographic distributionof smallloanstobusinesseswasgood,whileitsgeographicdistributionof mortgageloansandsmallloanstofarmswasadequate.Inaddition,examinersfoundno evidenceof discriminatoryorotherillegalcreditpractices. InevaluatingtheInvestmentTest,OCCexaminersfoundthatOldNationalBankhadan overallgoodlevelof qualifiedcommunitydevelopmentinvestmentsthatwerehighly responsivetocommunityneeds.ExaminershighlightednumerousCRA-qualifiedinvestmentsthatthebankmade,includingdonationstoorganizationswithacommunitydevelopmentfocus.ThebankalsoparticipatedinvariousCRA-qualifiedinvestmentvehicles. ForthecurrentCRAexaminationcycle,whichbeganJanuary1,2013,OldNationalhas indicatedthatOldNationalBankincreaseditscorporatecommunitydevelopmentinvestmentgoalfrom$37.5millionto$87.5million,anincreaseof 133percent. InevaluatingtheServiceTest,examinersnotedthatbrancheswereaccessibletogeographiesandindividualsof differentincomelevels.ExaminersalsonotedthatOldNational Bank’sopeningandclosingof brancheshadnotadverselyaffectedtheaccessibilityof its deliverysystemstoLMIgeographiesorLMIindividuals.Further,examinershighlighted thattheinstitutionprovidedarelativelyhighlevelof communitydevelopmentservices. CRAPerformanceof TowerBank.TowerBankwasassigneda“satisfactory”ratingatits mostrecentCRAperformanceevaluationbytheFederalReserveBankof Chicago,asof April29,2013(“TowerBankEvaluation”),withratingsof “satisfactory”fortheLending andCommunityDevelopmentTests.21FortheLendingTest,examinersconcludedthat TowerBank’sloan-to-depositratiowasreasonable.Further,themajorityof thebank’s HMDAreportableandsmallbusinessloansweremadeinitsassessmentareas,andthegeographicdistributionof itsloansreflectedreasonablepenetrationamongborrowersof differentincomelevelsandbusinessesof differentsizes.ExaminersalsonotedthatTower Bank’slevelof communitydevelopmentactivitiesrepresentedadequateresponsivenessto communitycreditneedsinitsassessmentareas. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof OldNationalBankandTowerBankincomplying withfairlendingandotherconsumerprotectionlaws.Aspartof thisconsideration,the BoardreviewedtheOldNationalBankandTowerBankEvaluations,assessedOld NationalBank’sHMDAdata,andconsideredthecommentontheapplicationandother agencies’viewsonOldNationalBank’srecordof performanceunderfairlendinglaws.The BoardalsoconsideredOldNationalBank’sfairlendingpoliciesandprocedures. Analysisof HMDADataandBranchClosings.TheBoardanalyzedOldNationalBank’s 2012HMDAdata,themostrecentpubliclyavailable,aswellaspreliminary2013HMDA 21 TheTowerBankEvaluationwasconductedusingexaminationproceduresforsmallinstitutionswithassetsof lessthan$1.2billionandgreaterthan$296millionasofJanuary1,2013.Institutionsinthisassetsizecategory arereferredtoasintermediatesmallbanksandaresubjecttoCRAexaminationsbasedonperformanceinthe followingareas:loan-to-depositratio,lendingintheassessmentarea,geographicdistributionoflendinginthe assessmentarea,lendingtoborrowersofdifferentincomesandtobusinessesofdifferentsizes,responsesto substantiatedcomplaints,andcommunitydevelopmentactivities.

188 FederalReserveBulletin|August2014 data.TheBoardanalyzeddatarelatedtoallHMDA-reportableloanstodevelopaviewof thebank’soveralllendingpatterns,aswellasthesubsetof thatdatarelatedspecificallyto theloanproductsthatcomposedthesubjectof thepubliccommentreceivedontheproposal,includingconventionalhomepurchaseloans,FederalHousingAdministration (“FHA”),FarmServiceAgency/RuralHousingService(“FSA/RHS”)andVeteranAffairs (“VA”)homepurchaseloans,homeimprovementloansandrefinanceloans.TheBoard analyzedthebank’scombinedassessmentareasandthespecificmarketareasaddressedin thepubliccomment(Indianapolis,Evansville,andFortWayne,IndianaMSAs).Within thosedatasets,theBoardfocuseditsreviewondatarelatedtoloansmadeordeniedto borrowersof theracesandethnicitieshighlightedbythepubliccomment,i.e.,African AmericansandHispanics. ThecommenterexpressedconcernsthatOldNationalBankwasnotmeetingthecredit needsof minorityindividualsinseveralcommunitiesservedbythebank,basedon2012 HMDAdata.Inparticular,thecommenterallegedthatOldNationalBankoriginatedmore loanstowhitesthantoAfricanAmericansorHispanicsacrossarangeof loanproducts, includingconventionalhomepurchaseloans,FHA,FSA/RHSandVAhomepurchase loans,refinanceloansandhomeimprovementloansintheIndianapolis,Evansville,and FortWayne,IndianaMSAs.ThecommenteralsoassertedthatOldNationalBankdisproportionatelydeniedapplicationsbyHispanicapplicantsineachof theseMSAs,suggesting apatternof denialratedisparities. TheBoard’sreviewconfirmedthelevelsof lendingbyOldNationalBanktoAfrican AmericanandHispanicborrowersanddenialdisparityratiosnotedbythecommenter. However,theBoard’sanalysisof HMDAdataforconventionalhomepurchaseloans, FHA,FSA/RHSandVAhomepurchaseloans,refinanceloansandhomeimprovement loansbyOldNationalBankinitscombinedassessmentareas,aswellasintheIndianapolis,Evansville,andFortWayneMSAsindividually,didnotshowanysignificantdifferences betweenOldNationalBank’slendingandtheaggregatelendingfor2012and2013.22 TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequal accesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.Although theHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas, HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhetherOld NationalBankexcludedordeniedcredittoanygrouponaprohibitedbasis.23FullyevaluatingOldNationalBank’scompliancewithfairlendinglawsandregulationswouldrequire athoroughreviewof thebank’sapplicationandunderwritingpoliciesandprocedures,as wellasaccesstoinformationcontainedintheapplicationfiles,todeterminewhetherthe observedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwriting factors. 22 Aggregatelendingisdefinedasthenumberofloansoriginatedandpurchasedbyallreportinglendersinspecifiedincomecategoriesasapercentageoftheaggregatenumberofloansoriginatedandpurchasedbyall reportinglendersinthemetropolitanorassessmentarea. 23 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data.

LegalDevelopments:SecondQuarter,2014 189 WithrespecttothespecificHMDAdataonhomepurchase,homeimprovementandrefinanceloanscitedbythecommenter,OldNationalprovidedinformationreflectingnondiscriminatoryreasonsforindividuallendingdecisions(i.e.,credithistory,inadequatecollateral,anddebt-to-incomeratio).OldNationalalsoprovidedtheBoardwithdetailed informationonOldNationalBank’straining,marketing,advertising,andunderwriting guidelinesreflectingitsstatedcommitmenttothepreventionof prescreening,discouragement,andexclusionof creditapplicationsonaprohibitedbasis. TheBoardhasconsultedwiththeOCCregardingitsevaluationof OldNationalBank’s compliancewithfairlendinglawsandregulations.InitsrecentOldNationalBankCRA PerformanceEvaluation,theOCCreportedthatitdidnotfindevidenceof discriminatory orotherillegalcreditpractices.Inaddition,anOCCMarch2013consumercompliance examinationandaNovember2013targetedexaminationof OldNationalBank’sriskmanagementprogramforfairlendingcompliancedidnotresultinanyfindingsof discriminationrelatingtoOldNationalBank’sfairlendingpoliciesandproceduresortounderwriting decisionsbythebank’smanagement. ThecommenteralsoallegedthatOldNationalhasabusinessstrategyof closingbranches andreducingfinancialservices,resultingininconveniencetolocalcommunities.24The BoardanalyzedOldNationalBank’scurrentbranchdistributionandbelievesitisreadily accessibletoLMIgeographiesandindividualsinthebank’sassessmentareas.Twentyeightpercentof OldNationalBank’sbranchesarelocatedinLMIcensustracts.According to2010censusdata,thepercentageof thepopulationinLMIgeographieswithinOld NationalBank’sassessmentareaswas27percent.Assuch,thepercentageof OldNational BankbranchesinLMIgeographiesslightlyexceedsthepercentageof thepopulationin LMIgeographieswithintheOldNationalBankassessmentareas. OldNationalhasstatedthatOldNationalBankdoesnotintendtocloseanybranchesin connectionwiththeproposedtransaction.Althoughthebankclosedseveralbranchesin recentyears,thebankhasrepresentedthatthedecisionswerebasedonprofitabilityanalysisandproximitytootherbranchesandthatcommunityimpactwasassessedpriortoall closings.Further,theBoardhasconsideredthatfederalbankinglawprovidesaspecific mechanismforaddressingbranchclosings.Federallawrequiresaninsureddepositoryinstitutiontoprovidenoticetothepublicandtotheappropriatefederalsupervisoryagency beforeclosingabranch.25TheBoardhasreviewedOldNationalBank’sbranchclosing policyandnotesthattheOCCwillcontinuetoreviewOldNationalBank’sbranchclosing recordinthecourseof conductingCRAperformanceevaluations. OldNational’sFairLendingProgram.OldNationalhasinstitutedpoliciesandprocedures tohelpensurecompliancewithallfairlendingandotherconsumerprotectionlawsand regulations.Thecompany’slegalandcompliancerisk-managementprogramincludeswrittenpoliciesoutliningthebank’sresponsibilityforcompliancewithfairlendinglawsand regulations,fairlendingofficersservingwithineachof thebank’slendingdepartments, andrequiredannualfairlendingtrainingforapplicablestaff andtheboardof directors. OldNationalalsohasacentralizedunderwritingprocedure,anautomatedapplicationpro- 24 ThecommenterfurtherallegedthatOldNationalhasbeenclosingbranchesforthepurposeofkeepingits assetsslightlybelow$10billiontoavoidincreasedregulatoryburdenundertheDodd-FrankWallStreet ReformandConsumerProtectionAct(“Dodd-FrankAct”).TheBoardnotesthatafterconsummationofthis transaction,OldNationalwouldhavemorethan$10billioninassets. 25 Section42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedbytheJointPolicy StatementRegardingBranchClosings(64FederalRegister34844(1999)),requiresthatabankprovidethepublicwithatleast30days’notice,andtheappropriatefederalsupervisoryagencywithatleast90days’notice, beforethedateofaproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsandothersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings.

190 FederalReserveBulletin|August2014 cess,asecondreviewprocess,adocumentedexceptionprocess,andastandardpricing sheet. Inaddition,fairlendingreviewsareconductedquarterlyof individualbusinessunits,and comprehensivecorporatereviewsareperformedannuallytoensurecompliancewiththe bank’sunderwritingandpricingproceduresandfairlendinglaws.Thereviewsutilize HMDAandnon-HMDAdataandanalyzeanyfairlendingcomplaintstheinstitution receive.Further,theComplianceDepartmentconductsquarterlyfairlendingtestingand monitoring,includinganalysisof policiesandprocedures,reviewsof loanandapplication data,monitoringof exceptionsandoverrides,andreviewsof newproductsandinitiatives. OldNational’srisk-managementsystemsanditspoliciesandproceduresforassuringcompliancewithfairlendinglawswouldbeimplementedatthecombinedorganization. OldNationalBankrepresentsthatitprovidesannualfairlendingtrainingtoallemployees involvedinanyaspectof thebank’scredittransactions.OldNationalalsostatesthatit conductsongoingmonitoringandanalysisof loandata,policies,andconsumercomplaints toensurecompliancewithfairlendingregulations. C.AdditionalInformationonConvenienceandNeedsof CommunitiestobeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Thecommentergenerallyquestionedwhethertheproposalwouldresultinthe publicbenefitsthattheapplicantasserts. OldNationalrepresentsthattheproposalwouldprovideopportunitiestoachievevarious operationalefficienciesandeconomiesof scale,whichwouldbenefitcurrentandfuture customersof thecombinedorganizationthroughmoreefficientandcost-effectivebanking services.OldNationalassertsthatthetransactionhasthepotentialtobenefitallaspectsof Tower’soperations,particularlyitslendingfunctions,assetandliabilitymanagement,and dataprocessingcapabilities.OldNationalalsostatesthatthecombinedorganization’s largerlendinglimitwouldallowOldNationaltobettermeetthelendingneedsof itscorporatecustomersandmoreeffectivelycompeteforlargercorporatecustomers. OldNationalstatesthattheproposalwouldprovidecustomerswithanexpandednetwork of almost170branchesinIndiana,Michigan,Illinois,Kentucky,andOhio.OldNational notesthatthecombinedorganizationwouldprovideTowerBank’scustomerswithan expandedandmoresophisticatedrangeof productsandservicesthanTowerBankcurrentlyoffers,includinganenhancedrangeof consumerservicesanddepositaccounts.Further,insuranceproductswillbemadeavailabletoTowerBank’scustomersthroughOld NationalInsurance,whichoffersabroadarrayof insuranceproductstoindividualsand businessesacrosstheUnitedStates. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyOldNational,confidentialsupervisoryinformation,andthepubliccommentontheproposal.Basedonthe Board’sanalysisof theHMDAdata,evaluationof themortgagelendingoperationsand complianceprogramsof OldNationalBankandTowerBank,andreviewof examination reports,theBoardconcludesthattheconvenienceandneedsfactor,includingtheCRA recordof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwith approvalof theapplication.

LegalDevelopments:SecondQuarter,2014 191 FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”26 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.27These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,whichareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.28 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,OldNationalwould haveapproximately$10.3billioninconsolidatedassetsandwouldbethe101stlargest financialinstitutionintheUnitedStates.TheBoardgenerallypresumesthatamerger resultinginafirmwithlessthan$25billionintotalconsolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-border activities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction.Thecompaniesengageandwouldcontinuetoengageintraditionalcommercialbankingactivities.Theresultingorganizationwouldexperiencesmallincreasesinthemetrics thattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness, withtheresultingfirmgenerallyrankingoutsideof thetop100U.S.financialinstitutions intermsof thosemetrics.Forexample,OldNational’sintrafinancialassetsandliabilities wouldcompriseanegligibleshareof thesystemwidetotal,bothbeforeandafterthetransaction.Theresultingorganizationwouldnotengageincomplexactivities,norwoulditprovidecriticalservicesinsuchvolumethatdisruptioninthoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtrade orresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. 26 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 27 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 28 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

192 FederalReserveBulletin|August2014 Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.29Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyOldNationalwithalltheconditionsimposedinthisorder,includingreceipt of allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitments aredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheReserveBank,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveApril7,2014. Votingforthisaction:ChairYellen,andGovernorsTarullo,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Umpqua Holdings Corporation Portland, Oregon OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2014–2(March28,2014) UmpquaHoldingsCorporation(“Umpqua”),Portland,Oregon,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tomergewith SterlingFinancialCorporation(“Sterling”)andtherebyacquireitssubsidiarybank,SterlingSavingsBank(“SterlingBank”),bothof Spokane,Washington.Immediatelyfollowing theproposedacquisition,SterlingBankwouldbemergedintoUmpqua’ssubsidiarybank, UmpquaBank,Roseburg,Oregon,astatenonmemberbank.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(78FederalRegister63476(2013)).3Thetimefor 29 ThecommenterrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCAct doesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately presenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.Inthe Board’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submittedawrittencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequest doesnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedby apublichearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnotpresentthe commenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied. 1 12U.S.C.§1842. 2 ThemergerofSterlingBankintoUmpquaBankissubjecttoapprovaloftheFederalDepositInsuranceCorporation(“FDIC”)undertheBankMergerAct.12U.S.C.§1828(c). 3 12CFR262.3(b).

LegalDevelopments:SecondQuarter,2014 193 submittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct.Umpqua,with consolidatedassetsof approximately$11.6billion,isthe96thlargestinsureddepository organizationintheUnitedStates,controllingapproximately$9.1billioninconsolidated deposits.4UmpquaBankoperatesinCalifornia,Nevada,Oregon,andWashington. UmpquaBankisthefifthlargestdepositoryinstitutioninOregon,controllingdepositsof approximately$4.4billion,whichrepresent7.5percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.5UmpquaBankisthe24thlargestdepositoryinstitutioninCaliforniawithapproximately$3.3billionindeposits,the19thlargestdepository institutioninWashingtonwithapproximately$1.1billionindeposits,andthe16thlargest depositoryinstitutioninNevadawithapproximately$279.1millionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsineachof thosestates. Sterling,withconsolidatedassetsof $10.3billion,controlsSterlingBank,whichoperatesin California,Idaho,Oregon,andWashington.SterlingBankistheeighthlargestdepository institutioninWashington,controllingdepositsof approximately$3.4billion,whichrepresent2.9percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.SterlingBankistheninthlargestdepositoryinstitutioninOregon,controllingdepositsof approximately$1.8billion,whichrepresent3.1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.SterlingBankisthe63rdlargestdepositoryinstitution inCalifornia,controllingdepositsof approximately$872.9million,whichrepresentless than1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.Inaddition,SterlingBankisthe11thlargestdepositoryinstitutioninIdaho,controllingdeposits of approximately$492.6million,whichrepresent2.4percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,Umpquawouldbecomethe63rdlargestinsured depositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $22.0billion.6Umpquawouldhaveconsolidateddepositsof approximately$16.2billion. UmpquawouldbecomethefourthlargestdepositoryorganizationinOregon,controlling depositsof approximately$6.2billion,whichrepresent10.6percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate.Umpquawouldbecomethesixth largestdepositoryorganizationinWashington,controllingdepositsof approximately $4.5billion,whichrepresent3.8percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate.Umpquawouldbecomethe21stlargestdepositoryorganizationinCalifornia,controllingdepositsof approximately$4.1billion,whichrepresentless than1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthat state. InterstateandDepositCapAnalysis Section3(d)of theBHCActimposescertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbyabankholding companythatiswellcapitalizedandwellmanagedtoacquirecontrolof abankinastate otherthanthehomestateof thebankholdingcompanywithoutregardtowhetherthe 4 Assetandnationwidedeposit-rankingdataareasofDecember31,2013,unlessotherwisenoted. 5 StatedepositdataareasofJune30,2013.Inthiscontext,insureddepositoryinstitutionsincludecommercial banks,savingsassociations,andsavingsbanks. 6 Theproformaassetanddepositdataforthecombinedorganizationafterconsummationoftheproposal includetheassetsanddepositsofthesixbranchesthatUmpquahascommittedtodivest,whichisdiscussed below.

194 FederalReserveBulletin|August2014 transactionisprohibitedunderstatelaw.7However,thissectionfurtherprovidesthatthe Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststatethathasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeorfiveyears.8TheBoardmustalsotakeinto accounttherecordof performanceof theacquiringbanksundertheCommunityReinvestmentAct(“CRA”)9andapplicablestatecommunityreinvestmentlaws.10Inaddition,the Boardmaynotapproveanapplicationbyabankholdingcompanytoacquireaninsured depositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastate otherthanthehomestateof thebankholdingcompanyandthebankholdingcompany controlsorwouldcontrolmorethan10percentof thetotaldepositsof insureddepository institutionsintheUnitedStates.11TheBoardalsomaynotapproveanapplicationif the combinedorganizationwouldcontrol30percentormoreof thetotaldepositsof insured depositoryinstitutionsinthetarget’shomestateorinanystateinwhichtheacquirerand targethaveoverlappingbankingoperations.12 Forpurposesof theBHCAct,thehomestateof UmpquaisOregon,andSterlingBank’s homestateisWashington.13SterlingBankisalsolocatedinCalifornia,Idaho,andOregon. Umpquaiswellcapitalizedandwellmanagedunderapplicablelaw.Washingtonhasafiveyearminimumagerequirement,14andSterlingBankhasbeeninexistenceformorethan fiveyears. Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutions,thetotal amountof consolidateddepositsof insureddepositoryinstitutionsintheUnitedStatesis $11.0trillion.Onconsummationof theproposedtransaction,Umpquawouldcontrolless than1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnitedStates.Inaddition,thecombinedorganizationwouldcontrollessthan 30percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestatesin whichUmpquaandSterlinghaveoverlappingbankingoperations;thesestatesareCalifornia,Oregon,andWashington.Also,theBoardhastakenintoaccountUmpquaBank’s recordof performanceundertheCRAanddeterminedthatitdoesnotprohibittheBoard fromapprovingtheproposal.Accordingly,inlightof allthefactsof record,theBoardis notprohibitedfromapprovingtheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless 7 12U.S.C.§1842(d)(1)(A). 8 12U.S.C.§1842(d)(1)(B). 9 12U.S.C.§2901etseq. 10 12U.S.C.§1842(d)(3). 11 12U.S.C.§1842(d)(2)(A). 12 12U.S.C.§1842(d)(2)(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsinany stateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsanyinsured depositoryinstitutionorabranch.Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabankto belocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch.See12U.S.C. §1841(o)(4)-(7). 13 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 14 Wash.Rev.Code§§30.04.230,30.04.232(2012).

LegalDevelopments:SecondQuarter,2014 195 theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.15TheBoardhasconsideredthecompetitiveeffectsof thisproposalinlightof allthefactsof record.UmpquaBankandSterlingBankcompetedirectlyin12banking marketsinCalifornia,Oregon,andWashington. A.CompetitiveEffectsinBankingMarkets TheBoardhasreviewedthecompetitiveeffectsof theproposalinthebankingmarketsin whichUmpquaBankandSterlingBankcompete.Inparticular,theBoardhasconsidered thenumberof competitorsthatwouldremaininthebankingmarkets;therelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarkets(“marketdeposits”)controlledbyUmpquaandSterling;16theconcentrationlevelsof marketdepositsandthe increaseintheselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)under theDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBank MergerGuidelines”);17othercharacteristicsof themarkets;and,asdiscussedbelow,commitmentsmadebyUmpquatodivestsixbranches. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintenof thetwelvebankingmarketsin whichUmpqua’sandSterling’ssubsidiarybankscompetedirectly.Onconsummation,nine marketswouldremainmoderatelyconcentrated,andonemarketwouldremainhighlyconcentrated,asmeasuredbytheHHI.ThechangeintheHHIinthehighlyconcentrated bankingmarketwouldbesmallandconsistentwithBoardprecedentandthethresholdsin theDOJBankMergerGuidelines.ThechangeintheHHIintheninemoderatelyconcentratedmarketsalsowouldbeconsistentwithBoardprecedentandthethresholdsinthe DOJBankMergerGuidelines.Inaddition,anumberof competitorswouldremaininall tenbankingmarkets.18 IntheCoosBay,Oregon,bankingmarket(the“CoosBaybankingmarket”),19Umpqua Bankisthelargestdepositoryinstitution,controllingapproximately$334.6millionin deposits,whichrepresentapproximately39.9percentof depositsinthatmarket.Sterling Bankisthesecondlargestdepositoryinstitutioninthatmarket,controlling$207.6million indeposits,whichrepresentapproximately24.7percentof depositsinthatmarket.Inthe Roseburg,Oregon,bankingmarket(the“Roseburgbankingmarket”),20UmpquaBankis thelargestdepositoryinstitution,controllingapproximately$885.9millionindeposits, 15 12U.S.C.§1842(c)(1). 16 Depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryof depositsdataasofJune30,2013,andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsare includedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethe potentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,the Boardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See, e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 17 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines in2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/ 10-at-938.html. 18 Thecompetitiveeffectsoftheproposalinthesetenmarketsaredescribedintheappendix. 19 TheCoosBaybankingmarketisdefinedasCoosCountyandReedsportinDouglasCounty,allinOregon. 20 TheRoseburgbankingmarketisdefinedascentralDouglasCounty,Oregon.

196 FederalReserveBulletin|August2014 whichrepresentapproximately63.1percentof depositsinthatmarket.SterlingBankisthe seventhlargestdepositoryinstitutionintheRoseburgbankingmarket,controlling $21.4millionindeposits,whichrepresentapproximately1.5percentof depositsinthat market.Tomitigatethepotentiallyadversecompetitiveeffectsof theproposalintheCoos BayandRoseburgbankingmarkets,Umpquahascommittedtodivestsixbranches,which accountfornearlyallof SterlingBank’sapproximately$229.0millionindepositsinthese twomarkets.21 Afterthedivestiture,theproposalwouldbeconsistentwithBoardprecedentandtheDOJ BankMergerGuidelinesintheCoosBayandRoseburgbankingmarkets.UmpquaBank wouldremainthelargestdepositoryinstitutionintheCoosBaybankingmarket,controllingapproximately$334.6millionindeposits,whichrepresentapproximately39.9percentof depositsinthatmarket.TheHHIwouldremainunchangedat4516.Atleastfive othercommercialbankingorganizationswouldremaininthatmarket.UmpquaBank wouldremainthelargestdepositoryinstitutionintheRoseburgbankingmarket,controllingapproximately$885.9millionindeposits,whichrepresentapproximately63.1percent of depositsinthatmarket.TheHHIwouldremainunchangedat4461.Atleastsixother commercialbankingorganizationswouldremaininthatmarket. B.Viewsof OtherAgenciesandConclusiononCompetitiveConsiderations TheDOJalsohasconductedadetailedreviewof thepotentialcompetitiveeffectsof the proposalandhasadvisedtheBoardthatconsummationof theproposalwiththeproposed divestitureof branchesasdiscussedabovewouldnotlikelyhaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebanking agencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtothe proposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthe12bankingmarketsinwhichUmpquaandSterlingcompetedirectlyor inanyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. OtherSection3(c)Considerations Section3of theBHCActrequirestheBoardtotakeintoconsiderationanumberof other factorsinactingonbankacquisitionapplications.Thesefactorsincludethefinancialand managerialresources(includingthecompetence,experience,andintegrityof theofficers, directors,andprincipalshareholders)andfutureprospectsof thecompanyandbanksconcerned;theeffectivenessof thecompanyincombattingmoneylaundering;theconvenience andneedsof thecommunitytobeserved;andtheextenttowhichtheproposalwould resultingreaterormoreconcentratedriskstothestabilityof theU.S.bankingorfinancial system. 21 Asaconditiontoconsummationoftheproposedmerger,Umpquahascommittedthatitwillexecuteanagreementtosellwithin180daysofconsummatingtheproposedmergerthesixSterlingBankbrancheslocatedin theCoosBayandRoseburgbankingmarketstooneortwopurchasersdeterminedbytheBoardtobecompetitivelysuitable.Inaddition,UmpquahasprovidedasimilarcommitmenttotheDOJ.Iftheproposeddivestiture isnotcompletedwithinthe180-dayperiod,Umpquacommitstotransfertheunsoldbranchestoanindependenttrusteewhowillbeinstructedtosellthemtoanalternatepurchaserorpurchasersinaccordancewiththe termsofthisorderandwithoutregardtoprice.Boththetrusteeandanyalternatepurchasermustbedeemed acceptabletotheBoard.SeeBankAmericaCorporation,78FederalReserveBulletin338(1992);UnitedNew MexicoFinancialCorporation,77FederalReserveBulletin484(1991).

LegalDevelopments:SecondQuarter,2014 197 TheBoardhasconsideredallof thesefactorsand,asdescribedbelow,hasdeterminedthat theyareallconsistentwithapprovalof theapplication.Thereviewwasconductedinlight of allthefactsof record,includingconfidentialsupervisoryandexaminationinformation fromvariousU.S.bankingsupervisorsof theinstitutionsinvolved,publiclyreportedand otherfinancialinformation,informationprovidedbyUmpqua,andpubliccomments receivedontheproposal. A.Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. TheBoardhasconsideredthefinancialfactorsof theproposal.UmpquaandUmpqua Bankarewellcapitalizedandwouldremainsoonconsummationof theproposedacquisition,whichisabankholdingcompanymerger,structuredasanexchangeof shares.22 Umpquaisinsatisfactoryfinancialcondition,andtheassetquality,earnings,andliquidity of bothUmpquaBankandSterlingBankareconsistentwithapproval.Basedonitsreview of therecord,theBoardfindsthattheorganizationhassufficientfinancialresourcesto effecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Umpqua,Sterling,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas considereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingand anti–moneylaunderinglaws. Umpqua,Sterling,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobe wellmanaged.Umpqua’sexistingrisk-managementprogramanditsdirectorateandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof Umpquahavedemonstratedknowledgeandexperienceinthebankingandfinancialservicessectors. TheBoardhasalsoconsideredUmpqua’splansforimplementingtheproposal.Umpquais devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.Umpquawouldimplementitsrisk-management policies,procedures,andcontrolsatthecombinedorganization,andtheseareconsidered acceptablefromasupervisoryperspective.Inaddition,Umpqua’smanagementhasthe experienceandresourcesthatshouldallowthecombinedorganizationtooperateinasafe andsoundmanner,andUmpquaplanstointegrateSterlingBank’sexistingmanagement andpersonnelinamannerthataugmentsUmpqua’smanagement. 22 Aspartoftheproposedtransaction,eachshareofSterlingcommonstockwouldbecanceledandconverted intoarighttoreceivecashandUmpquacommonstockbasedonanexchangeratio.

198 FederalReserveBulletin|August2014 Umpqua’ssupervisoryrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionsafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposalandUmpqua’santi–moneylaunderingpoliciesareconsistentwithapproval. B.ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCRA.23The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,24andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.25 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof UmpquaBankandSterlingBank,datareportedbyUmpquaBank andSterlingBankundertheHomeMortgageDisclosureAct(“HMDA”),26otherinformationprovidedbyUmpqua,confidentialsupervisoryinformation,andthepubliccomments receivedontheproposal.Thecommentersobjectedtotheproposalonthebasisof UmpquaBank’sandSterlingBank’sCRAperformanceandfairlendingrecords,as reflectedin2012HMDAdata. 1.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatestherecordof performanceof aninstitution inlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformance recordsof therelevantinstitutions.27TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.28Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriate federalsupervisor. CRAPerformanceof UmpquaBank.UmpquaBankwasassignedanoverall“satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof July15,2013 (“UmpquaBankEvaluation”).29ExaminersnotedthatUmpquaBankhadagoodrecord of meetingthecreditneedsof itsassessmentareasandarelativelyhighlevelof community 23 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 24 12U.S.C.§2901(b). 25 12U.S.C.§2903. 26 12U.S.C.§2801etseq. 27 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 28 12U.S.C.§2906. 29 TheUmpquaBankEvaluationreviewedhomemortgage,smallbusiness,andcommunitydevelopmentlending datafromJanuary1,2010,throughDecember31,2012.Theevaluationalsocoveredqualifiedcommunity investmentsandservicesduringthesameperiod.Alllendingactivitiesthatoccurredin2010and2011were

LegalDevelopments:SecondQuarter,2014 199 developmentloans.Examinersidentifiednoevidenceof discriminatoryorotherillegal creditpracticesinconsistentwithhelpingtomeetcommunitycreditneeds.UmpquaBank receiveda“highsatisfactory”ratingonboththeLendingandServiceTestsanda“lowsatisfactory”ratingontheInvestmentTest.30 AsdescribedintheUmpquaBankEvaluation,FDICexaminersfoundthatthebank’s overalllendingreflectedgoodresponsivenesstothecreditneedsof thecommunitiesit serves.31Thebankhadagoodrecordof lendingtobusinessesof differentsizes,especially smaller-sizedbusinesses,32andanadequaterecordof lendingtoretailcustomers,including residentialmortgageborrowers,of differentincomelevels.Examinersnotedthat,consistent withsafeandsoundbankingpractices,thebankwasadequatelyservingthecreditneedsof low-incomeindividuals,verysmallbusinesses,andthemosteconomicallydisadvantaged portionsof itscombinedassessmentareas.ExaminersalsonotedthatUmpquaBankused flexiblelendingprogramsinservingthecreditneedsof thecommunitiesitserves33and made49communitydevelopmentloanstotaling$153.9millionduringtheevaluation period,whichrepresentedanapproximately$37millionincreaseincommunitydevelopmentlendingfromthepreviousevaluation. WithrespecttotheInvestmentTest,FDICexaminersfoundthatUmpquaBankhadan adequatelevelof qualifiedcommunitydevelopmentinvestmentsandgrantsandoccasionallyusedinnovativeandcomplexinvestmentstosupportcommunitydevelopmentinitiativesgivencurrenteconomicconditions.Inparticular,FDICexaminersnotedthat, althoughUmpquaBank’scurrentlevelof communitydevelopmentinvestmentsandgrants haddoubledinsizeasapercentageof thebank’stotalassetsandtotalinvestmentssince thepreviousevaluation,thelevelof investmentsremainedlowat0.7percentof totalassets and3.4percentof totalinvestmentsasof March31,2013.34Thedollarvolumeof investments,viewedinlightof UmpquaBank’scapacity,theopportunityformakingqualified investmentsinitsassessmentareas,andtheactivitiesof peerinstitutions,wasakeydriver inthe“lowsatisfactory”ratingassignedtothebankontheInvestmentTest. comparedtothe2000U.S.Census,whilelendingactivitiesthatoccurredin2012werecomparedtothe 2010U.S.Census.TheUmpquaBankEvaluationwasconductedusingtheLargeBankCRAExamination Procedures. 30 TheUmpquaBankEvaluationincludedafull-scopereviewoffiveassessmentareas:OregonNon– MetropolitanStatisticalArea(“MSA”)AssessmentArea;Portland-Vancouver-HillsboroMulti-StateMSA (“PortlandMSA”);Sacramento-Arden-Arcade-Roseville,CaliforniaMSA;Seattle-Bellevue-Everett,WashingtonMetropolitanDivision;andReno-Sparks,NevadaMSA.Alimited-scopereviewwasperformedinthe Bend,Corvallis,Eugene-Springfield,Medford,andSalemMSAsinOregon;theChico,Modesto,Napa,Redding,SantaRosa-Petaluma,Stockton,Vallejo-FairfieldMSAsinCalifornia;theOakland-Fremont-Hayward,CaliforniaMetropolitanDivision;theCaliforniaNon-MSAAssessmentArea;andtheTacoma,WashingtonMetropolitanDivision.Examinersplacedgreaterweightonthebank’sperformanceinOregon,the Portland-Vancouver-HillsboroMulti-StateMSA,andCaliforniaduetotheconcentrationofloanproduction andbranchinfrastructureintheseareas. 31 Asubstantialmajorityofthebank’sloansweremadewithinitsassessmentareas. 32 FDICexaminers’conclusionswithrespecttosmallbusinesseswerebasedprimarilyonUmpquaBank’srateof lendingtobusinesseswithgrossannualrevenues(“GARs”)of$1millionorlesscomparedtoothersmallbusinesses,aswellasonthebusinessdemographicsofthebank’sassessmentareas. 33 Forexample,thebankprovided3,644loanstotaling$761.8millionundertheHomeAffordableRefinanceProgram;1,598loanstotaling$308.1millionunderFederalHousingAdministration(“FHA”)loanprograms;and 937loanstotaling$211.8millionunderDepartmentofVeteransAffairs(“VA”)loanprograms.Theseprograms incorporateflexiblefeaturesthatassistwithcreditneedsidentifiedbycommunitycontacts(e.g.,theFHAand VAprogramsofferflexibleunderwritingtermssuchaslow–orno–downpaymentrequirements,andmanyborrowersunderthoseprogramsareLMIindividualsandfamilies). 34 Inconnectionwiththeproposedtransaction,UmpquahasinformedtheBoardthatthecompanywillestablish acharitablefoundation,towhichUmpquawillmakeaninitialcontributionofatleast$10million,forthebenefitofthecommunitiesservedbythecombinedorganization.Thefoundationwillprimarilyfocusonyouth developmentandeducation,thearts,andcommunitydevelopment,includingaffordablehousingandfinancial literacy.

200 FederalReserveBulletin|August2014 InevaluatingtheServiceTest,FDICexaminersnotedthattheweakestaspectsof Umpqua Bank’sperformancewerethereasonablenessof servicesandbusinesshoursandthat UmpquaBank’sbranchdistributionlaggedthemarketinpenetrationinLMIgeographies, especiallypenetrationof moderate-incomegeographies.Nonetheless,examinersassigned UmpquaBankaratingof “highsatisfactory,”notingthatthebank’scommunitydevelopmentservicescarriedthemostweightindeterminingtheoverallratingundertheService Test.Inthisrespect,examinersnotedthatUmpquaBankisaleaderinprovidingcommunitydevelopmentservices.Forexample,thebankprovidedatotalof 21,543hoursof qualifiedcommunitydevelopmentservicesduringtheassessmentperiod;thisrepresentedasubstantialincreasefromthepreviousevaluationinwhich260employeesprovided2,477hours of qualifiedcommunitydevelopmentservices.Examinersalsoconcludedthatinmoststates inwhichthebankoperatesaccessibilitytothebank’sdeliverysystemswasquitegoodand wasaccessibletoessentiallyallportionsof thebank’sassessmentareas.35Moreover,examinersnotedthataccesstothedeliverysystems,especiallyinLMIgeographiesandbyLMI individuals,hasnotbeenadverselyaffectedbythebank’sclosureandopeningof branches. CRAPerformanceof SterlingBank.SterlingBankwasassigneda“satisfactory”ratingat itsmostrecentCRAperformanceevaluationbytheFDIC,asof October11,2011(“SterlingBankEvaluation”),withratingsof “highsatisfactory”ontheLendingTestand“low satisfactory”ontheInvestmentandServiceTests.36ExaminersnotedthatSterlingBank’s lendingreflectedgoodresponsivenesstocommunitycreditneedsandthattherewasexcellentdistributionof loansamongcustomersof differentincomelevelsandbusinessesof differentsizes.Examinersalsonoted,however,thatthebankhadonlyadequatelevelsof qualifiedcommunitydevelopmentinvestmentsandservices. FortheLendingTest,examinersfoundthatthebank’sdistributionof mortgageloans reflectedexcellentpenetrationamongborrowersof differingincomelevels.Examinersnotedthatin2010,thebankexceededtheaggregateof alllendersinthepercentageof loanstolow-incomeborrowers(7.2percentcomparedtotheaggregate’s5.6percent)andto moderate-incomeborrowers(21.8percentcomparedtotheaggregate’s16.3percent).In 2011,SterlingBank’slendingtomoderate-incomeborrowersincreasedto23.1percentof itstotallending,whichexceededthepercentageof totalfamiliesrepresentedbymoderateincomeborrowers.Examinersalsofoundthatthebank’ssmallbusinesslendingreflected goodpenetrationamongbusinessesof differentrevenuesizes.In2010,55.0percentof the bank’ssmallbusinesslendingwastobusinesseswithGARsof $1millionorless,significantlyexceedingtheaggregate’spercentageof 41.3percent.Overall,examinersfoundthat thebankexhibitedagoodrecordof servingthecreditneedsof themosteconomicallydisadvantagedgeographiesof itsassessmentareas,low-incomeindividuals,andverysmall businesses. FortheInvestmentandServiceTests,examinersfoundthebank’slevelsof qualifiedinvestments,donations,andservicesprovidedwereadequate.Thebankreported117qualified investmentsanddonationstotaling$57.9million,anincreaseof $17.9millionwhencomparedtoSterlingBank’spreviousexamination.Examinersfoundthatthebankoccasionallyutilizesinnovativeandcomplexinvestmentstosupportcommunitydevelopmentinitiatives.Examinersalsofoundthatthebankexhibitedadequateresponsivenesstocreditand communityeconomicdevelopmentneeds.Inaddition,examinersfoundthatdeliverysystemswereaccessibletoessentiallyallportionsof thebank’sassessmentareas. 35 AlthoughUmpquaBank’sperformanceundertheServiceTestwasweakestinNevada,examinersnotedthat thebankonlybeganoperatinginthatstatefollowinganacquisitionin2010. 36 TheevaluationreflectsSterlingBank’sperformancein2010andthefirsthalfof2011.

LegalDevelopments:SecondQuarter,2014 201 2.FairLendingRecord,HMDA,andSmallBusinessLendingAnalysis,andPublicComments ontheApplication TheBoardhasconsideredtherecordsof UmpquaBankandSterlingBankincomplying withfair-lendingandotherconsumer-protectionlaws.Aspartof thisconsideration,the BoardreviewedtheUmpquaBankandSterlingBankEvaluationsandUmpquaBank’s fairlendingpoliciesandprocedures.TheBoardalsoconsideredotheragencies’viewson UmpquaBank’srecordof performanceunderfairlendinglaws.Inaddition,theBoardhas takenintoaccountthecommentsontheapplication. SeveralcommentersexpressedconcernsthatUmpquaBankandSterlingBankarenot meetingthecreditneedsof minorityandLMIindividualsinthecommunitiesservedbythe banksbasedon2012HMDAdata.Inparticular,thecommentersallegedthatUmpqua BankandSterlingBankmadedisproportionatelyfewerconventionalresidentialmortgage loansandrefinanceloanstoAfricanAmericanandHispanicborrowersthantowhiteborrowers,anddeniedmoreapplicationsforconventionalhomepurchaseloansbyAfrican AmericanandHispanicborrowerscomparedtowhiteborrowers,intheSpokane,WashingtonMSA(“SpokaneMSA”)andPortlandMSA.37Similarly,commentersassertedthat bothinstitutionsmadefewerhomeloanstoAsianscomparedtotheaggregateof alllendersintheSeattle-Tacoma-Bellevue,WashingtonMSA(“SeattleMSA”)andPortland MSA.38CommentersalsoallegedthatUmpquaBankandSterlingBankmadea smallerpercentageof homeloanstoLMIborrowerscomparedtotheaggregateinthePortland,Seattle,andEugene-Springfield,Oregon(“Eugene”)MSAs.39Onecommentercontendedthat,whileitdidnotbelievethatUmpquaBankisconsciouslydiscriminating,the bank’sbusinesslendingtoAfricanAmericanandHispanicborrowersandmortgagelendingtominorityandLMIborrowersincertainCaliforniamarketsshowedaneedfor improvement.40CommentersalsoexpressedconcernswithrespecttoUmpquaBank’s lowerpercentageof depositsfrom,andbranchesin,LMIareasof Portlandcomparedto theaggregate. TheBoardhasreviewedHMDAdatafor2010through2012forbothUmpquaBankand SterlingBank,themostrecentpubliclyavailabledata.TheBoardanalyzeddatarelatedto allHMDA-reportableloanstodevelopaviewof overalllendingpatternsbyUmpquaBank andSterlingBank.TheBoardgenerallyanalyzedeachbank’sstatewideassessmentareas, combinedstatewideassessmentareas,andthespecificmarketareasaddressedinthepublic comments(thePortland,Eugene,Seattle,andSpokaneMSAs,andUmpquaBank’sCali- 37 Forexample,commentersallegedthat,intheSpokaneMSA,UmpquaBankmadetwoconventionalmortgage loanstoAfricanAmericansandonetoHispanics,comparedto101mortgageloanstowhites,andthatthe bankdeniedoneinfourapplicationsformortgageloansfromHispanics,comparedtoonlyoneineverysix applicationsbywhites.Theyfurtherallegedthat,inthePortlandMSA,UmpquaBankmadeeightrefinance loanstoAfricanAmericansandninetoHispanics,comparedto1,052refinanceloanstowhites. 38 Commentersallegedthat,intheSeattleMSA,UmpquaBankandSterlingBankmade7.7and8.3percentof theirrespectivehomeloanstoAsianscomparedto13.3percentfortheaggregate.Theyalsopointedoutthat UmpquaBankmade4.1percent,andSterlingBankmade4.3percent,oftheirmortgageloanstoAsians,comparedto6.7percentfortheaggregateinthePortlandMSA. 39 Forexample,commentersallegedthatUmpquaBankextendedfewerresidentialmortgageloanstoLMIborrowerscomparedtotheaggregateinthePortlandMSA(22.5percenttoLMIborrowerscomparedto25.9percentfortheaggregate),intheSeattleMSA(18.3percenttoLMIborrowerscomparedto25.6percentforthe aggregate),andintheEugeneMSA(21percenttoLMIborrowerscomparedto26.1percentfortheaggregate). 40 Forexample,thecommenterclaimedthat,inthenonmetropolitanareasofthebank’sCaliforniaoperations, UmpquaBankhadanoveralllownumberofmortgageapplicationsfromminorityandLMIborrowers,witha denialrateforHispanicsthatisroughlydoubleotherdemographics,andthatthebankdidnotmakeanyloans toAfricanAmericanbusinessesandonlyoneloantoHispanicbusinessesin2011and2012.

202 FederalReserveBulletin|August2014 forniaNon-MSAAssessmentArea).41Inresponsetoacommentregardingadeclinein UmpquaBank’sSmallBusinessAdministrationlendinginitsnonmetropolitanCalifornia markets,theBoardalsoreviewedUmpquaBank’ssmallbusinesslendingrecordfrom2010 through2012forthebank’sCaliforniaNon-MSAAssessmentAreaanditsstatewide assessmentareas. Analysisof LendingtoLMIBorrowersandMinorities.TheBoard’sreviewconfirmedthe commenters’assertionsthatUmpquaBank’svolumeof loanstoLMIindividualsinthe Portland,Eugene,andSeattleMSAslaggedtheaverageforalllendersinthosemarkets.For example,2012datashowedthatUmpquaBank’spercentageof applicationsfromand loanstoLMIborrowersinthePortlandMSAlaggedtheaggregateby4.8percent (21.6percentcomparedto26.4percent)and3.4percent(21.0percentcomparedto 24.4percent),respectively. However,theInteragencyCRAExaminationProceduresforlargeinstitutionsrequire examinerstoconsiderseveralfactors,includingthepercentageof loanstobothLMIindividualsandLMIcensustracts,whenreviewinganinstitution’sperformanceunderthe LendingTest.42TheBoard’sreviewof 2012datashowedthatthebank’spercentageof applicationsfromandloanstoLMItractsapproximatedorslightlyexceededthoseof the aggregateinthePortlandMSA.TheBoardfoundasimilarpatternintheEugeneand SeattleMSAs.Moreover,thedatareviewedbytheBoardshowedthatasignificantmajority of bothbanks’mortgageapplicationsin2012wereforrefinancingloans,mostof which werefromwhiteapplicants.Althoughrefinancingsincreasedthevolumeof applications andoriginationstoLMItractsandborrowers,italsosubstantiallyincreasedthevolumeof applicationsandoriginationstomiddle-andupper-incometractsandborrowers,which drovedownthebanks’percentagesforLMIborrowersandtracts.Thistrendisconsistent with2012datafortheaggregateinallmarketsreviewedbytheBoard. ThedatareviewedbytheBoardalsoindicatedthatUmpquaBanklaggedtheaggregatein thepercentageof loanstoAsianborrowersinthePortland(2.8percentcomparedto 5.6percent)andSeattle(7.5percentcomparedto12.9percent)MSAs,andinthepercentageof applicationsfromandloanstoAfricanAmericanandHispanicborrowersinthe bank’sOregonstatewideassessmentarea.43However,thedataalsorevealedthatUmpqua Bank’sdenialratesforsuchborrowersarerelativelylowascomparedwiththeaggregate (forexample,thebank’s2012denialrateforAsianmortgageapplicantswas13.4percentin Portlandand12.3percentinSeattle,comparedto17.2percentand15.9percentforthe aggregate,respectively).Thisindicatesthatthelowvolumeof applicationsthebank receivesfromAfricanAmericans,Asians,andHispanicsisakeyfactorinthebank’slow volumeof lendingtosuchborrowers.44 41 UmpquaBankdesignatesonlyportionsofthePortlandandSeattleMSAsinthebank’sassessmentareas.The Board’sreviewfocusedonthoseportionsoftheseMSAsforwhichthebankhasCRAresponsibility.Inthis respect,thedatareviewedbytheBoarddiffersomewhatfromthatreliedonbythecommenters,whichcited UmpquaBank’slendingrecordcomparedwiththeentirePortlandandSeattleMSAs. 42 Examinersalsoconsiderthenumberandamountofloansmadeintheinstitution’sassessmentarea,itsrecord ofcommunitydevelopmentlending,anditsuseofinnovativeorflexiblelendingpractices.Forexample,the UmpquaBankEvaluationnotedthatthebankhaspromotedtheuseofdown-paymentassistanceprograms andhasworkedwithanumberofagenciessuchastheFederalHomeLoanBanktoassistlow-incomeborrowersobtaingrantsandlow-interestloanstomeettheirdown-paymentneedstopurchasehomes.See12CFR 345.22(discussingthescopeoftheFDIC’sevaluationoftheLendingTestfornonmemberbankssuchas UmpquaBank). 43 Similarly,SterlingBank’slendingtoAfricanAmericanandHispanicborrowers,exceptfortheSpokaneMSA, laggedtheaggregateinallmarketsunderreviewin2012. 44 Umpqua’sanalysisindicatedthatUmpquaBank’s2012overallminoritydenialdisparityratiowas1.4:1comparedtotheaggregate’sratioof1.33:1.

LegalDevelopments:SecondQuarter,2014 203 Inresponsetothecommenters’concernswithrespecttothelowvolumeof mortgageloans toAfricanAmerican,Asian,andHispanicindividuals,Umpquaurgesthatconsideration shouldbegiventotheoveralllowpercentagethesedemographicsrepresentinitsmarkets.45 UmpquaalsoassertsthatitslendingpatternstoAfricanAmericanandHispanicborrowers correlatecloselytothelowercreditscoresandhigherloan-to-valueanddebt-to-income ratiosof minorityapplicantstoUmpqua.Moreover,Umpquaarguedthatitsdenialrates forAsianborrowersareequaltoorlowerthanthoseof theaggregateandthatdifferences inlendingpatternsfortheseborrowersreflectacompetitivemortgagelendingmarket ratherthandiscriminatorylendingpractices.46Inaddition,UmpquaarguedthatapplicationsfromAfricanAmericanandHispanicborrowersinthePortlandMSA,aswellas fromAsianborrowersintheCorvallis,Eugene,Portland,Sacramento,Seattle,andTacoma MSAsgenerallyincreasedfrom2011to2012,inpartduetothebank’sincreasedcommunityengagementefforts. Analysisof SmallBusinessLending.TheBoardalsoreviewedUmpquaBank’ssmallbusinesslending.IntheCaliforniaNon-MSAAssessmentArea,theBoard’sreviewshowed thatthebank’spercentageof smallbusinessloanstoLMItractsexceededtheaggregatein both2010and2011.In2012,thebank’spercentageof loanstoLMItractswas12.3percent,whichslightlylaggedtheaggregate’s14.0percent.However,UmpquaBank’spercentageof loansintheCaliforniaNon-MSAAssessmentAreatopredominantlyminoritycensustractsgenerallyexceededtheaggregatein2010,2011,and2012. TheBoardalsoreviewedUmpquaBank’ssmallbusinesslendingrecordinthebank’s Oregon,California,andWashingtonstatewideassessmentareas.Althoughthebank’spercentageof loansinpredominantlyminoritytractslaggedtheaggregateinitsOregonand Californiaassessmentareas,itgenerallyapproximatedtheaggregateinitsWashington assessmentarea.Thebank’spercentageof smallbusinessloanstoLMItractsgenerally exceededtheaggregateforeachof thethreestatewideassessmentareas.Inaddition,the BoardnotesthatintheUmpquaBankEvaluation,examinersfoundUmpquaBank’soveralldistributionof loanstosmallbusinessestobegood,comparedtothebusinessdemographicsof themarketsreviewed. OtherFairLendingConsiderations.TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparitiesandbelievesthatalllendinginstitutionsareobligatedto ensurethattheirlendingpracticesarebasedoncriteriathatareconsistentwithsafeand soundlendingbutalsoprovideequalaccesstocreditbycreditworthyapplicantsregardless of theirraceorethnicity.AlthoughHMDAdatamightreflectcertaindisparitiesinthe ratesof loanapplications,originations,anddenialsamongmembersof differentracialor ethnicgroupsincertainlocalareas,HMDAdataalonedonotprovideasufficientbasison whichtoconcludewhetherUmpquaBankorSterlingBankhaveexcludedordeniedcredit toanygrouponaprohibitedbasis.47InevaluatingUmpquaBank’scompliancewithfair lendinglawsandregulationsoverall,theBoardhasconsideredotherinformation,including thebank’sloanapplicationandunderwritingpoliciesandproceduresandexamination 45 Forexample,2010censusdatashowthat,inUmpquaBank’sOregonstatewideassessmentarea,Asian,African American,andHispanicborrowersaccountedfor4.98percent,2.51percent,and11.45percentofthepopulation,respectively. 46 Inparticular,Umpquanoted,andFDICstaffconfirmed,thatAsian-ownedbanksandotherlendersattracta significantportionoftheapplicationsfromAsianborrowersinWashington,Oregon,andCalifornia. 47 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)are notavailablefromHMDAdata.

204 FederalReserveBulletin|August2014 reportsthatprovideon-siteevaluationsof compliancebythebankwithfairlendinglaws andregulations. TheBoardhasconsultedwithUmpquaBank’sprimaryfederalregulators,theFDICand theConsumerFinancialProtectionBureau,regardingtheirevaluationsof thebank’scompliancewithfairlendinglawsandregulationsoverall.Basedonitsrecentreview,theFDIC reportedthatitdidnotfindevidencethatUmpquaBankengagedindiscriminatoryconductinmakingitscreditdecisionsandexpressednoconcernregardingtheadequacyof UmpquaBank’sfairlendingpoliciesandprocedures. Inresponsetothecommenters’concernsabouttheracialandincomedisparitiesinthe bank’slendingpractices,theFDICconductedareviewtodeterminewhether UmpquaBankhasbeenmakingcreditdecisionsfairly,basedonthecreditworthinessof theborrower.48TheFDIC’sreviewconfirmedgapsinthebank’slending,someof which werenotedbythecommenters.49Theanalysis,however,didnotrevealanyindicationsof disparatetreatmentbasedonracialcharacteristicsof theapplicants.TheFDIC’sreview alsoidentifiedsomegapsindistributioninpredominantlyminoritycensustracts,butafter furtherinvestigation,includingmapping,policyreview,interviewswithmanagement,and marketingreview,noevidenceof redliningwasapparent.Followingitsreviewof theissues raisedbythepubliccomments,theFDICconcludedthattherewasnobasisfordenyingthe mergerof SterlingBankintoUmpquaBankandhasapprovedthemergerundertheBank MergerAct.50 Asnotedabove,theBoard’sreviewindicatesthatlowvolumeof loanapplicationsisakey factorinUmpquaBank’srelativelylowvolumeof lendingtoLMIindividuals,toAfrican American,Asian,andHispanicindividuals,andtosmallbusinessesinpredominantly minoritycensustracts,incertainof itsassessmentareas,ascomparedwiththeaggregate. Tothatend,Umpquahascommittedthat,within60daysfollowingconsummationof the mergerwithSterling,Umpquawilldevelopaplanconsistentwiththecombinedorganization’ssizeandcomplexity,toassistthecombinedorganizationincontinuingtohelpmeet thecreditneedsof itscommunities,inaccordancewiththeCRA.Theplanwillestablish specificperformancegoalsandmeasurestoassistthecombinedorganizationinhelpingto meetcommunitycreditneeds,includingthroughoutreachandmarketingof itsproducts andservicestoLMIandunderservedindividualsandcommunitiesandbyidentifying opportunitiesforcommunitydevelopment–relatedinvestmentsinitscommunities. UmpquaBank’sFairLendingProgram.TheBoardhasreviewedthepoliciesandprocedures thatUmpquahasinstitutedtohelpensurecompliancewithallfair-lendingandotherconsumer-protectionlawsandregulations.Thecompany’slegal-andcompliance-risk-managementprogramincludesanannualreviewof fairlendingpoliciestoensureeffectivecontrols andcompliancewithlawsandregulations,asystemfordeterminingriskandinvestigation of fairlendingviolations,annualtrainingtokeepapplicableemployeesinformedof fair lendingriskandrelatedregulatoryrequirements,anautomatedunderwritingsystemto limittheriskof individualdecisionmakingonloanapprovals,andasecondaryreviewof allproposedloandenialsandcounterofferstoensurecompliance.Inaddition,Umpqua Bankhasestablishedasystemfortrackingandreviewingcanceled,withdrawn,anddenied applicationsbyindividualbusinessunits,whichreportfindingsfromthesereviewsto 48 ThereviewwasconductedaspartoftheFDIC’sevaluationoftheapplicationbyUmpquaBanktomergewith SterlingBank. 49 Thecommentersnotednumerousgapsinthebank’slendingrecordthattheFDICcouldnotsubstantiate. 50 TheBoardnotesthattheStateofOregonhasapprovedthemergerofUmpquaBankandSterlingBank.Letter fromJacobP.Mundaden,ProgramManager–Banks&TrustCompanies,OregonDepartmentofConsumer andBusinessServices,toPatriciaA.Robinson,Wachtell,Lipton,Rosen&Katz(Jan.24,2014).

LegalDevelopments:SecondQuarter,2014 205 managementonaweeklybasis.Umpquaplanstoleveragethestrengthsof itsandSterling’scomplianceprogramstodevelopanenhancedcompliancemanagementsystem,and toincreasethenumberof dedicatedcomplianceandCRAstaff,forthecombinedorganizationonconsummationof thetransaction.UmpquahasstatedthatSterlingBankhasa robustcompliancetestingprogramembeddedinkeyproductionunitsof thebankthat includessystematicreportingof testingresultstomanagementeachmonth.Umpquaplans tointegrateSterlingBank’stestingprogramintoUmpquaBank’sComplianceMonitoring Programtoaddresstheexpectedincreasedvolumeintransactionsandpotentiallynewrisks associatedwithofferingdifferentornewproductsandservices. 3.AdditionalInformationonConvenienceandNeedstobeServedbytheCombined Organization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.51Umpquarepresentsthattheproposalwouldcreatearegionalinstitutionof size, withalmost375branchesacrossfivestates,thatwillincreasethecompetitivenessof,and resultincostsavingsfor,thecombinedorganization.Thecombinedorganizationwilluse Umpqua’sbranchandoperatingstrategyandcombinethebusiness-linestrengthsof both companies.Umpquanotesthatthecombinedorganizationwouldbeabletoprovidecustomerswithbenefitsthroughmoreefficientandcost-effectiveprovisionof bankingservices andwouldallowforenhancedlevelsof productsandservices. Umpquaalsostatesthattheproposalwouldoffercustomersconveniencethroughan expandedbranchnetworkandabroaderrangeof financialproducts.UmpquaBankcustomerswillbenefitfromSterlingBank’sstrongmultifamilylendingprogram,andSterling Bank’sbusinesscustomerswillhaveaccesstoUmpquaBank’scommercial-lendingand equipment-leasingplatforms.Inaddition,currentcustomersof SterlingBankwouldbenefitfromtheinternationaltradefinanceproductsandinterestrateswapproductsofferedby UmpquaBank.Umpquaalsoassertedthattheproposalwouldstrengthentheoperations of thecombinedorganizationbecauseof thecomplementaryaspectsof theorganizations’ businesses,includinggeographiccoverageandcompatibilityof theirmanagementand operatingstyles,andthecombinedexperienceandexpertiseof themanagementand employeesof thetwoorganizations. Contrarytothecommenter’sassertion,Umpquarepresentsthatithasnotmadeanydecisionswithrespecttotheclosureorconsolidationof branches,withtheexceptionof thesix branchestobedivested,asdiscussedabove.UmpquaBankfurtherrepresentsthatitmaintainsabranch-closingpolicyandcompletesafullCRAandfairlendingimpactanalysis priortoclosingorconsolidatinganybranches.TheFDICdeterminedthatUmpquaBank’s branchclosingpolicyisincompliancewithregulatoryrequirements. 51 Twocommentersallegedthattheproposalwouldnotprovideaclearorsignificantpublicbenefit.Thecommentersspecificallyurgedthat,todemonstratesatisfactorilythepublicbenefitsoftheproposal,Umpqua should,amongotherthings,committoaplantoopenbranchesinunderservedareas,partnerwithlocalcommunitygroups,andincreaselendingtoLMIandminorityborrowerstotheindustryaggregatelevels.Inaddition,acommenterallegedthattheproposalwouldleadtobranchclosuresbythecombinedorganizationthat wouldfurtherrestrictaccesstobankingservicesinLMIcommunities.AcommenteralsosuggestedthataconflictofinterestexistsbecauseaformerSecretaryoftheTreasurywillbeaffiliatedwithashareholderofthe combinedorganization.Noevidenceofaconflictwaspresented,andtheBoardexpectsthattheparties involvedwillabidebyalllawsgoverningconflictsofinterest.

206 FederalReserveBulletin|August2014 4.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyUmpqua,confidential supervisoryinformation,andpubliccommentsontheproposal.BasedontheBoard’s analysisof theHMDAdata,evaluationof UmpquaBank’sandSterlingBank’slending operationsandcomplianceprograms,reviewof examinationreports,andconsultations withotheragencies,theBoardbelievesthattheconvenienceandneedsfactor,includingthe CRArecordof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistent withapprovalof theapplication. C.FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”52 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.53These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.54 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,Umpquawould haveapproximately$21.3billioninconsolidatedassetsandbyanyof anumberof alternativemeasuresof firmsize,Umpquawouldbebetweenthe50thand75thlargestU.S. insureddepositoryorganization.TheBoardgenerallypresumesthatamergerresultingina firmwithlessthan$25billionintotalconsolidatedassetswouldnotposesignificantrisks tothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwould resultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,or otherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction.Thecompaniesengageandwouldcontinuetoengageintraditionalcommercialbankingactivities. TheresultingorganizationwouldexperiencesmallincreasesinthemetricsthattheBoard considerstomeasureaninstitution’scomplexityandinterconnectedness,withtheresulting firmgenerallyrankingoutsideof thetop50U.S.financialinstitutionsintermsof those metrics.Forexample,Umpqua’sintrafinancialassetsandliabilitieswouldconstituteaneg- 52 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 53 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 54 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

LegalDevelopments:SecondQuarter,2014 207 ligibleshareof thesystem-widetotal,bothbeforeandafterthetransaction.Theresulting organizationwouldnotengageincomplexactivities,norwoulditprovidecriticalservices insuchvolumethatdisruptioninthoseserviceswouldhaveasignificantimpactonthe macroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreased resolutiondifficulties. Inlightof allthefactsandcircumstances,theBoardconcludesthatthistransactionwould notappeartoresultinmeaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingorfinancialsystem.Basedontheseandallotherfactsof record,the Boardhasdeterminedthatconsiderationsrelatingtofinancialstabilityareconsistentwith approval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.55Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyUmpquawithalltheconditionsimposedinthisorder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof SanFrancisco,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveMarch28,2014. Votingforthisaction:ChairYellen,andGovernorsTarullo,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard 55 ThecommentersrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCAct doesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately representtheirviews.TheBoardhasconsideredthecommenters’requestsinlightofallthefactsofrecord.In theBoard’sview,commentershavehadampleopportunitytosubmitcommentsontheproposaland,infact, submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenters’ requestsdonotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthatwouldbeclarified byapublichearing.Inaddition,therequestsdonotdemonstratewhythewrittencommentsdonotpresentthe commenters’viewsadequatelyorwhyahearingwouldotherwisewouldbenecessaryorappropriate.Forthese reasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestsforapublichearingontheproposalaredenied.

208 FederalReserveBulletin|August2014 Appendix Umpqua/SterlingbankingmarketsinCalifornia,Oregon,andWashingtonconsistentwithBoard precedentandDOJBankMergerGuidelines Remaining Amountof Marketdeposit Status Rank ResultingHHI ChangeinHHI numberof deposits shares(percent) competitors CrescentCity,California–Oregon—includesCentralDelNorteCounty,California,andsouthernCurryCounty,Oregon. Umpquapre-consummation 3 $57.5M 14.8 1792 204 6 Sterling 7 $26.7M 6.9 1792 204 6 Umpquapost-consummation 2 $84.1M 21.7 1792 204 6 SantaRosa,California—includestheSantaRosametropolitanareainSonomaCounty. Umpquapre-consummation 16 $21.2M 0.3 1319 4 17 Sterling 6 $479.4M 6.4 1319 4 17 Umpquapost-consummation 6 $500.6M 6.7 1319 4 17 SanFrancisco–Oakland–SanJose,California—includestheSanFrancisco-Oakland-SanJosemetropolitanareainAlameda,Contra Costa,Marin,SanFrancisco,SanMateo,andSantaClaracounties;thesouthernportionsofSonomaandSolanoCounties;thenorthern portionofSanBenitoCounty;andthesouthernedgeofNapaCounty. Umpquapre-consummation 32 $362.5M 0.1 1873 0 85 Sterling 39 $246.5M 0.1 1873 0 85 Umpquapost-consummation 26 $609.0M 0.2 1873 0 85 DeschutesCounty,Oregon—includesDeschutesCounty. Umpquapre-consummation 8 $110.5M 4.5 1455 24 11 Sterling 10 $62.5M 2.6 1455 24 11 Umpquapost-consummation 6 $173.0M 7.1 1455 24 11 Eugene,Oregon—includestheEugenemetropolitanareainLaneandLinncounties. Umpquapre-consummation 2 $646.9M 16.7 1276 17 12 Sterling 14 $19.3M 0.5 1276 17 12 Umpquapost-consummation 2 $666.2M 17.2 1276 17 12 GrantsPass,Oregon—includeseasternJosephineCounty,westernJacksonCounty,andGlendaleinDouglasCounty. Umpquapre-consummation 1 $246.3M 21.3 1281 141 10 Sterling 11 $38.3M 3.3 1281 141 10 Umpquapost-consummation 1 $284.5M 24.6 1281 141 10 Medford,Oregon—includestheMedfordmetropolitanareainJacksonCounty. Umpquapre-consummation 3 $370.6M 13.4 1292 131 12 Sterling 10 $134.1M 4.9 1292 131 12 Umpquapost-consummation 2 $504.7M 18.3 1292 131 12 Portland,Oregon–Washington—includesthePortlandmetropolitanareainClackamas,Columbia,Marion,Multnomah,Washington,and Yamhillcounties,Oregon,andClarkCounty,Washington. Umpquapre-consummation 6 $1.6B 4.3 1500 22 37 Sterling 8 $957.4M 2.6 1500 22 37 Umpquapost-consummation 5 $2.5B 6.8 1500 22 37 Salem,Oregon—includestheSalemmetropolitanareainMarionandPolkcounties. Umpquapre-consummation 6 $270.5M 6.9 1213 26 14 Sterling 13 $74.2M 1.9 1213 26 14 Umpquapost-consummation 5 $344.7M 8.8 1213 26 14 Seattle,Washington—includestheSeattlemetropolitanareainKing,Pierce,andSnohomishcounties;thesoutheasternportionof IslandCounty;andBainbridgeIslandinKitsapCounty. Umpquapre-consummation 15 $775.2M 1 1297 2 57 Sterling 11 $867.6M 1.1 1297 2 57 Umpquapost-consummation 9 $1.6B 2.1 1297 2 57 Note:DataareasofJune30,2013.Allamountsofdepositsareunweighted.Allrankings,marketdepositshares,andHHIsarebasedonthrift depositsweightedat50percent.

LegalDevelopments:SecondQuarter,2014 209 Order Issued Under Section 4 of the Bank Holding Company Act PacWest Bancorp Los Angeles, California CapGen Capital Group II LP New York, New York CapGen Capital Group II LLC New York, New York OrderApprovingtheAcquisitionof anIndustrialBankandNonbankingSubsidiaries FRBOrderNo.2014–3(April1,2014) PacWestBancorp(“PacWest”),LosAngeles,California,abankholdingcompanywithin themeaningof theBankHoldingCompanyAct(“BHCAct”),anditscontrollingshareholders,CapGenCapitalGroupIILP(“CapGenLP”)andCapGenCapitalGroupIILLC (“CapGenLLC,”andcollectivelywithPacWestandCapGenLP,“Notificants”),bothof NewYork,NewYork,1haverequestedtheBoard’sapprovalundersections4(c)(8)and 4(j)of theBHCActandsection225.24of theBoard’sRegulationY2toacquireCapital- SourceInc.(“CapitalSource”)andtherebyindirectlyacquireitssubsidiaryindustrialbank, CapitalSourceBank(“CSB”),bothof LosAngeles.Immediatelyfollowingtheproposed acquisition,CSBwouldbemergedintoPacWest’ssubsidiarybank,PacificWesternBank (“PWB”),LosAngeles.3Inaddition,Notificantshaverequestedapprovaltoacquireother nonbankingsubsidiariesof CapitalSourceandtherebyengageinextendingcreditand servicingloansinaccordancewithsection225.28(b)(1)of theBoard’sRegulationY4and inleasingpersonalpropertyinaccordancewithsection225.28(b)(3)of theBoard’sRegulationY.5 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(78Fed.Reg.54,648(Sept.5,2013)).Thetime forfilingcommentshasexpired,andtheBoardhasconsideredtheapplicationandallcommentsreceivedinlightof thefactorssetforthinsection4of theBHCAct. PacWest,withtotalconsolidatedassetsof approximately$6.5billion,isthe144thlargest depositoryorganizationintheUnitedStates,controllingapproximately$5.4billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.6PWBoperatesbranchesonlyinCalifornia.PWBisthe20thlargestdepositoryinstitutioninCalifornia,controllingdepositsof $5.6billion,whichrepresentlessthan1percentof thetotaldepositsof insureddepository 1 CapGenLPandCapGenLLCarebankholdingcompaniesundertheBHCActbecausetheycontrolPacWest. TheonlyactivityofCapGenLPistoownsharesofPacWestcommonstock.CapGenLLCisthesolegeneral partnerofCapGenLP. 2 12U.S.C.§§1843(c)(8)and(j);12CFR225.24. 3 ThemergerofCSBintoPWBissubjecttotheapprovaloftheFederalDepositInsuranceCorporation (“FDIC”)undertheFederalDepositInsuranceAct.TheFDICapprovedthemergeronMarch6,2014. 4 12CFR225.28(b)(1). 5 12CFR225.28(b)(3). 6 AssetandnationwidedepositrankingdataareasofDecember31,2013.Ingeneral,Boardordersonbanking applicationsandnotificationsdefineinsureddepositoryinstitutionstoincludecommercialbanks,savings banks,andsavingsassociationsforthepurposesofassetanddepositrankingdata.See,e.g.,InvestorsBancorp, MHC,FRBOrderNo.2013-16at2(December23,2013).Inthiscase,becauseCSBisanindustrialbank,in thiscontext,insureddepositoryinstitutionsalsoincludeindustrialbanksandindustrialloancompanies.

210 FederalReserveBulletin|August2014 institutionsinthatstate.7PWBalsoengagesinasset-basedlendinginvariousstatesinthe westernUnitedStatesandinequipmentleasingnationwide. CapitalSource,withtotalconsolidatedassetsof approximately$8.9billion,controlsCSB, itsonlyinsureddepositoryinstitution.Asanindustrialbank,CSBdoesnotacceptdemand deposits.Rather,CSBoffersalimitedsetof depositproductsthroughretailbranchesin southernandcentralCalifornia.CSBalsooperatesloanoriginationofficesthroughoutthe countryandengagesprimarilyincommerciallending.InadditiontoowningCSB,Capital- Sourcealsoengagesinalimitedamountof commerciallendingandequipmentleasing throughnonbanksubsidiaries.8 Onconsummationof theproposal,PacWestwouldbecomethe81stlargestdepository organizationintheUnitedStates,withtotalconsolidatedassetsof approximately$15.4billion,whichrepresentlessthan1percentof thetotalamountof assetsof insureddepositoryinstitutionsintheUnitedStates.PacWestwouldcontroltotalconsolidateddepositsof approximately$11.6billion.InCalifornia,PacWestwouldbecomethe14thlargestdepositoryorganization,controllingdepositsof approximately$11.6billion,whichrepresent 1.14percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. FactorsGoverningBoardReviewof theTransaction TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof anindustrial bankbyabankholdingcompanyandothernonbankingactivitiesforwhichPacWesthas requestedapprovalarecloselyrelatedtobankingforpurposesof section4(c)(8)of the BHCAct.9PacWesthascommittedthatalltheactivitiesof CapitalSourceandtheother nonbankingsubsidiariesof CapitalSourcethatitproposestoacquireengageinactivities thatwillconformtothosepermissibleundersection4of theBHCActandRegulationY orbedivested.10 Section4(j)(2)(A)of theBHCActrequirestheBoardtoconsiderwhethertheproposed acquisitionof CapitalSourceanditsnonbankingsubsidiaries“canreasonablybeexpected toproducebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,or gainsinefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”11Aspartof itsevaluationof thesefactors,theBoardreviewsthefinancialandmanagerialresourcesof thecompaniesinvolved,theeffectof theproposaloncompetitionintherelevantmarkets, therisktothestabilityof theUnitedStatesbankingorfinancialsystem,andthepublic 7 StatedepositandassetdataareasofJune30,2013. 8 Throughnonbanksubsidiaries,CapitalSourcesatisfiesexistingloancommitmentsmadepriortotheformation ofCSBin2008.ExcludingloansheldbyCSB,CapitalSourcehadatotaloutstandingloanprincipalbalanceof approximately$141millionasofSeptember30,2013. 9 12CFR225.28(b)(1),(3),and(4). 10 CapitalSourcecontrolscertainassetsthatarenotpermissibleforabankholdingcompanytocontrolundersection4oftheBHCActandRegulationY.CapitalSourceacquiredtheseassetsinsatisfactionofdebtspreviously contracted.PacWesthascommittedthatitwilldivestallsuchassetsnotlaterthantwoyearsfromthedatethat theproposedtransactionisconsummated,consistentwithsection4(c)(2)oftheBHCAct.12U.S.C. §1843(c)(2). 11 12U.S.C.§1843(j)(2)(A).Section604(e)oftheDodd-FrankWallStreetReformandConsumerProtectionAct of2010,Pub.L.No.111-203,124Stat.1601(2010)(“Dodd-FrankAct”),addedthe“risktothestabilityofthe UnitedStatesbankingorfinancialsystem”tothelistofpossibleadverseeffects.

LegalDevelopments:SecondQuarter,2014 211 benefitsof theproposal.12Inactingonanoticetoacquireanindustrialbank,theBoard reviewstherecordsof performanceof therelevantinsureddepositoryinstitutionsunder theCommunityReinvestmentAct(“CRA”).13 CompetitiveConsiderations Aspartof theBoard’sconsiderationof thefactorsundersection4of theBHCAct,the Boardhasconsideredthecompetitiveeffectsof Notificants’acquisitionof CapitalSource anditsnonbankingsubsidiariesinlightof allthefactsof record.NotificantsandCapital- Sourcebothengageincommerciallending,14commercialrealestatefinancing,andequipmentleasing.TheBoardpreviouslyhasdeterminedthatthegeographicmarketsforcommerciallending,commercialrealestatefinancing,andequipmentleasingareeitherregional ornationalinscope.15Therecordinthiscaseindicatesthattherearenumerouscompetitors thatwouldcontinuetoengageinthesebusinessesonconsummation.Further,themarkets fortheseserviceswouldremainunconcentrated,andNotificants’andCapitalSource’slevelsof participationarerelativelysmall. Inaddition,NotificantsandCapitalSourcebothengageincommunitydevelopmentactivities.TheBoardpreviouslyhasdeterminedthatthegeographicmarketforcommunity developmentactivitiesislocalinscope.16Themarketforcommunitydevelopmentactivities isunconcentrated,andtherearenumerousmarketparticipantswhoengageinthese activities. TheDepartmentof Justicehasconductedareviewof thepotentialcompetitiveeffectsof theproposalandhasadvisedtheBoardthatconsummationof thetransactionwouldnot belikelytohaveasignificantlyadverseeffectoncompetitioninanyrelevantmarket.In addition,theappropriatebankingagencieshavebeenaffordedanopportunitytocomment andhavenotobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposed transactionwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantmarket.Accordingly,theBoardhasdeterminedthat competitiveconsiderationsweighinfavorof approval. 12 See12CFR225.26;see,e.g.,CapitalOneFinancialCorporation,FRBOrder2012-2(February14,2012) (“CapitalOneOrder”);BankofAmericaCorporation/Countrywide,94FederalReserveBulletinC81(2008) (“BankofAmericaOrder”);WachoviaCorporation,92FederalReserveBulletinC138(2006);BancOneCorporation,83FederalReserveBulletin602(1997). 13 TheDodd-FrankActamendedsection4oftheBHCActtoprovidethat,ingeneral,theBoardmaynot approveanapplicationbyabankholdingcompanytoacquireaninsureddepositoryinstitutionifthehome stateofthetargetinsureddepositoryinstitutionisastateotherthanthehomestateofthebankholdingcompanyandtheapplicantcontrols,orwouldcontrol,morethan10percentofthetotalamountofdepositsof insureddepositoryinstitutionsintheUnitedStates.Dodd-FrankAct§623(b),codifiedat12U.S.C. §1843(i)(8).ForpurposesoftheBHCAct,thehomestateofNotificantsandCSBisCaliforniaand,therefore, section4(i)(8)oftheBHCActdoesnotapplytothistransaction.Also,asnoted,consummationoftheproposalwouldresultinNotificantscontrollinglessthan1percentofthedepositsofU.S.insureddepository institutions. 14 Notificantsengageincommerciallendingtobusinessesofvarioussizes.CapitalSourceengagesincommercial lendingprimarilytomediumandlargebusinesses. 15 See,e.g.,M&TBankCorporation,89FederalReserveBulletin222(2003)(commercialrealestatelendingand equipmentleasing);DeutscheBankAG,85FederalReserveBulletin509(1999)(commerciallending);and NationsBankCorporation,84FederalReserveBulletin858(1998)(commerciallending). 16 See,e.g.,BankofMontreal(orderdatedJune20,2011),97FederalReserveBulletin24(3rdQuar.2011).

212 FederalReserveBulletin|August2014 FinancialandManagerialResources TheBoardconsideredthefinancialandmanagerialresourcesof theorganizationsinvolved onbothaparent-onlyandconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In thisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy, assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof the combinedorganizationatconsummation,includingitscapitalposition,assetquality, liquidity,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespecially important. TheBoardhasconsideredthefinancialfactorsof theproposal.Notificantsarewellcapitalizedandwouldremainsoonconsummationof theproposal.PWBandCSBarealsowell capitalizedandwouldremainsoafterconsummation.Theproposedtransactionisstructuredasacashandshareexchange,andthetotalconsiderationforthetransactionwould beapproximately$2.3billion.Notificantsareinsatisfactorycondition,andtheassetquality,earnings,andliquidityof PWBandCSBweighinfavorof approval.Basedonits reviewof therecord,theBoardfindsthattheorganizationshavesufficientfinancial resourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecordsof Notificants,PWB,CapitalSource,andCSB,includingassessmentsof theirmanagement expertise,internalcontrols,risk-managementsystems,andoperations.Inaddition,the Boardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicable bankinglawsandwithanti-money-launderinglaws. PacWestandPWBareconsideredtobewellmanaged.PacWest’sexistingrisk-management programanditsdirectorateandseniormanagementweighinfavorof approval.Thedirectorsandseniorexecutiveofficersof PacWesthavesubstantialknowledgeof,andexperience in,thebankingandfinancialservicessectors.PacWesthasademonstratedrecordof successfullyintegratingorganizationsintoitsoperationsandrisk-managementsystemsfollowingacquisitions.Since2000,PacWesthasacquiredandsuccessfullyintegratedintoits operationsmorethan20bankingorganizations. TheBoardalsohasconsideredNotificants’plansforimplementingtheproposal.PacWest isdevotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.PacWestwouldimplementrisk-management policies,procedures,andcontrolsatthecombinedorganizationthatincludeelementsof existingpoliciesof bothPacWestandCapitalSourceaswellascertainnewpolicies.Inaddition,PacWest’smanagementhastheexperienceandresourcestoensurethatthecombined organizationoperatesinasafeandsoundmanner,andPacWestplanstointegrateCSB’s existingmanagementandpersonnelinamannerthataugmentsPWB’smanagementteam. PacWest’sintegrationrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionsafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsweighinfavorof approval.Basedonallthefactsof record,the Boardhasconcludedthatconsiderationsrelatingtothefinancialandmanagerialresources andfutureprospectsof theorganizationsinvolvedintheproposalandPacWest’santimoney-launderingpoliciesonbalanceweighinfavorof approval.

LegalDevelopments:SecondQuarter,2014 213 Recordof PerformanceundertheCRA TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeinstitutions’safeandsoundoperation.17TheCRArequiresthe appropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepository institution’srecordof meetingtheconvenienceandneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.18 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformancerecordsof PWBandCSB,informationprovidedbyPacWest,confidentialsupervisoryinformation,andthepubliccommentsreceivedontheproposal.Thecommentersobjectedtotheproposalonthebasisof PWB’sCRAperformancerecord. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardhasevaluatedtheproposalinlightof theexaminations bytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevant insureddepositoryinstitutions.19TheCRArequiresthattheappropriatefederalfinancial supervisoryagencyforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.20Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-site evaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof PWB.PWBwasassigneda“satisfactory”ratingatitsmostrecent CRAperformanceevaluationbytheFDIC,inOctober2010(“PWBEvaluation”).PWB wasevaluatedusingthelargebankexaminationprocedures,whichevaluatetheinstitution’s performanceundertheLending,Investment,andServiceTestswithintheassessmentareas itserves.21ThePWBEvaluationcoveredtheLosAngeles,SanDiego,Riverside-SanBernardinoEast,Murrieta-Temecula,andSanFranciscoassessmentareas.22PWBreceived “lowsatisfactory”ratingsfortheLending,Investment,andServiceTests.23 AsdescribedinthePWBEvaluation,FDICexaminersfoundthatthebank’soverallvolumeof lendingwasgoodandreflectedgoodresponsivenesstoitsassessmentareas’credit needs.24ExaminersfoundthatPWB’sgeographicdistributionof loanswasgood,emphasizingthatasubstantialmajorityof itssmallbusinessloanoriginationsweremadeinside 17 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 18 12U.S.C.§2903. 19 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75Fed.Reg.11,642at11,665 (March11,2010). 20 12U.S.C.§2906. 21 See12CFR345.21(a)(1). 22 Examinersconductedafull-scopereviewoftheLosAngelesassessmentareaandalimited-scopereviewofthe otherassessmentareas. 23 TheevaluationperiodfortheLendingTestinthePWBEvaluationwasJanuary1,2009toSeptember30,2010, exceptforcommunitydevelopmentloans,forwhichtheevaluationperiodwasfromDecember15,2008 throughOctober18,2010.TheevaluationperiodfortheInvestmentandServiceTestswasfromDecember15, 2008throughOctober18,2010. 24 Small-andmedium-sizedbusinesslendingisthebank’sprimarylendingfocus.

214 FederalReserveBulletin|August2014 itsassessmentareas.25ExaminersalsodeterminedthatPWBexhibitedanadequaterecord of servingtheneedsof thehighlyeconomicallydisadvantagedinitsassessmentareas.Further,examinersfoundthatPWBmadeanadequatelevelof communitydevelopmentloans. However,theexaminersalsonotedthatPWB’sdistributionof borrowersreflectedpoor penetrationamongbusinesscustomersof differentrevenuesizesandthatPWBmadelimiteduseof innovativeorflexiblelendingpractices. WithrespecttotheInvestmentTest,examinersnotedthatPWBhadanadequatelevelof qualifiedcommunitydevelopmentinvestmentsandgrants,particularlythosethatarenot routinelyprovidedbyprivateinvestors.ExaminersalsohighlightedPWB’soccasionaluse of innovativeand/orcomplexinvestmentstosupportcommunitydevelopmentinitiatives,aswellastheinstitution’sadequatelevelof responsivenesstocreditandeconomic developmentneeds. WithrespecttotheServiceTest,examinersnotedthatdeliverysystemswerereasonably accessibletoessentiallyallportionsof theinstitution’sassessmentareas.Examinersalso notedthatPWB’sopeningandclosingof brancheshadnotadverselyaffectedtheaccessibilityof itsdeliverysystems,particularlyinLMIgeographiesandtoLMIindividuals.Further,examinershighlightedthatPWB’sservicesdidnotvaryinawaythatinconvenienced portionsof itsassessmentareasandthattheinstitutionprovidedanadequatelevelof communitydevelopmentservices. CRAPerformanceof CSB.CSBwasassignedan“outstanding”ratingatitsmostrecent CRAperformanceevaluationbytheFDICinJune2013(“CSBEvaluation”).26CSBwas evaluatedusingthewholesalebankexaminationprocedures,whichevaluateaninstitution’s communitydevelopmentperformancebasedoncommunitydevelopmentlending,qualified investments,andcommunitydevelopmentservices.27TheCSBEvaluationcoveredtheLos Angeles,Fresno,Kern,Tulare,andKingsassessmentareas.ExaminershighlightedCSB’s highlevelof communitydevelopmentloansandexcellentrecordof performancein meetingthecreditneedsof itsassessmentareas.Examinersnotedthat,duringtheevaluationperiod,CSBextendedorpurchasedatotalof 106communitydevelopmentloansfor $366.6million.Further,examinersnotedthattheinstitutionhadahighlevelof qualified investmentsanddonationsandoccasionallyusedinnovativeorcomplexqualifiedinvestments.Duringtheevaluationperiod,CSBmade22newqualifiedinvestmentsfor$41.7million,368qualifieddonationsfor$1.1million,andmaintaineditsinvestmentsinqualified mortgage-backedsecurities.ExaminersalsonotedCSB’shighlevelof communitydevelopmentservices,includingtechnicalassistanceofferingsto,andserviceonboardsof directors of,organizationscommittedtoservingLMIcommunities.Duringtheevaluationperiod, CSBcontributed6,613qualifiedcommunityservicehoursinitsassessmentareas,which representedan85percentincreasefromthepriorevaluation. PWB’sEffortsSincethe2010CRAEvaluation.PacWestrepresentsthatsincethePWB Evaluation,PWBhasextended133communitydevelopmentloanstotaling$350.6million. Inaddition,PacWeststatedthatthepercentageof PWB’sloanstosmallbusinesseswith grossannualrevenuesof $1millionorlesshasincreasedfrom27percentto35percent sincethePWBEvaluation.PacWestreportedthatPWBhasaddedthreeSmallBusiness Administrationloanprograms,includingoneprogramfocusedonsmallbusinessesowned bymilitaryveterans.Further,PacWestreportedthatPWBhasmade431charitablecontributionstotalingmorethan$1.1milliontocommunity-basednonprofitorganizationsinits 25 Inthiscontext,“smallbusinessloans”areloanswithoriginalamountsof$1millionorlessthataresecuredby nonfarm,nonresidentialpropertiesorarecommercialandindustrialloanstoborrowersintheUnitedStates. 26 TheevaluationperiodfortheCSBEvaluationwasJuly1,2010toJune17,2013. 27 See12CFR345.21(a)(2)and345.25.

LegalDevelopments:SecondQuarter,2014 215 assessmentareassincethePWBEvaluation.PacWestalsonotedthatPWBexecutives,officers,andemployeeshaveprovidedapproximately8,700communitydevelopmentservice hourstovariousorganizationsthroughoutitsassessmentareassincethePWBEvaluation.28 B.PublicCommentsontheApplication Commentersexpressedconcernsabouttheproposedacquisitionof CSBbyPWB,inlight of PWB’srecordof performanceundertheCRA.Specifically,commenterscriticized PWB’s“lowsatisfactory”ratingsfortheLending,Service,andInvestmenttestsinthePWB Evaluation.Inaddition,commentersassertedthatPWB’ssmallbusinesslendingisgenerallytargetedtobusinesseswithannualrevenuesof morethan$1million.Specifically,commentersassertedthat,of PWB’ssmallbusinessloans,only32percentin2012and35percentinthefirstninemonthsof 2013weremadetobusinesseswithlessthan$1millionin revenue,whereasCSBmade54percentof itssmallbusinessloanstosuchbusinessesin 2012.Commentersalsocontendedthatthepenetrationof PWB’sbranchesinLMIneighborhoodsislow.Specifically,commentersarguedthatonly21percentof PWB’sbranches areinLMIneighborhoods,whichcommentersstatedwaslowerthanPWB’speers.CommentersalsoexpressedconcernthatPWBwouldclosecertainbranchesof CSBinLMI neighborhoodsfollowingconsummationof theproposal.Further,commenterscriticized PWB’slevelof supportforaffordablehousingdevelopment.29 Initsevaluationof theproposal,theBoardhasconsideredthat,althoughPWBreceived “lowsatisfactory”ratingsfortheLending,Service,andInvestmenttestsinthePWBEvaluation,theFDICassignedPWBanoverall“satisfactory”CRArating.Inaddition,the BoardhasconsideredPWB’seffortssincethePWBEvaluation.Asnotedabove,PacWest representsthatPWBhasprovidedloans,investments,contributions,andservicehoursto meetthecreditneedsof itscommunitiessincethePWBEvaluation.PacWestreportsthat PWBoriginated$88.5millionand$155millionincommunitydevelopmentloansin 2012and2013,respectively,comparedto$24millionin2009.Further,PacWestreports thatPWBhasmorethandoubledthedollarvolumeof qualifiedequityinvestmentsand charitablecontributionssincethePWBEvaluation.TheBoard’sanalysisof theCRA-relatedactivitiesreportedbyPWB—including$57millionof qualifiedequityinvestments, $1.1millionof charitablecontributions,andapproximately8,700communitydevelopment servicehours—indicatesthatPWBhasdemonstratedcontinuedcommitmenttomeeting thecreditneedsof thecommunitiesitserves. PWBmade1,109smallbusinessloansin2012,of which32percentweremadetobusinesseswithlessthan$1millioninrevenue.Incomparison,withinPWB’sCRAassessment areas,lendersintheaggregatemade47percentof theirsmallbusinessloansin2012to businesseswithlessthan$1millioninrevenue.Importantly,focusingonlyonLMIcensus tractsinPWB’sassessmentareas,PWBmade26percentof itssmallbusinessloanstobusinesseswithlessthan$1millioninrevenue,comparedto23percentforlendersintheaggregate.Further,asnotedabove,basedondatareportedbyPacWest,PWBhasincreased thepercentageof loanstosmallbusinesseswithgrossannualrevenuesof $1millionorless initsassessmentareasto37percentasof December31,2013. 28 Theseloans,investments,contributions,andservicehourshavenotyetbeenevaluatedbytheFDIC. 29 CommentersalsoexpressedconcernthatPWBwouldnotmeetthecreditneedsofcertainruralcommunities currentlyservedbyCSB.TheCRArequiresabanktomeetthecreditneedsofthecommunitiesinwhichit operates.12CFRpart228.PacWesthasrepresentedthatitplanstomeetthecreditneedsoftheborrowersin theruralcommunitiesservedbyCSBandthatPWBhashiredanewcommunitydevelopmentofficerwhose responsibilitieswillincludetheruralcommunitiescitedbycommenters.TheFDICwillreviewPWB’srecordof meetingthecreditneedsoftheruralcommunitiescurrentlyservedbyCSBinthecourseofconductingCRA performanceevaluations.

216 FederalReserveBulletin|August2014 Commentersexpressedconcernaboutthenumberof branchesoperatedbyPWBinLMI areas.Twenty-onepercentof PWB’sbranchesarelocatedinLMIcensustracts.In2010, theFDICconcludedinthePWBEvaluationthatPWB’sdeliverysystemswerereasonably accessibletoessentiallyallportionsof PWB’sassessmentareas.PWB’sbranchpenetration inLMIcensustractshasnotchangedmateriallysincetheFDICdeterminedthatPWB’s deliverysystemswerereasonablyaccessible.Since2010,PWBhasaddedtwobranchesin low-incomecensustracts.AlthoughPWBhasreduceditspresenceinmoderate-income censustractsbyfivebranchessince2010,theoveralldeclineof threeLMIbrancheswas lessthanPWB’sreductionof sevenbranchesinnon-LMIcensustracts. OnDecember13,2013,PWBprovidednoticetotheFDICandtheCaliforniaDepartment of BusinessOversightthatitintendstoclose12branchesof CSBandonebranchof PWB uponconsummationof theproposal.Federallawrequiresaninsureddepositoryinstitution toprovidenoticetothepublicandtotheappropriatefederalbankingagencybeforeclosing abranch.30Thecommentershavebeenaffordedtheopportunitytoaddressplanned branchclosuresinthecontextof thebranchclosingsnotice.TheBoardhasreviewed PWB’sbranchclosingpolicyinconnectionwiththisnoticeandnotesthattheFDICwill continuetoreviewPWB’sbranchclosingrecordinthecourseof conductingCRAperformanceevaluations. TheBoardhasverifiedthattwoof theCSBbranchesthatPWBproposestocloseare locatedinLMIcommunities.Onesuchbranchisapproximately250feetfromanexisting PWBbranch.TheotherCSBbranchtobeclosedinanLMIareaisapproximately5.5 milesawayfromthenearestPWBbranch.Inbothcases,thePWBbranchwouldoffercertainservicesnotofferedbytheCSBbranch,suchasdemanddepositaccountsandanautomatedtellermachine.Inaddition,therearesixotherfull-servicebranchesof otherbanks withinaone-mileradiusof theCSBbranch. TheBoardhasconsideredPWB’srecordof supportforaffordablehousingdevelopment. InthePWBEvaluation,theFDICnotedthatPWBhadmadeapproximately$17.6million inaffordable-housing-relatedloansbetweenJanuary2009andOctober2010.Asnoted above,theFDICconcludedinthePWBEvaluationthatPWB’scommunitydevelopment lendingwasadequate.PacWestreportedthat,betweenNovember2010andDecember2013, PWBmadeatleasteightloanstotaling$20.5millionforaffordablehousingprojectsandan $11millionloantoacommunityenhancementcorporation,aportionof whichwillbeused toprovideaffordablehousingtoLMIindividualsandfamilies.Further,PacWestreported thatithasinvestedatleast$56.7millioninqualifiedinvestments,aportionof whichis relatedtoaffordablehousing,sincethePWBEvaluation.TheBoard’sanalysisof PWB’s supportforaffordablehousing,aswellasotherlending,investments,andservices,indicates thatPWBhasmadecontinuedeffortstomeetthecreditneedsof thecommunitiesitserves. TheBoardhasconsultedwiththeFDIC,PWB’sprimaryfederalregulator,regardingits evaluationof thebank’sperformanceundertheCRAandothercommenterconcerns.Followingitsreviewof theissuesraisedbythepubliccomments,theFDICconcludedthat therewasnobasisfordenyingthemergerof CSBintoPWBandhasapprovedthemerger undertheFederalDepositInsuranceAct. 30 Section42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedbytheJointPolicy StatementRegardingBranchClosings(64Fed.Reg.34,844(June29,1999)),requiresthatabankprovidethe publicwithatleast30days’notice,andtheappropriatefederalbankingagencywithatleast90days’notice, beforethedateofaproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsandothersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings.

LegalDevelopments:SecondQuarter,2014 217 C.ConclusiononCRAPerformance TheBoardhasconsideredallthefactsof record,includingtheCRAperformancerecords of theinstitutionsinvolved,informationprovidedbyPacWest,commentsreceivedonthe proposalandresponsestothosecomments,31andconfidentialsupervisoryinformation. BasedontheBoard’sevaluationof PWB’sandCSB’sCRAperformancerecords,itsreview of examinationreports,anditsconsultationswiththeFDIC,theBoardbelievesthatthe convenienceandneedsfactor,includingtheCRArecordsof theinsureddepositoryinstitutionsinvolvedinthistransaction,weighsinfavorof approvalof theapplication. SomecommentersurgedtheBoardtorequirePacWesttoprovidespecificpledgesorplans tomeetthecreditneedsof thecommunitiesitserves.TheBoardgenerallyfocusesonthe existingCRAperformancerecordof anapplicantandtheprogramsthatanapplicanthas inplacetoservethecreditneedsof itsassessmentareasatthetimetheBoardreviewsa proposal.32Nevertheless,theBoardnotesthatPWBhasdevelopeda“CRACommunity DevelopmentPlan”establishingperformancestandardsforthebankduring2014insupportof itsCRAcomplianceobjectives.TheCRACommunityDevelopmentPlanoutlines specificgoalsforsmallbusinesslending,communitydevelopmentlending,qualifiedinvestments,charitablecontributions,andcommunitydevelopmentservices,takingintoaccount consummationof theproposedtransaction.PacWestrepresentsthattheCRACommunity DevelopmentPlanisdesignedtoimprovePWB’sCRAperformancerecord,withagoalof achievingan“outstanding”ratingwithinthreeyears. FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”tothelistof possibleadverseeffectsthattheBoardmustweighagainstany expectedpublicbenefitsinconsideringproposalsundersection4(j)of theBHCAct.33To assessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of themergedfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.34In additiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchasthe opaquenessandcomplexityof aninstitution’sinternalorganization,whichareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthat 31 SomecommentersalsoquestionedPWB’seffortsinawardingcontractstominority-andwomen-ownedbusinesses.AlthoughtheBoardfullysupportsprogramsdesignedtopromoteequalopportunityandeconomic opportunitiesforallmembersofsociety,thecommentsaboutsupplierdiversitypracticesarebeyondthefactors theBoardisauthorizedtoconsiderundertheBHCAct.See,e.g.,BankofAmericaOrderatC90.SomecommentersalsocriticizedPWB’scharitablecontributionsasapercentageofitsdepositsinCalifornia.TheBoard notesthatneithertheCRAnorthebankingagencies’implementingrulesrequirethatfinancialinstitutions engageinanytypeofphilanthropy. 32 SeeBankofAmericaOrderatC87(2008). 33 Dodd-FrankAct,§604(e),codifiedat12U.S.C.§1843(j)(2)(A).OtherprovisionsoftheDodd-FrankAct imposeasimilarrequirementthattheBoardconsiderorweightheriskstofinancialstabilityposedbyamerger, acquisition,orexpansionproposalbyafinancialinstitution.Seesections163,173,and604(d)and(f)ofthe Dodd-FrankAct. 34 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

218 FederalReserveBulletin|August2014 canberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothebroader economy.35 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theUnitedStates bankingorfinancialsystem.Afterconsummation,PacWestwouldhaveapproximately $15.4billioninconsolidatedassets,andbyanyof anumberof alternativemeasuresof firm size,PacWestwouldbeoutsidethe75largestU.S.financialinstitutions.TheBoardgenerallypresumesthatamergerthatinvolvesanacquisitionof lessthan$2billioninassets,or resultsinafirmwithlessthan$25billionintotalconsolidatedassets,willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransaction wouldresultinasignificantincreaseininterconnectedness,complexity,cross-border activities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction.PacWestengagesinandwouldcontinuetoengageintraditionalcommercialbanking activities.Theresultingorganizationwouldexperiencesmallincreasesinthemetricsthat theBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,with theresultingfirmgenerallyrankingoutsideof thetop100U.S.financialinstitutionsin termsof thosemetrics.Forexample,PacWest’sintrafinancialsystemassetsandliabilities wouldcompriseanegligibleshareof thesystem-widetotal,bothbeforeandafterthetransaction.Theresultingorganizationwouldnotengageincomplexactivities,norwoulditprovidecriticalservicesinsuchvolumethatdisruptioninthoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtrade orresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatfinancialstabilityconsiderationsrelatingtothisproposalweighinfavorof an approval. AdditionalPublicBenefitsof theProposal Asnotedabove,inconnectionwithanoticeundersection4(c)(8)of theBHCAct,section4(j)of theActrequirestheBoardto“considerwhetherperformanceof theactivityby abankholdingcompanyorasubsidiaryof suchcompanycanreasonablybeexpectedto producebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgains inefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”36 Inadditiontoconsideringtheeffectsdiscussedabove,theBoardhasconsideredthatthe proposalwouldallowPWBtoexpandtherangeof financialproductsandservicesavailable toexistingcustomersof CSB.Currently,CSBprovidesonlyalimitedrangeof depositand commercialloanproductsandisprohibitedbyitscharterfromofferingdemanddeposit accounts.Followingtheacquisition,CSB’scustomerswouldgainaccesstoPWB’sdeposit productsandservices,includingdemanddepositaccounts,valuecheckingaccounts,value interestcheckingaccounts,high-yieldcheckingaccounts,andhigh-yieldmoneymarket accounts.PWB’svaluecheckingandvalueinterestcheckingaccountsmaybeparticularly beneficialtoCSB’sLMIcustomers,astheseaccountshavelowopeningdepositrequirements,lowermonthlyservicechargescomparedtotraditionalcheckingaccounts,andlower monthlybalancesrequiredtowaivemonthlyservicecharges.Inaddition,CSB’scustomers 35 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneOrderat28. 36 12U.S.C.§1843(j)(2).

LegalDevelopments:SecondQuarter,2014 219 wouldgainaccesstoabroaderrangeof basiclendingandbankingproductsandservices, includingconsumerunsecuredpersonalloansandlinesof credit,securedhomeequitylines of credit,securedloansforpropertysuchasautomobilesandboats,andoverdraftlinesof creditlinkedtodemanddepositaccounts.PacWest’scustomerswouldbenefitfromadditional,morespecializedcommerciallendingproductsCapitalSourceprovides.Inaddition, customersof bothinstitutionswouldbenefitfromamoreexpansivebranchnetwork. Theproposalwouldprovidetheopportunityforoperationalefficiencies,costsavings,and revenueenhancementforthecombinedorganization.Byimprovingefficienciesandrecognizingsuchsavings,PacWestwouldbebetterplacedtoprovidecreditandbankingservices toitsentirecustomerbase,includingcurrentcustomersof CapitalSource. TheBoardhasdeterminedthattheconductof theproposednonbankingactivitieswithin theframeworkof RegulationY,Boardprecedent,andthisorderarenotlikelytoresultin significantadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interest,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem. Onthebasisof theentirerecord,includingthecommitmentsmadeinthiscaseandconditionsnotedinthisorder,andforthereasonsdiscussedabove,theBoardbelievesthatthe balanceof benefitsandpotentialadverseeffectsrelatedtocompetition,financialand managerialresources,convenienceandneeds,financialstability,andotherfactorsweighin favorof approvalof thisproposal.Accordingly,theBoardhasdeterminedthatthebalance of thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistent withapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalshouldbe,andherebyis,approved.37Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyNotificantswiththeconditionsimposedinthisorderandthecommitments madetotheBoardinconnectionwiththenotice.TheBoard’sapprovalalsoissubjecttoall theconditionssetforthinRegulationY,includingthoseinsections225.7and225.25(c),38 andtotheBoard’sauthoritytorequiresuchmodificationorterminationof theactivities of abankholdingcompanyoranyof itssubsidiariesastheBoardfindsnecessaryto ensurecompliancewith,andtopreventevasionof,theprovisionsof theBHCActandthe Board’sregulationsandordersissuedthereunder.Forpurposesof thisaction,theseconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardin 37 SeveralcommentersrequestedthattheBoardholdpublichearingsontheproposal.TheBoard’sregulations provideforahearingonanoticefiledundersection4oftheBHCActiftherearedisputedissuesofmaterial factthatcannotberesolvedinsomeothermanner.12CFR225.25(a)(2).Underitsrules,theBoardalsomay,in itsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelypresenttheirviews.TheBoardhasconsidered thecommenters’requestsinlightofallthefactsofrecord.IntheBoard’sview,thecommentershavehad ampleopportunitytosubmitcommentsontheproposaland,infact,submittedwrittencommentsthatthe Boardhasconsideredinactingontheproposal.Thecommenters’requestsdonotidentifydisputedissuesof factthatarematerialtotheBoard’sdecisionandwouldbeclarifiedbyapublichearing.Inaddition,the requestsdonotdemonstratewhythewrittencommentsdonotpresentthecommenters’viewsadequatelyor whyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsof record,theBoardhasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly, therequestsforapublichearingontheproposalaredenied. 38 12CFR225.7and225.25(c).

220 FederalReserveBulletin|August2014 connectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedlaterthanthreemonthsaftertheeffectivedateof thisOrder,unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederal ReserveBankof SanFranciscoactingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveApril1,2014. Votingforthisaction:ChairYellen,andGovernorsTarullo,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Order Issued Under Sections 3 and 4 of the Bank Holding Company Act Mercantile Bank Corporation Grand Rapids, Michigan OrderApprovingtheMergerof BankHoldingCompaniesandDeterminationonaFinancial HoldingCompanyElection FRBOrderNo.2014–8(May7,2014) MercantileBankCorporation(“Mercantile”),GrandRapids,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tomergewith FirstbankCorporation(“FirstbankCorp.”),Alma,andtherebyindirectlyacquireitssubsidiarybanks,Firstbank,MountPleasant,andKeystoneCommunityBank(“Keystone”), Kalamazoo,allof Michigan.Followingtheproposedacquisition,FirstbankandKeystone wouldbeconsolidatedintoMercantile’ssubsidiarybank,MercantileBankof Michigan (“MercantileBank”),GrandRapids,astatenonmemberbank.2Aspartof itsproposal, MercantilealsohasfiledwiththeBoardanelectiontobecomeafinancialholdingcompanypursuanttosections4(k)and(l)of theBHCActandsection225.82of theBoard’s RegulationY.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(78FederalRegister59689(2013)).4Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. Mercantile,withconsolidatedassetsof approximately$1.4billion,isthe478thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$1.1billion indeposits.5MercantilecontrolsMercantileBank,whichoperatesonlyinMichigan.MercantileBankisthe18thlargestdepositoryinstitutioninMichigan,controllingdepositsof approximately$1.1billion,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6 1 12U.S.C.§1842. 2 TheconsolidationofFirstbankandKeystoneintoMercantileBankissubjecttotheapprovaloftheFederal DepositInsuranceCorporation(“FDIC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct. 12U.S.C.§1828(c). 3 12U.S.C.§§1843(k)and(l);12CFR225.82. 4 12CFR262.3(b). 5 Assetandnationwidedeposit-rankingdataareasofDecember31,2013,unlessotherwisenoted. 6 StatedepositdataareasofJune30,2013,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks.

LegalDevelopments:SecondQuarter,2014 221 FirstbankCorp.,withconsolidatedassetsof approximately$1.5billion,isthe464thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$1.2billion indeposits.FirstbankCorp.controlsFirstbankandKeystone,whichbothoperateonlyin Michigan.FirstbankandKeystonetogethercontroldepositsof approximately$1.2billion, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate. Onconsummationof thisproposal,Mercantilewouldbecomethe262ndlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$2.9billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.Mercantilewouldcontroltotaldepositsof approximately$2.4billion. Mercantilewouldbecomethe13thlargestinsureddepositoryorganizationinMichigan, controlling1.4percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.7 MercantileandFirstbankCorp.havesubsidiarydepositoryinstitutionsthatcompete directlyintheGrandRapidsandLansing,Michigan,bankingmarkets.8TheBoardhas consideredthecompetitiveeffectsof theproposalonthesebankingmarketsinlightof all thefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthebankingmarkets,therelativesharesof totaldepositsininsured depositoryinstitutionsinthemarkets(“marketdeposits”)controlledbyMercantileand FirstbankCorp.;theconcentrationlevelsof marketdepositsandtheincreaseinthoselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);910 andothercharacteristicsof themarkets. 7 12U.S.C.§1842(c)(1). 8 TheGrandRapids,Michigan,marketisdefinedasKentCounty(exceptOakfieldandSpencertownships); Thornapple,Irving,Carlton,YankeeSprings,Rutland,andHastingstownshipsinBarryCounty;Casnovia TownshipinMuskegonCounty;Salem,Dorr,andLeightontownshipsinAlleganCounty;andJamestown,Georgetown,Blendon,Allendale,Tallmadge,Polkton,Wright,andChestertownshipsinOttawa County,allinMichigan.TheLansing,Michigan,marketisdefinedasClinton,Eaton,andInghamcounties; PortlandandDanbytownshipsinIoniaCounty;WoodlandandCastletontownshipsinBarryCounty;and Fairfield,Middlebury,Sciota,Woodhull,Perry,andAntrimtownshipsinShiawasseeCounty,allinMichigan. 9 DepositandmarketsharedataareasofJune30,2013,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);andNationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 10 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepostmergerHHIis under1000,moderatelyconcentratedifthepostmergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepostmergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines in2010(seePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10at-938.html),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified.

222 FederalReserveBulletin|August2014 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesinbothmarkets.Onconsummation,the GrandRapidsmarketwouldremainmoderatelyconcentrated,andtheLansingmarket wouldremainunconcentrated,asmeasuredbytheHHI.Thechangeinconcentrationin eachmarketresultingfromthetransactionwouldbeminimal.Inaddition,numerouscompetitorswouldremaininbothmarkets.11 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketsinwhichMercantileandFirstbankCorp.compete directlyorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdetermined thatcompetitiveconsiderationsareconsistentwithapproval. Financial,ManagerialandOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant.Further,theBoardhasconsideredthe futureprospectsof theorganizationsinvolvedintheproposalinlightof thefinancialand managerialresourcesandtheproposedbusinessplan. TheBoardhasconsideredthefinancialfactorsof theproposal.MercantileandMercantile Bankarebothwellcapitalizedandwouldremainsoonconsummationof theproposed acquisition.Theproposedtransactionisabankholdingcompanymergerthatisstructured asanexchangeof shares.12Theassetquality,earnings,andliquidityof MercantileBank, Firstbank,andKeystoneareconsistentwithapproval,andMercantileappearstohave 11 MercantileoperatesthefifthlargestdepositoryinstitutionintheGrandRapidsbankingmarketwithapproximately$898.2millionindeposits,whichrepresent6.5percentofmarketdeposits.FirstbankCorp.operatesthe 22ndlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$39.1million,which representlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,Mercantile wouldcontinuetooperatethefifthlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$937.3million,whichrepresent6.8percentofmarketdeposits.TheHHIwouldincreasebyfourpoints to1111,and26competitorswouldremaininthemarket. Mercantileoperatesthe13thlargestdepositoryinstitutionintheLansingbankingmarket,withapproximately $112.1millionindeposits,whichrepresent2.2percentofmarketdeposits.FirstbankCorp.operatesthe16th largestdepositoryorganizationinthemarket,controllingdepositsofapproximately$79.1million,whichrepresent1.6percentofmarketdeposits.Onconsummationoftheproposedtransaction,Mercantilewouldoperate the10thlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$191.2million, whichrepresent3.8percentofmarketdeposits.TheHHIwouldincreaseby7pointsto838,and22competitors wouldremaininthemarket. 12 Aspartoftheproposedtransaction,eachshareofFirstbankCorp.commonstockwouldbeexchangedforone shareofMercantilecommonstock.

LegalDevelopments:SecondQuarter,2014 223 adequateresourcestoabsorbthecostsof theproposalandtocompleteintegrationof the institutions’operations.Basedonitsreviewof therecord,theBoardfindsthattheorganizationhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Mercantile,FirstbankCorp.,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbank supervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingandanti-money-launderinglaws. Mercantile,FirstbankCorp.,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewellmanaged.Mercantile’sexistingrisk-managementprogramanditsdirectorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsandsenior executiveofficersof Mercantilehavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredMercantile’splansforimplementingtheproposal.Mercantileisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof thepostacquisitionintegrationprocessforthisproposal.Mercantilewouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseare consideredacceptablefromasupervisoryperspective.Inaddition,Mercantile’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperates inasafeandsoundmanner,andMercantileisproposingtointegrateFirstbank’sandKeystone’sexistingmanagementandpersonnelinamannerthataugmentsMercantile’smanagement.13 Mercantile’ssupervisoryrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellastherecordsof effectivenessof MercantileandFirstbankCorp.in combattingmoneylaunderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).14TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,15and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant 13 Onconsummation,thecombinedorganizationwillhavesixdirectorsontheboardofdirectors.Threedirectors currentlyservingonMercantile’sboardofdirectorsandthreedirectorscurrentlyservingonFirstbankCorp.’s boardofdirectorswouldserveontheboardofthecombinedorganization.ThePresidentandChiefExecutive OfficerofMercantilewillcontinuetoserveinhisrolefollowingthemerger,andthecurrentPresidentandChief ExecutiveOfficerofFirstbankCorp.wouldserveaschairmanoftheboard. 14 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 15 12U.S.C.§2901(b).

224 FederalReserveBulletin|August2014 depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.16 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof MercantileBank,Firstbank,andKeystone,datareportedbyMercantileBank,Firstbank,andKeystoneundertheHomeMortgageDisclosureAct (“HMDA”),17otherinformationprovidedbyMercantile,confidentialsupervisoryinformation,andthepubliccommentsreceivedontheproposal.TheBoardreceivedonecomment thatobjectedtotheproposalonthebasisof Mercantile’sfairlendingrecordintheGrand Rapids-Wyoming,MichiganMetropolitanStatisticalArea(“GrandRapidsMSA”),as reflectedin2012HMDAdata. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.18TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.19Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof MercantileBank.MercantileBankwasassignedanoverall“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof March26, 2012(“MercantileBankEvaluation”).MercantileBankreceivedan“outstanding”rating fortheLendingTestand“highsatisfactory”ratingsforboththeInvestmentandService Tests.ExaminersconsideredMercantileBanktohaveanexcellentrecordof lendinginside itsassessmentareasandnotedthatMercantileBankwasaleaderincommunitydevelopmentlending.20 AsdescribedintheMercantileBankEvaluation,FDICexaminersfoundthatthebank’s overalllendingactivitywasexcellent.21Thebankoriginatedasubstantialmajorityof its loanswithinitsdesignatedassessmentareasduringthereviewperiod.Examinersfound thattheoveralldistributionof smallbusinessloansreflectedexcellentpenetrationamong businessesof differentsizes.Theyalsofoundthatthegeographicdistributionof home mortgageandsmallbusinessloansreflectedexcellentpenetrationthroughoutthebank’s assessmentareas,includingLMIgeographies. 16 12U.S.C.§2903. 17 12U.S.C.§2801etseq. 18 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 19 12U.S.C.§2906. 20 TheMercantileBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures,and examinersreviewedloandataandsmallbusinesslendingactivityreportedbyMercantileBankfromJanuary1, 2009,toDecember31,2011.Thehomemortgagelendingdatareviewedincludeddataforthebank’sthenmortgagecompany,MercantileBankMortgageCompany,LLC(“MercantileMortgage”),whichwasdissolvedin January2013. 21 Examinersplacedgreaterweightonthebank’sperformanceinsmallbusinesslendingoverhomemortgage lendingbecausecommerciallendingisthebank’sprimaryfocus.Examinersalsoplacedgreaterweightonthe bank’sperformanceintheportionsofitsassessmentareasfallingwithinthreeMSAs:theGrandRapidsMSA, theHolland-GrandHaven,MichiganMSA(“HollandMSA”),andtheLansing-EastLansing,MichiganMSA (“LansingMSA”).

LegalDevelopments:SecondQuarter,2014 225 ExaminersalsonotedthatMercantileBankisaleaderincommunitydevelopmentlending. Duringtheevaluationperiod,thebankoriginated28qualifyingcommunitydevelopment loanstotalingapproximately$59.7millionintheGrandRapidsMSA,threeloanstotaling approximately$1.6millionintheHollandMSA,andoneloanof $223,000intheLansingMSA. InevaluatingtheInvestmentTest,examinersfoundthatMercantileBankhadasignificant levelof qualifiedcommunitydevelopmentinvestments.Examinershighlightednumerous CRA-qualifiedinvestmentsthatthebankmade,includingdonationstoorganizationswith acommunitydevelopmentfocus.ExaminersalsonotedthatMercantileBankparticipated invariousCRA-qualifiedinvestmentvehicles. InevaluatingtheServiceTest,examinersobservedthatthebank’sdeliverysystemswere accessibletoessentiallyallportionsof itsassessmentareasandindividualsof different incomelevels.ExaminersalsonotedthatMercantileBank’sopeningandclosingof brancheshadnotadverselyaffectedtheaccessibilityof itsdeliverysystemstoLMIgeographiesorLMIindividuals.ExaminersnotedthatMercantileBankofferedalternativedeliverysystemsthatincreasedtheavailabilityof itsloananddepositproducts,includingonline banking,a24-hourtelephonebankingsystem,mobileandotherelectronicbankingproducts,andcourierservices.Examinersalsofoundthatthebankprovidedarelativelyhigh levelof communitydevelopmentservices. ExaminersnotedthatMercantileBankhadnotreceivedanycomplaintsregardingitsperformanceinmeetingthecreditneedsof itsassessmentareas.Theexaminationdidnot resultinanyfindingsof discriminationrelatingtoMercantileBank’sfairlendingpolicies andproceduresortounderwritingdecisionsbythebank’smanagement.TheBoardhas consultedwiththeFDICregardingtheMercantileBankEvaluation. CRAPerformanceof Firstbank.Firstbankwasassigneda“satisfactory”ratingatitsmost recentCRAperformanceevaluationbytheFDIC,asof September27,2011(“Firstbank Evaluation”),withratingsof “satisfactory”fortheLendingandCommunityDevelopment Tests.22ExaminersnotedthatFirstbank’sCRAperformancedemonstratedapracticeof providingforthecreditneedsof itsassessmentarea.23 InevaluatingtheLendingTest,examinersnotedthatthebankoriginatedamajorityof its loanswithinitsassessmentarea,illustratingreasonableperformance.Examinersalsofound thatthebank’sgeographicdistributionof homemortgageloansandsmallbusinessloans reflectedreasonabledispersionthroughoutitsassessmentareaandthatthebank’sdistributionof loanstoborrowersreflectedareasonablepenetrationof individualsof different incomelevels,includingLMIindividuals,andbusinessesof differentsizes. WithrespecttotheCommunityDevelopmentTest,examinersnotedthatFirstbank’scommunitydevelopmentperformancereflectedadequateresponsivenesstothecommunity’s developmentneedsintheassessmentarea.ExaminersalsofoundthatFirstbankprovided anadequatelevelof communitydevelopmentservicesthroughitsemployeeinvolvementin communitydevelopmentorganizationsanditsretailbankingservicesthatbenefitLMI individuals. 22 TheFirstbankEvaluationwasconductedusingtheIntermediateSmallBankCRAExaminationProcedures, andexaminersreviewedthebank’scommercialandresidentiallendingactivityfromJuly21,2008,toJuly29, 2011.Theseproductswereselectedforanalysisbecausetheyrepresented51percentand30percent,respectively, ofthebank’sloanportfolio.AttherequestofFirstbank’smanagement,examinersalsoconsideredthelending activityofFirstbankMountPleasantMortgageCompany,which,atthattime,wasasubsidiaryofFirstbank. 23 TheFirstbankEvaluationreviewedthebank’snon-MSAassessmentarea,whichincludesWexford,Missaukee, Osceola,Clare,Mecosta,Isabella,andMontcalmcounties,allinMichigan.

226 FederalReserveBulletin|August2014 CRAPerformanceof Keystone.Keystonewasassignedanoverall“satisfactory”ratingatits mostrecentCRAperformanceevaluationbytheFDIC,asof August17,2009(“Keystone Evaluation”).24Examinersnotedthatthebank’sCRAperformancedemonstratedareasonableresponsivenesstothecreditneedsof itsassessmentarea.Examinersfoundthata majorityof thesmallbusinessandresidentialrealestateloansoriginatedbyKeystonewere madewithinthebank’sassessmentarea.25ExaminersalsonotedthatKeystone’soverall distributionof loansreflectedareasonabledispersionwithinitsassessmentareaandthat Keystone’spenetrationof loansamongindividualsof differentincomelevels,including LMIindividualsandbusinessesof differentsizes,wasreasonablegiventhedemographics of theassessmentarea. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof MercantileBank,Firstbank,andKeystonein complyingwithfairlendingandotherconsumerprotectionlaws.Aspartof thisconsideration,theBoardreviewedtheMercantileBank,Firstbank,andKeystoneEvaluations, assessedMercantileBank’sHMDAdata,andconsideredthecommentontheapplication andotheragencies’viewsonMercantileBank’srecordof performanceunderfairlending laws.TheBoardalsoconsideredMercantileBank’sfairlendingpoliciesandprocedures. Analysisof HMDADataTheBoardanalyzedMercantileBank’sandMercantileMortgage’s2011and2012HMDAdata,themostrecentpubliclyavailableinthespecificmarket areaaddressedinthepubliccomment(GrandRapidsMSA).Thecommenterexpressed concernsthatMercantilewasnotmeetingthecreditneedsof minorityindividualsinthe GrandRapidsMSA,basedon2012HMDAdata.Inparticular,thecommenterallegedthat MercantiledidnotoriginateloanstoAfricanAmericansorHispanicsacrossarangeof loanproducts,includingconventionalhomepurchaseloans,refinanceloans,andhome improvementloansintheGrandRapidsMSA.ThecommenteralsoassertedthatMercantiledisproportionatelydeniedapplicationsbyAfricanAmericanapplicantsforrefinance loansintheGrandRapidsMSA. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequal accesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.Although theHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas, HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhetherMercantileBankexcludedordeniedcredittoanygrouponaprohibitedbasis.26FullyevaluatingMercantileBank’scompliancewithfairlendinglawsandregulationswouldrequirea thoroughreviewof thebank’sapplicationandunderwritingpoliciesandprocedures,as wellasaccesstoinformationcontainedintheapplicationfiles,todeterminewhetherthe 24 TheKeystoneEvaluationwasconductedusingtheSmallBankCRAExaminationProceduresinKeystone’s singleassessmentareaofKalamazooandVanBurencounties,bothinMichigan.Examinersreviewedloan datareportedbyKeystonefromJanuary1,2007,toJune30,2009.Examinersalsoconsideredasampleof businessloansoriginatedbyKeystonefromJanuary1,2007,toJune30,2009. 25 ExaminersdidnotconsiderloansoriginatedbyKeystoneMortgageServices,LLC,Keystone’smortgagesubsidiary,intheirdeterminationofwhetherKeystone’ssmallbusinessandresidentialrealestateloansweremade withinitsassessmentarea. 26 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data.

LegalDevelopments:SecondQuarter,2014 227 observedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwriting factors. TheBoard’sreviewinthiscasegenerallyconfirmedthelevelsof lendingbyMercantileto AfricanAmericanandHispanicborrowersandthedenialdisparityrationotedbythecommenter.Mercantilestatesthatthelowlevelof applicationsreceivedfromAfricanAmericansandHispanicsisduetoseveralfactors:theeffectof persistentlyweakeconomicconditionsonminoritiesinGrandRapids,theverylowpercentageof applicationsreceivedbyall homemortgagereportersfromAfricanAmericansandHispanicsintheGrandRapids MSA,strongcompetitionfromotherbanksinthemarkettoattracthomemortgageapplicationsfromminorities,andthefactthathomemortgageloanstoindividualsaccountfor onlyasmallportionof Mercantile’stotallending.27Inlightof thelowlevelsof applicationsreceivedbyMercantilefromAfricanAmericansandHispanicsintheGrandRapids MSA,theBoardconductedalendinganalysisfor2012comparingMercantiletoitspeers inminoritytractsof theMSAanddidnotfindstatisticallysignificantdisparities.28 TheBoardhasconsultedwiththeFDIC,theprimarysupervisorof eachof thebanks involvedintheproposal.Inconnectionwiththebankmergerapplication,theFDIC received,andconductedananalysisof,anidenticalcommentonMercantile’srecordof lendingtoAfricanAmericansandHispanicsintheGrandRapidsMSA.TheFDICconsideredtheHMDAdatacitedbythecommenter;MercantileBank’sCRA,consumercompliance,andfairlendingrecord;thebank’stargetedmarketingtoAfricanAmericansand Hispanics;andothercommunityoutreachefforts.TheFDICconcludedthatitdidnotfind evidenceof MercantileBankengagingindiscriminatoryorotherillegalcreditpractices, andthatthepubliccommentshouldnotprecludeapprovalof theproposal. Mercantile’sFairLendingProgram.Mercantilehasinstitutedpoliciesandproceduresto helpensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.Thecompany’slegalandcompliancerisk-managementprogramincludesareview of thebank’smarketingandadvertising,compliancetrainingforapplicableemployees, comparativeloanfilereviews,andriskreviewsof allpotentialfairlendingcomplaints.Mercantilereportedthatallconsumerloanandmortgagedenialsaresubjecttoindependent secondreviews,andallcommercialloandenialsarereviewedbythebank’sCompliance Officer.Mercantilereportedthatthebank’scomplianceandinternalauditdepartments conductannualfairlendingriskassessmentstoanalyzepotentialvulnerabilitiesinloan processesandcontrolsandensurethatthebank’slendingpoliciesareconsistentlyand fairlyapplied.Inaddition,thebankengagesinmonthlymonitoringtoensurecompliance withfederalandstatelawsandregulations,andallcustomercomplaintsreceivedbythe bankarereviewedbythebank’sComplianceOfficerandRiskManagementDirector.29 Mercantile’srisk-managementsystemsanditspoliciesandproceduresforassuringcompliancewithfairlendinglawswouldbeimplementedatthecombinedorganization. 27 Commercialrealestateandcommercialandindustrialloansaccountforapproximately80percentofMercantile’stotallending,whileresidentialrealestateloansonlyaccountforapproximatelysevenpercentofthebank’s loanportfolio,basedonthedollaramountofloansoutstandingasofDecember31,2013. 28 Inthiscase,minoritytractsarethoseinwhichthemajorityofresidentsareAfricanAmericanorHispanic. 29 AcommentercriticizedMercantileBankforprovidingits2013HMDAloan/applicationregisterinpaperformatratherthaninelectronicformatashehadrequested.Asaresult,thecommenterrequestedanextensionof thecommentperiodfortheproposal.However,MercantileBankprovideditsHMDAloan/applicationregister tothecommenterinaccordancewiththeConsumerFinancialProtectionBureau’sregulations.See12CFR Part1003,SupplementI§1003.5(b)(2).TheBoard’sRulesofProcedurecontemplatethatthepubliccomment periodwillnotbeextendedabsentacleardemonstrationofhardshiporothermeritoriousreasonforseeking additionaltime.12CFR262.25(b)(2).Thecommenter’srequestforadditionaltimedoesnotidentifycircumstancesthatwouldwarrantanextensionofthepubliccommentperiodforthisproposal.Accordingly,the Boardhasdeterminednottoextendthepubliccommentperiod.

228 FederalReserveBulletin|August2014 Inaddition,Mercantilestatedthatthebankperformsanannualfairlendingself-assessment,inwhichthebank’sComplianceOfficerreviewsallresidentialhomemortgageloan denialsandhomeequityloandenialstoensureconsistentapplicationof underwritingpractices.Mercantilealsoreportedthatthecompliancedepartmentconductsacomparativefile reviewtoensurethatsimilarlysituatedborrowersreceiveequaltreatmentandthatunderwritingpracticesareconsistentlyapplied.Thefairlendingassessmentalsoincludesa reviewof thebank’smarketingandadvertisingandevaluatesthebank’sassessmentareato ensurethatitdoesnotarbitrarilyexcludeLMIorminorityareas. MercantileBank’s2012fairlendingself-assessmentfoundthatthebank’spolicies,procedures,andunderwritingpracticeswereappropriateandconsistentlyfollowed.Theself-assessmentalsorecommendedthatthesecondreviewprocessbeexpandedtoincludewithdrawnandincompleteapplications,thatthebankimplementrequirementsforusing alternativecreditreferences,andthatthebankincreasethescopeof billboardadvertising closertoLMIareas.Theself-assessmentnotedadeclineinhomemortgageapplications fromAfricanAmericansandHispanics,butstatedthatthebankhadincreaseditsadvertisingandoutreachtothosecommunities.AlthoughMercantileindicatedthatitgenerally doesnotadvertisehomemortgageloans,during2012and2013,itplacedanumberof mortgage-relatedadvertisementstargetedtotheAfricanAmericanandHispaniccommunitiesinGrandRapids.Thebankalsoexpandedthefocusof itsfinancialeducationseminars toincludemanagingcreditandbuyingorrefinancingahome;theseseminarswereheldat anAfricanAmericanchurchandacommunitycenterlocatedinapredominantlyAfrican Americancensustract. Mercantileindicatesthatthesetargetedmarketingeffortshavebeensuccessfulinincreasing thenumberof applicationsfromandmortgagestominorityborrowers.Mercantilereports thatminorityborrowers(includingjointraceandjointethnicityapplicants30)accounted for8.4percentof thebank’sHMDA-reportableapplicationsforthefirstthreequartersof 2013,anincreasefromtheaverageof .5percentfrom2009to2012.Mercantilealsostates thatminorityborrowersaccountedfor9.6percentof homemortgageapplicationsforallof 2013,thehighestleveloverthelastfiveyears. C.AdditionalInformationonConvenienceandNeedsof CommunitiestobeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. Mercantilerepresentsthattheproposalwouldprovideopportunitiestoachievecostsavings forthecombinedorganizationbyconsolidatingredundantfunctions,includingdataprocessing.Mercantilenotesthatthecombinedorganizationwouldbeabletoprovidecustomerswithbenefitsthroughmoreefficientandcost-effectiveprovisionof bankingservices andwouldbeabletodedicateadditionalresourcestomeetingthebankingneedsof itscustomers.Mercantilealsostatesthatthecombinedorganizationwillhavegreaterfinancial andmanagerialresources,amorediversifiedassetbase,andaccesstoabroaderrangeof markets,enablingittobeamoreeffectivecompetitorinitsmarkets. 30 Ajointraceapplicationisanapplicationinwhichoneapplicantreportsasingleracialdesignationof“white” andtheotherapplicantreportsoneormoreminorityracialdesignations.Ajointethnicityapplicationisan applicationinwhichoneapplicantreportsethnicityasHispanicorLatinoandtheotherapplicantreportsethnicityasnotHispanicorLatino.

LegalDevelopments:SecondQuarter,2014 229 Mercantilealsostatesthattheproposalwouldoffercustomersconveniencethrougha broaderrangeof financialproductsandservicesnotcurrentlyavailableatallof thebanks. Mercantileassertsthatthemergerwouldallowcustomersof thecombinedorganizationto benefitfromtheexperienceof eachorganization.Inparticular,Mercantile’scustomers wouldbenefitfromexpandingFirstbankCorp.’shomemortgageandconsumerlending productsinareascurrentlyservedbyMercantile.FirstbankCorp.’scustomerswouldbenefitfromMercantile’scommerciallendingfocusandexpandingMercantile’ssmallbusiness lendinginareascurrentlyservedbyFirstbankCorp.Inaddition,themergerwouldbenefit Mercantile’sandFirstbankCorp.’scurrentcustomersthroughaccesstosignificantlylarger branchandATMnetworks.ThebranchnetworkavailabletoMercantileandFirstbank Corp.customerswouldincreasefrom7and48,respectively,to56locationsthroughout Michigan.31 D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyMercantile,confidential supervisoryinformation,andthepubliccommentsontheproposal.BasedontheBoard’s analysisof theHMDAdata,evaluationof thelendingoperationsandcomplianceprogramsof MercantileBank,Firstbank,andKeystone,reviewof examinationreports,and consultationswithotheragencies,theBoardbelievesthattheconvenienceandneedsfactor, includingtheCRArecordof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”32 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.33These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative 31 Acommenteralsoassertedthat,basedonpublicstatementsmadebyseniorexecutivesofMercantileandFirstbankCorp.,thecombinedorganizationwouldnotexpandintobankingmarketslocatedinsoutheastMichigan. TheCRAdoesnotrequireaninstitutiontoexpandintonewmarkets.TheCRAdoesrequireMercantileBank tohelpmeetthecreditneedsofthecommunitiesinwhichitoperates.Asnotedabove,MercantileBank receivedan“outstanding”CRAratingfromtheFDIC,whichdemonstratesthebank’seffortsinmeetingthe creditneedsofitscommunities. Inaddition,acommenterprovidedtheBoardwithacopyofaclassactionlawsuitfiledagainstMercantilein thestateofMichigan,allegingthatthecompanyengagedindiscriminatorylendingpracticesagainstAfrican Americans.Thelitigationisinitspreliminarystages,andnowrongdoinghasbeenadjudicated. 32 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 33 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

230 FederalReserveBulletin|August2014 of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.34 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,Mercantilewouldhaveapproximately$2.9billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firmsize, wouldnotrankamongthe100largestU.S.financialinstitutions.TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan$25billioninconsolidatedassetswill notposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethat thetransactionwouldresultinasignificantincreaseininterconnectedness,complexity, crossborderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentin thistransaction.Thecompaniesengageandwouldcontinuetoengageintraditionalcommercialbankingactivities.Theresultingorganizationwouldexperiencesmallincreasesin themetricsthattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,withtheresultingfirmgenerallyrankingoutsideof thetop100U.S.financialinstitutionsintermsof thosemetrics.Forexample,Mercantile’sintrafinancialassets andliabilitieswouldconstituteanegligibleshareof thesystemwidetotal,bothbeforeand afterthetransaction.Theresultingorganizationwouldnotengageincomplexactivitiesor providecriticalservicesinsuchvolumethatdisruptioninsuchserviceswouldhaveagreat impactonthemacroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. FinancialHoldingCompanyElection Asnotedabove,Mercantilehaselectedtobecomeafinancialholdingcompanyinconnectionwiththeproposal.MercantilehascertifiedthatitandMercantileBankarewellcapitalizedandwellmanagedandhasprovidedalltheinformationrequiredundertheBoard’s RegulationY.35Mercantilealsohasstatedthatuponconsummationof theproposal,Mercantileandeachdepositoryinstitutionitwouldcontrolwouldbewellcapitalizedandwell managed.Basedonallthefactsof record,theBoardhasdeterminedthatMercantile’selectionwillbecomeeffectiveuponconsummationof theproposalif,onthatdate,Mercantile iswellcapitalizedandwellmanagedandalldepositoryinstitutionsitcontrolsarewellcapitalized,wellmanaged,andhaveaCRAratingof atleast“satisfactory.” Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.36Inreachingitsconclusion,theBoardhascon- 34 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 35 Seesection606(a)oftheDodd-FrankAct;12CFR225.82(b). 36 AcommenterrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCActdoes notrequirethattheBoardholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication.12CFR 225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisoryauthorities. Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallowinterested personsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelyrepresent theirviews.TheBoardhasconsideredtherequestinlightofallthefactsofrecord.IntheBoard’sview,the

LegalDevelopments:SecondQuarter,2014 231 sideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyMercantilewithalltheconditionsimposedinthisorder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof Chicago,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveMay7,2014. Votingforthisaction:ChairYellen,andGovernorsTarullo,Stein,andPowell. MargaretMcCloskeyShanks DeputySecretaryof theBoard Orders Issued Under International Banking Act CaixaBank, S.A. Barcelona, Spain OrderApprovingEstablishmentof aRepresentativeOffice FRBOrderNo.2014–09(May12,2014) CaixaBank,S.A.(“CaixaBank”),Barcelona,Spain,aforeignbankwithinthemeaningof theInternationalBankingAct(“IBA”),hasappliedundersection10(a)of theIBA1to establisharepresentativeofficeinNewYork,NewYork.TheForeignBankSupervision EnhancementActof 1991,whichamendedtheIBA,providesthataforeignbankmust obtaintheapprovalof theBoardtoestablisharepresentativeofficeintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork Times,July11,2013).Thetimeforfilingcommentshasexpired,andallcommentsreceived havebeenconsidered. CaixaBank,withtotalconsolidatedassetsof approximately$470billion,isthethirdlargest bankinSpain.2CaixaBankengagesinarangeof commercialandretailbankingactivities inSpainandinternationallyandcurrentlyhasnodirectoperationsintheUnitedStates. OutsideSpain,CaixaBankoperatesbranchesinPoland,Romania,andMorocco.Italso maintainsrepresentativeofficesinEurope,Asia,theMiddleEast,andSouthAmerica. commentershavehadampleopportunitytosubmitcommentsontheproposaland,infact,submittedwritten commentsthattheBoardhasconsideredinactingontheproposal.Therequestdoesnotidentifydisputed issuesoffactthatarematerialtotheBoard’sdecisionthatwouldbeclarifiedbyapublichearing.Inaddition, therequestdoesnotdemonstratewhythewrittencommentdoesnotpresentthecommenter’sviewsadequately orwhyahearingwouldotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthe factsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase. Accordingly,therequestforapublichearingontheproposalisdenied. 1 12U.S.C.§3107(a). 2 AssetandrankingdataareasofDecember31,2013.

232 FederalReserveBulletin|August2014 CaixaBankownsapproximately46percentof thesharesof BancoBPIS.A.,Porto,Portugal.3Approximately64percentof CaixaBank’ssharesareownedbyCajadeAhorrosy PensionesdeBarcelona(“LaCaixa”),Barcelona,alicensedsavingsbank.4Noothershareholderowns5percentormoreof CaixaBank’sshares. TheproposedrepresentativeofficewouldactasaliaisonbetweenCaixaBank’sheadoffice andcustomersintheUnitedStates.Theproposedrepresentativeofficewouldalsoconduct research,performpreliminaryandservicingstepsinconnectionwithlending,andperform back-officefunctions.5 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablisharepresentativeoffice,theBoardmustconsiderwhether(1)theforeignbankhas furnishedtotheBoardtheinformationitneedstoassesstheapplicationadequately,(2)the foreignbankandanyforeignbankparentengagedirectlyinthebusinessof bankingoutsideof theUnitedStates,and(3)theforeignbankandanyforeignbankparentaresubject tocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.6 TheBoardalsoconsidersadditionalstandardssetforthintheIBAandRegulationK.7 Asnotedabove,CaixaBankengagesdirectlyinthebusinessof bankingoutsidetheUnited States.8CaixaBankalsohasprovidedtheBoardwiththeinformationnecessarytoassess theapplicationthroughsubmissionsthataddresstherelevantissues. 3 InNovember2013,theBoardapprovedtheestablishmentofrepresentativeofficesinNewJerseyandMassachusettsbyBancoBPI.BancoBPI,S.A.,FRBOrderNo.2013-9(November18,2013).CaixaBankalsoowns approximately17percentofthesharesinBankofEastAsia(“BEA”),HongKong,whichisabankholding companyforthepurposesoftheBankHoldingCompanyActof1956,asamended(“BHCAct”).CaixaBank hasprovidedpassivitycommitmentstotheBoardtohelpassurethatCaixaBank’sownershipin,andbusiness relationshipswith,BEAwouldnotenableCaixaBankanditsaffiliatestoexerciseacontrollinginfluenceover BEAforthepurposesoftheBHCAct. 4 LaCaixadoesnotissuesharesandisnotownedbyanyothercompanyorindividual.Itisgoverned,represented,andcontrolledbyaGeneralAssembly,aboardofdirectorsandaControlCommittee.Thesegoverning bodiescompriserepresentativesofdepositholders,foundingentities,community-interestinstitutions,local authorities,andemployees. 5 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates,performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions.A representativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinany otherbankingactivity.12CFR211.24(d)(1). 6 12U.S.C.§3107(a)(2);12CFR211.24(d)(2).Inassessingthesupervisionstandard,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichhomecountrysupervisors (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandtherelationship betweenthebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthat areconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancial conditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacy andriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformthe Board’sdetermination. 7 See12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2).Thesestandardsinclude:whetherthebank’shomecountrysupervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesofthe bank;whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplacein thehomecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateral effortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebankanditsU.S.affiliatesareincompliancewith U.S.law;theneedsofthecommunity;andthebank’srecordofoperation.TheBoardmayalso,inthecaseof aforeignbankthatpresentsarisktothestabilityoftheUnitedStates,takeintoaccount,totheextent appropriate,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogress towardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountry tomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 8 LaCaixaengagesinthebusinessofbankingoutsidetheUnitedStatesindirectlythroughCaixaBank.

LegalDevelopments:SecondQuarter,2014 233 TheBoardhaspreviouslydetermined,inconnectionwithapplicationsinvolvingother banksinSpain,thatthosebanksweresubjecttohomecountrysupervisiononaconsolidatedbasisbytheirhomecountrysupervisor,theBankof Spain.9CaixaBankandLa CaixaaresupervisedbytheBankof Spainonsubstantiallythesametermsandconditions asthoseotherbanks.Basedonallthefactsof record,includingtheaboveinformation,it hasbeendeterminedthatCaixaBankandLaCaixaaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.TheBankof Spainhasno objectiontotheestablishmentof theproposedrepresentativeoffice. CaixaBankappearstohavetheexperienceandcapacitytosupporttheproposedrepresentativeofficeandhasestablishedcontrolsandproceduresfortheproposedrepresentative officetoensurecompliancewithU.S.law,aswellascontrolsandproceduresforitsworldwideoperationsgenerally.TakingintoconsiderationCaixaBank’srecordof operationinits homecountry,itsoverallfinancialresources,anditsstandingwithitshomecountrysupervisor,financialandmanagerialfactorsareconsistentwithapprovalof theproposedrepresentativeoffice. Spainisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaunderingandterroristfinancing.Inaccordancewith theserecommendations,Spainhasenactedlawsanddevelopedregulatorystandardsto determoneylaundering,terroristfinancing,andotherillicitactivities.Moneylaunderingis acriminaloffenseinSpain,andSpanishfinancialinstitutionsarerequiredtoestablish internalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.CaixaBankhaspoliciesandproceduresto complywiththeselawsandregulationsthataremonitoredbygovernmentalentities responsibleforanti-money-launderingcompliance. CaixaBankandLaCaixahavecommittedtomakeavailabletotheBoardsuchinformation ontheiroperationsandonanyof theiraffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeIBA,theBHCAct,andotherapplicablefederallaw. TotheextentthatprovidingsuchinformationtotheBoardmaybeprohibitedbylawor otherwise,CaixaBankandLaCaixahavecommittedtocooperatewiththeBoardtoobtain anynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosure of suchinformation.Inaddition,subjecttocertainconditions,theBankof Spainmay shareinformationonCaixaBank’soperationswithothersupervisors,includingtheBoard. Inlightof thesecommitmentsandotherfactsof record,andsubjecttothecondition describedbelow,ithasbeendeterminedthatCaixaBankandLaCaixahaveprovided adequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest. TheproposalwouldnotappeartoaffectfinancialstabilityintheUnitedStates.Inparticular,theabsoluteandrelativesizeof CaixaBankinitshomecountry;thescopeof Caixa- Bank’sactivities,includingthetypesof activitiesitproposestoconductintheUnited Statesandthepotentialforthoseactivitiestoincreaseortransmitfinancialinstability;and theframeworkinplaceforsupervisingCaixaBankinitshomecountrydonotappearto createsignificantrisktothefinancialstabilityof theUnitedStates.Basedontheseand otherfactors,financialstabilityconsiderationsinthisproposalareconsistentwith approval. 9 See,e.g.,Bankia,S.A.(orderdatedDecember16,2011),98FederalReserveBulletin42(4thQuar.2011);Caja deAhorrosdeValencia,CastellónyAlicante,Bancaja,etal.(orderdatedDecember17,2010),97Federal ReserveBulletin4(4thQuar.2010);andCajadeAhorrosyMontedePiedaddeMadrid,etal.(orderdated October16,2008),95FederalReserveBulletinB23(2009).

234 FederalReserveBulletin|August2014 Onthebasisof allthefactsof record,andsubjecttocommitmentsmadebyCaixaBank andLaCaixa,CaixaBank’sapplicationtoestablishtheproposedrepresentativeoffice isherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation, withtheconcurrenceof theGeneralCounsel,pursuanttoauthoritydelegatedbythe Board.10Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof CaixaBankanditsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineandenforcecompliancebyCaixaBankoritsaffiliateswithapplicable federalstatutes,theBoardmayrequireterminationof anyof CaixaBank’sdirectorindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecificallyconditionedoncompliancebyCaixaBankwiththeconditionsimposedinthisorderandthe commitmentsmadetotheBoardinconnectionwiththisapplication.11Forpurposesof thisaction,thesecommitmentsandconditionsaredeemedtobeconditionsimposedbythe Boardinwritinginconnectionwiththisdecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveMay12,2014. MargaretMcCloskeyShanks DeputySecretaryof theBoard The Joyo Bank, Ltd. Mito City, Japan OrderApprovingEstablishmentof aRepresentativeOffice FRBOrderNo.2014–7(April18,2014) TheJoyoBank,Ltd.(“Joyo”),MitoCity,Japan,aforeignbankwithinthemeaningof the InternationalBankingAct(“IBA”),hasappliedundersection10(a)of theIBA1toestablisharepresentativeofficeinNewYork,NewYork.TheForeignBankSupervision EnhancementActof 1991,whichamendedtheIBA,providesthataforeignbankmust obtaintheapprovalof theBoardtoestablisharepresentativeofficeintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork DailyNews,August30,2013).Thetimeforfilingcommentshasexpired,andallcomments receivedhavebeenconsidered. Joyo,withtotalassetsof approximately$82billion,isthe13thlargestbankinJapanby assetsize.2Joyoengagesinarangeof commercialandretailbankingactivitiesthroughits 10 12CFR265.7(d)(12). 11 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedrepresentativeofficeparallelsthecontinuingauthorityoftheStateofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthis applicationdoesnotsupplanttheauthorityoftheStateofNewYorkoritsagent,theNewYorkStateDepartmentofFinancialServices,tolicensetheproposedofficeofCaixaBankinaccordancewithanytermsorconditionsthattheymayimpose. 1 12U.S.C.§3107(a). 2 AssetandrankingdataareasofDecember31,2013.NorthernTrustCompany(“NTC”)ownsapproximately 5.3percentofthesharesofJoyo,asofMarch31,2013.NTCholdsthesesharesinregisterednomineeaccounts forvariousbeneficialowners,includingSilchesterPartnersLimited,London,England,which,whenitlast notifiedJoyoasrequiredbyJapaneselaw,owned5.1percentofthesharesofJoyo.Noothershareholderowns 5percentormoreoftheoutstandingsharesofJoyo.

LegalDevelopments:SecondQuarter,2014 235 150domesticbranches.OutsideJapan,JoyooperatesrepresentativeofficesinthePeople’s Republicof ChinaandSingapore.JoyohasnooperationsintheUnitedStates.3 TheproposedrepresentativeofficewouldactasaliaisonbetweenJoyoanditsU.S.customersandcorrespondentbanks.Theproposedrepresentativeofficewouldalsoengagein otherrepresentationalactivities,includinggatheringinformationandconductingresearch.4 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablisharepresentativeoffice,theBoardmustconsiderwhether(1)theforeignbankhas furnishedtotheBoardtheinformationitneedstoassesstheapplicationadequately,(2)the foreignbankandanyforeignbankparentengagedirectlyinthebusinessof bankingoutsideof theUnitedStates,and(3)theforeignbankandanyforeignbankparentaresubject tocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.5 TheBoardalsoconsidersadditionalstandardssetforthintheIBAandRegulationK.6 Asnotedabove,Joyoengagesdirectlyinthebusinessof bankingoutsidetheUnitedStates. JoyoalsohasprovidedtheBoardwiththeinformationnecessarytoassesstheapplication throughsubmissionsthataddresstherelevantissues. TheBoardhaspreviouslydetermined,inconnectionwithapplicationsinvolvingother banksinJapan,thatthosebanksweresubjecttohomecountrysupervisiononaconsolidatedbasisbytheirhomecountrysupervisor,Japan’sFinancialServicesAgency(“FSA”).7 JoyoissupervisedbytheFSAonsubstantiallythesametermsandconditionsasthose otherbanks.Basedonallthefactsof record,includingtheaboveinformation,ithasbeen determinedthatJoyoissubjecttocomprehensivesupervisiononaconsolidatedbasisbyits homecountrysupervisor.TheFSAhasnoobjectiontotheestablishmentof theproposed representativeoffice. 3 In1987,JoyoopenedarepresentativeofficeinNewYork,whichwasconvertedtoabranchin1989andclosed in2002. 4 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates,performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions.Arepresentativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinanyother bankingactivity.12CFR211.24(d)(1). 5 12U.S.C.§3107(a)(2);12CFR211.24(d)(2).Inassessingthesupervisionstandard,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichhomecountrysupervisors (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandtherelationship betweenthebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthat areconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancial conditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacy andriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformthe Board’sdetermination. 6 See12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2).Thesestandardsinclude:whetherthebank’shomecountrysupervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesofthe bank;whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplacein thehomecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateral effortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperationswiththeBoard;whetherthebankanditsU.S.affiliatesareincompliancewith U.S.law;theneedsofthecommunity;andthebank’srecordofoperation.TheBoardmayalso,inthecaseof aforeignbankthatpresentsarisktothestabilityoftheUnitedStates,takeintoaccount,totheextent appropriate,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogress towardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountry tomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 7 See,e.g.,MitsubishiUFJFinancialGroup,Inc.,FRBOrderNo.2012-12(November14,2012);TheBankof Fukuoka,Ltd.(orderdatedSeptember27,2011),97FederalReserveBulletin14(3rdQuar.2011);Mitsubishi UFJFinancialGroup,Inc.(orderdatedJune14,2011),97FederalReserveBulletin10(2ndQuar.2011).

236 FederalReserveBulletin|August2014 Joyoappearstohavetheexperienceandcapacitytosupporttheproposedrepresentative officeandhasestablishedcontrolsandproceduresfortheproposedrepresentativeofficeto ensurecompliancewithU.S.law,aswellascontrolsandproceduresforitsworldwide operationsgenerally.TakingintoconsiderationJoyo’srecordof operationsinitshome country,itsoverallfinancialresources,anditsstandingwithitshomecountrysupervisor, financialandmanagerialfactorsareconsistentwithapprovalof theproposedrepresentativeoffice. Japanisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaunderingandinternationalterrorism.Inaccordance withthoserecommendations,Japanhasenactedlawsandcreatedlegislativeandregulatory standardstodetermoneylaundering,terroristfinancing,andotherillicitactivities.Money launderingisacriminaloffenseinJapan,andJapanesefinancialinstitutionsarerequiredto establishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.Joyohaspoliciesandprocedures tocomplywiththeselawsandregulationsthataremonitoredbygovernmentalentities responsibleforanti-money-launderingcompliance. JoyohascommittedtomakeavailabletotheBoardsuchinformationontheoperationsof Joyoandanyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeIBA,theBankHoldingCompanyActof 1956,asamended,andother applicablefederallaw.TotheextentthatprovidingsuchinformationtotheBoardmaybe prohibitedbylaworotherwise,JoyohascommittedtocooperatewiththeBoardtoobtain anynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesforthedisclosureof suchinformation.Inaddition,subjecttocertainconditions,theFSAmayshare informationonJoyo’soperationswithothersupervisors,includingtheBoard.Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow, ithasbeendeterminedthatJoyohasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest. TheproposalwouldnotappeartoaffectfinancialstabilityintheUnitedStates.Inparticular,theabsoluteandrelativesizeof Joyoinitshomecountry;thescopeof Joyo’sactivities, includingthetypesof activitiesitproposestoconductintheUnitedStatesandthepotentialforthoseactivitiestoincreaseortransmitfinancialinstability;andtheframeworkin placeforsupervisingJoyoinitshomecountrydonotappeartocreatesignificantrisk tothefinancialstabilityof theUnitedStates.Basedontheseandotherfactors,financial stabilityconsiderationsinthisproposalareconsistentwithapproval. Onthebasisof allthefactsof recordandsubjecttocommitmentsmadebyJoyo,Joyo’s applicationtoestablishtheproposedrepresentativeofficeisherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof the GeneralCounsel,pursuanttoauthoritydelegatedbytheBoard.8Shouldanyrestrictions onaccesstoinformationontheoperationsoractivitiesof JoyoanditsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineandenforce compliancebyJoyooritsaffiliateswithapplicablefederalstatutes,theBoardmayrequire terminationof anyof Joyo’sdirectorindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecificallyconditionedoncompliancebyJoyowiththeconditions imposedinthisorderandthecommitmentsmadetotheBoardinconnectionwiththis application.9Forpurposesof thisaction,thesecommitmentsandconditionsaredeemedto 8 12CFR265.7(d)(12). 9 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedrepresentativeofficeparallelsthecontinuingauthorityoftheStateofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthis

LegalDevelopments:SecondQuarter,2014 237 beconditionsimposedbytheBoardinwritinginconnectionwiththisdecisionand,as such,maybeenforcedinproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveApril18,2014. MargaretMcCloskeyShanks DeputySecretaryof theBoard applicationdoesnotsupplanttheauthorityoftheStateofNewYorkoritsagent,theNewYorkStateDepartmentofFinancialServices,tolicensetheproposedofficeofJoyoinaccordancewithanytermsorconditions thattheymayimpose.

239 Federal Reserve BULLETIN November 2014 Vol. 100, No. 5 Legal Developments: Third Quarter, 2014 Orders Issued Under Bank Holding Company Act Order Issued Under Section 3 of the Bank Holding Company Act Old National Bancorp Evansville, Indiana OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2014–13(July14,2014) OldNationalBancorp(“OldNational”),Evansville,Indiana,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tomergewith UnitedBancorp,Inc.(“United”),andtherebyindirectlyacquireitssubsidiarybank, UnitedBank&Trust(“UnitedBank”),bothof AnnArbor,Michigan.Immediatelyfollowingtheproposedmerger,UnitedBankwouldbemergedintoOldNational’ssubsidiary bank,OldNationalBank,Evansville.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(79FederalRegister12194(2014)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. OldNational,withconsolidatedassetsof approximately$10.3billion,isthe101stlargest insureddepositoryorganizationintheUnitedStates,4controllingapproximately$7.8billionindeposits.OldNationalcontrolsOldNationalBank,whichoperatesinIndiana, Michigan,Illinois,Kentucky,andOhio.OldNationalBankisthe26thlargestinsured depositoryinstitutioninMichigan,controllingapproximately$606millionindeposits, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate. United,withconsolidatedassetsof approximately$899million,isthe745thlargestinsured depositoryorganizationintheUnitedStates,5controllingapproximately$790millionin deposits.UnitedcontrolsUnitedBank,whichoperatesonlyinMichigan.UnitedBankis the23rdlargestinsureddepositoryinstitutioninMichigan,controllingapproximately 1 12U.S.C.§1842. 2 ThemergerofUnitedBankintoOldNationalBankissubjecttotheapprovaloftheOfficeoftheComptrollerofthe Currency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c). 3 12CFR262.3(b). 4 Assetandnationwidedeposit-rankingdataareasofDecember31,2013,andhavebeenupdatedformergersinvolving partiestothisproposalthathavebeenconsummatedthroughApril25,2014. 5 Assetandnationwidedeposit-rankingdataareasofDecember31,2013.AsofMarch,31,2014,Unitedhadconsolidatedassetsofapproximately$922million.

240 FederalReserveBulletin|November2014 $800millionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.6 Onconsummationof thisproposal,OldNationalwouldbecomethe98thlargestdepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$11.2billion,whichrepresentlessthan1percentof thetotalamountof assetsof insureddepositoryinstitutionsintheUnitedStates.OldNationalwouldhavetotaldepositsof approximately$8.6billion.InMichigan,OldNationalwouldbecomethe15thlargest bankingorganization,controllingapproximately$1.4billionindeposits,whichrepresent lessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsin thatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActimposescertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbyabankholding companythatiswellcapitalizedandwellmanagedtoacquirecontrolof abankinastate otherthanthehomestateof thebankholdingcompanywithoutregardtowhetherthe transactionisprohibitedunderstatelaw.7However,thissectionfurtherprovidesthatthe Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststatethathasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeorfiveyears.8TheBoardalsomusttakeinto accounttherecordof performanceof theacquiringbankundertheCommunityReinvestmentAct(“CRA”)9andapplicablestatecommunityreinvestmentlaws.10Inaddition,the Boardmaynotapproveanapplicationbyabankholdingcompanytoacquireaninsured depositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastate otherthanthehomestateof thebankholdingcompanyandthebankholdingcompany controlsorwouldcontrolmorethan10percentof thetotaldepositsof insureddepository institutionsintheUnitedStates.11TheBoardalsomaynotapproveanapplicationif the combinedorganizationwouldcontrol30percentormoreof thetotaldepositsof insured depositoryinstitutionsinthetargetbank’shomestateorinanystateinwhichtheacquirer andtargethaveoverlappingbankingoperations.12 Forpurposesof theBHCAct,thehomestateof OldNationalisIndiana,andUnited’s homestateisMichigan.13OldNationaliswellcapitalizedandwellmanagedunderapplicablelaw.MichiganhasnominimumagerequirementandUnitedBankhasbeenin existenceformorethanfiveyears. 6 AllMichiganstatewideandmarket-leveldepositdataareasofJune30,2013,andhavebeenupdatedformergersinvolvingpartiestothisproposalthathavebeenconsummatedthroughApril25,2014.Inthiscontext, insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,cooperativebanks,industrial banks,andsavingsbanks. 7 12U.S.C.§1842(d)(1)(A). 8 12U.S.C.§1842(d)(1)(B). 9 12U.S.C.§2901etseq. 10 12U.S.C.§1842(d)(3). 11 12U.S.C.§1842(d)(2)(A). 12 12U.S.C.§1842(d)(2)(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsinany stateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsanyinsured depositoryinstitutionorabranch.Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabankto belocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch.See12U.S.C. §1841(o)(4)-(7). 13 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered.

LegalDevelopments:ThirdQuarter,2014 241 Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutions,thetotal amountof consolidateddepositsof insureddepositoryinstitutionsintheUnitedStatesis $11.0trillion.Onconsummationof theproposedtransaction,OldNationalwouldcontrol lessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnitedStates.Inaddition,thecombinedorganizationwouldcontrolless than30percentof thetotalamountof depositsof insureddepositoryinstitutionsinMichigan,theonlystateinwhichOldNationalandUnitedhaveoverlappingbankingoperations. TheBoardhastakenintoaccountOldNational’srecordof performanceundertheCRA anddeterminedthatitdoesnotprohibittheBoardfromapprovingtheproposal.Accordingly,inlightof allthefactsof record,theBoardisnotprohibitedfromapprovingtheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.14OldNationalBankandUnitedBankcompetedirectlyonlyintheLenawee, Michigan,bankingmarket(the“Lenaweebankingmarket”).15 TheBoardhasconsideredthecompetitiveeffectsof thisproposalontheLenaweebanking marketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;therelativesharesof total depositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)controlledby OldNationalandUnited;16theconcentrationlevelsof marketdepositsandtheincreasein thoselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMerger Guidelines”);17andothercharacteristicsof themarket. IntheLenaweebankingmarket,OldNationalBankistheseventhlargestdepositoryinstitution,controllingapproximately$32millionindeposits,whichrepresentapproximately 2.8percentof marketdeposits.UnitedBankisthelargestdepositoryinstitutioninthemarket,controllingapproximately$396millionindeposits,whichrepresentapproximately 14 12U.S.C.§1842(c)(1). 15 TheLenaweebankingmarketisdefinedasLenaweeCounty,Michigan.Deposit,marketshare,andranking dataforthemarketareallasofJune30,2013. 16 DepositandmarketsharedataareasofJune30,2013,updatedtoreflectmergersinvolvingpartiestothisproposalwhichhavebeenconsummatedthroughApril25,2014and,unlessotherwisenoted,arebasedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorsof commercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);andNationalCity Corporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsin themarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserve Bulletin52(1991). 17 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelines in2010(seePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10at-938.html),theDOJhasconfirmedthatitsDOJBankMergerGuidelines,whichwereissuedin1995,were notmodified

242 FederalReserveBulletin|November2014 34.4percentof marketdeposits.Onconsummation,OldNationalBankwouldbecomethe largestdepositoryinstitutioninthemarket,controllingapproximately$428millionin deposits,anditsproformamarketsharewouldbeapproximately37.2percent.TheHHI wouldincreaseby191points,from1877to2068. TheBoardhasconsideredfactorsthatmitigatethecompetitiveeffectsof theproposalin theLenaweebankingmarket.18First,abankmadeadenovoentryintothemarketby openingabranchin2012,suggestingthatthemarketmaybeattractiveforfutureentry. Second,therearetwoothercompetitorsintheLenaweebankingmarketwithmarket sharesover10percent,19andfiveothercompetitorswithmarketsharesover5percent.The totalnumberof institutionswithmarketsharesover5percentintheLenaweebanking marketindicatesarelativelybalancedmarketstructureinwhichmanyinstitutionshavea strongcompetitivepresenceinthemarketandareabletoexertcompetitivepressureonthe largestfirminthemarket.20Accordingly,theBoardhasconcludedthatthesefactorsmitigate,inpart,thepotentialeffectsof theproposalontheLenaweebankingmarket. TheDOJhasconductedadetailedreviewof thepotentialcompetitiveeffectsof theproposalandadvisedtheBoardthatitdoesnotbelievethatconsummationof theproposalis likelytohaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket. Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesintheLenaweebankingmarketorinanyotherrelevantbankingmarket. Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of thecombinedorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant.Further,theBoardhas consideredthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. 18 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998). 19 Oneofthesecompetitorshasanactualmarketshareover20percentintheLenaweebankingmarket.However, thisinstitutionisacreditunionandislessactiveincommerciallending,soitsmarketdepositshavebeen weightedat50percent. 20 InitsreviewoftheLenaweebankingmarket,theBoardincludedseveralthriftsandcreditunionsasmarket competitors.Onethriftwasgivena100percentweightingratherthanthecustomary50percent,becauseits ratioofcommercialandindustrialloanstototalassetswasabovethenationalaverageforbankholdingcompanies.Twocreditunionswereincludedinthecalculationsatthecustomary50percentweight.

LegalDevelopments:ThirdQuarter,2014 243 TheBoardhasconsideredthefinancialfactorsof theproposal.OldNationalandOld NationalBankarebothwellcapitalizedandwouldremainsoonconsummationof theproposedacquisition.Theproposedtransactionisabankholdingcompanymerger,structured asacashandshareexchange.21Theassetquality,earnings,andliquidityof OldNational BankandUnitedBankareconsistentwithapproval,andOldNationalappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Basedonitsreviewof therecord,theBoardfindsthatthe organizationhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of OldNational,United,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,riskmanagementsystems,andoperations.Inaddition,the Boardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicable bankingandanti-money-launderinglaws. OldNational,United,andtheirsubsidiarydepositoryinstitutionsareeachconsideredto bewellmanaged.OldNational’sexistingriskmanagementprogramanditsdirectorateand seniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutive officersof OldNationalhavesubstantialknowledgeof andexperienceinthebankingand financialservicessectors. TheBoardalsohasconsideredOldNational’splansforimplementingtheproposal.Old Nationalisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof the post-acquisitionintegrationprocessforthisproposal.OldNationalwouldimplementits riskmanagementpolicies,procedures,andcontrolsatthecombinedorganization,and theseareconsideredacceptablefromasupervisoryperspective.Inaddition,OldNational’s managementhastheexperienceandresourcestoensurethatthecombinedorganization operatesinasafeandsoundmanner.Furthermore,OldNationalhasdemonstrateda recordof successfullyintegratingotherbankingorganizationsintoitsoperationsandrisk managementsystemsafteracquisitions. OldNational’ssupervisoryrecord,managerialandoperationalresources,andplansfor operatingthecombinedinstitutionafterconsummationprovideareasonablebasistoconcludethatmanagerialfactorsareconsistentwithapproval.Basedonallthefactsof record, theBoardhasconcludedthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof OldNationalandUnitedincombattingmoneylaundering activities,areconsistentwithapproval.22 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCRA.23The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository 21 Aspartoftheproposedtransaction,eachshareofUnitedcommonstockwouldbecanceledandconverted intoarighttoreceivecashandOldNationalcommonstockbasedonanexchangeratio. 22 OnJune4,2012,OldNationalBankenteredintoastipulationandconsentorderwiththeOCCrelatingtoits BankSecrecyAct/anti-money-launderingcomplianceprogram.OldNationalBank,OCCOrderNo.2012-126 (June4,2012).OnJanuary14,2014,theOCClifteditsorderafterverifyingcompliancewiththeorder.s 23 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq.

244 FederalReserveBulletin|November2014 institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,24andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.25 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof OldNationalBankandUnitedBank,datareportedbyOldNational BankandUnitedBankundertheHomeMortgageDisclosureAct(“HMDA”),26other informationprovidedbyOldNational,confidentialsupervisoryinformation,andthepubliccommentreceivedontheproposal.TheBoardreceivedonecommentthatobjectedto theproposalonthebasisof OldNational’sandUnited’sfairlendingrecordsasreflectedin 2012HMDAdata. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.27TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.28Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof OldNationalBank.OldNationalBankwasassignedanoverall“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheOCCinDecember2012(“OldNationalBankEvaluation”).OldNationalBankreceivedan“outstanding” ratingfortheLendingTestand“highsatisfactory”ratingsforboththeInvestmentTest andtheServiceTest.29Inadditiontotheoverall“outstanding”ratingthatOldNational Bankreceived,thebankreceivedseparateoverall“outstanding”or“satisfactory”ratingsin eachmultistatemetropolitanareaandstatereviewed.30 AsdescribedintheOldNationalBankEvaluation,OCCexaminersfoundthatthebank’s overalllendingactivitywasexcellent.Thebankoriginatedasignificantmajorityof loans insideitsassessmentareasandhadanexcellentoverallrecordof lendingtoborrowersof differentincomelevels.Examinersnotedthatthebankhadanexcellentrecordof lending tohomemortgageborrowersof differentincomelevels,whileitsdistributionof loansto businessesandfarmswithdifferentrevenuesizeswasgood.Further,OldNationalBank’s overallgeographicdistributionof loanswasadequate.Specifically,thebank’sgeographic distributionof smallloanstobusinesseswasgood,whileitsgeographicdistributionof 24 12U.S.C.§2901(b). 25 12U.S.C.§2903. 26 12U.S.C.§2801etseq. 27 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 28 12U.S.C.§2906. 29 TheevaluationperiodfortheOldNationalBankEvaluationwasJuly1,2008,throughDecember31,2012. 30 TheOldNationalBankEvaluationincludedfull-scopereviewsofatleastoneassessmentareawithineachstate whereOldNationalBankhadanofficeandofmultistatemetropolitanareaswhereOldNationalBankoperatedbranchesinatleasttwostates.ThestatesreviewedwereIllinois,Indiana,Kentucky,andOhio,andthe multistatemetropolitanareasreviewedweretheEvansville(Indiana-Kentucky)andLouisville(Kentucky-Indiana)metropolitanareas.

LegalDevelopments:ThirdQuarter,2014 245 mortgageloansandsmallloanstofarmswasadequate.Inaddition,examinersfoundno evidenceof discriminatoryorotherillegalcreditpractices. InevaluatingtheInvestmentTest,OCCexaminersfoundthatOldNationalBankhadan overallgoodlevelof qualifiedcommunitydevelopmentinvestmentsthatwerehighly responsivetocommunityneeds.ExaminershighlightednumerousCRA-qualifiedinvestmentsthatthebankhadmade,includingdonationstoorganizationswithacommunity developmentfocus.ThebankalsoparticipatedinvariousCRA-qualifiedinvestment vehicles.ForthecurrentCRAexaminationcycle,whichbeganJanuary1,2013,Old NationalhasindicatedthatOldNationalBankincreaseditscorporatecommunitydevelopmentinvestmentgoalfrom$37.5millionto$87.5million,anincreaseof 133percent. InevaluatingtheServiceTest,examinersnotedthatbrancheswereaccessibletogeographiesandindividualsof differentincomelevels.ExaminersalsonotedthatOldNational Bank’sopeningandclosingof brancheshadnotadverselyaffectedtheaccessibilityof its deliverysystemstoLMIgeographiesorLMIindividuals.Further,examinershighlighted thattheinstitutionprovidedarelativelyhighlevelof communitydevelopmentservices. CRAPerformanceof UnitedBank.UnitedBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalDepositInsuranceCorporation(“FDIC”)inJune2011(“UnitedBankEvaluation”).UnitedBankreceiveda “highsatisfactory”ratingforeachof theLendingTest,InvestmentTest,andtheService Test.31InevaluatingtheLendingTest,FDICexaminersconcludedthatUnitedBank’s lendinglevelsreflectedgoodresponsivenesstoitsassessmentarea’screditneeds.Examiners foundthatthemajorityof thebank’sloanswereoriginatedintheoverallassessmentarea, andthegeographicdistributionof itsloanswasadequate.Examinersalsofoundthat UnitedBankmadearelativelyhighlevelof communitydevelopmentloans,usedinnovative andflexiblelendingpracticestoservethecreditneedsof itsassessmentarea,andthatits levelof communitydevelopmentactivitiesrepresentedverygoodresponsivenessto communitycreditneedsinitsassessmentarea.InevaluatingtheInvestmentTest,examinersfoundthatthebankhadasignificantlevelof qualifiedcommunitydevelopmentinvestmentsanddonationsinitsassessmentarea,particularlyinLenaweeCounty.Inevaluating theServiceTest,examinersnotedthatUnitedBank’sbranchandATMnetworkprovided accesstoallportionsof itsassessmentareaandthatthebankprovidedahighlevelof communitydevelopmentservices. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof OldNationalBankandUnitedBankincomplyingwithfairlendingandotherconsumerprotectionlaws.Aspartof thisconsideration,the BoardreviewedtheOldNationalBankEvaluationandtheUnitedBankEvaluation, assessedOldNationalBank’sandUnitedBank’sHMDAdata,andconsideredthecommentontheapplicationaswellasotheragencies’viewsonOldNationalBank’srecordof performanceunderfairlendinglaws.TheBoardalsoconsideredOldNationalBank’sfair lendingpoliciesandprocedures. Analysisof HMDADataandBranchClosings.TheBoardanalyzedOldNationalBank’s andUnitedBank’s2012HMDAdata,themostrecentpubliclyavailable,aswellaspreliminary2013HMDAdata.TheBoardanalyzeddatarelatedtoallHMDA-reportableloansto developaviewof thebank’soveralllendingpatterns,aswellasthesubsetof thosedata 31 TheUnitedBankEvaluationwasconductedusingLargeBankCRAevaluationproceduresinUnitedBank’s singleassessmentareaofLenawee,Washtenaw,andMonroecounties,allinMichigan.Examinersreviewed loandatareportedbyUnitedBankfromJanuary1,2009,toMarch31,2011.

246 FederalReserveBulletin|November2014 relatedspecificallytotheloanproductsthatcomposedthesubjectof thepubliccomment receivedontheproposal,includingconventionalhomepurchaseloans;FederalHousing Administration(“FHA”),FarmServiceAgency/RuralHousingService(“FSA/RHS”),and VeteranAffairs(“VA”)homepurchaseloans;homeimprovementloans;andrefinance loans.TheBoardanalyzedeachbank’scombinedassessmentareasandthespecificmarket areasaddressedinthepubliccomment(Indianapolis,Evansville,andFortWayne,Indiana MSAs;andtheAnnArbor,MichiganMSA).Withinthosedatasets,theBoardfocusedits reviewondatarelatedtoconventionalhomepurchaseloans,FHA,FSA/RHS,andVA homepurchaseloans,refinanceloans,andhomeimprovementloansmadeordeniedto borrowersof theracesandethnicitieshighlightedbythepubliccomment,i.e.,African AmericansandHispanics. OldNationalBank’sHMDADataandBranchClosings.Thecommenterexpressedconcerns thatOldNationalBankwasnotmeetingthecreditneedsof minorityindividualsinseveral communitiesservedbythebank,basedon2012HMDAdata.Inparticular,thecommenter allegedthatOldNationalBankoriginatedmoreloanstowhitesthantoAfricanAmericans orHispanicsacrossarangeof loanproducts,includingconventionalhomepurchaseloans; FHA,FSA/RHS,andVAhomepurchaseloans;refinanceloans;andhomeimprovement loansintheIndianapolis,Evansville,andFortWayne,IndianaMSAs.Thecommenteralso assertedthatOldNationalBankdisproportionatelydeniedapplicationsbyHispanicapplicantsineachof theseMSAs,suggestingapatternof denialratedisparities.32 TheBoard’sanalysisof HMDAdataforconventionalhomepurchaseloans;FHA,FSA/ RHS,andVAhomepurchaseloans;refinanceloans;andhomeimprovementloansbyOld NationalBankinitscombinedassessmentareas,aswellasintheIndianapolis,Evansville, andFortWayneMSAsindividually,didnotshowanysignificantdifferencesbetweenOld NationalBank’slendingandtheaggregatelendingfor2012and2013.33TheBoard’s reviewconfirmedthelevelsof lendingbyOldNationalBanktoAfricanAmericanandHispanicborrowersanddenialdisparityratiosnotedbythecommenter. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequal accesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.Although theHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas, HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhetherthebank excludedordeniedcredittoanygrouponaprohibitedbasis.34Fullyevaluatingabank’s compliancewithfairlendinglawsandregulationswouldrequireathoroughreviewof the bank’sapplicationandunderwritingpoliciesandprocedures,aswellasaccesstoinforma- 32 TheallegationsmadebythecommenterregardingOldNational’sfairlendingrecordareidenticaltothose madebythesamecommenterinconnectionwithOldNational’sapplicationtomergewithTowerFinancial Corporation(“Tower”),FortWayne,Indiana.TheBoardconsideredthoseallegationsandapprovedthatproposal.SeeOldNationalBancorp,FRBOrderNo.2014-6(April7,2014). 33 Aggregatelendingisdefinedasthenumberofloansoriginatedandpurchasedbyallreportinglendersinspecifiedincomecategoriesasapercentageoftheaggregatenumberofloansoriginatedandpurchasedbyall reportinglendersinthemetropolitanorassessmentarea.Inthiscontext,aggregatelendingisconsideredan indicatorofthelendingopportunitiesinthegeographicareainwhichthebankislocated. 34 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data.

LegalDevelopments:ThirdQuarter,2014 247 tioncontainedintheapplicationfiles,todeterminewhethertheobservedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwritingfactors. TheBoardhasconsultedwith,andplacedgreatemphasisontheviewsof,theOCCregardingitsevaluationof OldNationalBank’scompliancewithfairlendinglawsandregulations.InitsrecentOldNationalBankCRAPerformanceEvaluation,theOCCreported thatitdidnotfindevidenceof discriminatoryorotherillegalcreditpractices.Inaddition, inNovember2012andNovember2013,theOCCconductedtargetedexaminationsof Old NationalBank’sriskmanagementprogramforfairlendingcompliance,inwhichitassessed OldNationalBank’sfairlendingpolicies,procedures,andpractices,andthesetargeted examinationsdidnotresultinanyfindingsof discriminationrelatingtoOldNational Bank’sfairlendingpoliciesandproceduresortounderwritingdecisionsbythebank’s management. WithrespecttothespecificHMDAdataonhomepurchaseandhomeimprovementloans citedbythecommenter,OldNationalprovidedinformationreflectingnondiscriminatory reasonsforindividuallendingdecisions(i.e.,credithistory,inadequatecollateral,anddebtto-incomeratio).OldNationalalsoprovidedtheBoardwithdetailedinformationonOld NationalBank’straining,marketing,advertising,andunderwritingguidelinesreflectingits statedcommitmenttothepreventionof prescreening,discouragement,andexclusionof creditapplicationsonaprohibitedbasis. ThecommenteralsoallegedthatOldNationalhasabusinessstrategyof closingbranches andreducingfinancialservices,resultingininconveniencetolocalcommunities.35SeeOld NationalBancorp,FRBOrderNo.2014-6(April7,2014).TheBoardanalyzedOld NationalBank’scurrentbranchdistributionandbelievesitisreadilyaccessibletoLMI geographiesandindividualsinthebank’sassessmentareas.Twenty-eightpercentof Old NationalBank’sbranchesarelocatedinLMIcensustracts.36Accordingto2010census data,thepercentageof thepopulationinLMIgeographieswithinOldNationalBank’s assessmentareaswas27percent.Assuch,thepercentageof OldNationalBankbranches inLMIgeographiesslightlyexceedsthepercentageof thepopulationinLMIgeographies withintheOldNationalBankassessmentareas. OldNationalhasstatedthatOldNationalBankdoesnotintendtocloseanybranchesin connectionwiththeproposedtransaction.Althoughthebankclosedseveralbranchesin recentyears,thebankhasrepresentedthatthedecisionswerebasedonprofitabilityanalysisandproximitytootherbranchesandthatcommunityimpactwasassessedpriortoall closings.Further,theBoardhasconsideredthatfederalbankinglawprovidesaspecific mechanismforaddressingbranchclosings.Federallawrequiresaninsureddepositoryinstitutiontoprovidenoticetothepublicandtotheappropriatefederalsupervisoryagency beforeclosingabranch.37TheBoardhasreviewedOldNationalBank’sbranchclosing policyandnotesthattheOCCwillcontinuetoreviewOldNationalBank’sbranchclosing recordinthecourseof conductingCRAperformanceevaluations. 35 ThecommenterfurtherallegedthatOldNationalhasbeenclosingbranchesforthepurposeofkeepingitstotal assetsslightlybelow$10billiontoavoidincreasedregulatoryburdenundertheDodd-FrankWallStreet ReformandConsumerProtectionAct(“Dodd-FrankAct”).TheBoardnotesthatOldNationalalreadyhas morethan$10billionintotalassets,followingtheacquisitionofTower.SeeOldNationalBancorp,FRBOrder No.2014-6(April7,2014). 36 BranchdataareasofMay1,2014,andincludebranchesacquiredbyOldNationalthroughitsacquisitionof TowerinApril2014. 37 Section42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedbytheJointPolicy StatementRegardingBranchClosings(64FederalRegister34844(1999)),requiresthatabankprovidethepublicwithatleast30days’notice,andtheappropriatefederalsupervisoryagencywithatleast90days’notice, beforethedateofaproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsandothersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings.

248 FederalReserveBulletin|November2014 OldNational’sFairLendingProgram.OldNationalhasinstitutedpoliciesandprocedures tohelpensurecompliancewithallfairlendingandotherconsumerprotectionlawsand regulations.Thecompany’slegalandcomplianceriskmanagementprogramincludeswrittenpoliciesoutliningthebank’sresponsibilityforcompliancewithfairlendinglawsand regulations,fairlendingofficersservingwithineachof thebank’slendingdepartments, andrequiredannualfairlendingtrainingforapplicablestaff andtheboardof directors. OldNationalalsohasacentralizedunderwritingprocedure,anautomatedapplicationprocess,asecondreviewprocess,adocumentedexceptionprocess,andastandardpricing sheet. Inaddition,fairlendingreviewsareconductedquarterlyof individualbusinessunits,and comprehensivecorporatereviewsareperformedannuallytoensurecompliancewiththe bank’sunderwritingandpricingproceduresandwithfairlendinglaws.Thereviewsutilize HMDAandnon-HMDAdataandanalyzeanyfairlendingcomplaintstheinstitution receive.Further,theComplianceDepartmentconductsquarterlyfairlendingtestingand monitoring,includinganalysisof policiesandprocedures,reviewsof loanandapplication data,monitoringof exceptionsandoverrides,andreviewsof newproductsandinitiatives. OldNational’sriskmanagementsystemsanditspoliciesandproceduresforassuringcompliancewithfairlendinglawswouldbeimplementedatthecombinedorganization. OldNationalBankrepresentsthatitprovidesannualfairlendingtrainingtoallemployees involvedinanyaspectof thebank’scredittransactions.OldNationalalsostatesthatit conductsongoingmonitoringandanalysisof loandata,policies,andconsumercomplaints toensurecompliancewithfairlendingregulations. UnitedBank’sHMDAData.ThecommenteralsoexpressedconcernsthatUnitedBank wasnotmeetingthecreditneedsof minorityindividualsintheAnnArbor,Michigan MSA,basedon2012HMDAdata.Inparticular,thecommenterallegedthatUnitedBank originatedmoreloanstowhitesthantoAfricanAmericansorHispanicsacrossarangeof loanproducts,includingconventionalhomepurchaseloansandrefinanceloans,intheAnn ArborMSA.ThecommenteralsoassertedthatUnitedBankdisproportionatelydenied applicationsbyHispanicapplicantsintheMSA,suggestingapatternof denial-rate disparities. Ingeneral,theBoard’sreviewconfirmedthelevelsof lendingbyUnitedBanktoAfrican AmericanandHispanicborrowersanddenial-disparityratiosnotedbythecommenter.38 However,theBoard’sanalysisof HMDAdataforconventionalhomepurchaseloans; FHA,FSA/RHS,andVAhomepurchaseloans;refinanceloans;andhomeimprovement loansbyUnitedBankinitscombinedassessmentareas,aswellasintheAnnArborMSA individually,didnotshowanysignificantdifferencesbetweenUnitedBank’slendingand theaggregatelendingfor2012and2013.Inaddition,intheUnitedBankEvaluation, theFDICreportedthatitdidnotfindevidenceof discriminatoryorotherillegalcredit practices.OldNationalrepresentsthatitsfairlendingprogramwillbeimplementedacross thecombinedorganization. C.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. 38 TheBoardnotes,however,thatUnitedBankreportedoriginatingsixrefinanceloanstoAfricanAmericansin 2012,nottwoasstatedbythecommenter.

LegalDevelopments:ThirdQuarter,2014 249 OldNationalrepresentsthattheproposalwouldprovideopportunitiestoachievevarious operationalefficienciesandeconomiesof scale,whichwouldbenefitcurrentandfuture customersof thecombinedorganizationthroughmoreefficientandcost-effectivebanking services.OldNationalassertsthatthetransactionhasthepotentialtobenefitallaspectsof United’soperations,particularlyitslendingfunctions,assetandliabilitymanagement,and dataprocessingcapabilities.OldNationalalsostatesthatthecombinedorganization’s largerlendinglimitwouldallowOldNationaltobettermeetthelendingneedsof itscorporatecustomersandmoreeffectivelycompeteforlargercommercialcustomers. OldNationalstatesthattheproposalwouldprovidecustomerswithanexpandednetwork of over190branchesinIndiana,Michigan,Illinois,Kentucky,andOhio.OldNational notesthatthecombinedorganizationwouldprovideUnitedBank’scustomerswithan expandedandmoresophisticatedrangeof productsandservicesthanUnitedBankcurrentlyoffers,includinganenhancedrangeof consumerservicesanddepositaccounts.Further,insuranceproductswillbemadeavailabletoUnitedBank’scustomersthroughOld NationalInsurance,whichoffersabroadarrayof insuranceproductstoindividualsand businessesacrosstheUnitedStates. ConclusiononConvenienceandNeedsConsideration TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyOldNational,confidentialsupervisoryinformation,andthepubliccommentontheproposal.Basedonthe Board’sanalysisof theHMDAdata,itsevaluationof themortgagelendingoperationsand complianceprogramsof OldNationalBankandUnitedBank,itsreviewof examination reports,anditsconsultationswithotheragencies,theBoardconcludesthattheconvenience andneedsfactor,includingtheCRArecordof theinsureddepositoryinstitutionsinvolved inthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”39 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.40These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution 39 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 40 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

250 FederalReserveBulletin|November2014 thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.41 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,OldNationalwould haveapproximately$11.2billioninconsolidatedassetsandwouldbethe98thlargestfinancialinstitutionintheUnitedStates.TheBoardgenerallypresumesthatamergerresulting inafirmwithlessthan$25billionintotalconsolidatedassetswouldnotposesignificant riskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransaction wouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Thecompaniesengageandwouldcontinuetoengageintraditionalcommercialbanking activities.Theresultingorganizationwouldexperiencesmallincreasesinthemetricsthat theBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,with theresultingfirmgenerallyrankingoutsideof thetop100U.S.financialinstitutionsin termsof thosemetrics.Forexample,OldNational’sintrafinancialassetsandliabilities wouldconstituteanegligibleshareof thesystemwidetotal,bothbeforeandafterthetransaction.Theresultingorganizationwouldnotengageincomplexactivities,norwoulditprovidecriticalservicesinsuchvolumethatdisruptioninthoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtrade orresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.42Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyOldNationalwithalltheconditionsimposedinthisOrder,includingreceipt of allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitments aredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. 41 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012). 42 ThecommenterrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCAct doesnotrequiretheBoardtoholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately presenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.Inthe Board’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submittedawrittencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequest doesnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedby apublichearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnotpresentthe commenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

LegalDevelopments:ThirdQuarter,2014 251 Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof St.Louis,actingpursuanttodelegated authority. Byorderof theBoardof Governors,effectiveJuly14,2014. Votingforthisaction:ChairYellen,andViceChairmanFischer,GovernorsTarullo,Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Order Issued Under Section 4 of the Bank Holding Company Act Chemical Financial Corporation Midland, Michigan OrderApprovingtheAcquisitionof aSavingsAssociation,Mergerof DepositoryInstitutions, andEstablishmentof Branches FRBOrderNo.2014–16(September30,2014) ChemicalFinancialCorporation(“Chemical”),Midland,Michigan,afinancialholding companywithinthemeaningof theBankHoldingCompanyAct(“BHCAct”),has requestedtheBoard’sapprovalundersections4(c)(8)and4(j)of theBHCAct1toacquire NorthwesternBancorp,Inc.(“Northwestern”),anditswhollyownedsubsidiary,NorthwesternBank,astatesavingsbankthathaselectedtobetreatedasasavingsassociationfor purposesof section10(l)of theHomeOwners’LoanAct,2bothof TraverseCity, Michigan. Inaddition,Chemical’ssubsidiarystatememberbank,ChemicalBank,alsoof Midland, hasrequestedtheBoard’sapprovaltomergewithNorthwesternBankpursuanttosection18(c)of theFederalDepositInsuranceAct(“BankMergerAct”),withChemicalBank asthesurvivingentity.3ChemicalBankalsohasappliedundersection9of theFederal ReserveAct(“FRA”)4toestablishandoperate25branchesatthelocationsof NorthwesternBank’smainofficeandbranches. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(79FederalRegister23977(Apr.29,2014))and inaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.5Asrequired bytheBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequested fromtheUnitedStatesAttorneyGeneral.Thetimeforfilingcommentshasexpired, andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactors setforthintheBHCAct,theBankMergerAct,andtheFRA. Chemical,withtotalconsolidatedassetsof approximately$6.2billion,isthe154thlargest depositoryorganizationintheUnitedStates,controllingdepositsof approximately $5.1billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured 1 12U.S.C.§§1843(c)(8)and(j). 2 12U.S.C.§1467a(l). 3 12U.S.C.§1828(c). 4 12U.S.C.§321.Theselocationsarelistedintheappendix. 5 12CFR262.3(b).

252 FederalReserveBulletin|November2014 depositoryinstitutionsintheUnitedStates.6ChemicalBankoperatesbranchesonlyin Michiganandistheninthlargestinsureddepositoryinstitutioninthestate,withitsdepositsrepresenting2.9percentof thetotalamountof depositsininsureddepositoryinstitutionsinMichigan.7 Northwestern,withtotalconsolidatedassetsof approximately$855million,controls depositsof approximately$758million.NorthwesternBankoperatesbranchesonlyin Michiganandisthe25thlargestinsureddepositoryinstitutioninthestate,withitsdeposits representing0.5percentof thetotalamountof depositsininsureddepositoryinstitutions inMichigan. Onconsummationof theproposal,Chemicalwouldbecometheeighthlargestdepository organizationinMichigan,controllingdepositsof approximately$5.9billion,representing 3.3percentof depositsininsureddepositoryinstitutionsinMichigan. TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.8TheBoardrequiresthatsavingsassociationsacquiredbybankholding companiesconformtheirdirectandindirectactivitiestothosepermissibleforbankholding companiesundersection4of theBHCAct.9Chemicalhascommittedthatalltheactivities of Northwesternanditsnonbankingsubsidiarieswillconformtothosepermissibleunder section4of theBHCActandRegulationYorbedivested.10 CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.11TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof communitiestobeserved.12Inaddi- 6 NationwidedepositrankingdataareasofDecember31,2013.AssetdataareasofJune30,2014.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks,savingsbanks,savingsassociations,and non-deposittrustcompanies. 7 StatemarketshareandrankingdataareasofJune30,2013. 8 12CFR225.28(b)(4)(ii).NorthwesternBankmeetsthedefinitionof“savingsassociation”undertheBHCAct. 12U.S.C.§1841(j)(3). 9 12CFR225.28(b)(4)(ii). 10 TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”)amendedsection4of theBHCActtoprovidethat,ingeneral,theBoardmaynotapproveanapplicationbyabankholdingcompanytoacquireaninsureddepositoryinstitutionifthehomestateofthetargetinsureddepositoryinstitution isastateotherthanthehomestateofthebankholdingcompanyandtheapplicantcontrols,orwouldcontrol, morethan10percentofthetotalamountofdepositsofinsureddepositoryinstitutionsintheUnitedStates. Dodd-FrankAct§623(b),codifiedat12U.S.C.§1843(i)(8).ForpurposesoftheBHCAct,thehomestate ofbothChemicalandNorthwesternBankisMichiganand,therefore,section4(i)(8)oftheBHCActdoesnot applytothistransaction.Also,asnoted,consummationoftheproposalwouldresultinChemicalcontrolling lessthan1percentofthedepositsofU.S.insureddepositoryinstitutions. 11 12U.S.C.§1828(c)(5). 12 12U.S.C.§1828(c)(5)(B).Inadditiontoassessingthecompetitiveeffectsoftheproposal,ineverycaseunder theBankMergerAct,theBoardmusttakeintoconsiderationthefinancialandmanagerialresourcesandfuture prospectsoftheexistingandproposedinstitution,theconvenienceandneedsofthecommunitytobeserved, recordsofcompliancewithanti-money-launderinglaws,andtherisktothestabilityoftheUnitedStatesbankingorfinancialsystem.Id.at§1828(c)(5).

LegalDevelopments:ThirdQuarter,2014 253 tion,theBoardmustconsiderthecompetitiveeffectsof aproposaltoacquireasavings associationunderthepublicbenefitsfactorof section4(j)of theBHCAct.13 ChemicalBankandNorthwesternBankcompetedirectlyintheMichiganbankingmarkets of Roscommon,Cadillac,andGaylord.14TheBoardhasreviewedthecompetitiveeffects of theproposalinthosebankingmarketsinlightof allthefactsof record.Inparticular, theBoardhasconsideredthenumberof competitorsthatwouldremaininthebanking markets,therelativesharesof thetotaldepositsininsureddepositoryinstitutionsinthe markets(“marketdeposits”)thatChemicalBankwouldcontrol,15theconcentrationlevels of marketdepositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJBankMergerGuidelines”),16andothercharacteristicsof the markets. Thestructuraleffectsthatconsummationof theproposalwouldhaveintheRoscommon, Cadillac,andGaylordbankingmarketswarrantadetailedreviewbecausetheconcentrationlevelsonconsummationwouldexceedthethresholdlevelsintheDOJBankMerger Guidelines.Basedoninitialcompetitivescreeningdata,theincreasesinthemarkets’HHIs wouldbe,respectively,232,230,and473tolevelsof 2464,2613,and2407. Onreview,itappearsthattwotypesof adjustmentstotheinitialcompetitivescreeningdata arewarranted.First,theBoardhasevaluatedthecompetitiveinfluenceof twothriftinstitutions(includingNorthwesternBank)operatingintheRoscommon,Cadillac,andGay- 13 12U.S.C.§1843(j)(2)(A).Section4(j)(2)(A)oftheBHCActrequirestheBoardtoconsiderwhethertheproposedacquisitionofNorthwesternanditsnonbankingsubsidiaries“canreasonablybeexpectedtoproduce benefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweigh possibleadverseeffects,suchasundueconcentrationofresources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityoftheUnitedStatesbankingorfinancialsystem.” Id.Aspartofitsevaluationofthesefactors,theBoardreviewsthefinancialandmanagerialresourcesofthe companiesinvolved,theeffectoftheproposaloncompetitionintherelevantmarkets,therisktothestabilityof theUnitedStatesbankingorfinancialsystem,recordsofcompliancewithanti-money-launderinglaws,andthe publicbenefitsoftheproposal.See12CFR225.26;see,e.g.,CapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012)(“CapitalOneOrder”);BankofAmericaCorporation/Countrywide,94Federal ReserveBulletinC81(2008);WachoviaCorporation,92FederalReserveBulletinC138(2006);BancOneCorporation,83FederalReserveBulletin602(1997).Inactingonanoticetoacquireasavingsassociation,theBoard reviewstherecordsofperformanceoftherelevantinsureddepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”). 14 TheRoscommonbankingmarketisdefinedasCrawfordCounty,OscodaCounty,andRoscommonCounty,all ofMichigan.TheCadillacbankingmarketisdefinedasMissaukeeCounty,WexfordCounty,andthenorthern halfofOsceolaCounty,includingBurdell,Sherman,Highland,Marion,LeRoy,RoseLake,Hartwick,and MiddleBranchTownships,allofMichigan.TheGaylordbankingmarketisdefinedasOtsegoCountyand MontmorencyCounty,excludingHillmanandRustTownships,allofMichigan. 15 Depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryof depositsdataasofJune30,2013,andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsare included.TheBoardhaspreviouslyindicatedthatthriftinstitutionshavebecome,orhavethepotentialto become,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserve Bulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularly hasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,First Hawaiian,Inc.,77FederalReserveBulletin53(1991). 16 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionhaveissuedrevisedHorizontalMerger Guidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/ 10-at-938.html.

254 FederalReserveBulletin|November2014 lordbankingmarkets.17Eachinstitution’scommercialandindustrialloanportfoliosare similartothoseof commercialbanksinthemarket,asmeasuredintermsof theratiosof thosetypesof loanstototalloansandassets.18Accordingly,theBoardhasconcludedthat depositscontrolledbytheseinstitutionsshouldbeweightedat100percentinthemarketsharecalculations. Second,fivecommunitycreditunionsexertacompetitiveinfluenceintheRoscommon, Cadillac,andGaylordbankingmarkets.Eachinstitutionoffersawiderangeof consumer bankingproducts,operatesstreet-levelbranches,andhasbroadmembershipcriteriathat includealmostallof theresidentsintherelevantbankingmarket.19Accordingly,theBoard findsthatthesecircumstanceswarrantincludingthedepositsof thesecreditunionsata 50percentweightinestimatingmarketinfluence.Thisweightingtakesaccountof thelimitedlendingdonebythesecreditunionstosmallbusinessesrelativetobanks’lendinglevels. Thesetwotypesof adjustmentssuggestthattheresultingmarketconcentrationof theproposedtransactioninallthesemarketsislesssignificantthanwouldappearfromthemeasurementsfocusedoncommercialbankcompetitors.Inparticular,withthesetwoadjustmentstoreflectcompetitionbyotherinsureddepositoryinstitutionsinthemarket,the marketconcentrationlevelsintheRoscommon,Cadillac,andGaylordbankingmarketsas measuredbytheHHIwouldincreaseby261,329,and403tolevelsof 1909,2338,and 1914,respectively,andthemarketsharesof Chemicalresultingfromthetransactionwould increaseinthesemarketsfrom20.4,21.4,and13.6percentto26.8,29.1,and28.4percent, respectively. TheBoardalsohasconsideredwhetherotherfactorsmitigatethecompetitiveeffectsof the proposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheRoscommon,Cadillac,andGaylordbankingmarkets.Thenumberand strengthof factorsnecessarytomitigatethecompetitiveeffectsof aproposaldependon thesizeof theincreaseandtheresultinglevelof concentrationinabankingmarket.20In eachmarket,therecordindicatesthattheproposalisnotlikelytohaveasignificantly adverseimpactoncompetition. 17 Thestandardtreatmentofthriftsinthecompetitiveanalysisistogivetheirdeposits50percentweightingto reflecttheirlimitedlendingtosmallbusinessesrelativetobanks’lendinglevels.However,theBoardpreviously hasindicatedthatitmayconsiderthecompetitivenessofathriftinstitutionatalevelgreaterthan50percentof itsdepositswhenappropriateifcompetitionfromtheinstitutioncloselyapproximatescompetitionfromacommercialbank.See,e.g.,BanknorthGroup,Inc.,75FederalReserveBulletin703(1989).Where,ashere,thefacts andcircumstancesofabankingmarketindicatethataparticularthriftservesasasignificantsourceofcommercialloansandprovidesabroadrangeofconsumer,mortgage,andotherbankingproducts,theBoardhas concludedthatcompetitionfromsuchathriftcloselyapproximatescompetitionfromacommercialbankand thatdepositscontrolledbytheinstitutionshouldbeweightedat100percentinmarket-sharecalculations.See, e.g.,RiverValleyBancorp,FRBOrderNo.2012-10(October17,2012);RegionsFinancialCorporation,93FederalReserveBulletinC16(2007);andBanknorthGroup,Inc.,supra. 18 Thesethriftinstitutionseachhavearatioofcommercialandindustrialloanstoassetsofmorethan5percent, whichiscomparableto,orgreaterthan,theratioforsomecommercialbanksinthemarketandgreaterthan theratioforsomethriftinstitutionsthattheBoardhaspreviouslyfoundtobefullcompetitorsofcommercial banks. 19 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionswiththesefeaturesasa mitigatingfactor.See,e.g.,MitsubishiUFJFinancialGroup,Inc.,FRBOrderNo.2012-12(November14, 2012);OldNationalBancorp,FRBOrderNo.2012-9(August30,2012);UnitedBankshares,Inc.(orderdated June20,2011),97FederalReserveBulletin19(2ndQuar.2011);ThePNCFinancialServicesGroup,Inc.,94 FederalReserveBulletinC38(2008);ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65 (2007);RegionsFinancialCorporation,supra;PassumpsicBancorp,92FederalReserveBulletinC175(2006); WachoviaCorporation,92FederalReserveBulletinC183(2006). 20 SeeNationsBankCorp.,84FederalReserveBulletin129(1998).

LegalDevelopments:ThirdQuarter,2014 255 RoscommonBankingMarket.IntheRoscommonbankingmarket,theHHIeffectsof the transactionwouldexceedtheDOJGuidelinesbyamodestamount.21Chemicalwould remainthesecondlargestcompetitorwitha26.8percentdepositmarketshare.The Roscommonbankingmarketexhibitsabalancedmarketstructure,witheightothercompetitivelyactiveinsureddepositoryinstitutionsremaining,threeof whichwouldcontinue toeachholdgreaterthan9percentof depositmarketshare,includingthemarket’slargest participantwith28.7percentof marketdeposits.Thepresenceof viablecompetitorssuggeststhatChemicalwouldhavelimitedabilitytounilaterallyofferlessattractivetermsto consumers. CadillacBankingMarket.IntheCadillacbankingmarket,Chemicalwouldremainthesecondlargestcompetitorwitha29.1percentdepositmarketshare.However,eightothercompetitivelyactiveinsureddepositoryinstitutionswouldremain,threeof whichwouldcontinuetoeachholdgreaterthan9percentof depositmarketshare.TheCadillacbanking markethasexperiencedasubstantialdecreaseinmarketconcentrationinrecentyears,with theHHIdecliningby572pointsoverthelastfiveyears.Inaddition,recententryand expansionaryactivitysuggeststhatthemarketisattractivetopotentialcompetitors.One bankenteredthemarketdenovoin2012,andanexistingcompetitoropenedanewbranch in2011. GaylordBankingMarket.IntheGaylordbankingmarket,Chemicalwouldbecomethe largestcompetitorwitha28.4percentdepositmarketshare.However,sevenothercompetitivelyactiveinsureddepositoryinstitutionswouldremain,fourof whichwouldcontinueto eachholdgreaterthan11percentof depositmarketshare.TheGaylordbankingmarket hasexperiencedasubstantialdecreaseinmarketconcentrationinrecentyears,withthe HHIdecliningby284pointsoverthelastfiveyears.Inaddition,recententryandexpansionaryactivitysuggeststhatthemarketmaybeattractivetopotentialcompetitors.One bankenteredthemarketdenovoin2012,andacreditunioncompetitorcurrentlyhasa newbranchunderconstructiontobeopenedin2014. OtherFactorsandConclusionRegardingCompetitiveFactors TheDOJconductedareviewof thepotentialcompetitiveeffectsof themergerandhas advisedtheBoardthatconsummationwouldnotbelikelytohaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebanking agencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtothe proposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheRoscommon,Cadillac,andGaylordbankingmarkets,orinanyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. 21 Anadditionalassessmentofthetransaction,basedoncompetitors’sharesofthetotalnumberofbranchesin themarket,alsosupportstheviewthatthestructuraleffectsofthetransactionwouldnotsubstantiallylessen competition.Branchesareonewaybanksattractcustomersandareabletoprovideservicestocustomers throughoutthemarket(see,forexample,RobertM.Adams,KennethP.Brevoort,andElizabethK.Kiser (2007),“WhoCompeteswithWhom?TheCaseofDepositoryInstitutions,”JournalofIndustrialEconomics, vol.55,no.1,pp.141-167;AstridDick(2008),“DemandEstimationandConsumerWelfareintheBanking Industry,”JournalofBankingandFinance,vol.32,no.8,pp.1661-1676;andKatherineHoandJoyIshii (2011),“LocationandCompetitioninRetailBanking,”InternationalJournalofIndustrialOrganization,vol. 29,no.5,pp.537-546.).ThechangeintheproformabranchHHI,definedasthesumofthesquaredbranch shareforeachinstitutioninthemarket(wherethebranchshareisdefinedasaninstitution’snumberof branchesinthemarketdividedbythetotalnumberofbranchesinthemarket),intheRoscommonmarket wouldbe200pointstoalevelof1538,assuminga50percentweightforcreditunionbranches.

256 FederalReserveBulletin|November2014 Financial,Managerial,andOtherSupervisoryFactors Inreviewingthisproposalundersection4of theBHCAct,theBankMergerAct,andthe FRA,theBoardhasconsideredthefinancialandmanagerialresourcesandfutureprospectsof theinstitutionsinvolved.Initsevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoard evaluatesthefinancialconditionof theproformaorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardconsidersthefutureprospectsof theorganizations involvedintheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthe costsof theproposalandtheproposedintegrationof theoperationsof theinstitutions.In assessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobe especiallyimportant. ChemicalandChemicalBankarewellcapitalizedandwouldremainsoonconsummation of theproposal.Theproposedtransactionisstructuredasacashpurchaseof shares,and thetotalconsiderationforthetransactionwouldbeapproximately$120million.Chemical expectstofundthetransactionwithitsinvestmentsandcash-equivalentsonhand.The assetquality,earnings,andliquidityof Chemicalareconsistentwithapproval,andChemicalappearstohaveadequateresourcestoabsorbthecostsof theproposalandtocomplete theintegrationof ChemicalBank’sandNorthwesternBank’soperations.Futureprospects areconsideredconsistentwithapproval.Basedonitsreviewof therecord,theBoardfinds thatChemicalhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand hasreviewedtheexaminationrecordsof ChemicalandChemicalBank,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the Boardhasconsidereditsandotherrelevantfinancialsupervisoryagencies’supervisory experienceswiththeorganizationsandtheorganizations’recordsof compliancewith applicablebankingandanti-money-launderinglaws.TheBoardalsohasconsidered Chemical’splansforimplementingtheproposal.ChemicalandChemicalBankareconsideredtobewellmanaged,andtheirboardsof directorsandseniormanagementhavesignificantbankingexperience.Chemicalwouldoperatetheacquiredbranchesof Northwestern BankunderChemical’sexistingpoliciesandprocedures,whichareconsideredtobesatisfactory.Inaddition,Chemical’smanagementhastheexperienceandresourcesthatshould allowthecombinedorganizationtooperateinasafeandsoundmanner. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolved,as wellastherecordsof effectivenessof ChemicalandChemicalBankincombattingmoneylaunderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardmustconsidertheconvenienceandneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof the relevantdepositoryinstitutionsundertheCRA.22Asnoted,theBoardalsomustreviewthe recordsof performanceundertheCRAof therelevantinsureddepositoryinstitutions whenactingonanoticeundersection4of theBHCActtoacquireasavingsassociation. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddeposi- 22 12U.S.C.§2901etseq.

LegalDevelopments:ThirdQuarter,2014 257 toryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,23andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.24 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof ChemicalBankandNorthwesternBank,informationprovidedby Chemical,andconfidentialsupervisoryinformation. A.Recordof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancebasedonthe CRAevaluationcompletedbythatinstitution’sprimaryregulator.25TheCRArequires thattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.26Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailed,on-siteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof ChemicalBank.ChemicalBankwasassignedanoverall“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserveBankof Chicago(“ReserveBank”)inAugust2013(“ChemicalBankEvaluation”).27Chemical Bankreceived“outstanding”ratingsfortheLendingTest,theInvestmentTest,andthe ServiceTest.28 InevaluatingtheLendingTest,ReserveBankexaminersnotedthatthebankoriginateda substantialmajorityof loanswithinitsassessmentareasandshowedexcellentresponsivenesstocreditneedsthroughoutitsassessmentareas.Examinersnotedthatthebankhadan excellentrecordof servingthecreditneedsof verysmallbusinesses.Further,Chemical Bank’sgeographicdistributionof loansreflectedexcellentpenetrationthroughoutthe assessmentareas.ExaminersalsonotedthatChemicalBankisaleaderinmakingcommunitydevelopmentloansinsideitsassessmentareasandusesflexibleandinnovativelending practicesinservingassessmentareaneeds.Examinersnotedthatthedollaramountof ChemicalBank’slendingincreasedbyapproximately11.0percentfromtheprior evaluation. InevaluatingtheInvestmentTest,ReserveBankexaminersfoundthatChemicalBankhad providedanexcellentlevelof qualifiedinvestments,donations,andgrants.Theexaminers 23 12U.S.C.§2901(b). 24 12U.S.C.§2903. 25 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (March11,2010). 26 12U.S.C.§2906. 27 TheChemicalBankEvaluationreviewedhomemortgageandsmallbusinesslendingdatafromJanuary1,2011, throughDecember31,2012.Theevaluationperiodforcommunitydevelopmentloans,investments,andserviceswasJuly1,2011,throughAugust26,2013. 28 TheChemicalBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The ChemicalBankEvaluationincludedafull-scopereviewoffiveassessmentareas:theGrandRapids-Wyoming MetropolitanStatisticalArea(“MSA”);theNiles-BentonHarborMSA;theBayCityMSA;theKalamazoo- PortageMSA;andtheNorthCentral-Non-MSA.Alimited-scopereviewwasperformedintheBattleCreek MSA;theFlintMSA;theHolland-GrandHavenMSA;theSaginaw-SaginawTownshipNorthMSA;the SouthBend-Mishawaka(Multi-State)MSA(CassCounty,Michigan,only);theEast-Non-MSA;theSouth- Non-MSA;andtheWest-Non-MSA.

258 FederalReserveBulletin|November2014 notedthatthebankdemonstratedexcellentresponsivenesstocreditandcommunitydevelopmentneeds.Thebankalsomadeextensiveuseof innovativeandcomplexinvestmentsto supportcommunitydevelopmentinitiatives.ExaminersnotedthatChemicalBank’sCRAqualifiedinvestmentsincreasedbyapproximately32.9percentinnumberand50.5percent indollarsfromthepriorevaluation. InevaluatingtheServiceTest,examinersnotedthatChemicalBank’sbranchlocation changeshadimprovedtheaccessibilityof itsdeliverysystems,particularlytoLMIgeographiesandLMIindividuals.Examinersalsofoundthatthebank’sdeliverysystemswere readilyaccessibletothebank’sgeographiesandindividualsof differentincomelevelsinthe assessmentarea.Further,examinershighlightedthatChemicalBankwasaleaderinprovidingcommunitydevelopmentservicesthroughoutitsassessmentareas. CRAPerformanceof NorthwesternBank.NorthwesternBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalDeposit InsuranceCorporationinApril2014(“NorthwesternBankEvaluation”),withratingsof “satisfactory”fortheLendingTestandtheCommunityDevelopmentTest.29 InevaluatingtheLendingTest,examinersnotedthatthebankoriginatedasubstantial majorityof loanswithinitsassessmentarea.30Examinersalsofoundthatthebank’sgeographicdispersionof loansreflectedreasonabledispersionthroughoutitsassessmentarea, andthebank’sdistributionof loanstoborrowersreflectedreasonablepenetrationtobusinessesof differentsizesandamongindividualsof differentincomelevels.Further,examinersconcludedthatNorthwesternBank’sloan-to-depositratiowasreasonablegivenitssize, financialcondition,andassessmentareacreditneeds. InevaluatingtheCommunityDevelopmentTest,examinersnotedthatNorthwestern Bank’slevelof communitydevelopmentperformancedemonstratedadequateresponsivenesstothecommunitydevelopmentneedsof itsassessmentareathroughqualifiedloans, investments,andservices,consideringitscapacityandtheneedforsuchactivitiesinits assessmentarea.ExaminersalsonotedthatNorthwesternBankdidnotreceiveanycomplaintsaboutitsperformanceinmeetingassessmentareacreditneeds. B.AdditionalInformationonConvenienceandNeedsof CommunitiestobeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. Asdiscussedmorefullybelow,theproposedtransactionwouldprovideNorthwestern Bank’scustomerswithalargernetworkof branchesandATMsforcustomerstoconvenientlyaccess,abroaderarrayof bankingproductsandservices,andhigherlegallending limits.Chemicalfurtherrepresentsthatthecombinedorganizationwillofferawidervariety of productsandservicesthataretailoredtomeettheneedsof LMIgeographiesandindi- 29 TheNorthwesternBankEvaluationwasconductedusingtheIntermediateSmallBankCRAExaminationProcedures.TheLendingTestincludedareviewofhomemortgageloansandsmallbusinessloansfortheperiodof January1,2012,toDecember31,2013.TheCommunityDevelopmentTestwasevaluatedfromareviewof communitydevelopmentloans,investments,andserviceactivitiessinceNorthwesternBank’slastCRAevaluationonApril1,2011.TheNorthwesternBankEvaluationreflectedtheactivitiesofbothNorthwesternBank anditsaffiliatedmortgagecompany,NorthwesternMortgageCompany.NorthwesternBankisnotareporter asdefinedundertheHomeMortgageDisclosureActbecauseitdoesnothaveanyofficeswithinaMSA. 30 NorthwesternBankhasonedesignatedassessmentarea,comprisedof14countieswithinMichigan,including Emmet,Charlevoix,Otsego,Antrim,Crawford,Roscommon,Kalkaska,Missaukee,GrandTraverse,Leelanau, Benzie,Wexford,Manistee,andMason,allofwhicharewithinnonmetropolitanareas.

LegalDevelopments:ThirdQuarter,2014 259 viduals.AlthoughChemicalplanstocloseoneNorthwesternBankbranchfollowingthe mergerandtoconsolidatethreeotherswithnearbyChemicalBankbranches,NorthwesternBankcustomersneverthelesswouldbenefitfromhavingalargernetworkof banking officesthroughoutMichigan. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyChemical,andconfidentialsupervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceandconsumercomplianceprogramsof ChemicalBankandNorthwesternBank,its reviewof examinationreports,anditsconsultationswithotheragencies,theBoardconcludesthattheconvenienceandneedsfactor,includingtheCRArecordsof theinsured depositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof the application. FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”tothelistof possibleadverseeffectsthattheBoardmustweighagainstany expectedpublicbenefitsinconsideringproposalsundersection4(j)of theBHCAct,andas afactorthatmustbeconsideredundersection18(c)of theBankMergerAct.31 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of themergedfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.32In additiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchasthe opaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthat canberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothebroader economy.33 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theUnitedStates bankingorfinancialsystem.Afterconsummation,Chemicalwouldhaveapproximately $7.0billioninconsolidatedassetsandwouldbethe134thlargestfinancialinstitutioninthe UnitedStatesasmeasuredbyassets.TheBoardgenerallypresumesthatamergerthat involvesanacquisitionof lessthan$2billioninassets,orresultsinafirmwithlessthan $25billionintotalconsolidatedassets,willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors. Suchadditionalriskfactorsarenotpresentinthistransaction.Chemicalengagesinand 31 Dodd-FrankAct,.§604(e)and(f),codifiedat12U.S.C.§§1843(j)(2)(A)and1828(c)(5).Otherprovisionsof theDodd-FrankActimposeasimilarrequirementthattheBoardconsiderorweightheriskstofinancialstabilityposedbyamerger,acquisition,orexpansionproposalbyafinancialinstitution.Seesections163,173, and604(d)oftheDodd-FrankAct. 32 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 33 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneOrder.

260 FederalReserveBulletin|November2014 wouldcontinuetoengageintraditionalcommercialbankingactivities.TheresultingorganizationwouldexperiencesmallincreasesinthemetricsthattheBoardconsidersto measureaninstitution’scomplexityandinterconnectedness,withtheresultingfirmgenerallyrankingoutsideof thetop100U.S.financialinstitutionsintermsof thosemetrics.For example,Chemical’sintrafinancialsystemassetsandliabilitieswouldcompriseanegligible shareof thesystem-widetotal,bothbeforeandafterthetransaction,andtheresulting organizationwouldcontrollessthan0.1percentof theassetsof allU.S.depositoryinstitutions.Theresultingorganizationwouldnotengageincomplexactivities,norwoulditprovidecriticalservicesinsuchvolumethatdisruptioninthoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtrade orresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. PublicBenefitsof theProposal Asnotedabove,inconnectionwithanoticeundersection4(c)(8)of theBHCAct,section4(j)of theActrequirestheBoardto“considerwhetherperformanceof theactivityby abankholdingcompanyorasubsidiaryof suchcompanycanreasonablybeexpectedto producebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgains inefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”34 TheBoardhasconsideredthattheproposalwouldallowChemicalBanktoexpandthe rangeof financialproductsandservicesavailabletoexistingcustomersof Northwestern Bank.Chemicalrepresentsthatthemergerwouldenhancetheabilityof thecombinedentitiestoemploycapitalwhereitmaybebestutilized,tocontinueandexpandtheservices presentlyprovidedtotheirrespectivecustomers,andtorespondtochangingmarketconditionsandcommunityneeds.ChemicalrepresentsthattheproposedtransactionwouldprovideNorthwesternBank’scustomerswithabroaderarrayof bankingproductsandservicesofferedbyChemicalBank,includingportfoliomortgageloans,consumerloans, commercialandindustrialloans,andtreasurymanagementproducts.Chemicalalsostates thatthecombinedorganizationwouldhavehigherlegallendinglimitsthaneitherChemical BankorNorthwesternBank.Inaddition,customersof bothinstitutionswouldbenefit fromamoreexpansivebranchandATMnetwork.TheBoardhasdeterminedthattheconductof theproposednonbankingactivitieswithintheframeworkof RegulationY,Board precedent,andthisorderarenotlikelytoresultinsignificantadverseeffects,suchasundue concentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsound bankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancialsystem. Onthebasisof theentirerecord,includingthecommitmentsmadeinthiscaseandconditionsnotedinthisorder,andforthereasonsdiscussedabove,theBoardbelievesthatthe balanceof benefitsandpotentialadverseeffectsrelatedtocompetition,financialand managerialresources,convenienceandneeds,financialstability,andotherfactorsweighin favorof approvalof thisproposal.Accordingly,theBoardhasdeterminedthatthebalance of thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistent withapproval. 34 12U.S.C..§1843(j)(2).

LegalDevelopments:ThirdQuarter,2014 261 Establishmentof Branches Asnoted,ChemicalBankhasappliedundersection9of theFRAtoestablishbranchesat thecurrentlocationsof NorthwesternBank,andtheBoardhasconsideredthefactorsitis requiredtoconsiderwhenreviewinganapplicationunderthatsection.35Specifically,the BoardhasconsideredChemicalBank’sfinancialcondition,management,capital,actions inmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance, andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfinds thosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthatthe noticeandapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,the Boardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCAct,theBankMergerAct,andtheFRA.Approvalof thenoticeand applicationsisspecificallyconditionedoncompliancebyChemicalwithallthecommitmentsmadeinconnectionwiththisproposalandtheconditionssetforthinthisorder.The commitmentsandconditionsaredeemedtobeconditionsimposedinwritingbytheBoard and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposedtransactionmaynotbeconsummatedbeforethefifteenthcalendardayafter theeffectivedateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof this order,unlesssuchperiodisextendedforgoodcausebytheBoardorbytheReserveBank, actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveSeptember30,2014. Votingforthisaction:ChairYellen,andViceChairmanFischer,GovernorsTarullo,Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix MichiganBranchestoBeAcquired Acme 1. 5300USHighway31North Cadillac 2. 1573NorthMitchellStreet 3. 150GraniteStreet Charlevoix 4. 1425BridgeStreet ElkRapids 5. 97RiverStreet 35 12U.S.C.§322;12CFR208.6.

262 FederalReserveBulletin|November2014 Gaylord 6. 711WestMainStreet 7. 2091SouthOstegoAvenue HoughtonLake 8. 5213WestHoughtonLakeDrive Interlochen 9. 2112M-137 Kalkaska 10. 112SouthCedarStreet Kingsley 11. 111NorthBrownsonAvenue Leland 12. 115NorthMainStreet Ludington 13. 101EastCourtStreet 14. 3965WestUSHighway10 Manistee 15. 325FirstStreet Petoskey 16. 300HowardStreet 17. 919SpringStreet SuttonsBay 18. 105WestFourthStreet 19. 212NorthSaintJosephStreet TraverseCity 20. 625SouthGarfieldTraverseCity 21. 107EastFrontStreet 22. 613WestFourteenthSt. 23. 4205USHighway31South 24. 203UnionStreet 25. 13936SouthWestBayShoreDrive

LegalDevelopments:ThirdQuarter,2014 263 Order Issued Under Bank Merger Act ANB Bank Denver, Colorado OrderApprovingtheMergerof BanksandtheEstablishmentof Branches FRBOrderNo.2014–14(September11,2014) ANBBank(“ANB”),Denver,Colorado,1astatememberbank,hasrequestedtheBoard’s approvalundersection18(c)of theFederalDepositInsuranceAct2(“BankMergerAct”) tomergewithCapitalWestBank(“CWBank”),Laramie,Wyoming.3Inaddition,ANB hasappliedundersection9of theFederalReserveAct(“FRA”)4toestablishandoperate branchesatthelocationsof CWBank. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.5Thetimeforfilingcommentshasexpired.AsrequiredbytheBankMergerAct,a reportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral.TheBoardhasconsideredtheapplicationandallcommentsreceivedinlight of thefactorssetforthintheBankMergerActandtheFRA. ANB,withtotalassetsof approximately$2.1billion,operatesinColorado,Wyoming, Kansas,andMissouri.ANBisthe17thlargestinsureddepositoryinstitutioninColorado, controllingdepositsof approximately$1.2billion,whichrepresent1.1percentof thetotal amountof depositsininsureddepositoryinstitutionsinthestate(“statedeposits”).6ANB isthe11thlargestinsureddepositoryinstitutioninWyoming,controllingdepositsof approximately$359.8million,whichrepresent2.7percentof thetotalamountof state deposits. CWBank,withtotalassetsof approximately$162million,operatesinColoradoandWyoming.CWBankisthe137thlargestinsureddepositoryinstitutioninColorado,controlling depositsof approximately$18.6million,whichrepresentlessthan1percentof thetotal amountof statedeposits.CWBankisthe25thlargestinsureddepositoryinstitutionin Wyoming,controllingdepositsof approximately$122.8million,whichrepresentlessthan 1percentof thetotalamountof statedeposits. Onconsummationof theproposal,ANBwouldremainthe17thlargestinsureddepository institutioninColorado,controllingdepositsof approximately$1.2billion,representing 1.1percentof thetotalamountof statedeposits.ANBwouldbecometheeighthlargest insureddepositoryinstitutioninWyoming,controllingdepositsof approximately $482.6million,representing3.6percentof thetotalamountof statedeposits. 1 ANBisasubsidiaryofSturmFinancialGroup,Inc.(“SFG”),abankholdingcompany,alsoofDenver, Colorado. 2 12U.S.C.§1828(c). 3 CWBankisasubsidiaryofFirstCapitalWestBankshares,Inc.(“CWBankshares”),abankholdingcompany, alsoofLaramie,Wyoming. 4 12U.S.C.§321.Thesebranchesarelistedintheappendix. 5 12CFR262.3(b). 6 AssetdataareasofJune30,2014.DepositdataandstaterankingsareasofJune30,2013.Inthiscontext, insureddepositoryinstitutionsincludeinsuredcommercialbanks,savingsbanks,andsavingsassociations.

264 FederalReserveBulletin|November2014 InterstateAnalysis Section102of theRiegle-NealInterstateBankingandBranchingEfficiencyActof 1994 (“Riegle-NealAct”)authorizesabanktomergewithabanklocatedinanotherstateunder certainconditionsunless,beforeJune1,1997,thehomestateof oneof thebanksinvolved inthetransactionadoptedalawexpresslyprohibitingmergertransactionsinvolvingoutof-statebanks.7Forpurposesof theRiegle-NealAct,thehomestateof ANBisColorado, andthehomestateof CWBankisWyoming.8ANBhasprovidedacopyof itsBank MergerActapplicationtotherelevantstateagencyandhascompliedwithstatelaw.The proposalalsocomplieswithallotherrequirementsof theRiegle-NealAct.9Accordingly, theRiegle-NealActdoesnotprohibitthisinterstatebranchacquisition. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.10TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof communitiestobeserved.11 ANBandCWBankcompetedirectlyintheWyomingbankingmarketsof Cheyenneand Laramie.12TheBoardhasreviewedthecompetitiveeffectsof theproposalinthose bankingmarketsinlightof allthefactsof record.Inparticular,theBoardhasconsidered thenumberof competitorsthatwouldremaininthebankingmarkets,therelativeshareof thetotaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)that ANBwouldcontrol,13theconcentrationlevelsof marketdepositsandtheincreaseinthese levelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”),14 andothercharacteristicsof themarkets. 7 12U.S.C.§1831u. 8 See12U.S.C.§1831u(a)(4)and(g)(4). 9 See12U.S.C.§1831u.AsrequiredbytheRiegle-NealAct,ANBandCWBankarebothatleastadequately capitalized(asdefinedin12U.S.C.§1831o(b)(1)(B)),andtheresultingbankwouldbewellcapitalizedandwell managedonconsummationofthetransaction.TheColoradoDivisionofBankinghasindicatedthatthis transactionwouldcomplywithapplicableColoradolaw,andtheWyomingDivisionofBankinghasindicated thatthistransactionwouldcomplywithapplicableWyominglaw.SeeWYO.STAT.13-2-804,805.Onconsummationoftheproposal,ANBwouldcontrollessthan10percentofthetotalamountofdepositsininsured depositoryinstitutionsintheUnitedStatesandlessthan30percentofthetotalamountofdepositsininsured depositoryinstitutionsinWyoming.See12U.S.C.§1831u(b)(2)(A)and(B)(ii).Allotherrequirementsofsection102oftheRiegle-NealActwouldalsobemetonconsummationoftheproposal. 10 12U.S.C§1828(c)(5)(A). 11 12U.S.C.§1828(c)(5)(B). 12 TheCheyennebankingmarketisdefinedastheCheyenneRanallyMetropolitanArea(“RMA”)andthenon- RMAportionofLaramieCounty,bothinWyoming.TheLaramiebankingmarketisdefinedasAlbany County,Wyoming. 13 DepositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsintheFederal DepositInsuranceCorporation’ssummaryofdepositsdataasofJune30,2013,andarebasedoncalculations inwhichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardhaspreviouslyindicatedthat thriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks. See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin53(1991). 14 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata

LegalDevelopments:ThirdQuarter,2014 265 IntheCheyennebankingmarket,consummationof theproposalwouldbeconsistentwith BoardprecedentandwithinthethresholdsintheDOJBankMergerGuidelines.Onconsummationof theproposal,theCheyennebankingmarketwouldremainmoderatelyconcentrated,asmeasuredbytheHHI,andnumerouscompetitorswouldremaininthebankingmarket.15 IntheLaramiebankingmarket,ANBisthethirdlargestinsureddepositoryinstitution, controllingdepositsof approximately$45.3million,whichrepresentapproximately8.6percentof marketdeposits.CWBankisthesecondlargestinsureddepositoryinstitutionin themarket,controllingdepositsof approximately$73.3million,whichrepresentapproximately13.9percentof marketdeposits.Onconsummationof theproposal,ANBwould becomethesecondlargestdepositoryinstitutionintheLaramiebankingmarket,controllingdepositsof approximately$118.6million.Whentheinitialcompetitivescreeningdata areused,thecombinedentitywouldrepresent22.4percentof marketdepositsandthe HHIwouldincreaseby238points,from3086to3324. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitioninthemarket.16Inparticular,theBoardconsideredthecompetitiveinfluence of threeactivecommunitycreditunionsintheLaramiebankingmarket.Allthreecredit unionsofferawidevarietyof products,operateatleastonestreet-levelbranch,andhave eitheropenmembershiporbroadmembershipcriteriathatincludemostof theresidentsin theLaramiebankingmarket.17Thesecreditunionscontrolapproximately$283.8millionin marketdeposits,whichrepresentapproximately21percentof marketdepositsona50percentweightedbasis.Withthesedepositsweightedat50percent,afterconsummationANB wouldcontrolapproximately17.7percentof marketdeposits,andtheHHIwouldincrease by147points,from2186to2333.Furthermore,onconsummationatotalof 10competitorswouldcontinuetooperateinthemarket,includingthethreecreditunionsandthe market’slargestcompetitor,FirstInterstateBank,withapproximately40.7percentof marketdeposits.18TheBoardhasconcludedthatthesefactorsmitigatethepotentialeffectsof theproposal. TheDOJconductedareviewof thecompetitiveeffectsof theproposalandhasadvisedthe Boardthatconsummationwouldnotbelikelytohaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshave beenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionhaveissuedrevisedHorizontalMerger Guidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/ 10-at-938.html. 15 IntheCheyennebankingmarket,ANBoperatesthesecondlargestinsureddepositoryinstitution,controlling depositsofapproximately$185.6million,whichrepresent13.6percentofmarketdeposits.CWBankoperates theninthlargestinsureddepositoryinstitution,controllingdepositsofapproximately$49.5million,whichrepresent3.6percentofmarketdeposits.Afterconsummation,ANBwouldremainthesecondlargestinsured depositoryinstitutioninthemarket,controllingdepositsofapproximately$235.2million,whichrepresent17.2percent ofmarketdeposits.TheHHIwouldincreaseby99points,from1082to1181.Onconsummationoftheproposal,atotalof19competitorswouldremaininthemarket. 16 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreaseinandresultinglevelofconcentrationinabankingmarket.SeeNationsBankCorp.,84FederalReserveBulletin129(1998). 17 TheBoardpreviouslyhasconsideredthecompetitivenessofcertainactivecreditunionsasamitigatingfactor. See,e.g.,RiverValleyBancorp,FRBOrderNo.2012-10(October17,2012);TheHancockHoldingCompany, 97FederalReserveBulletin49(2ndQuar.2011);ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65(2007);RegionsFinancialCorporation,93FederalReserveBulletinC16(2007). 18 Thispercentagereflectstheinclusionofthethreecreditunionsona50percentweightedbasis.

266 FederalReserveBulletin|November2014 Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheCheyenneorLaramiebankingmarkets,orinanyotherrelevantbanking market.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingthisproposalundertheBankMergerAct,theBoardhasconsideredthefinancialandmanagerialresourcesandfutureprospectsof theinstitutionsinvolved.Initsevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof thepro formaorganization,includingitscapitalposition,assetquality,liquidity,andearnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardconsiders thefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancial andmanagerialresourcesandtheproposedbusinessplan.TheBoardalsoconsidersthe abilityof theorganizationtoabsorbthecostsof theproposalandtheproposedintegration of theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistently hasconsideredcapitaladequacytobeespeciallyimportant. ANBiswellcapitalizedandwouldremainsoonconsummationof theproposal.CWBank wouldbemergedintoANB.19Theassetquality,earnings,andliquidityof ANBareconsistentwithapproval,andANBappearstohaveadequateresourcestoabsorbthecostsof the proposalandtocompletetheintegrationof ANB’sandCWBank’soperations.Future prospectsareconsideredconsistentwithapproval.Basedonitsreviewof therecord,the Boardfindsthattheorganizationhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof ANBandhasreviewedthe examinationrecordsof ANB,includingassessmentsof itsmanagement,risk-management systems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiences andANB’srecordof compliancewithapplicablebankingandanti-money-launderinglaws. TheBoardalsohasconsideredANB’splansforimplementingtheproposal.ANBisconsideredtobewellmanaged,anditsboardof directorsandseniormanagementhavesubstantialbankingexperience.ANBwouldoperatetheacquiredbranchesof CWBankunder itsexistingpoliciesandprocedures,whichareconsideredtobesatisfactory.Inaddition, ANB’smanagementhastheexperienceandresourcesthatshouldallowthecombinedorganizationtooperateinasafeandsoundmanner. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof ANB,aswellastherecordsof effectivenessof ANBandCWBankincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardmustconsidertheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedandtakeinto accounttherecordsof therelevantdepositoryinstitutionsundertheCommunityReinvest- 19 Simultaneouslywiththebankmerger,SFGandCWBankshareswouldmerge.Thetransactionisstructuredas acashpurchaseofshares,whichSFGwillfundfromcashonhand.Withrespecttothemergerofthebank holdingcompanies,SFGrequestedawaiveroftheapplicationrequirementundersection3oftheBankHoldingCompanyActof1956,asamended,pursuanttosection225.12(d)(2)oftheBoard’sRegulationY.The Boardhasapprovedthewaiverrequest.

LegalDevelopments:ThirdQuarter,2014 267 mentAct(“CRA”).20TheCRArequiresthefederalfinancialsupervisoryagenciesto encouragefinancialinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountaninstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankmergerproposals. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof ANBandCWBank,informationprovidedbyANB,andconfidentialsupervisoryinformation. A.Recordof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancebasedonthe CRAevaluationcompletedbythatinstitution’sprimaryregulator.21TheCRArequires thattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.22Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailed,onsiteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof ANB.ANBreceivedanoverallratingof “satisfactory”atitsmost recentCRAperformanceexaminationbytheFederalReserveBankof KansasCity (“ReserveBank”),inJanuary2013(“ANBEvaluation”).ANBreceived“lowsatisfactory” ratingsontheLendingTestandtheServiceTest,andan“outstanding”ratingonthe InvestmentTest.23 InevaluatingtheLendingTest,examinersfoundthatthebank’slendingactivitiesshowed adequateresponsivenesstothecreditneedsinitsassessmentareas,becausethebankoriginatedahighpercentageof loansinsideitsassessmentareas.Examinersnotedthatgeographicandborrowerdistributionreflectedagoodpenetrationinitsassessmentareasand anadequatepenetrationamongborrowersof differentincomelevelsandbusinessesand farmsof differentrevenuesizes.ExaminersnotedthatANB’slevelof communitydevelopmentlendingwasadequate,withatotalof sevenloansoriginated,totalingapproximately $2.4million. InevaluatingtheInvestmentTest,examinersbelievedthattheamountof investmentsand donationsmadeinColoradowasexcellentandtheamountmadeinWyomingwas adequate.Inparticular,examinersfoundthatANBwasinstrumentalinprovidinginvestmentfundstorevitalizeandstabilizemoderate-incometractslocatedindowntownGrand Junction,Colorado. 20 12U.S.C.§2901etseq. 21 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 22 12U.S.C.§2906. 23 TheevaluationperiodwasfromJuly1,2010,throughDecember31,2011.TheANBEvaluationwasconducted usingLargeInstitutionCRAExaminationProcedures.Theevaluationincludedfull-scopereviewsoftheDenver-Aurora-Broomfield,ColoradoMetropolitanStatisticalArea(“MSA”);theColoradoSprings,Colorado MSA;andtheCheyenne,WyomingMSA.Limited-scopereviewswereperformedinthenonmetropolitan MountainAssessmentArea(“AA”)(includingEagle,Garfield,andPitkincounties,allinColorado);theGrand Junction,ColoradoMSA;theBoulder,ColoradoMSA;theSanMiguelCounty,ColoradoAA;theNorthern WyomingAA;theCasper,WyomingMSA;andtheAlbanyCounty,WyomingAA.Examinersplacedgreater weightonthebank’sperformanceinColoradobecauseoftheconcentrationofthebank’sloans,deposits,and branchlocationsinthatstate.

268 FederalReserveBulletin|November2014 InevaluatingtheServiceTest,examinersfoundthatANBprovidedanadequatelevelof communitydevelopmentservicesinitsassessmentareas.Thebank’sbranchlocationsand alternativedeliverysystems,suchasATMsanddrive-throughbankingfacilities,wereaccessibletothebank’svariousgeographiesandtoindividualsof differentincomelevelsineach assessmentarea.Thebank’sservicesandhoursdidnotvaryinawaythatinconvenienced anyof theneedsinitsassessmentareas,particularlyof LMIindividualsandinitsvarious geographies. CRAPerformanceof CWBank.CWBankreceivedanoverallratingof “satisfactory”atits mostrecentCRAperformanceexaminationbytheOfficeof theComptrollerof theCurrency,inMay2012(“CWBankEvaluation”).24ExaminersfoundthatCWBank’sloan-todepositratiowasreasonablegiventhebank’sperformancecontextandstrongcompetition initsassessmentareasandthatasubstantialmajorityof itsloanswereinsideitsassessment areas.Examinersconcludedthatthebank’slendingwithinitsassessmentareasexceeded thestandardforsatisfactoryperformanceandwasreasonable. B.AdditionalInformationonConvenienceandNeedsof CommunitiestobeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. ANBrepresentsthattheproposedtransactionwouldprovideCWBank’scustomerswitha broadernetworkof branches,enhancedproductsandservices,andexpandedfinancial resourcesandlendingcapacity.Inaddition,themergerwouldprovideincreasedefficiencies andothersavings,particularlyinareasof strategicplanning,dataprocessing,andmarketing.ANBplanstocloseCWBank’sbranchinLaramie,Wyoming,andconsolidateCW Bank’sbranchinCheyenne,Wyoming,intoANB’sbranchlocatedlessthan1,000feet away.25CWBankcustomerswillcontinuetohaveaccesstobankingservicesineachof the communitiescurrentlyservedbyCWBank. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyANB,andconfidential supervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceand consumercomplianceprogramsof ANBandCWBank,itsreviewof examinationreports, anditsconsultationswithotheragencies,theBoardconcludesthattheconvenienceand needsfactor,includingtheCRArecordsof theinsureddepositoryinstitutionsinvolvedin thistransaction,isconsistentwithapprovalof theapplication. 24 TheCWBankEvaluationwasconductedusingSmallBankCRAExaminationProcedures,andexaminers reviewedthebank’scommercialbusinessandresidentialrealestatelendingactivityfromJuly1,2007,through March26,2012.TheCWBankEvaluationreviewedthebank’sAlbanyCounty,WyomingAA;theCheyenne, WyomingMSA;andtheFortCollins-Loveland,ColoradoMSA. 25 ANBrepresentsthattheclosingoftheLaramie,Wyomingbranchwillbecompletedinaccordancewiththe bank’sbranchclosingpolicyandapplicablelawsandregulations.

LegalDevelopments:ThirdQuarter,2014 269 FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”26 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.27These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.28 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,ANBwouldhave approximately$2.2billioninconsolidatedassetsandwouldbeoutsidethetop100largest financialinstitutionsintheUnitedStatesasmeasuredbyassets.TheBoardgenerally presumesthatamergerresultinginafirmwithlessthan$25billionintotalconsolidated assetswouldnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsent evidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness, complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenot presentinthistransaction.ANBwouldcontinuetoengageintraditionalcommercialbankingactivities.Theresultingorganizationwouldonlyexperienceverysmallincreasesinthe metricsthattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,withtheresultingfirmrankingoutsideof thetop100U.S.financialinstitutions intermsof thosemetrics.Forexample,ANB’sintrafinancialassetsandliabilitieswould compriseanegligibleshareof thesystemwidetotal,bothbeforeandafterthetransaction, andtheresultingfirmwouldcontrollessthan0.1percentof theassetsof allU.S.depositoryinstitutions.Theresultingorganizationwouldnotengageincomplexactivities,nor woulditprovidecriticalservicesinsuchvolumethatdisruptioninthoseserviceswould haveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. 26 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5). 27 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 28 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

270 FederalReserveBulletin|November2014 Establishmentof Branches ANBhasappliedundersection9of theFRAtoestablishbranchesatthecurrentlocations of CWBank,andtheBoardhasconsideredthefactorsitisrequiredtoconsiderwhen reviewinganapplicationunderthatsection.29Specifically,theBoardhasconsideredANB’s financialcondition,management,capital,actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentinbankpremises.Forthe reasonsdiscussedinthisorder,theBoardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyANBwithallthecommitmentsmadeinconnectionwiththisproposaland theconditionssetforthinthisorder.Thecommitmentsandconditionsaredeemedtobe conditionsimposedinwritingbytheBoardand,assuch,maybeenforcedinproceedings underapplicablelaw. Acquisitionof CWBankmaynotbeconsummatedbeforethe15thcalendardayafterthe effectivedateof thisorderorlaterthanthreemonthsaftertheeffectivedateof thisorder, unlesssuchperiodisextendedforgoodcausebytheBoardorbytheReserveBank,acting pursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveSeptember11,2014. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo,Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix BranchestoBeEstablishedbyANB2015CentralAvenue Cheyenne,Wyoming82001 2108MilestoneDrive FortCollins,Colorado80525 2020GrandAvenue Laramie,Wyoming82070 29 12U.S.C.§322;12CFR208.6.

LegalDevelopments:ThirdQuarter,2014 271 Order Issued Under Federal Reserve Act Regions Bank Birmingham, Alabama OrderApprovingEstablishmentof aBranch FRBOrderNo.2014–15(September26,2014) RegionsBank,astatememberbanksubsidiaryof RegionsFinancialCorporation,bothof Birmingham,Alabama,hasrequestedtheBoard’sapprovalundersection9of theFederal ReserveAct(“Act”)1andtheBoard’sRegulationH2toestablishabranchattheintersectionof WestLakeHoustonParkwayandMagnoliaCove(KingsHarborDevelopment)in Kingwood,Texas. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.3Thetimeforfiling commentshasexpired,andtheBoardhasconsideredthenoticeandallcommentsreceived inlightof thefactorsspecifiedintheAct. RegionsBankisthe17thlargestdepositoryinstitutioninTexaswith81branches,controllingapproximately$3.7billionindeposits,whichrepresentslessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsinthestate.4RegionsBank’smain officeisinBirmingham,anditoperates238additionalbranchesinAlabama.Regions Bankoperatesatotalof 1,673branchesinAlabama,Arkansas,Florida,Georgia,Illinois, Indiana,Iowa,Kentucky,Louisiana,Mississippi,Missouri,NorthCarolina,SouthCarolina,Tennessee,Texas,andVirginia. UndertheBoard’sRegulationH,whichimplementssection9of theAct,5thefactorsthat theBoardmustconsiderinactingonbranchapplicationsinclude(1)thefinancialhistory andconditionof theapplyingbankandthegeneralcharacterof itsmanagement;(2)the adequacyof thebank’scapitalanditsfutureearningsprospects;(3)theconvenience andneedsof thecommunitytobeservedbythebranch;(4)inthecaseof brancheswith deposit-takingcapability,thebank’sperformanceundertheCommunityReinvestmentAct (“CRA”);6and(5)whetherthebank’sinvestmentinbankpremisesinestablishingthe branchsatisfiescertaincriteria.7 TheBoardhasconsideredtheapplicationinlightof thesefactorsandpubliccomment receivedontheproposal.AcommenterobjectedtotheproposalandallegedthatRegions BankdiscriminatesagainstAfricanAmericansandredlinesAfricanAmericanneighbor- 1 12U.S.C.§321etseq. 2 12CFRPt.208. 3 12CFR262.3(b). 4 StatedepositdataareasofJune30,2013,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,cooperativebanks,industrialbanks,andsavingsbanks. 5 12CFR208.6(b). 6 12U.S.C.§2901etseq. 7 Section9oftheAct,12U.S.C.§321,whichappliestheinterstatebranchingprovisionsoftheNationalBank Act,12U.S.C.§36(e),providesthatastatememberbankmaynotestablishabranchinanystateotherthanthe bank’shomestateorastateinwhichthebankalreadyoperatesabranch,exceptundercertainspecifiedconditions.See12U.S.C.§1831u(d)(2)andTex.Fin.Code.Ann.§203.006(statingthatanout-of-statebankthat hasestablishedabranchinTexasmayestablishadditionalbranchesinthestatetothesameextentthataTexas statebankmayestablishabranchinTexas).RegionsBankcurrentlyoperatesbranchesinTexas.SeeRegions FinancialCorporation,84FederalReserveBulletin558(1998).

272 FederalReserveBulletin|November2014 hoods,particularlyintheHouston,TexasMetropolitanStatisticalArea(“HoustonMSA”), withrespecttoitsbranching,marketing,andlendingactivities. Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof RegionsBank,theBoardhasreviewedreportsof examination,othersupervisoryinformation,publiclyreportedandotherfinancialinformation,informationprovided byRegionsBank,andthecommentreceived.RegionsBankiswellcapitalizedandwould remainsoonconsummationof theproposal.Afterconsideringallthefactsof record, includingRegionsBank’sproposedinvestmentintheKingwoodbranch,theBoardhas concludedthatthefinancialhistoryandcondition,capitaladequacy,andfutureearnings prospectsof RegionsBankareconsistentwithapprovalof theproposal. InconsideringRegionsBank’smanagerialresources,theBoardhasreviewedthebank’s examinationrecord,includingassessmentsof itsmanagement,risk-managementsystems, andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswithRegions Bankandthebank’srecordof compliancewithapplicablebankinglaw,includingantimoney-launderinglaws.RegionsBankisconsideredtobewellmanaged.Basedonthis reviewandallthefactsof record,theBoardhasconcludedthatthecharacterof Regions Bank’smanagement,aswellastherecordsof effectivenessof RegionsBankincombatting moneylaunderingactivities,areconsistentwithapprovalof theproposal.8 ConvenienceandNeedsConsiderations TheBoardalsohasconsideredtheconvenienceandneedsof thecommunitytobeserved, takingintoaccountthecommentreceivedandthebank’sperformanceundertheCRA. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,9andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.10 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof RegionsBank,datareportedbyRegionsBankundertheHome MortgageDisclosureAct(“HMDA”),11otherinformationprovidedbyRegionsBank,confidentialsupervisoryinformation,andthepubliccommentreceivedontheproposal. A.Recordof PerformanceUndertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof 8 TheBoardandtheAlabamaStateBankingDepartmenthaveenteredintoaConsentOrderwithRegionsBank relatedtomisconductinvolvingtheprocessfollowedbythebankinthefirstquarterof2009foridentifyingand reportingnon-accrualloansandthebank’sresponsetoatargetedexaminationoftheseprocessesundertaken bytheBoardandtheAlabamaStateBankingDepartmentin2009.TheConsentOrderacknowledgesthat RegionsBankhasmadeimprovementsindevelopingitsrisk-managementprogramanditsinternalcontrols. TheConsentOrderrequiresRegionsBanktocontinuetoimproveitsrelevantpolicies,practices,controls,and procedures.Inconsideringthisproposal,theBoardtookaccountofthecurrentandcontinuingprogressmade byRegionsBankincomplyingwiththeprovisionsoftheConsentOrder. 9 12U.S.C.§2901(b). 10 12U.S.C.§2903. 11 12U.S.C.§2801etseq.

LegalDevelopments:ThirdQuarter,2014 273 therelevantinstitutions.12TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.13Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. RegionsBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserveBankof Atlanta(“ReserveBank”)inSeptember2012(“RegionsBankEvaluation”).RegionsBankreceived“highsatisfactory”ratings fortheLendingTest,theInvestmentTest,andtheServiceTest.14Inadditiontotheoverall “satisfactory”ratingthatRegionsBankreceived,thebankreceivedseparateoverall“outstanding”or“satisfactory”ratingsintheoverwhelmingmajorityof themultistatemetropolitanareasandstatesreviewed.15InTexas,RegionsBankreceivedanoverall“satisfactory”rating,“lowsatisfactory”ratingfortheLendingTest,an“outstanding”ratingforthe InvestmentTest,anda“lowsatisfactory”ratingfortheServiceTest. AsdescribedintheRegionsBankEvaluation,ReserveBankexaminersfoundthatthe bank’soveralllendingactivityintheassessmentareaswasgoodandreflectedgoodresponsivenesstotheassessmentareas’creditneeds.Examinersnotedthatthebankhadagood recordof lendingtoborrowersof differentincomelevels,andthatitsdistributionof loans tobusinessesandfarmsof differentsizeswasgood.Further,examinersfoundthatRegion Bank’soverallgeographicdistributionof loanswasgoodandthatthebank’sgeographic distributionof homemortgageandsmallbusinesslendinginLMIgeographieswas adequate.Inaddition,examinersfoundnoevidenceof discriminatoryorotherillegalcredit practices. ExaminersnotedthatRegionsBankmadearelativelyhighlevelof communitydevelopmentloans.Duringtheevaluationperiod,thebankoriginatedorrenewed680community developmentloans.Theseloanswereforavarietyof purposes,includingthefinancingof affordablehousingforLMIindividuals,communityservicestargetedtoLMIpopulations, promotionof economicdevelopmentbyfinancingsmallbusinesses,andrevitalizationof targetedcommunitieslocatedinLMItractsorotherqualifiedgeographies. InevaluatingRegionsBank’sperformanceundertheInvestmentTest,examinershighlightedRegionsBank’squalifiedinvestments,investmentsinaffordablehousing,andgrants anddonationsintheassessmentareas.Duringtheevaluationperiod,RegionsBanksupported662qualifiedinvestmentswithinitsassessmentareas.Examinershighlightedthat RegionsBankisaleaderinfinancingaffordablemultifamilyhousingthroughtheLow 12 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 13 12U.S.C.§2906. 14 TheRegionsBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The evaluationperiodfortheLendingTestwasfromJanuary1,2010,throughDecember31,2011,exceptforcommunitydevelopmentloans,whichhadanevaluationperiodfromJuly1,2010,throughJune30,2012.The evaluationperiodforboththeInvestmentTestandtheServiceTestwasfromJuly1,2010,throughJune30, 2012. 15 TheRegionsBankEvaluationincludedareviewof155ofRegionsBank’sassessmentareas,includingafullscopereviewof40oftheseassessmentareas.TheRegionsBankEvaluationincludedafull-scopereviewofat leastoneassessmentareawithineachstatewhereRegionsBankhadanofficeandofmultistatemetropolitan areaswhereRegionsBankoperatedbranchesinatleasttwostates.ThestatesreviewedwereAlabama,Arkansas,Florida,Georgia,Illinois,Indiana,Iowa,Kentucky,Louisiana,Mississippi,Missouri,NorthCarolina, SouthCarolina,Tennessee,andTexas;andthemultistatemetropolitanareasreviewedweretheAugusta(Georgia-SouthCarolina),Chattanooga(Tennessee-Georgia),Columbus(Georgia-Alabama),Kingsport(Tennessee-Virginia),Memphis(Tennessee-Mississippi-Arkansas),St.Louis(Illinois-Missouri),andTexarkana(Arizona-Texas)metropolitanareas.

274 FederalReserveBulletin|November2014 IncomeHousingTaxCredits("LIHTCs")program.Inaddition,Regionsmadequalified grantsanddonationstocommunitydevelopmentorganizations.Themajorityof thedonationsprovidedsupportfororganizationsengagedinprovidingcommunityservicestoLMI individualsorcommunitiesandforeconomicdevelopment. InevaluatingRegionsBank’sperformanceundertheServiceTest,examinersnotedthat brancheswereaccessibletogeographiesandindividualsof differentincomelevels.ExaminersalsonotedthatRegionsBank’sopeningandclosingof brancheshadgenerallynot adverselyaffectedtheaccessibilityof itsbankingservicestoLMIgeographies.Further, examinershighlightedthatRegionsBankprovidedagoodlevelof communitydevelopmentservicesthroughoutitsassessmentareas. RegionsBank’sEffortsSincethe2012CRAEvaluation.RegionsBankrepresentsthatsince theRegionsBankEvaluation,ithascontinueditscommunitydevelopmentactivities, includinglending,investments,contributions,andservices,initscombinedassessment areasandintheHoustonMSAassessmentarea.Forinstance,thebankrepresentsthatit hasmadecommunitydevelopmentloansintheHoustonMSAassessmentareathatprovidedfundingforaffordablemultifamilyhousing,charterschoolconstructioninunderservedcommunities,andothersmallbusinessventuresaccessibletounderservedcommunities.AccordingtoRegionsBank,italsoofferedasuiteof financialmanagementproducts andservicestargetedtounbankedandunder-bankedpopulations,includingcheckcashing services,moneytransferandexpeditedbillpayservices,moneyorders,prepaiddebitcards, savingsaccounts,mobiledepositservices,small-dollarsecuredloans,andfreeonlinefinancialeducation. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordof RegionsBankincomplyingwithfairlendingand otherconsumerprotectionlaws.Aspartof thisconsideration,theBoardreviewedthe RegionsBankEvaluation,assessedRegionsBank’sHMDAdata,andconsideredthecommentontheapplicationaswellasotheragencies’viewsonRegionsBank’srecordof performanceunderfairlendinglaws.TheBoardalsoconsideredRegionsBank’sfairlending policiesandprocedures. HMDAData,andFairLendingAnalysis.AcommenterallegedthatRegionsBankdiscriminatesagainstAfricanAmericanindividuals,AfricanAmerican-ownedbusinesses,andAfricanAmericanneighborhoodsintheHoustonMSA,andthatthebankhasengagedin redliningwithrespecttoitsprovisionof bankingproductsandservicesintheHoustonMSA. TheBoardanalyzedRegionsBank’sHMDAdatafrom2012and2013foritscombined assessmentareasanditsassessmentareaintheHoustonMSA,whichincludesthespecific marketareasaddressedinthepubliccomment,relatedtoallHMDA-reportableloansto developaviewof thebank’soveralllendingpatterns.TheBoardalsoanalyzedthesubset of thosedatarelatedspecificallytotheloanproductsthatwerethesubjectof thepublic commentreceivedontheproposal,homemortgageloans,homeimprovementloans,and smallbusinessloans.Withinthosedatasets,theBoardfocuseditsreviewondatarelatedto homemortgageloans,homeimprovementloans,andsmallbusinessloansmadeordenied toborrowersandlocationsidentifiedinthepubliccomment,i.e.,AfricanAmericanindividuals,AfricanAmerican-ownedbusinesses,andAfricanAmericansneighborhoods. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities. TheBoardbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlending practicesarebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequalaccesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.

LegalDevelopments:ThirdQuarter,2014 275 AlthoughtheHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,HMDAdataalonedonotprovideasufficientbasisonwhichtoconclude whetherthebankexcludedordeniedcredittoanygrouponaprohibitedbasis.16Fully evaluatingabank’scompliancewithfairlendinglawsandregulationswouldrequireathoroughreviewof thebank’sapplicationandunderwritingpoliciesandprocedures,aswellas accesstoinformationcontainedintheapplicationfiles,todeterminewhethertheobserved lendingdisparitiespersistaftertakingintoaccountlegitimateunderwritingfactors. Thedatafor2012and2013revealthat,initscombinedassessmentareas,Regions Bank’spercentageof mortgageoriginationstoAfricanAmericansandtoborrowersin LMIcensustractswasmorefavorablethanthatof theaggregateof alllenders.However, RegionsBanklaggedinthepercentageof itsoriginationstoborrowersinminoritycensus tractsinitscombinedassessmentareas.IntheHoustonMSA,RegionsBank’spercentage of mortgageoriginationstoAfricanAmericans,toborrowersinminoritycensustracts,and toborrowersinLMIcensustractswasmorefavorablethanthatof theaggregateof all lendersduringthisperiod. Forhomeimprovementloansinitscombinedassessmentareas,RegionsBankexceededthe aggregateinitslendingtoAfricanAmericans,toborrowersinminoritycensustracts,and toborrowersinLMIcensustractsin2012and2013.Forhomeimprovementloansinits HoustonMSAassessmentareain2012,RegionsBankwasconsistentwiththeaggregatein itspercentageof loanstoAfricanAmericansandtoborrowersinLMIcensustracts,but exceededtheaggregateinitspercentageof suchloanstoborrowersinminoritycensus tracts.In2013,thebankexceededtheaggregateforloanstoAfricanAmericansinits HoustonMSAassessmentarea,butlaggedtheaggregateforloanstoborrowersinminoritycensustractsandtoborrowersinLMIcensustracts. TheBoardalsoreviewedRegionsBank’ssmallbusinesslendinginitscombinedassessment areasandintheHoustonMSAassessmentareafor2012and2013.Thedatarevealthatthe bankmadesmallbusinessloansavailableinareasinwhichthemajorityof residentsare AfricanAmerican.RegionsBank’ssmallbusinessloanoriginationsinminoritycensus tractsandLMIcensustractsinthebank’scombinedassessmentareaswasapproximately comparabletotheaggregatein2012and2013.In2013,RegionsBanklaggedtheaggregate insmallbusinesslendinginminoritycensustractsintheHoustonMSAassessmentarea, butexceededtheaggregateinsmallbusinesslendinginLMIcensustracts. Inaddition,theBoardperformedaredlininganalysisof RegionsBank’slendingdata,geographicdistributionof branches,andmarketingandoutreachefforts.TheBoardanalyzed RegionsBank’slendinginminoritycensustractsandincensustractsinwhichAfrican Americansrepresentedthemajorityof thepopulation.ThedatadonotrevealthatRegions BankwasredliningeitherminoritycensustractsorpredominatelyAfricanAmericancensustractsinitslendingactivity. Thepercentageof RegionsBankbranchesinLMIcensustractsinthebank’scombined assessmentareasisslightlylowerthanthepercentageof LMIcensustractsinthebank’s combinedassessmentareas.Inaddition,RegionsBank’spercentageof branchesin LMIcensustractsapproximatesthoseof itspeers.Becausethereissubstantialoverlap 16 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data.

276 FederalReserveBulletin|November2014 betweenminoritycensustractsandLMIcensustractsintheHoustonMSAassessment area,RegionsBank’sbrancheslocatedinLMIcensustractsareavailabletoservecensus tractswithconcentrationsof minorityresidents.Further,theBoardreviewedasampleof RegionsBank’sadvertisingandmarketingmaterialsandfoundthatthebankincludesmarketingandoutreachactivitiestargetedatavarietyof minorityandLMIpopulations.Inits reviewof thebank’smarketingactivitiesandcommunityoutreach,theBoarddidnotfind anyevidencethatthebankexcludesAfricanAmericansoranyotherminorities. RegionBank’sFairLendingProgram.RegionsBankhasinstitutedpoliciesandprocedures tohelpensurecompliancewithallfairlendingandotherconsumerprotectionlawsand regulations.Thebankhasafairlendingdepartmentthatincludesdedicatedmanagersfor eachof thebank’slendingbusinessgroupsandprovidesoversightbyconductingfairlendingriskassessmentsandmonitoringandtesting.Inaddition,RegionsBankrequiresmandatoryannualfairlendingtrainingforapplicablestaff andhasmonthlyfairlendingtrainingfornewstaff involvedinhomemortgagelending.RegionsBankalsohasacentralized consumercomplaintsprogramthatitmonitorstoensurecompliancewithfairlending regulations. ConclusiononConvenienceandNeedsConsiderations RegionsBankrepresentedthattheKingwoodbranchwillbenefitdepositorsbyimproving customerconvenience,creatingefficiency,andexpandingtheavailabilityof productsand servicestobankingcustomers.Basedonallthefactsof record,includingconsultations withotheragencies,andforthereasonsdescribedinthisorder,theBoardconcludesthat theconvenienceandneedsfactor,includingtheCRArecordof theinsureddepository institutioninvolvedinthistransaction,isconsistentwithapprovalof theapplication. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.17TheBoard’sapprovalisspecificallyconditionedonRegionsBankRegionsBank’scompliancewithallcommitmentsmadetothe Boardinconnectionwiththeproposal.Thecommitmentsandconditionsreliedonbythe Boardaredeemedtobeconditionsimposedinwritinginconnectionwithitsfindingsand decisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Approvalof thisapplicationisalsosubjecttotheestablishmentof theproposedbranch withinoneyearof thedateof thisorder,unlesssuchperiodisextendedbytheBoardorthe ReserveBank,actingunderauthoritydelegatedbytheBoard. Byorderof theBoardof Governors,effectiveSeptember26,2014. 17 TheBoardconstruesthecommentreceivedontheproposaltoincludearequestthattheBoardholdpublic hearingsontheproposal.Underitsrules,theBoardmay,initsdiscretion,holdapublichearingifappropriate toallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnot adequatelypresenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefacts ofrecord.IntheBoard’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposal and,infact,submittedawrittencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthat wouldbeclarifiedbyapublichearing.Inaddition,therequestdoesnotdemonstratewhythewrittencomment doesnotpresentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingis notrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

LegalDevelopments:ThirdQuarter,2014 277 Votingforthisaction:ChairYellen,andViceChairmanFischer,GovernorsTarullo,Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

279 Federal Reserve BULLETIN Index A FederalRegister,131,151 Annualpercentagerate(APR),43,54, FederalReserveAct,orderissued 59 under Anti-moneylaundering,134 RegionsBank,271–276 Averageprimeofferrate(APOR),54, FinancialActionTaskForce 59–60 (FATF),122,124,129,143,147, 233 B Financial BankHoldingCompanyAct(BHC Services,15 Act),ordersissuedunder FreddieMac,43,47,54,69 AmerisBancorp,73–84 ChemicalFinancial G Corporation,251–261 GinnieMae,69,79 Community&SouthernHoldings, H Inc.,131–140 Henriques,Alice,article,1–40 Cullen/FrostBankers,Inc.,151–162 Herfindahl-HirschmanIndex FirstInterstateBancSystem, (HHI),75,87,152 Inc.,163–171 HomeMortgageDisclosureAct InvestorsBancorp,MHC,99–108 (HMDA),41–78 MBFinancialInc.,172–181 HongKongMonetaryAuthority MercantileBank (HKMA),147 Corporation,220–230 Hsu,JoanneW.,article,1–40 OldNationalBancorp,182–191, 239–250 I PacWestBancorp,209–219 InternationalBankingAct,orders UmpquaHoldings issuedunder Corporation,192–207 BancoBPI,S.A.,119–122 UnitedBankshares,Inc.,85–98 BanqueCentrale BankMergerAct,ordersissuedunder Populaire,140–144 ANBBank,263–270 CaixaBank,S.A,231–234 FirstFarmersBank& CanaraBank,123–126 Trust,110–114 RBCInvestorServicesBank GreenDotBank,115–119 S.A.,127–130 Bhutta,Neil,41–72 TheJoyoBank,Ltd.,234–236 Bricker,Jesse,article,1–40 WingLungBankLimited,144–148 C L Credit Lending Score(s),43,47,53,62 Applicationdenialrates,48,52 D Borrowerraceandethnicity,49 Departmentof VeteransAffairs Fair,53–54,78,93,136,157 (VA),42,48,52,57,69 Manufacturedhomes,47,70 Dettling,LisaJ.,article,1–40 Nonconventional,43,47–48,51–54, Dodd-FrankWallStreetReformand 55,58 ConsumerProtectionAct Non-owner-occupant,45 (Dodd-Frank),107,148 Refinance,43–48,52 Low-and-middle-income(LMI) F Borrowers,censustracts,incomes, FannieMae,47,69 neighborhoods,43,49,52,68, FarmServiceAgency(FSA),42,69 94,138,156 FarmerMac,69 FederalDepositInsuranceCorporation M (FDIC),135,245,258 MiddleEastandNorthAfrica FederalHousingAdministration FinancialActionTask (FHA),42,48,52,58,69 Force,143

280 FederalReserveBulletin|Index Moore,KevinB.,article,1–40 RegulationK,142,232,235 Mortgage RegulationY,99,109,209,220,252 Applications,43–48 Ringo,DanielR.,41–72 Originations,43–48 RuralHousingService(RHS),42,69 N S NewYorkDailyNews,123,234 Sabelhaus,,John,article,1–40 NewYorkTimes,127,231 SanGabrielValleyTribune,145 P T Payment-to-income(PTI)ratio(s),25, TheRecorder,145 64,71 TheStandard-Times,119 Privatemortgageinsurance TheStarLedger,119 (PMI),47–48 TheWashingtonPost,141 Thompson,Jeffrey,article,1–40 R RegulationC,69 W RegulationH,271 Windle,RichardA.,article,1–40 RegulationK,123,128

Federal Reserve Bulletin 2014 Compilation www.federalreserve.gov 0215 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM @FederalReserve Flickr.com/FederalReserve YouTube.com/FedReserveBoard Federal Reserve Bulletin 2014 Compilation